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Contents
CHAPTER 1 Reserve Bank of India Act, 1934 2
CHAPTER 2 Foreign Exchange Management Act, 1999 16
CHAPTER 3 FEMA - Current & Capital Account Transactions, Liberalized Remittance Scheme 30
CHAPTER 4 FEMA - Foreign Direct Investment in India 59
CHAPTER 5 FEMA - Direct Investment Outside India 74
CHAPTER 6 External Commercial Borrowings (ECB) 85
CHAPTER 7 Foreign Contribution (Regulation) Act, 2010 94
CHAPTER 8 Foreign Trade Policy & Procedure 108
CHAPTER 9 Non-Banking Finance Companies (NBFC) 128
CHAPTER 10 Special Economic Zones Act, 2005 145
CHAPTER 11 Competition Act, 2002 162
CHAPTER 12 Consumer Protection Act, 1986 192
CHAPTER 13 Essential Commodities Act, 1955 213
CHAPTER 14 Legal Metrology Act, 2009 221
CHAPTER 15 Transfer of Property Act, 1882 230
CHAPTER 16 Real Estate (Regulation & Development) Act, 2016 257
CHAPTER 17 Benami Transaction (Prohibition) Act, 1988 287
CHAPTER 18 Prevention of Money Laundering Act, 2002 298
CHAPTER 19 Contract Act, 1872 307
CHAPTER 20 Specific Relief Act, 1963 375
CHAPTER 21 Sale of Goods Act, 1932 392
CHAPTER 22 Partnership Act, 1932 422
CHAPTER 23 Negotiable Instruments Act, 1881 450
Solved Paper CS - Executives (New Syllabus) Dec. - 2018 493
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1
CHAPTER
BESEBUE BANK OF IhDIA ACT, 1934
INTRODUCTION : The Reserve Bank of India (RBI) is the apex financial institution of the country's financial system
entrusted with the task of control, supervision, promotion, development and planning. RBI is the queen bee of the
Indian financial system which influences the commercial banks' management in more than one way. The RBI
influences the management of commercial banks through its various policies, directions and regulations. Its role in
bank management is quite unique. In fact, the RBI performs the four basic functions of management, viz., planning,
organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks.
In 1921, the Imperial Bank of India was established to perform as Central Bank of India by the British Government.
But unfortunately Imperial Bank failed to show its performance up to the mark and didn’t achieve any success as
the Central Bank. So, Government required setup of brand new central bank. In 1st April 1935, Reserve Bank of India
was setup. In January, 1949, RBI was nationalized.
OBJECTIVE & ESTABLISHMENT
Question 1] What are the objectives of the Reserve Bank of India (RBI)?
Ans.: Important aspects relating to objectives of the Reserve Bank of India (RBI) are as follows:
(1) Primary objects: The Preamble to the RBI Act, 1934 spells out the objectives of the RBI as:
(a) To regulate the issue of bank notes and
(b) To keep reserves with a view to securing monetary stability in India and
(c) To operate the currency and credit system of the country to its advantage.
Prior to the establishment of the RBI, the Indian financial system was totally inadequate on account of the inherent
weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India.
The Hilton-Y oung Commission, therefore, recommended division of functions and responsibility for control of
currency and credit and the divergent policies by setting-up of a central bank - called the RBI - which would regulate
the financial policy and develop banking facilities throughout the country. Hence, the RBI was established with this
primary object in view.
(2) Remain free from political influence: Another objective of the RBI has been to remain free from political
influence and be in successful operation for maintaining financial stability and credit.
(3) Fundamental objects: The fundamental object of the RBI is to discharge purely central banking functions in
the Indian money market i.e. to act as -
(a) Note-issuing authority
(b) Bankers' bank
(c) Banker to government
(4) Promote the growth of the economy: The RBI aims to promote the growth of the economy within the
framework of the general economic policy of the Government, consistent with the need of maintenance of price
stability.
(5) Development of Indian Economy: A significant object of the RBI has also been to assist the planned process
of development of the Indian economy. Besides the traditional central banking functions, with the launching of the
5 year plans in the country, the RBI has been moving ahead in performing a host of developmental and promotional
functions, which are normally beyond the purview of a traditional Central Bank.
Question 2] Write a short note on: Establishment and incorporation of Reserve Bank
Ans.: Establishment and incorporation of Reserve Bank [Section 3(1)]: A bank to be called the RBI shall be
constituted for the purposes of taking over the management of the currency from the Central Government and of
carrying on the business of banking in accordance with the provisions of the Act.
RBI shall be a body corporate [Section 3(2)]: The Bank shall be a body corporate by the name of the RBI, having
perpetual succession and a common seal and shall by the said name sue and be sued.
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Capital of the RBI [Section 4]: The capital of the RBI shall be ` 5 Crore.
Offices, branches and agencies [Section 6]: The RBI shall establish offices in Bombay, Calcutta, Delhi and Madras
and may establish branches or agencies in any other place in India with the previous sanction of the Central
Government.
Question 3] Write a short note on: Central Board of Directors
Ans.: The Central Board of Directors is at the top of the RBI's organizational structure. Appointed by the
Government, the Central Board has the primary authority and responsibility for the oversight of RBI. It delegates
specific functions to the Local Boards and various committees. The Governor is the RBI's chief executive. The
Governor supervises and directs the affairs and business of RBI. The management team also includes Deputy
Governors and Executive Directors.
Composition of Central Board [Section 8(1)]: The Central Government nominates 14 Directors on the Central Board
including -
♦ One director each from the 4 Local Boards;
♦ Other 10 directors represent different sectors of the economy such as agriculture, industry, trade and
professions.
All these appointments are made for a period of 4 years.
The Government also nominates one Government official as a Director representing the Government, who is usually
the Finance Secretary to the Government of India and remains on the Board 'during the pleasure of the Central
Government'.
Function and duties of the Governor & Deputy Governors [Section 8(2)]: The Governor and Deputy Governors
devote their whole time to the affairs of the RBI and receive salaries and allowances as may be determined by the
Central Board, with the approval of the Central Government.
Voting by Deputy Governor [Section 8(3)]: The Deputy Governor and the Director nominated may attend any
meeting of the Central Board and take part in its deliberations but shall not be entitled to vote.
However, if due some reason if the Governor is unable to attend any meeting, a Deputy Governor authorized by
him in this behalf in writing may vote for him at that meeting.
Term of office of the Governor, Deputy Governor & Nominated Director [Section 8(4)]: The Governor and Deputy
Governor hold the office for such term not exceeding 5 years as the Central Government may fix when appointing
them. They are eligible for re-appointment.
A Nominated Director holds the office for a period of 4 years and thereafter until his successor is nominated.
Act or proceedings are not invalid due to vacancy in Board [Section 8(5)]: No act or proceeding of the Board can
be questioned on the ground merely of the existence of any vacancy in Board or for any defect in the constitution
of the Board.
Re-nomination of retiring director [Section 8(7)]: A retiring director shall be eligible for re-nomination.
Question 4] Under what circumstances the Central Government has power to supersede the RBI?
What conditions are required to be fulfilled by the Central Government for taking such action?
Ans.: Powers of Central Government to supersede Central Board [Section 30]: If in the opinion of the Central
Government the RBI fails to carry out any of the obligations imposed on it under the Act, the Central Government
by notification in the Gazette of India may declare the Central Board to be superseded.
After the issuing such notification the general superintendence and direction of the affairs of the RBI shall be
entrusted to such agency as the Central Government may determine. Such agency may exercise the powers and do
all acts and things which may be exercised or done by the Central Board under the Act.
When action is taken under this section the Central Government shall cause a full report of the circumstances
leading to such action and of the action taken to be laid before Parliament at the earliest possible opportunity and
in any case within 3 months from the issue of the notification superseding the Board.
Question 5] Write a short note on: Local Boards of the RBI
Ans.: Local Boards, their constitution and functions [Section 9]:
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(1) A Local Board shall be constituted for each of the four areas specified in the First Schedule i.e. one each for
the Western, Eastern, Northern and Southern areas of the country. Local Board shall consist of 5 members to be
appointed by the Central Government to represent.
(2) The members of the Local Board shall elect from amongst themselves one person to be the chairman of the
Board.
(3) Every member of a Local Board shall hold office for a term of 4 years and thereafter until his successor shall
have been appointed and shall be eligible for re-appointment.
(4) A Local Board shall advise the Central Board on such matters as may be generally or specifically referred to
it. It shall perform such duties as the Central Board may delegate to it.
Question 6] Which kind of business cannot be transacted by the RBI as per the Reserve Bank of India Act, 1934?
Ans.: Business which the RBI may not transact [Section 18]:
(1) The RBI cannot engage in trade. It cannot have a direct interest in any commercial, industrial, or other
undertaking except such interest as it may in any way acquire in the course of the satisfaction of any of its claims.
However, all such interests shall be disposed of at the earliest possible moment.
(2) The RBI cannot purchase the shares of any banking company or of any other company, or grant loans upon
the security of any such shares.
(3) The RBI cannot advance money on mortgage of immovable property or documents of title relating thereto.
The RBI cannot become the owner of immovable property, except so far as is necessary for its own business
premises and residences for its officers and servants.
(4) The RBI cannot make loans or advances.
(5) The RBI cannot draw or accept bills payable otherwise than on demand.
(6) The RBI cannot allow interest on deposits or current accounts.
FUNCTIONS OF RBI
Question 7] What are the functions of RBI under the Reserve Bank of India Act, 1934?
Ans.: Various functions of RBI under the RBI Act, 1934 are as follows:
♦ Banking Functions
♦ Issue bank notes
♦ Monetary Policy Functions
♦ Public Debt Functions
♦ Foreign Exchange Management
♦ Banking Regulation & Supervision
♦ Regulation and Supervision of NBFCs
♦ Regulation & Supervision of Co-operative banks
♦ Regulation of Derivatives and Money Market Instruments
♦ Payment and Settlement Functions
♦ Consumer Protection Functions
♦ Financial Inclusion and Development Functions
Question 8] Write a short note on: Banking Function of RBI
RBI is the banker's bank but also the lender of the last resort. Comment.
Ans.: Banker to Government: The second important function of the RBI is to act as Government banker, agent and
adviser. The RBI is agent of Central Government and of all State Governments in India excepting that of Jammu and
Kashmir.
Bankers' Bank and Lender of the Last Resort: The RBI acts as the banker's bank. Every scheduled bank is required
to maintain with the RBI a cash balance equivalent to 3% of their aggregate deposit liabilities. The minimum cash
requirements can be changed by the RBI. The scheduled banks can borrow from the RBI on the basis of eligible
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securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since
commercial banks can always expect the RBI to come to their help in times of banking crisis the RBI becomes not
only the banker's bank but also the lender of the last resort.
Question 9] Write a short note on: Notes issue function of RBI
Whether the RBI is allowed to issue currency having denomination above ` 10,000?
Whether bank notes issued by the RBI are liable to stamp duty?
Ans.: Management of currency is one of the core central banking functions of the RBI for which it derives the
necessary statutory powers from Section 22 of the RBI Act, 1934.
Bank of issue: The bank has the sole right to issue bank notes of all denominations. The distribution of ` 1, ` 2
currencies note and coins and small coins all over the country are undertaken by the RBI as agent of the
Government.
Right to issue bank notes [Section 22]: The RBI shall have the sole right to issue 'bank notes' in India.
The RBI, on the recommendation of the Central Board, may issue 'currency notes' of the Government of India. All
of the provisions of the RBI Act shall apply to 'currency notes' as they apply to 'bank notes' issued by the RBI.
The issue function of bank notes is performed by the Issue Department, which is separated and kept wholly distinct
from Banking Department.
The RBI recommends the Central Government about denomination of bank notes i.e. ` 2, ` 5, ` 10, ` 20, ` 50, ` 100, `
500, ` 1,000, ` 2,000, ` 5,000 & ` 10,000 or other denominations not exceeding ` 10,000. [Section 24]
The design, form and material of bank note are approved by Central Government on the recommendations of
Central Board of the RBI. Every bank note is a legal tender at any place in India. However, on recommendation of
the Central Board, the Central Government may declare any series of bank notes of any denomination as not to be
a legal tender.
Exchange of Notes: Another important function is exchange of mutilated or torn notes, which under the RBI Act,
1934 is not a matter of right, but a matter of grace.
The bank notes that are being issued by RBI are exempt from payment of stamp duty. [Section 29]
` 1 and ` 2 denominations notes are the 'currency notes'. These are issued by the Government of India in consultation
with RBI. The printing of ` 1 & ` 2 denominations has been discontinued, though the notes in circulation are valid.
Currently 'bank notes' issued by RBI are mostly in circulation i.e. notes having denominations ` 10, ` 20, ` 50,
` 100, ` 200, ` 500, ` 2,000
In India, the paper currency was first issued during British East India Company rule. The first paper notes were issued
by the private banks such as Bank of Hindustan and the presidency banks during late 18th century. With the
introduction of the Paper Currency Act, 1861, the British Government of India was conferred the monopoly to issue
paper notes in India.
After this act, the government of India entered into agreements with the Presidency Banks to work as authorized
agents to promote circulations of the paper notes across length and breadth of British India. But since India is a vast
country, redemption of these notes became a big issue. Consequently, some "Currency Circles" came up in various
parts of country where the paper notes of Indian government were legal tenders.
In 1867, the agreements with the presidency banks were terminated. The job of promoting, circulating and
redemption of the currency notes was entrusted to Mint Masters, Accountant General and the Controller of
Currency. This practice continued till RBI came into existence in 1935.
Section 22 of the RBI Act, 1934 makes provided that RBI has the sole right to issue 'bank notes' of all denominations.
Thus, RBI is responsible for the design, production and overall management of the nation's currency, with the goal
of ensuring an adequate supply of clean and genuine notes. In consultation with the Government, the Reserve Bank
routinely addresses security issues and targets ways to enhance security features to reduce the risk of counterfeiting
or forgery of currency notes.
Question 10] Write a short note on: Public Debt Functions of the RBI Write a short note on: Government Securities
Act, 2006
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Ans.: The RBI's debt management strategy aims at minimizing the cost of borrowing, reducing the rollover and other
risks, smoothening the maturity structure of debt, and improving depth and liquidity of Government securities
markets by developing an active secondary market.
As per Preamble to the Government Securities Act, 2006, it is an Act to consolidate and amend the law relating to
Government securities and its management by the RBI and for matters connected therewith or incidental thereto.
♦ The Act applies to Government securities created and issued by the Central/State Government.
♦ The Act prescribes the procedure and modalities to be followed by RBI in the management of public debt
and also confers various powers on RBI including the power to determine the title to a Government security if there
exists any doubt in the opinion of RBI.
♦ No order made by RBI under the Act shall be called in question by any Court for the reasons stated therein.
[Section 18]
♦ Prior to the enactment of the Government Securities Act, 2006, the said public debt functions of the RBI have
been governed under the provisions of the Public Debt Act, 1944.
Question 11] Write a short note on: Foreign exchange management function of RBI What are the functions of the
RBI under the Foreign Exchange Management Act, 1999?
Ans.: Foreign Exchange Management Act (FEMA) envisages that RBI will have a key role in management of foreign
exchange. The main functions of RBI under FEMA are as follows:
♦ To exercise its powers under the FEMA and discharge duties with respect to external trades and payments,
development and maintenance of foreign exchange market in India.
♦ To authorize any person to deal in foreign exchange or in foreign securities, as an authorized dealer, money
changer or off-shore banking unit or in any other manner as it deems fit.
♦ To revoke an authorization issued to an authorized dealer in public interest or if the authorized person has
failed to comply with the conditions subject to which the authorization was granted.
♦ To impose penalty for contraventions of FEMA.
♦ To compound such contraventions u/s 15 of the FEMA.
Question 12] Write a short note on: Banking regulation & supervision function of RBI
Ans.: The power to regulate and supervise banks has been provided to RBI under the provisions of Banking
Regulation Act, 1949. The RBI has wide powers of supervision and control over commercial and co-operative banks,
relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of
working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspection of
the banks and to call for returns and necessary information from them. Thus, supervisory functions of the RBI have
helped a great deal in improving the standard of banking in India.
Question 13] What are the 'Stressed Assets'? What are the powers of RBI for resolution of stressed assets?
Ans.: Stressed Assets are loans where the borrower has defaulted in repayment or where the loan has been
restructured.
In terms of Sections 35AA & 35AB of the Banking Regulation Act, 1949, the RBI has been specifically authorized to
issue directions to banking companies for resolution of stressed assets.
Power of issuing directions to banking companies to initiate insolvency resolution process [Section
35 A A]: The Central Government may authorize the RBI to issue directions to any banking company to initiate
insolvency resolution process in respect of a default, under the provisions of the Insolvency & Bankruptcy Code,
2016.
Power of RBI to issue directions in respect of stressed assets [Section 35AB]: The RBI may, from time to time, issue
directions to any banking company for resolution of stressed assets.
The RBI may specify one or more authorities or committees with such members as the RBI may appoint to advise
any banking company or banking companies on resolution of stressed assets.
Question 14] Write a short note on: Regulation and Supervision of NBFCs by RBI * 1
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Ans.: The regulation and supervision of non-banking financial companies is one of the critical functions that the RBI
has been entrusted with. Following are some of the important points in this regard:
(1) Registration of NBFC: With the amendment of the RBI Act, 1934 in January 1997, in terms of Section 45-IA,
all Non-Banking Financial Companies have to be mandatorily registered with the RBI.
(2) Regulate or prohibit issue of prospectus or advertisements soliciting deposits: As part of regulation and
supervision of NBFCs, the RBI has been conferred with the statutory powers to regulate or prohibit issue of
prospectus or advertisements soliciting deposits of money by NBFCs, power to determine policy and issue directions
to NBFCs etc.
(3) Call information and issue directions: The RBI has been empowered under Section 45-L of the RBI Act, 1934
to call for information and issue directions to NBFCs for the reasons stated therein.
(4) Supervisory control: As a part of the supervisory control over the non-banking financial companies, the RBI
has powers to inspect NBFCs under Section 45-N of RBI Act, 1934.
The RBI shall exercise all above powers in the public interest or to regulate the financial system of the country to its
advantage or to prevent the affairs of any NBFC being conducted in a manner detrimental to the interest of the
depositors or in a manner prejudicial to the interest of the NBFC.
Question 15] What is the role and functions of the RBI in relation to regulation & supervision of co-operative
banks in India?
Ans.: Regulation and supervision of urban co-operative banks is another area the RBI has been entrusted with.
As per Article 246 of the Constitution of India, the exercise of legislative powers of the Union and the State are given
in the List-I (Union List) and List II (State List) respectively of the Schedule VII to the Constitution.
The entry relating to Co-operative Societies fall in State List whereas the entry relating to banking falls in the Union
List. These results in the duality of jurisdiction over co-operative banks both by the RBI in terms of Banking
Regulation Act, 1949, and the Registrar of Co-operative Societies, in terms of the respective State Co-operative
Societies Act of the State.
Section 56 of the Banking Regulation Act, 1949, makes it applicable to co-operative societies involved in the business
of banking. As a part of the regulatory and supervisory regime over co-operative banks, the RBI has been entrusted
with the powers to issue licenses and cancel licenses of co-operative banks, supersede their boards, inspect them
and also issue directions to them in the public interest, interest of banking policy, control over loans and advances
etc.
Judicial view:
It was held by the Bombay High Court that though the control over management of Co-operative Society is vested
in the Registrar of Co-operative Societies, but insofar as banking is concerned, by virtue of Section 56 read with
Section 35 A of the Banking Regulation Act, 1949, the RBI has full power to regulate and control co-operative
societies in relation to banking operations. [Janata Sahakari Bank Ltd. v. State of Maharashtra AIR 1993 Bombay
252]
Question 16] Discuss briefly how derivatives and money market instruments are regulated by the Reserve Bank
of India.
Ans.: To regulate derivatives and money market instruments, Chapter III-D consisting Sections 45U to 45X was
inserted in the RBI Act, 1934 by amending the RBI Act, 1934 in year 2007.
Derivative [Section 45U(a)]: Derivative means an instrument which is settled at a future date and whose value is
derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also
called "underlying").
Derivative includes:
♦ Interest rate swaps
♦ Forward rate agreements
♦ Foreign currency swaps
♦ Foreign currency rupee swaps
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♦ Foreign currency options
♦ Foreign currency rupee options
♦ Such other instruments as may be specified by the RBI from time to time.
Money Market Instruments [Section 45U(b)]: Money market instruments includes:
♦ Call or notice money
♦ Term money
♦ Repo
♦ Reverse repo
♦ Certificate of deposit
♦ Commercial usance bill
♦ Commercial paper
♦ Such other debt instrument having maturity up to 1 year as the RBI may specify from time to time.
Power to regulate transactions in derivatives, money market instruments [Section 45W]: The RBI may specify from
time to time or determine the policy relating to interest rates or interest rate products in public interest or to
regulate the financial system of the country to its advantage. The RBI may give directions to all agencies dealing in
securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature.
Duty to comply with directions and furnish information [Section 45X[: It shall be the duty of every director or
member of the agencies referred above to comply with the directions given by the RBI. They are also under
obligation to submit the information/statement/particulars called by the RBI.
Question 17] Write a short note on: Legal tender character of notes
Ans.: Legal tender character of notes [Section 26]: Every bank note shall be legal tender at any place in India in
payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.
On recommendation of the Central Board the Central Government may declare that with effect from specified date
in the notification, any series of bank notes of any denomination shall cease to be legal tender to such extent as
may be specified in the notification.
Question 18] Write a short note on: Coin Distribution
Ans.: The Indian Coinage Act, 1906 governs the minting of rupee coins, including small coins of the value of less
than ` 1. Coins are legal tender in India for unlimited amounts. 50 paisa coins are legal tender for any sum not
exceeding ` 10 and smaller coins for any sum not exceeding ` 1. The RBI acts as an agent of the Central Government
for distribution, issue and handling of the coins and for withdrawing and remitting them back to Government as
may be necessary.
A mint is an industrial facility which manufactures coins that can be used in currency.
Question 19] What do you understand by 'counterfeit money'? What steps are being taken by the RBI against
counterfeiting of currency?
Write a short note on: Combating Counterfeiting
Ans.: Counterfeit money is imitation currency produced without the legal sanction of the Government. Producing
or using counterfeit money is a form of fraud or forgery.
Counterfeiting currency-notes or bank-notes is offence u/s 489A of the Indian Penal Code, 1860 and punishable
with imprisonment for life, or with imprisonment of either description for a term which may extend to 10 years and
shall also be liable to fine.
Combating Counterfeiting: The RBI, in consultation with the Government of India, periodically reviews and
upgrades the security features of the bank notes to deter counterfeiting.
It also shares information with various law enforcement agencies to address the issue of counterfeiting.
It has also issued detailed guidelines to banks and government treasury offices on how to detect and impound
counterfeit notes.
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Question 20] What are the restrictions under the Reserve Bank of India Act, 1934 for making or drawing
negotiable instruments which are payable to bearer on demand?
Ans.: Issue of demand bills and notes [Section 31]:
(1) A bill of exchange or hundi cannot be made payable to bearer on demand. If it is made payable to bearer, it
should be payable after certain days.
(2) A promissory note cannot be made payable to bearer at all, either 'on demand' or even 'after some days'.
(3) A cheque or draft can be made payable to bearer on demand.
Any person in India other than the RBI/Central Government shall not make or issue any promissory note payable to
the bearer of the instrument.
The purpose of this provision is to ensure that only government has monopoly of issuing paper currency in India.
Question 21] What do you understand by the term 'Prudential norms'? What are the prudential norms for the
following as notified by the RBI:
(a) Capital Adequacy
(b) Loans & Advances
(c) Investments
Write a short note on: Prudential norms for banks
Ans.: 'Prudential norms' are the guidelines and general norms issued by the central bank of the country for the
proper and accountable functioning of bank and bank-like establishments.
In order to strengthen the balance sheets of banks, the RBI prescribes appropriate prudential norms with respect
to:
♦ Income Recognition
♦ Asset Classification
♦ Capital Adequacy
♦ Investments Portfolio
♦ Capital Market Exposures etc.
(1) Capital Adequacy: Capital requirement (also known as regulatory capital or capital adequacy) is
the amount of capital which a bank or other financial institution is required to be held as per the norms prescribed
by the financial regulator.
The RBI has instructed banks to maintain adequate capital on a continuous basis. The adequacy of capital is
measured in terms of Capital to Risk-Weighted Assets Ratio (CRAR).
Under the recently revised framework, banks are required to maintain adequate capital for credit risk, market risk,
operational risk and other risks. Basel III norms are applicable from year 2019 for capital adequacy.
Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector's
ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of
spill over from the financial sector to the real economy.
The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled
commercial banks are required to maintain CAR of 9% while Indian public sector banks are emphasized to maintain
CAR of 12%.
(2) Loans and Advances: In order to maintain the quality of their loans and advances, the RBI requires banks to
classify their loan assets as performing and non-performing assets (NPA), primarily based on the record of recovery
from the borrowers. NPAs are further categorized into following categories:
(a) Sub-standard Assets: A sub-standard asset would be one, which has remained NPA for a period less than or
equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardize the liquidation of the
debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not
corrected.
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(b) Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard category for
a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as
substandard, with the added characteristic that the weaknesses make collection highly questionable and
improbable.
(c) Loss Assets: A loss asset is one where loss has been identified by the bank or internal/external auditors or
the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered
uncollectible although there may be some salvage or recovery value.
(3) Investments: The RBI requires banks to classify their investment portfolios into three categories for the
purpose of valuation:
(a) Held for Trading (HFT)
(b) Available for Sale (AFS)
(c) Held to Maturity (HTM)
The securities held under HFT and AFS categories have to be marked-to-market periodically and depreciation, if any,
needs appropriate provisions by banks.
Securities under HTM category must be carried at acquisition/ amortized cost, subject to certain conditions.
Question 22] What are the basic parameters of the Reserve Bank's policies for Foreign Exchange
Reserves Management?
Write a short note on: Foreign Exchange Reserves Management by RBI
Ans.: The RBI, as the custodian of the country's foreign exchange reserves, is vested with the responsibility of
managing their investment. The legal provisions governing management of foreign exchange reserves are laid down
in the RBI Act, 1934.
The RBI's reserves management function has in recent years grown both in terms of importance and sophistication
for following two reasons.
(1) Share of foreign currency assets in the balance sheet of the RBI has substantially increased.
(2) With the increased volatility in exchange and interest rates in the global market, the task of preserving the
value of reserves and obtaining a reasonable return on them has become challenging.
The basic parameters of the RBI's policies for foreign exchange reserves management are safety, liquidity and
returns. Within this framework, the RBI on:
(a) Maintaining market's confidence in monetary and exchange rate policies.
(b) Enhancing the RBI's intervention capacity to stabilize foreign exchange markets.
(c) Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of
crisis, including national disasters or emergencies.
(d) Providing confidence to the markets that external obligations can always be met, thus reducing the costs at
which foreign exchange resources are available to market participants.
(e) Adding to the comfort of market participants by demonstrating the backing of domestic currency by external
assets.
While safety and liquidity continue to be the twin-pillars of reserves management, return optimization has become
an embedded strategy within this framework. The RBI has framed policy guidelines stipulating stringent eligibility
criteria for issuers, counterparties, and investments to be made with them to enhance the safety and liquidity of
reserves. The RBI, in consultation with the Government, continuously reviews the reserves management strategies.
MONETARY POLICY
Question 23] What do you understand by 'Open Market Operations'?
Ans.: Open Market Operations are conducted by the RBI by way of sale or purchase of Government Securities to
adjust money supply conditions.
The central bank sells Government Securities to suck out liquidity from the system and buys back Government
Securities to infuse liquidity into the system.
10
The RBI uses Open Market Operations along with other monetary policy tools such as Repo Rate, Cash Reserve Ratio
& Statutory Liquidity Ratio to adjust the quantum and price of money in the system.
Question 24] Write a short note on: Monetary Policy Function of the RBI What do you understand by the term
'Monitory Policy'?
Ans.: Monetary policy is the policy laid down by the RBI which involves management of money supply and interest
rate. It is the policy to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
In India, monetary policy of the RBI is aimed at managing the quantity of money in order to meet the requirements
of different sectors of the economy and to increase the pace of economic growth.
The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit
control policy, moral persuasion and through many other instruments.
The RBI is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It
can do so through changing the 'Bank Rate' or through 'Open Market Operations'.
Question 25] Write a short note on: Monetary Policy Committee
For what purpose Monetary Policy Committee is established? What is the composition of this committee?
Ans.: The Central Government, in consultation with the RBI shall determine the inflation target in terms of the
Consumer Price Index, once in every 5 years, which needs to be notified in the Official Gazette.
Constitution of Monetary Policy Committee [Section 45ZB(1)]: The Central Government shall should constitute a
Monetary Policy Committee by notification in the Official Gazette.
Composition of Monetary Policy Committee (MPC) [Section 45ZB(2)]: The Monetary Policy Committee consists of
-
(a) The Governor of the RBI.
(b) Deputy Governor of the RBI in charge of Monetary Policy.
(c) One officer of the RBI to be nominated by the Central Board.
(d) Three persons to be appointed by the Central Government.
Duty of Monetary Policy Committee [Section 45ZB(3)]: The Monetary Policy Committee shall determine the Policy
Rate required to achieve the inflation target.
Decision of the Monetary Policy Committee [Section 45ZB(4)]: The decision of the Monetary Policy Committee is
binding on RBI and the RBI is required to publish a document explaining the steps to be taken to implement the
decisions of the Monetary Policy Committee.
Question 26] What types of instruments are used by the RBI for implementing Monetary Policy in India?
Ans.: There are several direct and indirect instruments that are used for implementing monetary policy which are
discussed below -
(1) Repo Rate: Repo rate is the rate at which Central Bank (RBI) lends money to commercial banks in the event
of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
In the event of inflation, RBI increase repo rate as this acts as a disincentive for banks to borrow from the Central
Bank. This ultimately reduces the money supply in the economy
(2) Reverse Repo Rate: Reverse repo rate is the rate at which the Central Bank (RBI) borrows money from
commercial banks within the country. It is a monetary policy instrument which can be used to control the money
supply in the country.
An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant.
An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the
RBI, thereby decreasing the supply of money in the market.
(3) Liquidity Adjustment Facility: Liquidity Adjustment Facility (LAF) is used to aid banks in adjusting the day to
day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for adjusting in
their SLR/ CRR requirements. LAF consists of 'repo' and 'reverse repo' operations. Repo or repurchase option is a
collateral lending i.e. banks borrow money from RBI to meet short term needs by selling securities to RBI with an
11
agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for this transaction is
called the repo rate. Repo operations therefore inject liquidity into the system. Reverse repo operation is done
when RBI borrows money from banks by lending securities. The interest rate paid by RBI in this case is called the
reverse repo rate. Reverse repo operation absorbs the liquidity from the system. The collateral used for repo and
reverse repo operations are Government of India securities. In LAF, money transaction is done via RTGS (Real time
Gross settlement).
Why the LAF?
The RBI is responsible in facilitating the smooth functioning of the financial system. An important distorting
phenomenon associated with the operation of the financial system is illiquidity. Liquidity means adequate and
timely cash in the system for financial institutions to carry out their functions. Liquidity situation in the economy
as a whole may fluctuate highly due to many factors. Excess liquidity may transfer itself into price ris e.
Simultaneously, liquidity shortages may lead to havoc in the financial system especially in the banking system.
The responsibility of the RBI is to keep liquidity in a daily manner.
How it works?
The LAF as its name suggests is a liquidity adjustment mechanism for the banking system. It is aimed to inject
liquidity into the system when there is liquidity shortage. Simultaneously, it absorbs liquidity when there is excess
liquidity. For all these purposes, the LAF is working in an automatic manner based on repo and reverse repo
operations. The LAF is operating on a daily basis. The central point of LAF is that liquidity injection is done through
Repo Operations and liquidity absorption from banks to the RBI is done through Reverse Repo Operations.
The working of repo and reverse repo operations under LAF is simple. Banks which have liquidity shortages,
approach the RBI and gives government securities to it while obtaining loans. During the time of liquidity
stringency, most of the commercial banks will be resorting to repo operations. On the other hand, during the
time of excess liquidity, the commercial banks will be parking money with the RBI and thus will be earning an
interest rate (at reverse repo rate).
The reverse repo rate is fixed at 1% lower than the repo rate. This means whenever the repo rate changes, the
reverse repo rate also changes equally. For example, if the RBI increases repo rate by 1 %, the reverse repo rate
also is increased by 1%. Similarly, if the RBI decreases repo rate by 1%, the reverse repo rate also is decreased by
1%.
(4) Marginal Standing Facility (MSF): Marginal Standing Facility is a new Liquidity Adjustment Facility window
created by RBI in its credit policy of May 2011. MSF is the rate at which the banks are able to borrow overnight
funds from the RBI.
The question is - Banks are already able to borrow from RBI via Repo Rate, then why MSF is needed? It is to be noted
here that this window was created for commercial banks to borrow from RBI in certain emergency conditions when
inter-bank liquidity dries up completely and there is volatility in the overnight interest rates. To curb this volatility,
RBI allowed banks get more funds from RBI at a rate higher than the repo rate.
Rate of Interest: The rate of interest on MSF is above 100 bps above the Repo Rate. The banks can borrow up to 1%
of their net demand and time liabilities from this facility. This means that difference between Repo Rate and MSF is
200 basis points. So, Repo Rate will be in the middle, the Reverse Repo Rate will be 100 basis points below it, and
the MSF rate 100 bps above it. Thus, if Repo Rate is X%, reverse repo rate is X-1% and MSF is X+1%.
(5) Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted
average call money rate.
(6) Bank Rate: Bank Rate refers to the official interest rate at which RBI will provide loans to the banking system
which includes commercial/cooperative banks, development banks etc. Such loans are given out either by direct
lending or by rediscounting (buying back) the bills of commercial banks and treasury bills. Thus, bank rate is also
known as discount rate.
When RBI increases the bank rate, the cost of borrowing for banks rises and this credit volume gets reduced
leading to decline in supply of money.
12
Bank Rate and Repo Rate seem to be similar terms. However, Repo Rate is a short-term measure and it refers to
short-term loans and used for controlling the amount of money in the market. On the other hand, Bank Rate is a
long-term measure and is governed by the long-term monetary policies of the RBI.
(7) Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.
In Indian context, CRR is the average daily balance that a bank is required to maintain with the RBI as a share of
specified percentage of its 'Demand & Time Liabilities'.
(8) Statutory Liquidity Ratio (SLR): The SLR is determined by a percentage of total demand and time liabilities.
Time liabilities refer to the liabilities which the commercial banks are liable to pay to the customers after a certain
period mutually agreed upon, and demand liabilities are such deposits of the customers which are payable on
demand. An example of time liability is 6 month fixed deposit which is not payable on demand but only after 6
months. An example of demand liability is a deposit maintained in a saving account or current account that is
payable on demand through a withdrawal form such as a cheque. The SLR is determined by a percentage of total
'Demand & Time Liabilities'.
Banks have to maintain a stipulated proportion of their 'Demand & Time Liabilities' in the form of liquid assets like
cash, gold and unencumbered securities.
Currently statutory liquidity ratio is 19.5% of total 'Demand & Time Liabilities'
(9) Open Market Operations (OMOs): Please refer to answer of Question No. 23.
(10) Market Stabilization Scheme (MSS): Market Stabilization scheme (MSS) is a monetary policy intervention by
the RBI to withdraw excess liquidity (or money supply) by selling government securities in the economy. This
instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising
from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash
so mobilized is held in a separate government account with the RBI.
Question 27] Distinguish between: Repo Rate and Bank Rate Ans.: Following are the main points of distinction
between repo rate and bank rate:
Points Repo Rate Bank Rate
Meaning Repo rate is the rate at which Central Bank (RBI) Bank Rate refers to the official interest rate at
lends money to commercial banks in the event which RBI will provide loans to the banking
of any shortfall of funds. system which includes commercial or co-
operative banks, development banks etc.
Time Repo Rate is a short-term measure and is Bank Rate is a long-term measure and is
Frame governed by the short-term monetary policies of governed by the long-term monetary policies of
the RBI. the RBI.
Rate Repo rate is lower than a bank rate. Bank rate is higher than repo rate.
Current Current repo rate is 6.50%. Current bank rate is 6.75%.

rate
Question 28] Distinguish between: Repo Rate and Reverse Repo Rate Ans.: Following are the main points of
distinction between repo rate and reverse repo rate:
Points Repo Rate Reverse Repo Rate
Meaning Repo rate is the rate at which Central Bank (RBI) Reverse repo rate is the rate at which the Central
lends money to commercial banks in the event Bank (RBI) borrows money from commercial
of any shortfall of funds. banks within the country.
13
Effect High repo rate drains excess liquidity from the High reverse repo rate injects liquidity into the
market as the banks have to pay high interest to economic system by offering high profits to
obtain loan from RBI banks
Rate Repo rate is always higher than the reverse repo Reverse repo rate is always lower than the repo
rate rate.
Current Current repo rate is 6.50%. Current reverse repo rate is 6.25%.
rate
Question 29] Distinguish between: Cash Reserve Ratio & Statutory Liquidity Ratio Ans.: Following are the main
points of distinction between cash reserve ratio and statutory liquidity ratio:
Points Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)
Meaning Cash Reserve Ratio (CRR) is a specified minimum Liquidity maintained by the banks in specified
fraction of the total deposits of customers, percentage of its 'Demand & Time Liabilities' is
which commercial banks have to hold as known as Statutory Liquidity Ratio.
reserves either in cash or as deposits with the
central bank.
Form Cash Reserve Ratio has to be maintained by the Statutory Liquidity Ratio has to be maintained in
banks in cash. cash and other assets like gold and government
securities viz. Central and State government
securities.
Points Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)
Main Cash Reserve Ratio is to be maintained by Statutory Liquidity Ratio has to be maintained in
tenance keeping cash in certain percentage of 'Demand cash and other assets by the bank itself.
& Time Liabilities'.
with
Purpose Cash Reserve Ratio controls the excess money Statutory Liquidity Ratio helps in meeting out
flow in the economy. the unexpected demand of depositors.
Rate Currently Cash Reserve Ratio is 4% of total' Currently Statutory Reserve Ratio is 19.5% of
Demand & Time Liabilities'. total 'Demand & Time Liabilities'.
Question 30] Discuss briefly provisions of the Reserve Bank of India Act, 1934 relating to 'meetings of monetary
policy committee'.
Ans.: Meetings of Monetary Policy Committee [Section 45ZI]:
(1) The RBI shall organize at least 4 meetings of the Monetary Policy Committee in a year.
(2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the RBI at least one
week before the first meeting in that year.
(3) The meeting schedule may be changed only -
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Governor, an additional meeting is required or a meeting is required to be
rescheduled due to administrative exigencies.
(4) Any change in meeting schedule shall be published by the RBI as soon as practicable.
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(5) The quorum for a meeting of the Monetary Policy Committee shall be 4 Members, at least one of whom shall
be the Governor and in his absence, the Deputy Governor who is the Member of the Monetary Policy Committee.
(6) The meetings of the Monetary Policy Committee shall be presided over by the Governor, and in his absence
by the Deputy Governor who is a Member of the Monetary Policy Committee.
(7) Each Member of the Monetary Policy Committee shall have one vote.
(8) All questions which come up before any meeting of the Monetary Policy Committee shall be decided by a
majority of votes by the Members present and voting, and in the event of an equality of votes, the Governor shall
have a second or casting vote.
(9) The Central Government may convey its views in writing to the Monetary Policy Committee from time to
time.
(10) The vote of each Member of the Monetary Policy Committee for a proposed resolution shall be recorded
against such Member.
(11) Each Member of the Monetary Policy Committee shall write a statement specifying the reasons for voting in
favour of, or against the proposed resolution.
(12) The procedure, conduct, code of confidentiality and any other incidental matter for the functioning of the
Monetary Policy Committee shall be such as may be specified by the regulations made by the Central Board.
(13) The proceeding of the Monetary Policy Committee shall be confidential.
Question 31] Write a short note on: Monetary Policy Report
Ans.: Monetary Policy Report [Section 45ZM]: The RBI shall publish once in every 6 months a document to be called
the Monetary Policy Report explaining -
(a) the sources of inflation and
(b) the forecasts of inflation for the period between 6 to 18 months from the date of publication of the
document.
The form and contents of the Monetary Policy Report shall be such as may be specified by the regulations made by
the Central Board.
15
Chapter
2
FOREIGN EHCNANGE MANAGEMENT ACT. 1999
INTRODUCTION: The Foreign Exchange Regulation Act, 1973 in India was replaced on June2000by the Foreign
Exchange Management Act, 1999. The FERA was passed in 1973 at a time when there was acute shortage of foreign
exchange in the country. It had a controversial 27 years stint during which many bosses of the Indian corporate
world found themselves at the mercy of the Enforcement Directorate. Moreover, any offence under FERA was a
criminal offence liable to imprisonment, but FEMA makes offences relating to foreign exchange civil offences.
FEMIA had become the need to support the pro-liberalization policies of the Government of India. The objective of
the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external
trade and payments for promoting the orderly development and maintenance of foreign exchange market in India.
Among the various objectives of the FEMA, an important one is to revise and unite all the laws that relate to foreign
exchange. Further FEMA aims to promote foreign payments and trade in the country. Another important objective
of the FEMA is to encourage the orderly maintenance and development of the foreign exchange market in India.
FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled
by a person, who is a resident of India.
Question 1] Outline the objective & scope of the Foreign Exchange Management Act, 1999.
Ans.: As per the preamble, the objective is to consolidate and amend the law relating to foreign exchange with view
to:
(a) Facilitate external trade and payments.
(b) For promoting development & maintenance of foreign exchange market in India.
Scope: The Act extends to the whole of India. It also applies to:
- All branches, offices and agencies outside India owned or controlled by a person resident in India (PRI), and
- Any contravention committed outside India, by any person to whom this Act applies.
FEMA has considerably liberalized provisions in respect of foreign exchange. However, in extraordinary situations,
the Central Government has been empowered to suspend operation of any or all provisions of FEMA in public
interest, by issuing a notification. The Central Government has also been empowered to relax provisions by issuing
a notification.
Question 2] "FEMA is to facilitate external trade and payments and promotion of orderly development and
maintenance of foreign exchange market in India." Discuss.
CS (Executive) - June 2014 (5 Marks)
Ans.: Foreign Exchange Regulation Act, 1973 (FERA) was a relatively strict Act, that had as its main objective to
control the foreign exchange movement to and from India. Foreign Exchange Management Act, 1999 (FEMA), is
mainly intended to manage the flows of foreign exchange and encourage FDI in India.
Any offence under FERA was a criminal offence liable to imprisonment, but FEMA makes offences relating to foreign
civil offences.
FEMA had become the need to support the pro-liberalization policies of the Government of India. The objective of
the Act is to consolidate and amend the law relating to foreign exchange, to facilitate external trade and payments
for promoting the orderly development and maintenance of foreign exchange market in India.
As the name indicates, the Act is to 'manage' not to 'regulate'; hence FEMA is investor friendly. FEMA lays down
that "everything is permitted unless what is not covered, controlled or prohibited".
Question 3] Discuss briefly the regulatory framework governing the Foreign Exchange Management. * 1 2 3 4 5 6
Ans.: The Legislations, Rules & Regulations, governing Foreign Exchange Management are as under:
♦ Foreign Exchange Management Act, 1999.
♦ Rules made by Ministry of Finance u/s 46.
16
♦ Regulations made by RBI u/s 47.
♦ Master Direction issued by RBI on every year.
♦ Foreign Direct Investment policy issued by Department of Industrial Policy and Promotion.
♦ Notifications and Circulars issued by RBI.
Foreign Exchange Management Act, 1999: FEMA contains 7 Chapters divided into 49 Sections of which 12 Sections
cover operational part and the rest deals with contravention, penalties, adjudication, appeals, enforcement
directorate etc.
Rules made under FEMA are as follows:
(1) FEM (Encashment of Draft, Cheque, Instrument & Payment of Interest) Rules, 2000
(2) FEM (Authentication of Documents) Rules, 2000
(3) FEM (Current Account Transaction) Rules, 2000
(4) FEM (Adjudication Proceedings & Appeal) Rules, 2000
(5) FEM (Compounding Proceedings) Rules, 2000
(6) The Appellate Tribunal for Foreign Exchange (Recruitment, Salary, Allowances & Other Conditions of
Service of Chairperson & Members) Rules, 2000.
Regulations made under FEMA are as follows:
(a) FEM (Acquisition & Transfer of Immovable Property Outside India) Regulations, 2015
(b) FEM (Borrowing & Lending in Rupees) Regulations, 2000
(c) FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000
(d) FEM (Deposit) Regulations, 2016
(e) FEM (Export & Import of Currency) Regulations, 2015
(f) FEM (Guarantees) Regulations, 2000
(g) FEM (Acquisition & Transfer of Immovable Property in India) Regulations, 2000
(h) FEM (Establishment in India of Branch office or a Project office or any other Place of Business) Regulations,
2016
(i) FEM (Export of Goods & Services) Regulations, 2015
(j) FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015
(k) FEM (Insurance) Regulations, 2015
(l) FEM (Investment in Firm or Proprietary Concern in India) Regulations, 2000
(m) FEM (Manner of Receipt & Payment) Regulations, 2016
(n) FEM (Permissible Capital Account Transactions) Regulations, 2000
(o) FEM (Possession & Retention of Foreign Currency) Regulations, 2015
(p) FEM (Realization, Repatriation & Surrender of Foreign Exchange) Regulations, 2015
(q) FEM (Remittance of Assets) Regulations, 2016
(r) FEM (Transfer or Issue of Security by a person Resident outside India) Regulations, 2017
(s) FEM (Foreign Exchange Derivative Contracts) Regulations, 2000
(f) FEM (Transfer or Issue of any Foreign Security) Regulations, 2004
(u) FEM (Crystallization of inoperative Foreign Currency Deposits) Regulations, 2014
(v) FEM (Transfer or Issue of any foreign Security) Regulations, 2004
(w) FEM (International Financial Services Centre) Regulations, 2015
(x) FEM (Regularization of Assets Held Abroad by a Person Resident in India) Regulations, 2015.
Question 4] Explain the terms Foreign Exchange & Foreign Security as per the Foreign Exchange Management Act,
1999. CS (Inter) - Dec 2000, June 2004 (3 Marks)
17
CS (Inter) - June 2007 (3 Marks)
Distinguish between: Foreign Exchange & Foreign Security
CS (Executive) - Dec 2010 (5 Marks)
Ans.: Foreign Currency [Section 2(m)]: Foreign currency means any currency other than Indian currency. Foreign
Exchange [Section 2(n)]: Foreign exchange means foreign currency and includes-
(i) Deposits, credits and balances payable in any foreign currency;
(ii) Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but
payable in any foreign currency,
(iii) Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside
India, but payable in Indian currency.
Foreign Security [Section 2(o)]: Foreign security means any security, in the form of shares, stocks, bonds,
debentures or any other instrument in foreign currency. It also includes securities expressed in foreign currency,
but where redemption or any form of return such as interest or dividends is payable in Indian currency.
Question 5] Write a short note on: 'Person' under the FEMA CS (Executive) - Dec 2013 (5 Marks)
Ans.: Person [Section 2(u)]: Person includes -
(a) Individual
(b) Hindu undivided family
(c) Company (.d) Firm
(e) AOPorBOI
(f) Every artificial juridical person and
(g) Any agency, office or branch owned or controlled by any person.
Question 6] Write a short note on: Person Indian of Origin under the FEMA
Ans.: As per FDI Policy, person of Indian origin means a citizen of any country other than Bangladesh or Pakistan, if
-
(a) He at any time held Indian Passport;
(b) He or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of
India or the Citizenship Act, 1955;
(c) The person is a spouse of an Indian citizen or a person referred to in Clause (i) or (ii).
REGULATION & MANAGEMENT OF FOREIGN EXCHANGE
Question 7] What are the restriction under the Foreign Exchange Management Act, 1999 for to dealing and
holding in foreign exchange and foreign security?
Ans.: Dealing in Foreign Exchange [Section 3]: Following activities are permitted as per provision of the Act, rules
and regulations or with the general or special permission of the RBI:
(a) Dealing or transfer any foreign exchange or security to any person.
(b) Making payment to any person resident outside India in any manner.
(c) Receiving any payment on behalf of any person resident outside India in any manner.
(d) Entering into any financial transaction in India for acquisition or creation or transfer of a right to acquire, any
asset outside India by any person.
Holding of Foreign Exchange [Section 4]: Person resident in India can acquire, hold, own, possess or transfer any
foreign exchange, foreign security or any immovable property situated outside India only after complying the
provisions of the Act, Rules and Regulations made thereunder.
POSSESSION & RETENTION OF FOREIGN EXCHANGE
Question 8] What are the provisions of the regulations framed by RBI in respect of possession and retention of
foreign currency?
18
Ans.: As per Section 4, person resident in India can acquire, hold, own, possess or transfer any foreign exchange
only after compliance with the provisions of the Act, Rules and Regulations. In this regard the RBI has framed Foreign
Exchange Management (Possession & Retention of Foreign Currency) Regulations, 2015.
Limits for possession and retention of foreign currency or foreign coins [Regulation 3]: The RBI specifies the
following limits for possession or retention of foreign currency or foreign coins:
(i) An authorized person acting within the scope of his authority may possess foreign currency and coins without
any limit.
(ii) Any person may possess foreign coins without any limit.
(iii) A person resident in India may possess foreign currency notes, bank notes and foreign currency travellers
cheque not exceeding US$ 2,000 provided that such foreign exchange -
(a) was acquired by him while on a visit to any place outside India by way of payment for services not arising
from any business in or anything done in India,
(b) was acquired by him, from any person not resident in India and who is on a visit to India as honorarium or
gift or for services rendered or in settlement of any lawful obligation,
(c) was acquired by him by way of honorarium or gift while on a visit to any place outside India or
(d) represents unspent amount of foreign exchange acquired by him from an authorized person for travel
abroad.
Possession of foreign exchange by a person resident in India but not permanently resident [Regulation
4]: A person resident in India but not permanently resident may possess without limit foreign currency in the form
of currency notes, bank notes and travellers cheques, if such foreign currency was acquired, held or owned by him
when he was resident outside India and, has been brought into India in accordance with the regulations made under
the Act.
Explanation: For the purpose of this clause, 'not permanently resident' means a person resident in India for
employment of a specified duration or for a specific job or assignment, the duration of which does not exceed 3
years.
Question 9] Raman is a software engineer of Armtek Ltd. The company sent him to Japan to develop a software
programme there on deputation for 2 years. He earned a sum of US$ 3,000 as an honorarium there. On his return
to India he wants to hold this foreign currency with him. Whether Raman will be allowed to keep the foreign
currency with him? CA (Final) - May 2009 (7 Marks)
Ans.: As per Regulation 3 of the Foreign Exchange Management (Possession & Retention of Foreign Currency)
Regulations, 2015, a person resident in India may possess foreign currency notes, bank notes and foreign currency
travellers cheque not exceeding US$ 2,000 provided that such foreign exchange was acquired by him by way of
honorarium while on a visit to any place outside India.
Raman is a person resident outside India as he was not present in India for the preceding year for a single day. Thus,
he may hold foreign currency of US$ 3,000. When Raman will become a person resident in India, he can hold foreign
currency of US$ 2,000 and will have to surrender to US$ 1,000 to an authorized person.
Question 10] Dr. Sukant, who is permanently resident in India, retains foreign currency notes of US$ 5,000 which
he had acquired during his visit to USA by way of expert medical advice rendered to patients there. Advice with
reference to FEMA. CS (Executive) - June 2014 (1 Mark)
travellers cheque not exceeding US$ 2,000 provided that such foreign exchange was acquired by him while on a
visit to any place outside India by way of payment for services. Thus, Dr. Sukant can hold foreign currency of US$
2,000 and will have to surrender to US$ 3,000 to an authorized person.
Question 11] Shyam, who had purchased US$ 15,000 for his business trip overseas, has US$ 550 on his return.
Advise with reference to provisions of FEMA. CS (Inter) - Dec 2007 (1 Mark)
19
travellers cheque not exceeding US$ 2,000 provided that such foreign exchange represents unspent amount of
foreign exchange acquired by him from an authorized person for travel abroad. Shyam, who had purchased US$
15,000 for his business trip overseas, has US$ 550 on his return, which is less than amount specified i.e. US$ 2,000;
hence Shyam can hold the US$ 550.
However, as per Regulation 7 of the Foreign Exchange Management (Realization, Repatriation & Surrender of
Foreign Exchange) Regulations, 2015 a person being an individual resident in India shall surrender the
received/realized/unspent/unused foreign exchange whether in the form of currency notes, coins and travellers
cheques, etc. to an authorized person within a period of 180 days from the date of such receipt/realization/
purchase/ acquisition or date of his return to India, as the case may be.
Thus, it is advised to Shyam to surrender US$ 550 to authorized dealer within 180 days from the date of his return.
REALIZATION, REPATRIATION & SURRENDER OF FOREIGN EXCHANGE
Question 12] What is meant by 'repatriate to India'? State the cases where foreign exchange can be held or need
not be repatriated to India by a person resident in India.
CA (Final) - May 2002 (7 Marks)
Discuss the exemptions from the provisions relating to holding, realization and repatriation of foreign currency
under the Foreign Exchange Management Act, 1999.
Ans.: Repatriate to India [Section 2(y)]: Repatriate to India means bringing into India the realized foreign exchange
and -
(i) The selling of foreign exchange to an authorized person in India in exchange for rupees, or
(ii) The holding of realized amount in an account with an authorized person to the extent notified by the RBI and
includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange.
Realization & repatriation of foreign exchange [Section 8]: Where any amount of foreign exchange is due or has
accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India
such foreign exchange within specified period and in specified manner by the RBI.
Exemption from realization and repatriation in certain cases [Section 9]: In following cases foreign exchange need
not be repatriated to India:
(a) Possession of foreign currency or coins by any person up to specified limit.
(b) Foreign currency account held or operated as specified by RBI.
(c) Foreign exchange acquired or received before the 8.7.1947 or any income arising or accruing which is held
outside India by any person in pursuance of a general or special permission granted by the RBI.
(d) Foreign exchange acquired and held by way of gift or inheritance by a person resident in India up to limit as
specified by RBI.
(e) Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts,
inheritance or any other legitimate means up to limit specified by the RBI.
(f) Such other receipts in foreign exchange as may be specified by the RBI.
Question 13] Discuss the provisions of the relevant regulation made by the RBI relating to "realization,
repatriation & surrender of foreign exchange".
Ans.: As per Section 8 of the Foreign Exchange Management Act, 1999, where any amount of foreign^ exchange is
due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and
repatriate to India such foreign exchange within such period and in such manner as may be specified by the RBI.
In exercise of power conferred u/s 8, the RBI has made the Foreign Exchange Management (Realization,
Repatriation & Surrender of Foreign Exchange) Regulations, 2015. Provisions of this regulation are discussed
below:
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Duty of persons to realize foreign exchange due [Regulation 3]: A person resident in India to whom any amount of
foreign exchange is due or has accrued shall take all reasonable steps to realize and repatriate to India such foreign
exchange.
He shall in no case do or refrain from doing anything, or take or refrain from taking any action, which has the effect
of securing -
(a) that the receipt by him of the whole or part of that foreign exchange is delayed; or
(b) that the foreign exchange ceases in whole or in part to be receivable by him.
Manner of Repatriation [Regulation 4]: On realization of foreign exchange due, a person shall repatriate the same
to India (i.e. he should bring into India or receive in India) and -
(a) Sell it to an authorized person in India in exchange for rupees; or
(ib) Retain or hold it in account with an authorized dealer in India to the extent specified by the RBI; or
(c) Use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner
specified by the RBI.
A person shall be deemed to have repatriated the realized foreign exchange to India when he receives in India
payment in rupees from the account of a bank or an exchange house situated in any country outside India,
maintained with an authorized dealer. (Thus, he can collect the amount in his bank account abroad and remit the
same to India)
Period for surrender of realized foreign exchange [Regulation 5]: A person not being an individual resident in India
shall sell the realized foreign exchange to an authorized person under Regulation 4(a), within the period specified
below:
(1) Foreign exchange due or accrued as remuneration for services rendered, whether in or outside India, or in
settlement of any lawful obligation, or an income on assets held outside India, or as inheritance, settlement or gift,
within 7 days from the date of its receipt.
(2) In all other cases within a period of 90 days from the date of its receipt.
Period for surrender in certain cases [Regulation 6]:
(1) If a person not being an individual resident in India who has acquired or purchased foreign exchange for any
purpose mentioned in the declaration made by him to an authorized person does not use it for such purpose or for
any other purpose for which purchase or acquisition of foreign exchange is permissible, he shall surrender such
foreign exchange or the unused portion thereof to an authorized person within a period of 60 days from the date
of its acquisition or purchase by him.
(2) Where the foreign exchange acquired or purchased by any person from an authorized person is for the
purpose of foreign travel, then, the unspent balance of such foreign exchange shall be surrendered to an authorized
person -
(a) within 90 days from the date of return of the traveller to India, when the unspent foreign exchange is in the
form of currency notes and coins; and
(b) within 180 days from the date of return of the traveller to India, when the unspent foreign exchange is in the
form of travellers cheques.
Period for surrender of received/realized/unspent/unused foreign exchange by resident individuals [Regulation
7]: A person being an individual resident in India shall surrender the received/realized/ unspent/ unused foreign
exchange whether in the form of currency notes, coins and travellers cheques, etc. to an authorized person within
a period of 180 days from the date of such receipt/realization/ purchase/ acquisition or date of his return to India,
as the case may be.
Exemption [Regulation 8]: Nothing in these regulations shall apply to foreign exchange in the form of currency of
Nepal or Bhutan.
AUTHORIZED PERSON
Question 14] What do you understand by the expression 'Authorized Person'? Explain the provisions relating to
authorized person? CS (Executive) - Dec 2013 (5 Marks)
21
Define the term 'authorized person' under the Foreign Exchange Management Act, 1999 and state the powers of
the RBI to issue direction to an authorized person.
Ans.: Authorized Person [Section 2(c)]: Authorized person means an authorized dealer, money changer, off-shore
banking unit or any other person for the time being authorized u/s 10 to deal in foreign exchange or foreign
securities.
Generally, all nationalized banks, leading non-nationalized banks and foreign banks are appointed as authorized
dealers to deal in foreign exchange.
(1) Authorization to act as Authorized Person [Section 10(1) & (2)]: The RBI may, on an application made to it,
authorize any person to be known as authorized person to deal in foreign exchange or securities. An authorization
shall be in writing and shall be subject to the prescribed conditions.
(2) Revocation of authorization [Section 10(3)]: An authorization granted may be revoked by the RBI at any
time if the RBI is satisfied that-
(a) It is in public interest so to do
(b) The authorized person has failed to comply with the condition or has contravened any of the provisions of
the Act or any rule, regulation, notification, direction or order made thereunder
However, a reasonable opportunity of making a representation in the matter should be given to authorized person
before revocation.
(3) Duties of Authorized Person [Section 10(4)]: An authorized person shall comply with general or special
directions or orders given by the RBI. An authorized person shall not engage in any transaction which is not in
conformity with the terms of his authorization without the previous permission of the RBI.
(4) Obtaining information & refusal to deal [Section 10(5)]: An authorized person shall before undertaking and
declaration from a person to satisfy himself that the transaction in is not violation of FEMA. If authorized person
has any doubt, he should refuse the transaction in writing. If the authorized person has reason to believe that
transaction is contemplated, he should the matter to the RBI.
(5) Effect of misuse [Section 10(6)]: A person who has foreign exchange shall be deemed to have committed
contravention of the provisions of the FEMA if such person—
- Does not use foreign exchange for purpose for which it was acquired or
- Does not surrender it to authorized person within the specified period or
- Uses the foreign exchange for any other purpose other than for which it was acquired
RBI's powers to issue directions to authorized person [Section 11]: The RBI may give to the authorized persons any
direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or
foreign security for the purpose of securing compliance with the provisions of FEMA.
The RBI may also direct any authorized person to furnish necessary information in prescribed manner for the
purpose of ensuring the compliance with FEMA.
Where any authorized person contravenes any direction or fails to file any return, the RBI may after giving
reasonable opportunity of being heard impose on the authorized person a penalty which may extend to ` 10,000.
In the case of continuing contravention an additional penalty up to ` 2,000 per day can be imposed.
Power of RBI to inspect authorized person [Section 12]: The RBI can inspect the business of any authorized person
for the purpose of -
(a) Verifying the correctness of any statement, information or particulars furnished to the RBI
(b) Obtaining any information or particulars which authorized person has failed to furnish
(c) Securing compliance with the provisions of FEMA.
It shall be the duty of every authorized person and every director, partner or other officer of authorized person to
produce to any officer making an inspection books, accounts and other documents in his custody within such time
and in such manner as the said officer my direct.
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Question 15] The RBI issued certain directions to Dream Ltd., an authorized person under the Foreign Exchange
Management Act, 1999 to file certain returns. The Company failed to file the said returns. Decide, as to what
penal provisions are applicable against the said authorized person under the said Act.CA (Final) - May 2010 (3
Marks)
Ans.: Section 11 of the Foreign Exchange Management Act, 1999 provides that where any authorized person
contravenes any direction given by the RBI under the said Act or fails to file any return as directed, the RBI may,
after giving reasonable opportunity of being heard impose a penalty which may extend to ` 10,000. In the case of
continuing contravention an additional penalty up to ` 2,000 per day can be imposed.
Thus, Dream Ltd. liable to penalty as stated above for failure to file return.
CONTRAVENTION & PENALTIES
Question 16] What are the penalties provided for contravention of any provisions under the Foreign Exchange
Management Act, 1999?
Ans.: Penalties [Section 13]: If any person contravenes any provision of FEMA, he shall be liable to a penalty as
stated below:
♦ If amount is quantifiable: Penalty up to thrice the sum involved in such contravention.
♦ If amount is not quantifiable: Penalty up to ` 2 lakhs.
In case of continuing contravention additional penalty up to ` 5,000 per day can be imposed.
Adjudicating Authority can also order confiscation of any currency, security or any other money or property in
respect of which the contravention has taken place.
Adjudicating Authority can also direct that foreign exchange holdings of any person committing the contraventions
shall be brought back into India or shall be retained outside India as per directions.
Question 17] Explain the provisions in respect of enforcement of the orders of the Adjudicating Authority under
the Foreign Exchange Management Act, 1999.
Ans.: Enforcement of the orders of Adjudicating Authority [Section 14]: If any person fails to make full payment of
the penalty imposed on him within a period of 90 days of receipt of notice. If such payment is not made, he shall be
liable to civil imprisonment.
Order for arrest and detention in civil prison of a defaulter cannot be made unless a notice is issued to the defaulter.
After he appears, he will be asked to show cause why he should not be committed to civil prison. Pending inquiry,
he can be released on furnishing security.
A warrant for the arrest of the defaulter may be issued if the Adjudicating Authority is satisfied that:
♦ The defaulter has dishonestly transferred, concealed or removed his property or he is refusing or neglecting
to pay even if he has means to pay.
♦ He is likely to abscond the local limits.
If a person to whom show cause notice is issued does not appear before Adjudicating Authority, warrant of arrest
can be issued.
Every person arrested in pursuance of a warrant of arrest shall be brought before the Adjudicating Authority within
24 hours of his arrest.
The defaulter can be released if he pays the amount entered in the warrant of arrest and the costs of the arrest to
the officer arresting him.
COMPOUNDING OF OFFENCES
Question 18] Write a short note on: Power of the RBI to compound contraventions of the foreign exchange
transactions. CS (Inter) - Dec 2006 (3 Marks)
What is meant by contravention and compounding of contraventions?
23
Ans.: Contravention and compounding of contravention: Contravention is a breach of the provisions of the Foreign
Exchange Management Act (FEMA), 1999 and rules/regulations/notifications/orders/ directions/circulars issued
thereunder.
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.
The RBI is empowered to compound contraventions of the provisions of the FEMA. It is a voluntary process in which
an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person
who contravenes any provisions of FEMA, 1999 by minimizing transaction costs.
Wilful, mala fide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the
RBI.
Power to compound contravention [Section 15(1)]: Any contravention u/s 13 may, on an application made by the
person committing such contravention, be compounded within 180 days from the date of receipt of application by
the Director of Enforcement or such other officers of the Directorate of Enforcement and Officers of the RBI as may
be authorized in this behalf by the Central Government in prescribed manner.
No further proceedings after compounding [Section 15(2)]: Where a contravention has been compounded, no
proceeding or further proceeding, as the case may be, shall be initiated or continued against the person committing
such contravention in respect of the contravention so compounded.
Question 19] Discuss the provisions and procedure relating to compounding of various offences under the Foreign
Exchange (Compounding Proceedings) Rules, 2000.
Ans.: Power of Reserve Bank to compound contravention [Rule 4(1)]: If any Person contravenes anv provisions of
Foreign Exchange Management Act, 1999 except Section 3(a) of the Act, then applications for compounding can be
made as specified below:
Sum involved in contravention is Officer of RBI that can compound the offence
` 10 lakhs or below Assistant General Manager
More than X 10 lakhs but less than X 40 lakhs Deputy General Manager
More than X 40 lakhs but less than X 100 lakhs General Manager
More than X 100 lakhs Chief General Manager
Section 3(a): No person shall deal in or transfer any foreign exchange or foreign security to any person not being
an authorized person.
No compounding if similar offence is committed within a period of 3 years [Rule 4(2)]: No contravention shall be
compounded unless the amount involved in such contravention is quantifiable.
Once an offence is compounded, similar offence committed within period of 3 years cannot be compounded. Thus,
similar offence can be compounded only once in 3 years.
Every officer shall exercise the powers to compound any contravention subject to the direction, control and
supervision of the Governor of the RBI. [Rule 4(3)]
Fee for compounding [Rule 4(4)]: Every application for compounding any contravention shall be made in prescribed
Form to the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai along with a fee of ` 5,000
by way of DD in favour of compounding authority.
The Power of Enforcement Directorate to compound contraventions [Rule 5(1)]: Applications seeking
compounding of contraventions u/s 3(a) shall be submitted to Enforcement Directorate as specified below:
Sum involved in contravention is Directorate that can compound the offence
` 5 lakhs or below Deputy Director of the Directorate of Enforcement
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More than ` 5 lakhs but less than ` 10 Additional Director of the Directorate of Enforcement
lakhs
More than ` 10 lakhs but less than ` 50 Special Director of the Directorate of Enforcement
lakhs
More than ` 50 lakhs but less than T100 Special Director with Legal Advisor of the Directorate of Enforcement
lakhs
More than ` 100 lakhs Director of Enforcement with Special Director of the Directorate of
Enforcement
No compounding if similar offence is committed within a period of 3 years [Rule 5(2)]: No contravention shall be
compounded unless the amount involved in such contravention is quantifiable.
Once an offence is compounded, similar offence committed within period of 3 years cannot be compounded. Thus,
similar offence can be compounded only once in 3 years.
Every officer of the Directorate of Enforcement shall exercise the powers to compound any contravention subject
to the direction, control and supervision of the Governor of the RBI. [Rule 5(3)]
Fee for compounding [Rule 5(4)]: Every application for compounding any contravention shall be made in prescribed
Form to the Director, Directorate of Enforcement, New Delhi, along with a fee of ` 5,000 by way of DD in favour of
compounding authority.
Question 20] Mr. Ronu an Indian national, failed to realize and repatriate foreign exchange amounting to ` 1
Crore. Subsequently he realized that he has committed a convention of the Foreign Exchange Management Act,
1999. He desires to compound the said offence. State, whether Mr. Ronu can do so?
Ans.: Offence committed by Mr. Ronu do not get covered u/s 3(a) of the Foreign Exchange Management Act, 1999
and hence provisions relating to Rule 5 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 will be
applicable in his case for compounding the offence.
Thus, as per provisions of the Rule 5, he should make an application to Special Director with Legal Advisor of the
Directorate of Enforcement as sum involved in contravention is ` 1 Crore.
He should submit his application of compounding to the Director, Directorate of Enforcement, New Delhi, along
with a fee of ` 5,000 by way of Demand Draft.
ADJUDICATION & APPEAL
Question 21] Write a short note on: Adjudicating Authority under the FEMA.
Ans.: Appointment of Adjudicating Authority [Section 16(1)]: The Central Government is empowered to appoint
the Adjudicating Authorities for holding an inquiry under the FEMA.
Where the Adjudicating Authority is of opinion that the said person is likely to abscond or is likely to evade in any
manner, the payment of penalty, if levied, it may direct the said person to furnish a bond or guarantee for such
amount and subject to such conditions as it may deem fit.
Jurisdiction for Adjudicating Authority [Section 16(2)]: The Central Government shall, while appointing the
Adjudicating Authorities also specify in the order published in the Official Gazette, their respective jurisdictions.
Adjudicating Authority not to hold enquiry except on complaint filed by Authorized officer [Section 16(3)]: No
Adjudicating Authority shall hold an enquiry except upon a complaint in writing made by any officer authorized by
a general or special order by the Central Government.
Who may appear before Adjudicating Authority [Section 16(4)]: A person may appear either in person or take the
assistance of a legal practitioner or a Chartered Accountant of his choice for presenting his case before the
Adjudicating Authority.
25
Power of Civil Court [Section 16(5)]: Every Adjudicating Authority shall have the same powers of a Civil Court. All
proceedings before it shall be deemed to be judicial proceedings within the meaning of Sections 193 and 228 of the
Indian Penal Code, 1860.
Adjudicating Authority shall be deemed to be a Civil Court for the purposes of Sections 345 and 346 of the Code of
Criminal Procedure, 1973.
Disposal of complaint expeditiously by the Adjudicating Authority [Section 16(6)]: Every Adjudicating Authority
shall deal with the complaint as expeditiously as possible and endeavour shall be made to dispose of the complaint
finally within 1 year from the date of receipt of the complaint. However, where the complaint cannot be disposed
of within the said period, the Adjudicating Authority shall record periodically the reasons in writing for not disposing
off the complaint within the said period.
Question 22] Joseph, a resident in India has failed to realize and repatriate the foreign exchange into country and
in this regard a complaint has been made to the Government authorities by somebody inimical to Joseph. Explain
briefly the powers of the Adjudicating Authorities to enquire and deal with the complaint of violation of the
provisions of the Foreign Exchange Management Act, 1999.
CS (Final) - Dec 2000 (8 Marks)
Ans.: As per Section 8 of the Foreign Exchange Act, 1999, a person resident in India shall take all reasonable steps
to realize and repatriate the foreign exchange due him.
As per Section 16, no Adjudicating Authority shall hold an enquiry except upon a complaint in writing made by any
officer authorized by a general or special order by the Central Government.
In present case, the complaint against Joseph has been made by a person who is inimical to Joseph and not by an
officer authorized by a general or special order of the Central Government. Therefore, the Adjudicating Authority
cannot hold the inquiry.
Question 23] Explain the provisions relating to filing of appeal with Special Director (Appeals) under the Foreign
Exchange Management Act, 1999.
Ans.: Appeal to Special Director (Appeals) [Section 17(1)]: The Central Government has been empowered to
appoint one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities.
Who may prefer an appeal [Section 17(2)]: Any person aggrieved by an order made by the Adjudicating Authority
may prefer an appeal to the Special Director (Appeals), if Adjudicating Authority is Assistant Director of the
Enforcement or Deputy Director of Enforcement.
Time limit for filing appeal [Section 17(3)]: Every appeal shall be filed within 45 days from the date on which the
copy of the order made by the Adjudicating Authority is received by the aggrieved person. Such appeal shall be filed
in prescribed form, verified in prescribed manner and be accompanied by prescribed fee.
However, the Special Director (Appeals) may entertain an appeal after the expiry of 45 days, if he is satisfied that
there was sufficient cause for not filing it within that period.
Passing of Order [Section 17(4)]: On receipt of an appeal, the Special Director (Appeals) may after giving the parties
to the appeal an opportunity of being heard, pass such order thereon as he thinks fit, confirming, modifying or
setting aside the order appealed against.
Copies of order [Section 17(5)]: The Special Director (Appeals) shall send a copy of every order made by him to the
parties to appeal and to the concerned Adjudicating Authority.
Powers of Special Director (Appeals): The Special Director (Appeals) shall have the same powers of a Civil Court. All
proceedings before him shall be deemed to be judicial proceedings within the meaning of Sections 193 and 228 of
the Indian Penal Code, 1860. Special Director (Appeals) shall be deemed to be a Civil Court for the purposes of
Sections 345 and 346 of the Code of Criminal Procedure, 1973.
Question 24] Explain the provisions relating to filing of appeal with Appellate Tribunal under the Foreign Exchange
Management Act, 1999.
Explain the procedure relating to establishment of Appellate Tribunal under Foreign Exchange Management Act,
1999. CS (Executive) - June 2017 (5 Marks)
26
Ans.: Establishment of Appellate Tribunal [Section 18]: The Appellate Tribunal constituted u/s 12(1) of the
Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for
the FEMA Act, 1999 and the said Appellate Tribunal shall exercise the jurisdiction, powers and authority conferred
on it under the FEMA Act, 1999.
Appeal to Appellate Tribunal [Section 19(1)]: An appeal can be filed by with Appellate Tribunal against the order
made by -
♦ Special Director (Appeals)
♦ An Adjudicating Authority [other than Assistant Director of the Enforcement or Deputy Director of
Enforcement]
Deposit of Penalty: Any person filing appeal to the Appellate Tribunal shall deposit the amount of penalty as may
be notified by the Central Government.
Discretion to dispense with deposit of penalty: The Appellate Tribunal may dispense with the deposit of penalty, if
it is of the opinion that the deposit of penalty would cause undue hardship to such person.
Time limit for filing appeal [Section 19(2)]: Every appeal shall be filed within a period of 45 days from the date of
receipt of copy of the order made by the Adjudicating Authority or the Special Director (Appeals). However, the
Appellate Tribunal may entertain an appeal after the expiry of 45 days if it is satisfied that there was sufficient cause
for not filing it within that period.
Passing of Order [Section 19(3)]: On receipt of an appeal, the Appellate Tribunal pass such orders as it thinks fit,
confirming, modifying or setting aside the order appealed against after giving the parties an opportunity of being
heard.
Copies of order [Section 19(4)]: The Appellate Tribunal shall send a copy of every order to the parties to the appeal
and to the concerned Adjudicating Authority or the Special Director (Appeals).
Time limit for disposal of appeal [Section 19(5)]: The appeal filed before the Appellate Tribunal shall be dealt with
by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within 180 days
from the date of receipt of the appeal. However, if appeal could not be disposed of within the period of 180 days,
the Appellate Tribunal shall record its reasons in writing for not disposing off the appeal within the said period.
Question 25] TKM Exporters of New Delhi are engaged in Export Business. It made certain exports, but failed to
realize and repatriate to India the foreign exchange due on its exports. The Adjudicating Authority imposed a
penalty under the provisions of Foreign Exchange Management Act, 1999. Being aggrieved by this penalty, the
said exporter seeks your advice as to the authority to which appeal can be made and the time limit for making
such appeals. You are required to advise on the matter.
CA (Final) - Nov 2005, May 2008 (7 Marks)
Ans.: Sections 17 & 19 of Foreign Exchange Management Act, 1999 provides for appeals against orders of
Adjudicating Authority. If Adjudicating Authority is Assistant Director of the Enforcement or Deputy Director of
Enforcement, appeal will be filed before Special Director (Appeals). However, if the Adjudicating Authority is senior
to the Assistant Director of Enforcement or Deputy Director of Enforcement, then the appeal can be directly filed in
Appellate Tribunal.
Appeal to Special Director (Appeals): Every appeal to Special Director (Appeals) shall be filed within 45 days from
the date on which the copy of the order made by the Adjudicating Authority is received by the aggrieved person.
Such appeal shall be filed in prescribed form, verified in prescribed manner and be accompanied by prescribed fee.
However, the Special Director (Appeals) may entertain an appeal after the expiry of 45 days, if he is satisfied that
there was sufficient cause for not filing it within that period.
Special Director (Appeals) will hear the parties and then pass appropriate order. Copy of the order shall be sent to
the concerned parties and the Adjudicating Authority.
Appeal to Appellate Tribunal: Appeal against the order of Adjudicating Authority being senior to Assistant Director
of Enforcement or Deputy Director of Enforcement or against the order of Special Director (Appeals) can be made
directly to the Appellate Tribunal within 45 days from the date on which the copy of the order made by Adjudicating
27
Authority or Special Director (Appeals) is received by the aggrieved person. In this case also, the delay can be
condoned by the Appellate Tribunal.
Any person filing appeal to the Appellate Tribunal shall deposit the amount of penalty as may be notified by the
Central Government. The Appellate Tribunal may dispense with the deposit of penalty, if it is of the opinion that the
deposit of penalty would cause undue hardship to such person.
Question 26] Explain the composition of Appellate Tribunal under Foreign Exchange Management Act, 1999. CS
(Executive) - June 2017 (5 Marks)
Ans.: Composition of Appellate Tribunal [Section 20]:
(1) The Appellate Tribunal shall consist of a Chairperson and such number of Members as the Central
Government may deem fit.
(2) Subject to the provisions of the Act -
(a) The jurisdiction of the Appellate Tribunal may be exercised by Benches thereof.
(b) A Bench may be constituted by the Chairperson with one or more Members as the Chairperson may deem
fit.
(c) The Benches of the Appellate Tribunal shall ordinarily sit at New Delhi and at such other places as the Central
Government may, in consultation with the Chairperson, notify.
(id) The Central Government shall notify the areas in relation to which each Bench of the Appellate Tribunal may
exercise jurisdiction.
(3) The Chairperson may transfer a Member from one Bench to another Bench.
(4) If at any stage of the hearing of any case or matter it appears to the Chairperson or a Member that the case
or matter is of such a nature that it ought to be heard by a Bench consisting of two Members, the case or matter
may be transferred by the Chairperson or, as the case may be, referred to him for transfer, to such Bench as the
Chairperson may deem fit.
Question 27] Discuss the provisions relating to qualification and terms of office of Chairperson and members of
Appellate Tribunal.
Ans.: Qualifications for appointment of the Chairperson and Member Appellate Tribunal [Section 21(1)]: A person
shall not be qualified for appointment as the Chairperson or a Member unless he -
(a) In the case of Chairperson, is or has been, or is qualified to be, a Judge of a High Court.
(b) In the case of a Member, is or has been, or is qualified to be, a District Judge.
Qualifications for appointment of the Special Director (Appeals) [Section 21(2)]: A person shall not be qualified for
appointment as a Special Director (Appeals) unless -
(a) He has been a member of the Indian Legal Service and has held a post in Grade I of that Service. OR
(b) He has been a member of the Indian Revenue Service and has held a post equivalent to a Joint Secretary to
the Government of India.
Term of office [Section 22]: The Chairperson and every other Member shall hold office as such for a term of five
years from the date on which he enters upon his office:
However, no Chairperson or other Member shall hold office as such after he has attained -
(a) In the case of the Chairperson, the age of 65 years.
(b) In the case of any other Member, the age of 62 years.
Question 28] Who may present the case before Appellate Tribunal or the Special Director (Appeals) under the
FEMA?
Ans.: Right of appellant to take assistance [Section 32]: A person preferring an appeal to the Appellate Tribunal or
the Special Director (Appeals) may either appear in person or take the assistance of a Legal Practitioner or a
Chartered Accountant to present his case.
28
The Central Government may authorize one or more Legal Practitioners or Chartered Accountants or any of its
officers to act as presenting officers to present the case with respect to any appeal before the Appellate Tribunal or
the Special Director (Appeals).
Question 29] Whether the Civil Court have jurisdiction to entertain the cases involving contravention of FEMA
provisions?
Ans.: Civil Court not to have jurisdiction [Section 34]: No Civil Court shall have jurisdiction to entertain any suit or
proceeding in respect of any matter which an Adjudicating Authority or the Appellate Tribunal or the Special
Director (Appeals) is empowered by or under the Act to determine.
No Civil Court shall grant injunction in respect of any action taken or to be taken in pursuance of any power
conferred by or under the Act.
Question 30] Write a short note on: Appeal to High Court under the FEMA
Ans.: Appeal to High Court [Section 35]: Any person aggrieved by any decision or order of the Appellate Tribunal
may file an appeal to the High Court within 60 days from the date of communication of the decision or order of the
Appellate Tribunal to him on any question of law arising out of such order.
However, if the High Court is satisfied that the appellant was prevented by sufficient cause from filing the appeal
within period of 60 days it may allow to file appeal within a further period of 60 days.
Question 31] State the liabilities of directors in case of contravention of any provisions of the Foreign Exchange
Management Act, 1999 by the companies.
Ans.: Contravention by companies [Section 42]: Where a company commits a contravention of any of the
provisions of the Act or of any Rule/Direction/Order, every person who, at the time the contravention was
committed, was in charge of, and was responsible to, the company for the conduct of the business of the company
as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against
and punished accordingly.
However, any such person shall not be liable to punishment if he proves that the contravention took place without
his knowledge or that he exercised due diligence to prevent such contravention.
Where a contravention has been committed by a company and it is proved that the contravention has taken place
with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary
or other officer of the company, all such officers shall also be deemed to be guilty of the contravention and shall be
liable to be proceeded against and punished accordingly.
Explanation: For the purposes of this section -
(i) Company means any body corporate and includes a firm or other association of individuals.
(ii) Director in relation to a firm, means a partner in the firm.
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3
CHAPTER
FEMA - CURRENT & CAPITAL ACCOUNT TRANSACTIONS, LIBERALIZED REMITTANCE
SCHEME
CURRENT ACCOUNT TRANSACTIONS
Question 1] What are the current account transactions under the Foreign Exchange Management Act, 1999? CS
(Executive) - Dec 2017 (5 Marks)
Ans.: The term current account transaction has been defined to mean a transaction other than a capital account
transaction and includes -
♦ Payments due in connection with foreign trade, other current business, services and short term banking and
credit facilities in the ordinary course of business.
♦ Payments due as interest on loan and as net income from investments.
♦ Remittances for living expenses of parents, spouse and children residing abroad.
♦ Expenses in connection with foreign travel, education and medical care of parents, spouse and children.
Under the FEMA, freedom has been granted for selling and drawing of foreign exchange to or from an authorized
person for undertaking current account transactions. However, the Central Government has been vested with
powers in consultation with RBI to impose reasonable restrictions on current account transactions. The Central
Government has framed Foreign Exchange Management (Current Account Transactions) Rules, 2000 dealing with
various aspects of current account transactions.
Question 2] Can person sell or draw foreign exchange for current account transactions?
Write a short note on: Current Account Transactions
CS (Inter) - Dec 2002 (3 Marks), June 2005 (3 Marks) CS (Inter) - Dec 2007 (3 Marks) CS (Executive) - June 2012 (3
Marks)
Ans.: Current Account Transactions [Section 5]: Any person may sell or draw foreign exchange to or from an
authorized person if such sale or drawal is a current account transaction. However, such sell or draw foreign
exchange can be made after complying the Foreign Exchange Management (Current Account Transactions) Rules,
2000. As per this rule current account transaction are divided in into following categories:
(1) Transaction for which drawal of foreign exchange is prohibited. [Rule 3]
(2) Transaction for which foreign exchange can be drawn with prior approval of Central Government. [Rule 4]
(3) Transaction for which foreign exchange can be drawn with prior approval of RBI. [Rule 5]
Question 3] Write a short note on: Prohibition of drawal of foreign exchange
Ans.: Prohibition on drawal of Foreign Exchange [Rule 3]: Drawal of foreign exchange by any person for the
following purpose is prohibited:
(a) Transaction specified in the Schedule I or
(b) Travel to Nepal and-Bhutan or
(c) Transaction with a person resident in Nepal or Bhutan.
However, the prohibition in clause (c) may be exempted by RBI by special or general order.
Transactions prohibited as per Schedule I are as follows:
1. Remittance out of lottery winnings.
2. Remittance of income from racing/riding etc., or any other hobby.
3. Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.
4. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned
Subsidiaries abroad of Indian companies.
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5. Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
6. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice
value of exports of tea and tobacco.
7. Payment related to "Call Back Services" of telephones.
8. Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.
The remittance facility under the Liberalized Remittance Scheme is not available for remittance for any purpose
prohibited under Schedule I to the FEM (Current Account Transactions) Rules, 2000.
Question 4] State the current account transactions which require approval of Central Government under the FEM
(Current Account Transactions) Rules, 2000?
Ans.: Prior approval of Government of India [Rule 4]: No person shall draw foreign exchange for a transaction
included in the Schedule II without prior approval of the Government of India.
However, this restriction shall not apply where the payment is made out of funds held in Resident Foreign Currency
(RFC) Account of the remitter.
Transactions requiring approval of Central Government as per Schedule II are as follows:
1. Cultural Tours.
2. Advertisement in foreign print media for the purposes other than promotion of tourism, foreign
investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector
Undertakings.
3. Remittance of freight of vessel chartered by a PSU.
4. Payment of import through ocean transport by a Government Department or a PSU on CIF basis (i.e. other
than FOB and FAS basis).
5. Multi-modal transport operators making remittance to their agents abroad.
6. Remittance of hiring charges of transponders by TV Channels or Internet Service providers.
7. Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping.
8. Remittances under technical collaboration agreements where payment of royalty exceeds 5%-enTocal
sales and 8% on exports and lump sum payment exceeds US $ 2 million [Deleted vide Notification No. GSR 382(E)
May 5, 2010; Thus, transaction is permitted without prior approval of Central Government].
9. Remittance of prize money/sponsorship of sports activity abroad by a person other than International/
National/State Level sports bodies, if the amount involved exceeds US$ 1,00,000.
10. Remittance for membership of P&l Club.
The remittance facility under the Liberalized Remittance Scheme is not available for any item restricted under
Schedule II ofFEM (Current Account Transactions) Rules, 2000.
Question 5] State the current account transactions which require approval of RBI under the FEM (Current Account
Transactions) Rules, 2000? (i)
Ans.: Prior approval of RBI [Rule 5]: No person shall draw foreign exchange for a transaction included in the
Schedule III without prior approval of the RBI. However, this Rule shall not apply where the payment is made out
of funds held in Resident Foreign Currency (RFC) Account of the remitter.
Rule 4 or Rule 5 shall not apply to drawal made out of funds held in Exchange Earners Foreign Currency (EEFC)
Account of the remitter.
Use of International Credit Card while outside India [Rule 7]: Noting contained in Rule 5 shall apply to the use of
International Credit Card for making payment by a person towards meeting expenses while such person is a visit
outside India.
Transactions requiring prior approval of RBI as per Schedule III are as follows:
Facilities for individuals: Individuals can avail of foreign exchange facility for the following purposes within the limit
of US$ 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require
prior approval of the RBI.
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(i) Private visits to any country (except Nepal and Bhutan).
(ii) Gift or donation.
(iii) Going abroad for employment.
(iv) Emigration.
(v) Maintenance of close relatives abroad.
(vi) Travel for business, or attending a conference or specialized training or for meeting expenses for meeting
medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical
treatment/check-up.
(vii) Expenses in connection with medical treatment abroad.
(viii) Studies abroad.
(ix) Any other current account transaction.
However, for the purposes mentioned at item numbers (iv), (vii) & (viii), the individual may avail of exchange facility
for an amount in excess of the limit prescribed under the Liberalized Remittance Scheme (LRS) if it is so required
by a country of emigration, medical institute offering treatment or the university, respectively.
If an individual remits any amount under the said LRS in a financial year, then the applicable limit for such individual
would be reduced from US$ 2,50,000 by the amount so remitted.
For a person who is resident but not permanently resident in India and -
(a) is a citizen of a foreign State other than Pakistan; or
(b) is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary or joint
venture in India of such foreign company, may make remittance up to his net salary (after deduction of taxes,
contribution to provident fund and other deductions).
Explanation: For this purpose, a person resident in India on account of his employment or deputation of a
specified duration (irrespective of length thereof) or for a specific job or assignments, the duration of which does
not exceed 3 years, is a resident but not permanently resident.
A person other than an individual may also avail of foreign exchange facility, mutatis mutandis, within the limit
prescribed under the said LRS for the purposes mentioned herein above.
Facilities for persons other than individual: The following remittances by persons other than individuals shall
require prior approval of the RBI.
(f) Donations exceeding 1% of their foreign exchange earnings during the previous 3 financial years or US$
50,00,000, whichever is less, for -
(a) creation of Chairs in reputed educational institutes;
(b) contribution to funds (not being an investment fund) promoted by educational institutes; and
(c) contribution to a technical institution or body or association in the field of activity of the donor company.
(ii) Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India
exceeding US$ 25,000 or 5% of the inward remittance whichever is more.
(iii) Remittances exceeding US$ 1,00,00,000 per project for any consultancy services in respect of
infrastructure projects and US$ 10,00,000 per project, for other consultancy services procured from outside India.
(iv) Remittances exceeding 5% of investment brought into India or US$ 1,00,000 whichever is higher, by an
entity in India by way of reimbursement of pre-incorporation expenses.
Procedure: The procedure for drawal or remit of any foreign exchange under this schedule shall be the same as
applicable for remitting any amount under the said LRS.
Question 6] What is the Liberalized Remittance Scheme (LRS) of US$ 2,50,000?
Ans.: Under the Liberalized Remittance Scheme (LRS), Authorized Dealers may freely allow remittances by resident
individuals up to US$ 2,50,000 per Financial Year (April-March) for any permitted current or capital account
transaction or a combination of both.
32
Important points relating to LRS are as follows:
(1) The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.
(2) The Scheme is available to all resident individuals including minors. In case of remitter being a minor, the
Form A2 must be countersigned by the minor's natural guardian.
(3) Remittances under the Scheme can be consolidated in respect of family members subject to individual family
members complying with its terms and conditions. However, clubbing is not permitted by other family members for
capital account transactions such as opening a bank account/ investment/purchase of property, if they are not the
co-owners/co-partners of the overseas bank account/investment/property. Further, a resident cannot gift to
another resident, in foreign currency, for the credit of the latter's foreign currency account held abroad under LRS.
(4) Remittances under the Scheme can be used for purchasing objects of art subject to the provisions of other
applicable laws such as the extant Foreign Trade Policy of the Government of India.
(5) The Scheme can be used for outward remittance in the form of a DD either in the resident individual's own
name or in the name of beneficiary with whom he intends putting through the permissible transactions at the time
of private visit abroad, against self-declaration of the remitter in the format prescribed.
(6) Individuals can also open, maintain and hold foreign currency accounts with a bank outside India for making
remittances under the LRS without prior approval of the RBI. The foreign currency accounts may be used for putting
through all transactions connected with or arising from remittances eligible under LRS.
(7) The limit of US$ 2,50,000 per financial year under the Scheme also includes/ subsumes remittances for
current account transactions (viz. private visit; gift/donation; going abroad on employment; emigration;
maintenance of close relatives abroad; business trip; medical treatment abroad; studies abroad) available to
resident individuals under Para 1 of Schedule III to FEM (Current Account Transactions) Rules.
(8) Release of foreign exchange exceeding US$ 2,50,000 requires prior permission from the RBI.
Question 7] State the transactions for which Liberalized Remittance Scheme (LRS) of US$ 2,50,000 is not
available?
Ans.: Prohibited items under the Scheme: The remittance facility under the Scheme is not available for the
following:
(1) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep
stakes, proscribed magazines, etc.) or any item restricted under Schedule II of FEM (Current Account Transactions)
Rules, 2000.
(2) Banks are not allowed to extend any kind of credit facilities to resident individuals to facilitate capital account
remittances under the LRS.
(3) Remittance from India for margins or margin calls to overseas exchanges/overseas counterparty.
(4) Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
(5) Remittance for trading in foreign exchange abroad.
(6) Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force
(FATF) as "non-cooperative countries and territories", from time to time.
(7) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of
committing acts of terrorism as advised separately by the RBI to the banks.
Question 8] Discuss briefly the various current account transactions permitted under the Liberalized Remittance
Scheme (LRS) issued by the RBI.
Ans.:
(a) Private Visits: For private visits abroad, other than to Nepal and Bhutan, any resident individual can obtain
foreign exchange up to an aggregate amount of US$ 2,50,000 from an Authorized Dealer or Full Fledged Money
Changer (FFMC), in any one financial year, irrespective of the number of visits undertaken during the year.
Further, all tour related expenses including cost of rail/road/water transportation; cost of Euro Rail; passes/tickets,
etc. outside India; and overseas hotel/lodging expenses shall be subsumed under the LRS limit. The tour operator
can collect this amount either in Indian rupees or in foreign currency from the resident traveller.
33
(b) Gift & Donations: Any resident individual may remit upto US$ 2,50,000 in one FY as gift to a person residing
outside India or as donation to an organization outside India.
A resident individual can make a rupee gift to a NRI/ PIO who is a relative of the resident individual by way of crossed
cheque/electronic transfer. The amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO)
A/c of the NRI/PIO and credit of such gift amount may be treated as an eligible credit to NRO A/c. The gift amount
would be within the overall limit of US$
2,50,000per financial year as permitted under the LRS for a resident individual. It would be the responsibility of the
resident donor to ensure that the gift amount is within the LRS limit and all the remittances made by the donor
during the financial year including the gift amount have not exceeded the limit prescribed under the LRS.
(c) Going abroad on employment: A person going abroad for employment can draw foreign exchange up to US$
2,50,000 per financial year from any Authorized Dealer in India.
(d) Emigration: A person wanting to emigrate can draw foreign exchange from AD Category I bank and AD
Category-II up to the amount prescribed by the country of emigration or US$ 2,50,000. Remittance of any amount
of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses
in the country of immigration and not for earning points or credits to become eligible for immigration by way of
overseas investments in government bonds; land; commercial enterprise; etc.
(e) Maintenance of close relatives abroad: A resident individual can remit upto US$ 2,50,000 per financial year
towards maintenance of close relatives abroad. [Relative as defined in Section 2(77) of the Companies Act, 2013]
(f) Business Trip: Visits by individuals in connection with attending of an international conference, seminar,
specialized training, apprentice training, etc., are treated as business visits. For business trips to foreign countries,
resident individuals can avail of foreign exchange up to US$ 2,50,000 in a financial year irrespective of the number
of visits undertaken during the year.
However, if an employee is being deputed by an entity for any of the above and the expenses are borne by the
latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted by
the AD without any limit, subject to verifying the bona fide of the transaction.
(g) Medical treatment abroad: Authorized Dealers may release foreign exchange up to an amount of US$
2,50,000 or its equivalent per FY without insisting on any estimate from a hospital/doctor. For amount exceeding
the above limit, Authorized Dealers may release foreign exchange under general permission based on the estimate
from the doctor in India or hospital/doctor abroad. A person who has fallen sick after proceeding abroad may also
be released foreign exchange by an Authorized Dealer (without seeking prior approval of the RBI) for medical
treatment outside India.
In addition to the above, an amount up to US$ 2,50,000 per financial year is allowed to a person for accompanying
as attendant to a patient going abroad for medical treatment/check-up.
(h) Facilities available to students for pursuing their studies abroad: AD Category-I banks and AD Category-II,
may release foreign exchange up to US$ 2,50,000 or its equivalent to resident individuals for studies abroad without
insisting on any estimate from the foreign University. However, AD Category-I bank and AD Category-II may allow
remittances (without seeking prior approval of the RBI) exceeding US$ 2,50,000 based on the estimate received
from the institution abroad.
Question 9] Amol is planning to visit USA in next month. He requests you to state the procedure & documents
required to be submitted for obtaining foreign exchange under the Liberalized Remittance Scheme.
Ans.: Procedure and documentation by the remitter under LRS: The individual will have to designate a branch of
an Authorized Dealer through which all the remittances under the Scheme will be made. The resident individual
seeking to make the remittance should furnish Form A2 Annexed for purchase of foreign exchange under Liberalized
Remittance Scheme.
It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) to make remittance
under the Scheme.
Question 10] Discuss the requirements of granting loan to close relative under the Liberalized Remittance
Scheme.
34
Ans.: For the purpose of Liberalized Remittance Scheme 'relative' means relative as defined in Section 2(77) of the
Companies Act, 2013.
Facility to grant loan in rupees to NRI/PIO close relative under the LRS: Resident individual is permitted to lend to
a Non-resident Indian (NRI)/Person of Indian Origin (PIO) close relative by way of crossed cheque/electronic transfer
subject to the following conditions:
(1) The loan is free of interest and the minimum maturity of the loan is 1 year.
(2) The loan amount should be within the overall limit under the Liberalized Remittance Scheme of US$ 2,50,000
per financial year available for a resident individual. It would be the responsibility of the resident individual to ensure
that the amount of loan granted by him is within the LRS limit and all the remittances made by the resident individual
during a given financial year including the loan together have not exceeded the limit prescribed under LRS.
(3) The loan shall be utilized for meeting the borrower's personal requirements or for his own business purposes
in India.
(4) The loan shall not be utilized, either singly or in association with other person for any of the activities in
which investment by persons resident outside India is prohibited, namely:
(a) The business of chit fund, or
(b) Nidhi Company, or
(c) Agricultural or plantation activities or in real estate business, or construction of farm houses, or
(d) Trading in Transferable Development Rights (TDRs).
Explanation: For the purpose of item (c) above, real estate business shall not include development of townships,
construction of residential/commercial premises, roads or bridges.
(5) The loan amount should be credited to the NRO A/c of the NRI/PIO. Credit of such loan amount may be
treated as an eligible credit to NRO A/c.
(6) The loan amount shall not be remitted outside India.
(7) Repayment of loan shall be made by way of inward remittances through normal banking channels or by debit
to the NRO/NRE/FCNR Account of the borrower or out of the sale proceeds of the shares or securities or immovable
property against which such loan was granted.
Question 11] Mr. Sane, an Indian National desires to obtain foreign exchange for the following purposes:
(i) Remittance of US$ 50,000 out of winnings on a lottery ticket.
(ii) US$ 1,00,000 for sending a cultural troupe on a tour of USA.
(iii) US$ 50,000 for meeting the expenses of his business tour to Europe.
Advise him whether he can get foreign exchange and if so, under what conditions?
CA (Final) - May 2004 (7 Marks), May 2008 (7 Marks)
Ans.: Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a
current account transaction. However, such sell or draw foreign exchange can be made after complying the Foreign
Exchange Management (Current Account Transactions) Rules, 2000 and Liberalized Remittance Scheme. Keeping
in view the provisions of these Rules & LRS, answer to problem is given below:
(i) As per Rule 3, transactions specified in Schedule I are totally prohibited. "Remittance of out of winnings on
a lottery ticket" is specified in Schedule I. Thus, Mr. Sane cannot obtain foreign exchange US$ 50,000 out of winnings
on a lottery ticket.
(ii) As per Rule 4, transactions specified in Schedule II require approval of Central Government. Drawal of foreign
exchange for 'cultural tour' is specified in Schedule II. Thus, Mr. Sane can obtain foreign exchange US$ 1,00,000 for
sending a cultural troupe on a tour of USA with prior approval of Central Government.
(iii) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require
approval of RBI. "Drawal of foreign exchange for business tour" is specified in Schedule III. As per Schedule III read
with Liberalized Remittance Scheme an individual can draw foreign exchange upto US$ 2,50,000 for business tour.
35
Thus, Mr. Sane can obtain foreign exchange US$ 50,000for meeting the expenses of his business tour to Europe
without prior approval of RBI.
Question 12] Atul desires to obtain foreign exchange for the following purposes:
(a) Remittance of US$ 10,000 for payment for goods purchased from a party situated in Nepal.
(b) US$ 10,000 for remitting as commission to his agent in USA for sale of commercial plot situated near
Bangalore, consideration in respect of which was received by Atul by way of foreign currency inward remittance
amounting to US$ 1,00,000.
Advise him, if he can get the foreign exchange and under what conditions.
(a) As per Rule 3, drawal of foreign exchange by any person for travel to Nepal and Bhutan or transaction with
a person resident in Nepal or Bhutan is totally prohibited. However, this prohibition may be exempted by RBI by
special or general order. Thus, Atul cannot draw foreign exchange for payment for goods purchased from a party
situated in Nepal.
(b) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require
approval of RBI. As per LRS an individual can draw foreign exchange for current account transaction up to US$
2,50,000. Since, the proposed drawal of US$ 10,000 is within the permitted limit, such drawal does not require the
prior approval of RBI.
Question 13] Examine whether the following transactions are permissible under the Foreign Exchange
Management Act, 1999:
(i) Payment of remuneration to foreign technician.
(ii) Remittance of dividend to non-residents. CA (Final) - Nov 2003 (7 Marks)
Exchange Management (Current Account Transactions) Rules, 2000. Thus, if current account transaction is not
prohibited or do not require approval of Central Government or RBI then such transaction is permitted without any
restriction.
Payment of remuneration to f oreign technician and dividend to non-residents are current account transactions and
not prohibited or do not require approval of Central Government or RBI under the Foreign Exchange Management
(Current Account Transactions) Rules, 2000 and thus permitted without any restriction.
However, as per RBI circular, the foreign technician should hold an employment visa and salary paid to foreign
technician'can be remitted outside India only after tax has been deducted at source. (i)
Question 14] State which kind of approval is required for the following transactions under the Foreign Exchange
(i) X, a Film Star, wants to perform along with associates in New York on the occasion of Diwali for Indians
residing at New York. Foreign exchange US$ 20,000 is required for this purpose.
(ii) R wants to get his heart surgery done at UK. Up to what limit foreign exchange can be drawn by him and what
are the approvals required?
(ill) L wants to pursue a course in fashion design in Paris. The foreign exchange US$ 20,000 towards tuition fees
and US$ 30,000 for incidental and stay expenses for studying abroad is required for this purpose.CA (Final) -
May 2006 (7 Marks)
Ans.: Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current
account transaction. However, such sell or draw foreign exchange can be made after complying the Foreign
36
(i) As per Rule 4, transactions specified in Schedule II require approval of Central Government. Drawal of foreign
exchange for 'cultural tour' is specified in Schedule II. Thus, X a Film Star can obtain foreign exchange only with prior
approval of Central Government.
(ii) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval
of RBI. "Release of exchange for meeting expenses for medical treatment abroad" is covered under Rule 5. If the
amount required for medical treatment exceeds US$ 2,50,000 then prior approval of RBI is required. Thus, R can
draw foreign exchange to get his heart surgery done at UK if amount do not exceed US$ 2,50,000 otherwise prior
approval of RBI is necessary.
As per Liberalized Remittance Scheme, Authorized Dealers may release foreign exchange up to an amount of US$
2,50,000 or its equivalent per financial year without insisting on any estimate from a hospital/ doctor. For amount
exceeding the above limit, Authorized Dealers may release foreign exchange under general permission based on
the estimate from the doctor in India or hospital/ doctor abroad. A person who has fallen sick after proceeding
abroad may also be released foreign exchange by an Authorized Dealer (without seeking prior approval of the RBI)
for medical treatment outside India.
(iii) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval
of RBI. "Drawal of foreign exchange for studying abroad" is specified in Schedule III.
As per Liberalized Remittance Scheme, AD Category-I & Category-II, may release foreign exchange up to US$
2,50,000 or its equivalent to resident individuals for studies abroad without insisting on any estimate from the
foreign University. However, AD Category-I & Category-II may allow remittances (without seeking prior approval of
the RBI) exceeding US$ 2,50,000 based on the estimate received from the institution abroad.
(iv) Thus, R can draw foreign exchange up to US$ 50,000 without prior approval of RBI.
Question 15] State the kind of approval required for the following transaction under the Foreign Exchange
(i) M requires US $ 5,000 to make payment related to 'call back services' of telephone.
(io) N wants to pursue a course in business management in New York. He wants to draw US$ 50,000 towards
expenses for studying abroad.
(iii) R wants to draw US$ 20,000 to make donation to a charitable trust situated in South Korea.
(i) As per Rule 3, transactions specified in Schedule I are totally prohibited. "Payment related to Call Back Services
of telephones" is specified in Schedule I. Thus, M cannot obtain foreign exchange to make payment related to 'call
back services' of telephone.
(ii) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval
of RBI. "Drawal of foreign exchange for studying abroad" is specified in Schedule III.
AD Category-I & Category-II, may release foreign exchange up to US$ 2,50,000 or its equivalent to resident
individuals for studies abroad without insisting on any estimate from the foreign University. However, AD Category-
I & Category-II may allow remittances (without seeking prior approval of the RBI) exceeding US$ 2,50,000 based on
the estimate received from the institution abroad.
Thus, N can draw US$ 50,000 towards expenses for studying abroad.
37
(iii) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require
approval of RBI. Drawal of foreign exchange for "gift & donation" is covered in Schedule III. If the foreign exchange
to make donation exceeds US$ 2,50,000, then prior approval of RBI is necessary. Therefore, F can obtain US$ 20,000
for making donation to a charitable trust situated in South Korea without the prior approval of RBI.
Question 16] Indotech Ltd. desires to make payments of commission on exports made towards equity investment
in its joint venture company abroad. Advise with reference to FEMA.
CS (Executive) - Dec 2008 (1 Mark)
Ans.: As per Rule 3, transactions specified in Schedule I are totally prohibited. "Payment of commission on exports
made towards equity investment in JV/WOS abroad of Indian companies" is specified in Schedule I. Thus, Indotech
Ltd. cannot make payments of commission on exports made towards equity investment in its joint venture company
abroad.
Question 17] With reference to the relevant provisions of the Foreign Exchange Management Act, 1999 and the
Rules and Regulations made there under, advise on the following:
(i) Naresh, an Indian citizen, is interested in sending ` 10,000 to his sister residing in USA as birthday gift.
(ii) Dinesh, an Indian citizen, wants to use his international debit card for withdrawal of cash during his visit
abroad. CS (Executive) - Dec 2009 (1 x2 = 2 Marks) * (i)
Exchange Management (Current Account Transactions) Rules, 2000. Keeping in view the provisions of these Rules,
answer to problem is given below:
(i) As per Rule 5 read with Liberalized Remittance Scheme, transactions specified in Schedule III require
approval of RBI. "Gift remittances" are covered in Schedule III. If the gift remittance exceeds US$ 2,50,000 prior
approval of RBI is required. In given case Naresh wants to remit ` 10,000 to his sister in USA. If rate of exchange is
taken ` 65 per dollar then ` 10,000 = US$ 153.85. Since amount to be remitted does not exceed US$ 2,50,000 prior
approval of RBI is not required.
As per Liberalized Remittance Scheme, a resident individual can make a rupee gift to a NRI/PIO who is a relative of
the resident individual by way of crossed cheque/electronic transfer.
(ii) As per Rule 7, the transactions do not require RBI approval if payment is made by a person by use of an
International Credit Card, towards meeting expenses while such person is on a visit outside India. Thus, Dinesh can
use his international debit card for withdrawal of cash during his visit abroad.
Question 18] Anand desires to donate US$ 10,000 to Rotary International, an NGO in Chicago, USA. Advise with
reference to FEMA. CS (Executive) - June 2012 (1 Mark)
Ans.: As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 read with
Liberalized Remittance Scheme, transactions specified in Schedule III require approval of RBI. Drawal of foreign
exchange for "gift & donation" is specified in Schedule III. If the foreign exchange to make donation exceeds US$
2,50,000 then prior approval of RBI is necessary. Therefore, Anand can obtain US$ 20,000 for making donation to a
charitable trust situated in South Korea without the prior approval of RBI.
Question 19] Suresh desires to pay US$ 10,000 through international credit card being the remittance out of
lottery earnings. Advise with reference to FEMA. CS (Executive) - June 2012 (1 Mark)
Ans.: As per Rule 3 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, transactions
specified in Schedule I are totally prohibited. "Remittance out of lottery winnings" is specified in Schedule I.
Thus, Suresh cannot pay US$ 10,000 being the remittance out of lottery earnings.
Question 20] Rakesh, a person resident in India, is interested in extending an invitation to George, a person
resident outside India, to stay as his guest while on a visit to India. Advise with reference to FEMA. CS
(Executive) - June 2011 (1 Mark)
Ans.: There is no prohibition under the FEMA for making any payment in Indian rupee towards meeting expenses
on account of boarding, lodging and service related thereto or travels to and from and within the India of a person
38
resident outside who is on visit to India. Thus, Rakesh can invite to George, a person resident outside India, to stay
as his guest while on a visit to India.
Question 21] Flow much foreign exchange is available to a person going abroad on emigration?
Ans.: As per Rule 5 of the Schedule II of the Foreign Exchange Management (Current Account Transactions) Rules,
2000 read with Liberalized Remittance Scheme, the exchange facilities for emigration not exceeding US$ 2,50,000
do not require prior approval of RBI.
As per Liberalized Remittance Scheme, a person wanting to emigrate can draw foreign exchange from AD Category
I & Category-II up to the amount prescribed by the country of emigration or US$ 2,50,000. Remittance of any amount
of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses
in the country of immigration.
Question 22] Somesh, a person resident in India, availed of US$ 30,000 for his one month's private visit to USA in
June, 2018. He intends to make another private visit to Europe for one month in December, 2018 and avail of US$
40,000. Comment. CS (Inter) - Dec 2006 (2 Marks)
Ans.: As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 read with
Liberalized Remittance Scheme, no person shall draw foreign exchange for a transaction included in the Schedule
III without prior approval of the RBI.
Any resident individual can obtain foreign exchange up to an aggregate amount of US$ 2,50,000 from an Authorized
Dealer or Full Fledged Money Changer (FFMC), in any one financial year, irrespective of the number of visits
undertaken during the year.
Somesh wish to avail of US$ 40,000 for his one month's private visit to Europe, which is not in excess of limit
specified; hence he can draw US$ 40,000 without prior approval of RBI.
Question 23] State whether the following transactions are valid and permitted under the Foreign Exchange
Management (Current Account Transactions) Rules, 2000:
(i) An NRI sent a gift of US$ 1,60,000 to his younger sister on her marriage in June, 2018 and again sent
another gift of US$ 1,40,000 on the occasion of marriage of his younger brother in November, 2018.
(ii) An Indian patient is in need of specialized medical treatment in a US hospital at a cost of US$ 1,25,000.
(iii) A student, after graduation, wants to proceed to USA for pursuing higher studies in an engineering course for
which he requires US$ 1,25,000 per academic year, which is the estimate from the foreign university.
(iv) A company incorporated in India has to make a remittance of US$ 90,000 by way of reimbursement of pre-
incorporation expenses.
Ans.:
(i) Neither Foreign Exchange Management Act, 1999 nor Foreign Exchange Management (Current Account
Transactions) Rules, 2000 has put any restriction on receiving gifts from NRI. Hence, NRI can send the gifts to his
Indian relative without any limit and without any approval of RBI.
(ii) As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000
read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval of RBI. "Release of
exchange for meeting expenses for medical treatment abroad" is covered under Schedule III.
Authorized Dealers may release foreign exchange up to an amount of US$ 2,50,000 or its equivalent per financial
year without insisting on any estimate from a hospital/doctor. For amount exceeding the above limit, Authorized
Dealers may release foreign exchange under general permission based on the estimate from the doctor in India or
hospital/doctor abroad. A person who has fallen sick after proceeding abroad may also be released foreign exchange
by an Authorized Dealer (without seeking prior approval of the RBI) for medical treatment outside India.
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An Indian patient is in need of US$ 1,25,000 for medical treatment in a US which within the prescribed limit and
hence he can draw US$ 1,25,000 without prior approval of RBI.
(iii) As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000
read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval of RBI. Drawal of
foreign exchange for studying abroad is specified in Schedule III.
AD Category-I & Category-II, may release foreign exchange up to US$ 2,50,000 or its equivalent to resident
individuals for studies abroad without insisting on any estimate from the foreign University. However, AD Category-
I & AD Category-II may allow remittances (without seeking prior approval of the RBI) exceeding US$ 2,50,000 based
on the estimate received from the institution abroad.
A student requires US$ 1,25,000 for his higher education which within the prescribed limit and thus he can draw
foreign exchange up to US$ 1,25,000 without prior approval of RBI.
(iv) As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, no person
shall draw foreign exchange for a transaction included in the Schedule III without prior approval of the RBI. As per
Schedule III, Remittances exceeding 5% of investment brought into India or US$ 1,00,000 whichever is higher, by an
entity in India by way of reimbursement of pre-incorporation expenses requires prior approval of RBI. Thus, Indian
company can remit US$ 90,000by way of reimbursement of pre-incorporation expenses without prior approval of
RBI.
Question 24] H, an agent stationed abroad, desires to receive remuneration of US$ 30,000 for sale of commercial
plots in India. Comment. CS (Executive) - Dec 2007 (1 Mark)
Ans.: As per Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, no
person shall draw foreign exchange for a transaction included in the Schedule III without prior approval of the RBI.
As per Schedule III, remittance of commission to agents abroad for sale of residential flats or commercial plots in
India exceeding US$ 25,000 or 5% of the inward remittance whichever is more, requires prior approval of RBI. As
per facts given in case commission payable to Harish is US$ 30,000 which is in excess of limit specified; hence prior
approval of RBI is necessary.
Question 25] With reference to the relevant provisions of the Foreign Exchange Management Act, 1999 and the
rules and regulations made there under, advise on the following:
(i) Tomb Ltd. desires to make payment of commission on the exports made towards equity investment in its
wholly owned subsidiary abroad.
(ii) Hari, while on a visit abroad, used his international credit card for making payment towards meeting stay
expenses. CS (Inter) - June 2008 (2*2 = 4 Marks)
Ans.:
(i) As per Rule 3 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000,
transactions specified in Schedule I are totally prohibited. "Payment of commission on exports made towards equity
investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies" is covered in schedule I;
hence Tomb Ltd. cannot make payment of commission on the exports made towards equity investment in its wholly
owned subsidiary abroad.
(ii) As per Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, restriction
of taking prior approval of RBI shall not apply to the use of International Credit Card for making payment by a person
towards meeting expenses while such person is on a visit outside India. Thus, Hari, while on a visit abroad can use
his international credit card for making payment towards meeting stay expenses.
CAPITAL ACCOUNT TRANSACTIONS
Question 26] Write a short note on: Capital Account Transactions
Ans.: Capital Account Transactions [Section 2(e)]: Capital account transaction has been defined to mean any
transaction which alters the assets or liabilities including contingent liabilities, outside India of persons resident in
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India or assets or liabilities in India of person resident outside India and includes the transactions specified in Section
6(3).
Capital Account Transactions [Section 6(1) & (2)]: Any person may sell or draw foreign exchange to or from an
authorized person for a capital account transaction.
The RBI may, in consultation with the Central Government, specify-
(a) Any class or classes of capital account transactions which are permissible
(b) The limit up to which foreign exchange shall be admissible for such transactions.
However, that the RBI shall not impose any restriction on the drawal of foreign exchange for payments due on
account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
Question 27] Distinguish between: Current Account Transactions & Capital Account Transactions
Ans.: Following are the main points of difference between current account transactions & capital account
transactions:
Points Current Account Transactions Capital Account Transactions
Meaning Current account transaction means a Capital account transaction means a

transaction other than a capital account transaction which alters the assets or
transaction and includes,- liabilities, including contingent liabilities,
(i) payments due in connection with foreign outside India of persons resident in India or
trade, other current business, services, and assets or liabilities in India of persons resident
short-term banking and credit facilities in the outside India, and includes transactions
ordinary course of business referred to Section 6(3).
(ii) payments due as interest on loans and as
net income from investments
(iii) remittances for living expenses of
parents, spouse and children residing abroad,
and
(iv) expenses in connection with foreign
travel, education and medical care of parents,
spouse and children.
Nature Current account transactions are short term Capital account transactions are long term in
in nature. nature.
Control or All current account transactions are freely Capital account transactions are permitted to
prohibition permitted unless specifically controlled or the extent specifically allowed by the relevant
prohibited under the FEMA. regulations made under the FEMA.
Rule/ Current account transactions are regulated by Capital account transactions are regulated by
Regulation the Central Government through the Foreign the RBI by through the Foreign Exchange
Exchange Management (Current Account Management (Permissible Capital Account
Transactions) Rules, 2000. Transactions) Regulations, 2000.
Section As per Section 5, any person may sell or draw As per Section 6, any person may sell or draw
foreign exchange to or from an authorized foreign exchange to or from an authorized
person if such sale or drawal is a current person for a capital account transaction
account transaction. subject to regulation as may be prescribed by
the RBI.
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Question 28] State the provisions relating to 'prohibition and restriction for capital account transactions' under
the Foreign Exchange Management Act, 1999.
Ans.: Prohibition and restriction for capital account transactions [Section 6(3)]: The RBI may by regulations,
prohibit, restrict or regulate the following -
(a) Transfer or issue of any foreign security by a person resident in India.
(b) Transfer or issue of any security by a person resident outside India.
(c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person
resident outside India.
(d) Any borrowing or lending in rupees in whatever form or by whatever name called.
(e) Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident
in India and a person resident outside India.
(f) Deposits between persons resident in India and persons resident outside India.
(g) Export, import or holding of currency or currency notes.
(h) Transfer of immovable property outside India, other than a lease not exceeding 5 years, by a person resident in
India.
(i) Acquisition or transfer of immovable property in India, other than a lease not exceeding 5 years, by a person
resident outside India.
(j) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred - (i) by a person resident
in India and owed to a person resident outside India or (ii) by a person resident outside India.
Question 29] Can a person resident in India hold or own any foreign currency, security or any immovable property
outside India?
Ans.: As per Section 6(4) of the Foreign Exchange Management Act, 1999, if a person resident in India has acquired,
held or owned any foreign currency, foreign security or any immovable property outside India when he was resident
outside India then he may continue to hold or own such property.
Similarly, person resident in India may inherit foreign currency, foreign security or any immovable property situated
outside India from a person resident outside India.
Question 30] Can a person resident outside India hold or own any Indian currency, security or any immovable
property in India?
Ans.: As per Section 6(5) of the Foreign Exchange Management Act, 1999, a person resident outside India may hold,
own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency,
security or property was acquired, held or owned by such person when he was resident in India.
Similarly, person resident outside may inherit Indian currency, security or any immovable property situated in India
from a person who was resident in India.
Question 31] Kamini, a resident in India is likely to inherit an immovable property in USA from her father, who is
a resident outside India. Advise Kamini about the restrictions, if any, in this regard. Will your answer be different
if she is likely to inherit foreign securities?
CA (Final) - Nov 2006 (4 Marks)
Ans.: As per Section 6(4) of the Foreign Exchange Management Act, 1999, person resident in India may inherit
foreign currency, foreign security or any immovable property situated outside India from a person resident outside
India. Hence, Kamini can hold the immovable property/foreign security after such inheritance. Further, such
inheritance does not require approval of RBI.
Question 32] Patel, who was resident of USA for many years, now permanently returns to India. He continues to
hold some immovable property, foreign security and other foreign exchange assets in USA? Can he hold such
assets outside India? CA (Final) - Nov 2010 (4 Marks)
Ans.: As per Section 6(4) of the Foreign Exchange Management Act, 1999, if a person resident in India has acquired,
held or owned any foreign currency, foreign security or any immovable property outside India when he was resident
42
outside India then he may continue to hold or own such property. Thus, Patel may continue to hold immovable
property, foreign security and other foreign exchange assets in USA.
Question 33] Mrs. Chandra, a resident outside India, is likely to inherit from her father some immovable property
in India. Are there any restrictions under the provisions of the Foreign Exchange Management Act, 1999 in
acquiring or holding such property? CA (Final) - Nov 2012 (4 Marks)
Ans.: As per Section 6(5) of the Foreign Exchange Management Act, 1999, a person resident outside India may hold,
own, transfer or invest in Indian currency, security or any immovable property situated in
India if such currency, security or property was acquired, held or owned by such person when he was resident in
India.
Similarly, person resident outside may inherit Indian currency, security or any immovable property situated in India
from a person who was resident in India.
Thus, Mrs. Chandra is entitled inherit the immovable property in India of her father.
Question 34] State the permissible capital account transactions under the FEM (Permissible Capital Account
Transactions) Regulations, 2000.
Ans.: Permissible Capital Account Transactions [Regulation 3]: Capital account transactions of a person are
classified under the following heads, namely:
(A) Transactions, specified in Schedule I, of a person resident In India
(B) Transactions, specified in Schedule II, of a person resident outside India.
Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction
specified in the Schedules to the Regulations.
Prohibition [Regulation 4]: No person shall undertake or sell or draw foreign exchange to or from an authorized
person for any capital account transaction.
However, subject to FEMA provisions, a resident individual may, draw from an authorized person foreign exchange
not exceeding US$ 2,50,000 per financial year for a capital account transaction specified in Schedule I.
Where the drawal of foreign exchange by a resident individual for any capital account transaction specified in
Schedule I exceeds US$ 2,50,000 per financial year then the limit specified in the relevant regulations shall apply.
Person resident outside India cannot make investment in India in following:
(i) Business of chit fund
(ii) Nidhi Company
(iii) Agricultural or plantation activities
(iv) Real estate business, or construction of farm houses
(v) Trading in Transferable Development Rights (TDRs)
Method of payment for investment [Regulation 5]: The payment for investment shall be made by remittance from
abroad through normal banking channels or by debit to an account of the investor maintained with an authorized
person in India in accordance with the Relevant Regulations made by the RBI.
Declaration to be furnished [Regulation 6]: Every person selling or drawing foreign exchange to or from an
authorized person for a capital account transaction shall furnish to the RBI a declaration in the specified form and
within time specified time.
Question 35] State the permissible Capital Account Transactions under the Liberalized Remittance Scheme. * 1 2 3
Ans.: The permissible capital account transactions by an individual under Liberalized Remittance Scheme (LRS) are
as under:
(1) Opening of foreign currency account abroad with a bank.
(2) Purchase of property abroad.
(3) Making investments abroad -
(a) Acquisition and holding shares of both listed and unlisted overseas company or debt instruments.
43
(b) Acquisition of qualification shares of an overseas company for holding the post of Director.
(c) Acquisition of shares of a foreign company towards professional services rendered or in lieu of Director's
remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory
notes.
(4) Setting up Wholly Owned Subsidiaries and Joint Ventures outside India for bona fide business subject to the
specified terms & conditions.
(5) Extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined
in the Companies Act, 2013.
Question 36] State whether there are any restrictions in respect of the following transactions:
(i) Drawal of foreign exchange for payments due on account of amortization of loans in ordinary course of
business.
(ii) Purchase by a person resident outside India of shares of a company in India engaged in plantation activities.
Ans.:
(i) It is specifically provided in Section 6(2) of the Foreign Exchange Management Act, 1999 that the RBI shall not
impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or
for depreciation of direct investments in the ordinary course of business. Thus, there is no restriction for drawal of
foreign exchange for payments due on account of amortization of loans in ordinary course of business.
(ii) As per Regulation 4 of the Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000 person resident outside India cannot make investment in India in agricultural or plantation
activities. Thus, person resident outside India cannot purchase shares of a company in India engaged in plantation
activities.
Question 37] Mention the classes of capital account transactions which are permissible to the persons resident
in India under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
CS (Inter) - Dec 2006 (4 Marks)
What are the classes of capital account transactions of person resident of India?
Ans.: As per Schedule I to the Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000 a person resident in India may enter into following type of capital account transactions:
(a) Investment by a person resident in India in foreign securities.
(b) Foreign currency loans raised in India and abroad by a person resident in India.
(c) Transfer of immovable property outside India by a person resident in India.
(d) Guarantees issued by a person resident in India in favour of a person resident outside India.
(e) Export, import and holding of currency/currency notes.
(f) Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.
(g) Maintenance of foreign currency accounts in India and outside India by a person resident in India.
(h) Taking out of insurance policy by a person resident in India from an insurance company outside India.
(i) Loans and overdrafts by a person resident in India to a person resident outside India.
(j) Remittance outside India of capital assets of a person resident in India.
(k) Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a
person resident in India.
Question 38] Jay, a person resident in India, desires to take a life insurance policy from a foreign insurance
company, the yearly premium of which is US$ 25,000. Comment.
CS (Executive) - Dec 2008 (1 Mark), Dec 2010 (1 Mark) CS (Executive) - June 2013 (1 Mark), June 2014 (5 Marks)
44
Ans.: 'Insurance' is capital account transaction as commitments are for very long period. As per Schedule I to the
Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 a person resident in
India may take insurance policy from an insurance company outside India. As per RBI Circular, life insurance policy
can be taken having a yearly premium up to US$ 25,000.
Thus, Jay, a person resident in India, can take a life insurance policy from a foreign insurance company with the
yearly premium of US$ 25,000.
Question 39] Karan, a person resident in India, borrows US $ 20,000 from his friend resident outside India. Advice
with reference to FEMA. CS (Executive) - June 2011 (1 Mark)
Ans.: T aking loan or borrowing amount by a per son resident in India from person resident outside India is capital
account transaction and covered by Schedule I of the Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000. As per Regulation 4, subject to FEMA provisions, a resident individual may, draw
from an authorized person foreign exchange not exceeding US$ 2,50,000 per financial year for a capital account
transaction specified in Schedule I. Therefore, Karan can borrow US$ 20,000 from his friend resident outside India.
Question 40] An Indian company intends to open a foreign currency account in India as well as outside India.
Advice with reference to FEMA. CS (Executive) - Dec 2009 (1 Mark)
Ans.: As per Schedule I to the Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000 a person resident in India may enter into capital account transactions specified in the Schedule.
"Maintenance of foreign currency accounts in India and outside India by a person resident in India" is covered by
the Schedule I. Thus, an Indian company can open a foreign currency account in India as well as outside India.
Question 41] Ram, a person resident in India, intends to invest ` 25,000 in foreign securities in a calendar year.
Advice with reference to FEMA. CS (Executive) - Dec 2011 (1 Mark)
Ans.: As per Schedule I to the Foreign Exchange Management (Permissible Capital AccountTransactions)
Regulations, 2000 a person resident in India may enter into capital account transactions specified in the Schedule.
"Investment by a person resident in India in foreign securities" is specified in Schedule I.
Thus, Ram can invest ` 25,000 in foreign securities.
Question 42] Yogesh, a person resident in India, is desirous of taking a life insurance policy from a foreign
insurance company, the yearly premium of which is US $ 25,000. Mention the provisions of the Foreign Exchange
Management Act, 1999 and the FEMA Regulations in support of your answer.CS (Executive) - June 2014 (5
Marks)
Ans.: 'Insurance' is capital account transaction as commitments are for very long period. As per Schedule I to the
FEM (Permissible Capital Account Transactions) Regulations, 2000 a person resident in India may take insurance
policy from an insurance company outside India. As per RBI Circular, life insurance policy can be taken having a
yearly premium up to US$ 25,000. Thus, Yogesh, a person resident in India, can take a life insurance policy from a
foreign insurance company with the yearly premium of US$ 25,000.
Question 43] Which type of capital account transactions can be entered by a person resident outside India as per
Schedule II to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000?
Ans.: As per Schedule II to the FEM (Permissible Capital Account Transactions) Regulations, 2000, a
person resident outside India may enter into following type of capital account transactions:
(i) Investment in India by a person resident outside India, that is to say,
(a) issue of security by a body corporate or an entity in India and investment therein by a person resident outside
India; and
(b) investment by way of contribution by a person resident outside India to the capital of a firm or a
proprietorship concern or an association of persons in India.
(ii) Acquisition and transfer of immovable property in India by a person resident outside India.
(iii) Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India.
(iv) Import and export of currency/currency notes into/from India by a person resident outside India.
(v) Deposits between a person resident in India and a person resident outside India.
45
(vi) Foreign currency accounts in India of a person resident outside India.
(vii) Remittance outside India of capital assets in India of a person resident outside India.
Question 44] Examine whether the following transactions are permissible or not as Capital Account transactions
under the Foreign Exchange Management Act, 1999:
(i) Investment by person resident in India in foreign securities
(ii) Foreign currency loans raised in India and abroad by a person resident in India (iii) Export, import and
holding of currency/currency notes
(iv) Trading in transferable development rights
(v) Investment in a Nidhi Company CA (Final) - Nov 2007 (7 Marks)
Ans.:
(i) "Investment by person resident in India in foreign securities" is a capital account transaction. As per Regulation
3 of Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 any person can
enter into capital account transaction specified in Schedule I. Investment by person resident in India in foreign
securities is specified in Schedule I; hence it is permitted. However, as per Regulation 5 compliance has to be made
with regard to Relevant Regulation made in this behalf. The Relevant Regulation is Foreign Exchange Management
(Investment in Foreign Securities by a Person Resident in India) Regulations, 2000. Thus, investment by person
resident in India in foreign securities is permitted subject to compliance of above stated provisions.
(ii) "Foreign currency loans raised in India and abroad by a person resident in India" is a capital account
transaction. As per Regulation 3 of Foreign Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000 any person can enter into capital account transaction specified in Schedule I. Foreign currency
loans raised in India and abroad by a person resident in India is specified in Schedule I; hence it is permitted.
However, as per Regulation 5 compliance has to be made with regard to Relevant Regulation made in this behalf.
The Relevant Regulation is Foreign Exchange Management (Borrowing or Lending in Foreign Exchange)
Regulations, 2000.
Thus, foreign currency loans raised in India and abroad by a person resident in India is permitted subject to
compliance of above stated provisions.
(iii) "Export, import and holding of currency" is a capital account transaction. As per Regulation 3 of the Foreign
Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 any person can enter into
capital account transaction specified in Schedule I. Export, import and holding of currency is specified in Schedule I;
hence it is permitted. However, as per Regulation 5 compliance has to be made with regard to Relevant Regulation
made in this behalf. The Relevant Regulation is Foreign Exchange Management (Possession & Retention of Foreign
Currency) Regulations, 2000. Thus, Export, import and holding of currency is permitted subject to compliance of
above stated provisions.
(iv) "Trading in transferable development rights" is prohibited under the Regulation 4 of the Foreign Exchange
Management (Permissible Capital Account Transactions) Regulations, 2000; hence not permitted.
(v) "Investment in a Nidhi Company" is prohibited under the Regulation 4 of the Foreign Exchange Management
(Permissible Capital Account Transactions) Regulations, 2000; hence not permitted.
ACQUISITION & TRANSFER OF IMMOVABLE PROPERTY IN INDIA
Question 45] Explain the provisions of the Foreign Exchange Management (Acquisition & Transfer of Immovable
Property in India) Regulations, 2000.
Ans.: Acquisition & transfer of property in India by an Indian Citizen resident outside India [Regulation 3]: A person
resident outside India who is a citizen of India may -
(a) Acquire any immovable property in India other than agricultural/plantation/farm house.
(ib) Transfer any immovable property in India to a person resident in India.
(c) Transfer any immovable property to a person resident outside India who is a citizen of India or to a person
of Indian origin resident outside India.
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Acquisition & transfer of property in India by a person of Indian origin [Regulation 4]: A person of Indian origin
resident outside India may -
(a) Acquire any immovable property other than agricultural land/farm house/plantation property in India by
purchase, from out of funds received in India by way of inward remittance from any place outside India or funds
held in any non-resident account.
(b) Acquire any immovable property in India by way of gift from:
- A person resident in India or
- A person resident outside India who is a citizen of India or
- A person of Indian origin resident outside India.
(c) Acquire any immovable property in India by way of inheritance from a person resident outside India.
(id) Transfer any immovable property in India by way of sale to a person resident in India.
(e) Transfer agricultural land/farm house/plantation property in India, by way of gift or sale to a person resident
in India who is a citizen of India.
(f) Transfer residential or commercial property in India by way of gift to a person resident in India or to a person
resident outside India who is a citizen of India or to a person of Indian origin resident outside India.
Acquisition of immovable property for carrying on a permitted activity [Regulation 5]: A person resident outside
India who has established in India a branch, office or other place of business for carrying
on in India any activity, excluding a liaison office in accordance with the Foreign Exchange Management
(Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, may -
(a) Acquire any immovable property in India for carrying on such activity. However, all applicable laws, rules,
regulations or directions are duly complied with and the person files with the RBI a declaration in the Form IPI within
90 days from the date of such acquisition.
(b) Transfer by way of mortgage to an authorized dealer as a security for any borrowing, the immovable property
acquired.
Acquisition of immovable Property by Foreign Embassies/Diplomats/Consulate Generals [Regulation 5A]: Foreign
Embassy/Diplomat/Consulate General, may purchase or sell immovable property (other than agricultural
land/plantation property/ farm house) in India provided -
(i) Clearance from the Government of India, Ministry of External Affairs is obtained for such purchase or sale, and
(ii) The consideration for is paid out of funds remitted from abroad through the normal banking channels.
Repatriation of sale proceeds [Regulation 6]: A person resident outside India or his successor shall not except with
the prior permission of the RBI, repatriate outside India the sale proceeds of any immovable property.
In the event of sale of immovable property, the authorized dealer may allow repatriation of the sale proceeds
outside India, provided the following conditions are satisfied:
(i) The immovable property was acquired by the seller in accordance with the provisions FEMA.
(ii) The amount to be repatriated does not exceed -
(a) The amount paid for acquisition of the immovable property in foreign exchange received through normal
banking channels or out of funds held in Foreign Currency Non-Resident Account or
(b) The foreign currency equivalent of the amount paid where such payment was made from the funds held in
Non-Resident External account for acquisition of the property.
(iii) In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such
properties.
Prohibition on acquisition or transfer of immovable property in India by citizens of certain countries [Regulation
7): No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan without
prior permission of the RBI shall acquire or transfer immovable property in India, other than lease, not exceeding 5
years.
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Prohibition on transfer of immovable property in India [Regulation 8]: Save as otherwise provided in the Act or
Regulations, no person resident outside India shall transfer any immovable property in India. However, the RBI may
for sufficient reasons permit the transfer, subject to such certain conditions.
Question 46] Amit, a citizen of India, left India for employment in Australia on 1st June, 2017. Amit purchased a
flat at New Delhi for ` 15 lakhs in September, 2018. His brother, Sumit employed in New Delhi, also purchased a
flat in the same building in September, 2018 for ` 15 lakhs. Sumit's flat was financed by a loan from a housing
finance company and the loan was guaranteed by Amit. Examine with reference to the provisions of Foreign
Exchange Management Act, 1999, whether purchase of flat and guarantee by Amit are capital account
transactions and whether these transactions are permissible.
CA (Final) - Nov 2003 & Nov 2008 (7 Marks)
Ans.:
(i) In the given case, Amit left India for employment in June 2017. Therefore, he becomes a person resident outside
India as from June 2017. The purchase of flat in India by Amit (a person resident
outside India) is a capital account transaction and is permissible in accordance with Regulation framed in this behalf,
i.e. Foreign Exchange Management (Acquisition & Transfer of Immovable Property in India) Regulations, 2000.
As per Regulation 3, a person resident outside India can acquire immovable property if fulfils the following
conditions:
- The person resident outside India is a citizen of India.
- The immovable property acquired in India is not agricultural/plantation/farm house.
(ii) Guarantee involves a long term commitment which alters the assets and liabilities of a person and therefore
it is considered as a capital account transaction and thus restricted under FEMA.
Accordingly, Amit can give guarantee to the Housing Finance Company in respect of purchase of flat by Sumit only
after obtaining prior permission of RBI.
Question 47] An Indian citizen resident outside India is interested in acquiring a house in Chennai and a farm
house on the outskirts of Delhi. Advice with reference to FEMA.
CS (Executive) - June 2010 (1 Mark)
Mohan, an Indian citizen resident outside India, intends to acquire immovable property in India.
Ans.: As per Regulation 3 of the Foreign Exchange Management (Acquisition & Transfer of Immovable
Property in India) Regulations, 2000, a person resident outside India who is a citizen of India may acquire any
immovable property in India other than agricultural/plantation/farm house.
Thus, an Indian citizen resident outside India can acquire a house in Chennai but he cannot acquire a farm house on
the outskirts of Delhi.
Question 48] A person, resident outside India, is interested to repatriate outside India the sales proceeds of an
immovable property held in India. Advise with reference to FEMA.
Ans.: As per Regulation 6 of the Foreign Exchange Management (Acquisition & Transfer of Immovable Property
in India) Regulations, 2000, a person resident outside India or his successor shall not except with the prior
permission of the RBI, repatriate outside India the sale proceeds of any immovable property.
Question 49] Shyam, a non-resident Indian working in the USA intends to sell his ancestral house in India to a
person resident in India. Advise with reference to FEMA.
in India) Regulations, 2000, a person resident outside India who is a citizen of India may transfer any immovable
property in India to a person resident in India.
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Thus, Shyam, a non-resident Indian working in the USA can sell his ancestral house in India to a person resident in
India.
Question 50] A Malaysian diplomat entered into an agreement with a real estate company in India to purchase
non-agricultural land near New Delhi to establish a laboratory. Advice with reference to FEMA.CS (Executive) -
June 2013 (1 Mark)
Alex, a foreign diplomat desires to buy immovable property in India. Is he permitted to do so? Give reasons in
brief. CS (Executive) - Dec 2015 (3 Marks)
Ans.: As per Regulation 5A of the Foreign Exchange Management (Acquisition & Transfer of Immovable Property
in India) Regulations, 2000, Foreign Diplomat may purchase or sell immovable property (other than agricultural
land/plantation property/farm house) in India provided -
(i) Clearance from the Government of India, Ministry of External Affairs is obtained for such purchase or sale and
(ii) The consideration is paid out of funds remitted from abroad through the normal banking channels.
Thus, a Malaysian diplomat can enter into an agreement to purchase non-agricultural land to establish a laboratory
subject to compliance of above stated provisions.
ACQUISITION & TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA
Question 51] Discuss the regulations in respect of acquisition and transfer of immovable property outside India.
Ans.: As per Section 6(4) of the Foreign Exchange Management Act, 1999, a person resident in India may hold, own,
transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such
currency, security or property was acquired, held or owned by such person when he was resident outside India or
inherited from a person who was resident outside India.
Provisions relating to transfer of immovable property outside India are contained in FEM (Acquisition and Transfer
of Immovable Property Outside India) Regulations, 2015.
Restriction on acquisition or transfer of immovable property outside India [Regulation 3]: No person resident in
India shall acquire or transfer any immovable property situated outside India without general or special permission
of the RBI.
Exemptions [Regulation 4]: Nothing contained in these regulations shall apply to the property -
(a) Held by a person resident in India who is a national of a foreign state;
(b) Acquired by a person resident in India on or before 8th July 1947 and continued to be held by him with the
permission of the RBI.
Acquisition and transfer of immovable property outside India [Regulation 5]:
(1) A person resident in India may acquire immovable property outside India -
(a) By way of gift or inheritance from a person referred to in Section 6(4) of the Act, or referred to in Regulation
4(b);
(b) By way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in
accordance with the Foreign Exchange Management (Foreign Currency accounts by a person resident in India)
Regulations, 2015;
(c) Jointly with a relative who is a person resident outside India, provided there is no outflow of funds from
India.
(2) A person resident in India may acquire immovable property outside India, by way of inheritance or gift from
a person resident in India who has acquired such property in accordance with the foreign exchange provisions in
force at the time of such acquisition.
(3) A company incorporated in India having overseas offices, may acquire immovable property outside India for
its business and for residential purposes of its staff, in accordance with the direction issued by the Reserve Bank of
India from time to time.
Explanation: 'Relative' in relation to an individual means husband, wife, brother or sister or any lineal ascendant or
descendant of that individual.
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Question 52] A person, resident in India, wants to acquire immovable property outside India by way of gift from
a person who is resident outside India. Advice with reference to FEMA.
outside India) Regulations, 2000, a person resident in India may acquire immovable property outside India by way
of gift from a person resident outside India.
ESTABLISHMENT OF BRANCH OFFICE/LIAISON OFFICE/PROJECT OFFICE/OTHER PLACE OF BUSINESS IN INDIA
Question 53] A French Manufacturing Company desirous of setting up its branch office at Pune, seeks your advice
on the objects for which the company may be allowed to set up the desired branch office. Advise the company
about the procedure as required under the Foreign Exchange Management Act, 1999 to be followed in this regard.
Ans.: As per Section 6(6) of the Foreign Exchange Management Act, 1999, the RBI may by regulation, prohibit,
restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside
India. In exercise of such power, the RBI has framed FEM (Establishment in India of a branch office or a liaison
office or a project office or any other place of business) Regulations, 2016. Provisions of this Regulation are
explained below:
Prohibition against opening a branch office or a liaison office or a project office or any other place of business in
India [Regulation 3]: No person resident outside India shall without prior approval of the RBI open in India a branch
office or a liaison office or a project office or any other place of business by whatever name called except as laid
down in these Regulations.
(a) A banking company resident outside India shall not require any approval under these Regulations for
establishing any office in India if such company has obtained necessary approval under the provisions of the Banking
Regulation Act, 1949.
(b) An insurance company resident outside India shall not require any approval under these Regulations for
establishing any office in India if such company has obtained approval from the IRDA established u/s 3 of the
Insurance Regulatory & Development Authority Act, 1999.
(c) A company resident outside India shall not require any approval under these Regulations to establish a
branch office in the SEZs to undertake manufacturing and service activities, subject to the conditions that:
(i) Such branch offices are functioning in those sectors where 100% FDI is permitted;
(ii) Such branch offices comply with Chapter XXII of the Companies Act, 2013; and
(iii) Such branch offices function on a stand-alone basis.
Approval for opening a branch office or a liaison office or a project office or any other place of busin ess in India
[Regulation 4]:
(a) Eligibility: A person resident outside India can establish a branch office or a liaison office in India provided it
meets the following criterion:
(i) For Branch Office: A profit making track record during the immediately preceding 5 financial years in the
home country and net worth of not less than US$ 1,00,000 or its equivalent.
(ii) For Liaison Office: A profit making track record during the immediately preceding three financial years in the
home country and net worth of not less than US$ 50,000 or its equivalent.
However, a person resident outside India that is not financially sound and are subsidiaries of other companies may
submit a Letter of Comfort from their parent company subject to the condition that the parent company satisfies
the prescribed criterion for net worth and profit.
(b) Permissible activities: A person resident outside India permitted by the Reserve Bank under these
Regulations to establish a branch or liaison office in India may undertake or carry on any activity
specified in Schedule I or II (Annex B), as the case may be, but shall not undertake or carry on any other activity
unless otherwise specifically permitted by the RBI.
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(c) Application form: A person resident outside India desiring to establish a branch office or a liaison office or a
project office or any other place of business in India shall submit an application in Form FNC to an AD Category-I
who may, subject to the provisions of Regulation 5, grant approval as per the directions and/or guidelines issued by
the RBI in this regard. In case no office is opened by the person resident outside India within six months from the
date of approval letter, the approval for establishing the office in India shall be cancelled. In cases where the person
resident outside India is not able to open the office within the stipulated time frame due to reasons beyond their
control, the AD Category-I may consider granting extension of time for setting up the office by a further period of 6
months. Any further extension of time shall require the prior approval of the RBI in this regard.
(d) Extension of the validity period for liaison office:
(I) A person resident outside India may establish in India under these Regulations a liaison office for a period of
3 years subject to the provisions of Regulation 4(d)(III). The non-resident entity may apply to the AD Category-I bank
concerned for extension of the validity period of approval, and upon receipt of such an application, the AD Category-
I bank concerned may extend the validity period of approval for a period of 3 years from the date of expiry of the
original approval/ extension granted, subject to such directions issued by the RBI in this regard.
(II) The application for extension of the validity period of the liaison office of banks and entities engaged in
insurance business has to be directly submitted to the Department of Banking Regulation (DBR), RBI and the IRDA
respectively.
(III) Entities engaged in construction and development sectors and which are Non-Banking Finance Companies
are permitted to open a Liaison Office for 2 years only. No further extension would be considered for liaison offices
of entities which are Non-Banking Finance Companies and those engaged in construction and development sectors
(excluding infrastructure development companies). Upon expiry of the validity period, the offices shall have to
either close down or be converted into JV/WOS in conformity with the extant FDI policy.
(e) Additional offices: A person resident outside India desiring to establish additional branch office or liaison
office may submit to the AD Category-I a fresh FNC Form along with the justification for the need for additional
offices.
(J) Project office: A foreign company may open project office(s) in India provided it has secured from an Indian
company, a contract to execute a project in India, and
(i) the project is funded directly by inward remittance from abroad; or
(ii) the project is funded by a bilateral or multilateral International Financing Agency; or
(iii) the project has been cleared by an appropriate authority; or
(iv) a company or entity in India awarding the contract has been granted term loan by a Public Financial Institution
or a bank in India for the Project.
(g) Registration with State Police Authorities: A person from Bangladesh, Sri Lanka, Afghanistan, Iran, China,
Hong Kong or Macau opening a branch office or a liaison office or a project office or any other place of business in
India shall have to register with the concerned State Police Authorities. Copy of approval letter for 'persons' from
these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-
I, Government of India, New Delhi.
(h) Fund/non-fund based facilities: AD Category-I bank may extend fund and/or non-fund based facilities to
branch office and project offices based on the guidelines issued by the RBI in this regard.
(i) Remittance of profit or surplus:
(I) Branch office may remit outside India profit of the branch net of applicable Indian taxes, on production of the
following documents to the satisfaction of the AD Category-I bank through whom the remittance is effected:
(a) A certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year.
(b) A Chartered Accountant's certificate certifying -
1. the manner of arriving at the remittable profit;
2. that the entire remittable profit has been earned by undertaking the permitted activities and
3. that the profit does not include any profit on revaluation of the assets of the branch.
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(II) AD Category -1 bank may permit intermittent remittances by project offices pending winding up/completion of
the project subject to submission of the following:
1. certified copy of the final audited project accounts;
2. the statutory auditor's certificate showing the manner of arriving at the remittable surplus and confirming
that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.; and
3. An undertaking from the project office that the remittance will not, in any way, affect the completion of the
project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance
from abroad.
(j) Acquisition of property: Acquisition of property by branch office/project office shall be governed by the
guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside
India) Regulations.
(k) Transfer of assets: A person resident outside India permitted to establish a branch office or liaison office or
project office may apply to the concerned AD Category-I bank for transfer of its assets to JV/WOS or any other entity
in India. AD Category-I bank shall be guided by the instructions laid down by RBI in this regard.
(l) Annual Activity Certificate (AAC): The branch office/liaison office may submit the Annual Activity Certificate
(Annex D) as at the end of March 31 along with the audited financial statements including receipt and payment
account on or before September 30 of that year. In case the annual accounts of the office are finalized with
reference to a date other than March 31, the AAC along with the audited financial statements may be submitted
within 6 months from the due date of the Balance Sheets to the AD Category-bank and the Director General of
Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002. AAC from a Chartered
Accountant showing the project status and certifying that the accounts of the project office have been audited and
the activities undertaken are in conformity with the general/specific permission given by the RBI may be submitted
by the project office to the designated AD Category-I bank.
(m) Closure of office and remittance of winding up proceeds: Requests for closure of the branch office/ liaison
office may be submitted to the AD Category -1 bank along with the following documents:
(i) Copy of the RBI's/ AD Category-I bank's approval for establishing the office.
(ii) Auditor's certificate:
1. indicating the manner in which the remittable amount has been arrived at and supported by a statement of
assets and liabilities of the applicant, and indicating the manner of disposal of assets;
2. confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the
office have been either fully met or adequately provided for;
3. confirming that no income accruing from sources outside India (including proceeds of exports) has remained
un-repatriated to India.
(iii) Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending
against the office and there is no legal impediment to the remittance.
(iv) A report from the ROC regarding compliance with the provisions of the Companies Act, 2013, in case of
winding up of the branch office/liaison in India.
(v) Any other document/s, specified by the RBI/AD Category-I bank while granting approval. Remittance of
winding up proceeds of branch or liaison office established in India shall be governed by the guidelines issued under
Foreign Exchange Management (Remittance of assets) Regulations.
Approval of the RBI in certain cases for establishment of branch office, liaison office or project office or any other
place of business in India [Regulation 5]: Any application from a person resident outside for opening of a branch
office or a liaison office or a project office or any other place of business in India shall require prior approval of RBI
in the following cases where -
(a) The applicant is a citizen of or is registered/incorporated in Pakistan;
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(b) The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China,
Hong Kong or Macau and the application is for opening a liaison, branch or project office in Jammu and Kashmir,
North East region and Andaman and Nicobar Islands;
(c) The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security
and Information and Broadcasting. In the case of proposal for opening a project office relating to defence sector,
no separate reference or approval of Government of India shall be required if the said non-resident applicant has
been awarded a contract by/entered into an agreement with the Ministry of Defence or Service Headquarters or
Defence Public Sector Undertakings.
(d) The applicant is a Non-Government Organization, Non-Profit Organization, Body/Agency/Department of a
foreign government.
Such applications shall be forwarded to the RBI, Foreign Exchange Department, Central Office Cell, New Delhi by
the AD Category-I bank and be considered in consultation with the Government of India.
Question 54] Indel Manufacturing Inc., a company incorporated outside India, engaged in software development,
intends to open its branch in a Special Economic Zone (SEZ) in India. Advise with reference to FEMA. CS
(Executive) - Dec 2009 (1 Mark), Dec 2012 (1 Mark)
Ans.: As per Regulation 3 of the Foreign Exchange Management (Establishment in India of a branch office or a
liaison office or a project office or any other place of business) Regulations, 2016, no approval shall be necessary
from RBI for a company to establish a branch or unit in SEZ to undertake manufacturing and service activities if
conditions mentioned in that regulation are complied with.
Thus, Indel Manufacturing Inc. can open its branch in a SEZ in India subject to compliance of conditions mentioned
Regulation 3.
INVESTMENT IN FIRM OR PROPRIETARY CONCERN IN INDIA
Question 55] Explain the provisions of the Foreign Exchange Management (Investment in Firm or Proprietary
concern in India) Regulations, 2000.
Ans.: Restrictions on investment in a firm or a proprietary concern in India by a person resident outside India
[Regulation 3]: No person resident outside India shall make any investment by way of contribution to the capital of
a firm or a proprietary concern or any association of persons in India. However, the RBI may, on an application may
permit a person resident outside India to make an investment by way of contribution to the capital of a firm or a
proprietary concern or any association of persons in India.
Permission for investment in certain cases [Regulation 4]: A non-resident Indian or a Person of Indian Origin
resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India,
provided that -
(a) The amount invested is received either by inward remittance through normal banking channels or out of an
account maintained with an authorized person by the non-resident Indian or the person of Indian origin in
accordance with the relevant Regulations.
(b) The firm or the proprietary concern is not engaged in any agricultural/plantation activity or real estate
business, i.e. dealing in land and immovable property with a view to earning profit or earning income.
(c) The amount invested shall not be eligible for repatriation outside India
(,d) Where investment is made out of NRSR Account of the non-resident investor, the income earned on investment
or proceeds of investment shall be credited only to the NRSR Account of the investor.
(e) The firm or a propriety concern is not engaged in print media.
Permission to a firm or a proprietary concern to make payment to a non-resident Indian or a person of Indian
origin who has made investment [Regulation 5]: A firm or a proprietary concern in India may make payment to or
for the credit of a non-resident Indian or a person of Indian origin the sum invested by such person in that firm or
the proprietary concern or the income accruing to such person by way of profit on such investment.
Question 56] A person resident outside India desires to contribute ` 10 lakh as capital in a firm engaged in software
business in India. Advice with reference to FEMA. CS (Executive) - Dec 2009 (1 Mark)
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Ans.: As per Regulation 3 of the Foreign Exchange Management (Investment in Firm or Proprietary concern in
India) Regulations, 2000, the RBI may, on an application may permit a person resident outside India to make an
investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in
India. Such permission is subject to conditions laid down in Regulation 4.
Thus, person resident outside India can contribute ` 10 lakh as capital in a firm engaged in software business in India
subject to compliance of above stated provisions.
EXPORT OF GOODS & SERVICES
Question 57] Explain the provisions of the Foreign Exchange Management Act, 1999 relating to export of goods
and services?
Ans.: Export of Goods & Services [Section 7]: Every exporter of goods shall -
(a) Furnish to the RBI or other authority a declaration in prescribed form and in prescribed manner containing
true and correct material particulars, including the amount representing the full export value or the value which the
exporter expects to receive.
(b) Furnish to the RBI such other information as may be required by the RBI for the purpose of ensuring the
realization of the export proceeds by such exporter.
The RBI may direct any exporter to comply with specified requirements for the purpose of ensuring that export
value of the goods is received without any delay.
Every exporter of services shall furnish to the RBI or other authorities a declaration in such prescribed form and in
prescribed manner containing the true and correct material particulars in relation to payment for such services.
Realization & Repatriation of Foreign Exchange [Section 8]: Where any amount of foreign exchange is due any
person resident in India then such person shall take all reasonable steps to realize and repatriate to India such
foreign exchange within prescribed period and in prescribed as may be specified by the RBI.
Write a short note on: Declaration for export of goods and services under the FEMA.
Ans.: Declaration of exports [Regulation 3]:
(1) In case of exports taking place through Customs manual ports, every exporter of goods or software in physical
form or through any other form, either directly or indirectly, to any place outside India, other than Nepal and
Bhutan, shall furnish to the specified authority, a declaration in one of the forms set out in the Schedule and
supported by such evidence as may be specified, containing true and correct material particulars including the
amount representing -
(i) the full export value of the goods or software; or
(ii) if the full export value is not ascertainable at the time of export, the value which the exporter, having regard to
the prevailing market conditions expects to receive on the sale of the goods or the software in overseas market,
and affirms in the said declaration that the full export value of goods (whether ascertainable at the time of export
or not) or the software has been or will within the specified period be, paid in the specified manner.
(2) Declarations shall be executed in sets of such number as specified.
(3) In respect of export of services to which none of the Forms specified in these Regulations apply, the exporter
may export such services without furnishing any declaration, but shall be liable to realize the amount of foreign
exchange which becomes due or accrues on account of such export, and to repatriate the same to India in
accordance with the provisions of the Act.
(4) Realization of export proceeds in respect of export of goods/ software from third party should be duly
declared by the exporter in the appropriate declaration form.
Question 59] Atul Ltd., an Indian company intends to export its software of the value of ` 15,000.
Advise with reference to FEMA. CS (Executive) - June 2012 (1 Mark)
Ans.: As per Regulation 3 of the Foreign Exchange Management (Export of Goods & Services) Regulation, 2000, in
case of exports taking place through Customs manual ports, every exporter of software to any place outside India
shall furnish to the specified authority, a declaration in one of the forms set out in the Schedule and supported by
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such evidence as may be specified, containing true and correct material particulars including the amount
representing -
(i) the full export value of the software; or
(ii) if the full export value is not ascertainable at the time of export, the value which the exporter, having regard to
the prevailing market conditions expects to receive on the sale of the software.
(iii) Declarations shall be executed in sets of such number as specified.
(iv) In respect of export of services to which none of the Forms specified in these Regulations apply, the exporter
may export such services without furnishing any declaration, but shall be liable to realize the amount of foreign
exchange which becomes due or accrues on account of such export, and to repatriate the same to India in
accordance with the provisions of the Act.
Thus, Atul Ltd. can export its software of the value of ` 15,000 after compliance of above stated provisions.
Question 60] State the type of export for which no declaration is required to be filed under the FEM (Export of
Goods & Services) Regulation, 2000. CS (Executive) - Dec 2013 (8 Marks)
Ans.: Exemptions [Regulation 4]: Export of goods/software may be made without furnishing the declaration in the
following cases, namely:
(a) Trade Sample: Trade samples of goods and publicity material supplied free of payment.
(b) Personal effects of travellers: Personal effects of travellers, whether accompanied or unaccompanied.
(c) Ship's Store: Ship's stores, trans-shipment cargo and goods supplied under the orders of Central Government
or of such officers as may be appointed by the Central Government in this behalf or of the military, naval or air force
authorities in India for military, naval or air force requirements.
(d) Gifts of goods: By way of gift of goods accompanied by a declaration by the exporter that they are not more
than ` 5 lakhs in value.
(e) Aircrafts & its spare parts: Aircrafts or aircraft engines and spare parts for overhauling and/or repairs abroad
subject to their re-import into India after overhauling/repairs, within a period of 6 months from the date of their
export.
(f) Goods imported on re-export basis: Goods imported free of cost on re-export basis.
(g) Goods permitted by the Development Commissioner of the SEZ, EHTP, STP or FTZ: The following goods
which are permitted by the Development Commissioner of the SEZ, EHTP, STP or FTZ to be re-exported, namely:
(1) imported goods found defective, for the purpose of their replacement by the foreign suppli-
ers/collaborators;
(2) goods imported from foreign suppliers/ collaborators on loan basis;
(3) goods imported from foreign suppliers/collaborators free of cost, found surplus after production operations.
(h) Export of goods by units in SEZ: Goods to be re-exported by units in SEZ, under intimation to the
Development Commissioner of SEZ/concerned Assistant or Deputy Commissioner of Customs.
(i) Replacement goods: Replacement goods exported free of charge in accordance with the provisions of
Foreign Trade Policy in force, for the time being.
(j) Goods sent for testing: Goods sent outside India for testing subject to re-import into India.
(k) Sending of defective goods sent outside India for repair: Defective goods sent outside India for repair and re-
import provided the goods are accompanied by a certificate from an authorized dealer in India that the export is for
repair and re-import and that the export does not involve any transaction in foreign exchange.
(l) Exports specifically permitted by RBI: Exports permitted by the RBI, on application made to it, subject to the
terms and conditions, if any, as stipulated in the permission.
Question 61] On which type of documents Importer-Exporter Code Number is required to indicated under the
FEMA.
Ans.: Indication of Importer-Exporter Code Number [Regulation 5]: The importer-exporter code number allotted
by the DGFT shall be indicated on all:
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- Copies of the declaration forms submitted by the exporter to the specified authority and
- Correspondence of the exporter with the authorized dealer or the RBI.
Question 62] State the various types of Forms that are required to be filed when goods or services are exported.
Also state the authorities with whom such forms are required to be filed with reference to relevant regulation
under the FEMA.
Ans.: Authority to whom declaration is to be furnished and the manner of dealing with the declaration
[Regulation 6]:
A. Declaration in Form EDF:
(i) The declaration in Form EDF shall be submitted in duplicate to the Commissioner of Customs.
(ii) After duly verifying and authenticating the declaration form, the Commissioner of Customs shall forward the
original declaration form/data to the nearest office of the RBI and hand over the duplicate form to the exporter for
being submitted to the authorized dealer.
B. Declaration in Form SOFTEX:
(i) The declaration in Form SOFTEX in respect of export of computer software and audio/ video/ television software
shall be submitted in triplicate to the designated official of Ministry of Information Technology, Government of India
at the Software Technology Parks of India (STPIs) or at the Free Trade Zones (FTZs) or Special Economic Zones (SEZs)
in India.
(ii) After certifying all 3 copies of the SOFTEX form, the said designated official shall forward the original directly to
the nearest office of the RBI and return the duplicate to the exporter. The triplicate shall be retained by the
designated official for record.
C. Duplicate Declaration Forms to be retained with Authorized Dealers:
On the realization of the export proceeds, the duplicate copies of export declaration forms viz. EDF and SOFTEX
shall be retained by the Authorized Dealers.
Evidence in support of declaration [Regulation 7]: The Commissioner of Customs or the postal authority or the
official of Department of Electronics, to whom the declaration form is submitted, may, in order to satisfy themselves
of due compliance with Section 7 of the Act and these regulations, require such evidence in support of the
declaration as may establish that -
(a) The exporter is a person resident in India and has a place of business in India;
(b) The destination stated on the declaration is the final place of the destination of the goods exported;
(c) The value stated in the declaration represents -
- The full export value of the goods or software; or
- Where the full export value of the goods or software is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions expects to receive on the sale of the goods in
the overseas market.
Submission of export documents [Regulation 10]: The documents pertaining to export shall be submitted to the
authorized dealer mentioned in the relevant export declaration form, within 21 days from the date of export, or
from the date of certification of the SOFTEX Form.
However, subject to the directions issued by the RBI from time to time, the authorized dealer may accept the
documents pertaining to export submitted after the expiry of the specified period of 21 days, for reasons beyond
the control of the exporter.
Question 63] State the provision of the FEM (Export of Goods & Services) Regulation, 2000 relating to realization
of export proceeds.
Ans.: Manner of payment of export value of goods [Regulation 8]: Unless otherwise authorized by the RBI, the
amount representing the full export value of the goods exported shall be paid through an authorized dealer in the
manner specified in the FEM (Manner of Receipt & Payment) Regulations, 2000
as amended from time to time.
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Explanation: Re-import into India, within the period specified for realization of the export value, of the exported
goods in respect of which a declaration was made, shall be deemed to be realization of full export value of such
goods.
(1) The amount representing the full export value of goods/software/services exported shall be realized and
repatriated to India within 9 months from the date of export.
However, where the goods are exported to a warehouse established outside India with the permission of the RBI,
the amount representing the full export value of goods exported shall be paid to the authorized dealer as soon as it
is realized and in any case within 15 months from the date of shipment of goods.
The RBI or the authorized dealer may, for a sufficient and reasonable cause shown, extend the period of 9 months
or 15 months, as the case may be.
(2) Where the export of goods/software/ services has been made by Units in SEZ/Status Holder exporter/EOU
and units in EHTP, STP and Bio -Technology Parks (BTPs) as defined in the Foreign Trade Policy in force, then the
amount representing the full export value of goods or software shall be realized and repatriated to India within 9
months from the date of export. However, the RBI, or subject to the directions issued by the Bank in this behalf, the
authorized dealer may, for a sufficient and reasonable cause shown, extend the period of 9 months.
The RBI may for reasonable and sufficient cause direct that the said exporter/s shall cease to be governed by clause
(2). However no such direction shall be given unless the unit has been given a reasonable opportunity to make a
representation in the matter.
On such direction, the said exporter shall be governed by the provisions of clause (1), until directed otherwise by
the RBI.
Question 64] Which type of exports requires prior approval of RBI under the FEM (Export of Goods & Services)
Regulation, 2000?
Ans.: Certain exports requiring prior approval i.e. exports under trade agreement/rupee credit etc. [Regulation
13]: Export of goods under special arrangement between the Central Government and Government of a foreign
state, or under rupee credits extended by the Central Government to Government of a foreign state shall be
governed by the terms and conditions set out in the relative public notices issued by the Trade Control Authority in
India and the instructions issued from time to time by the RBI.
An export under the line of credit extended to a bank or a financial institution operating in a foreign state by the
EXIM Bank for financing exports from India, shall be governed by the terms and conditions advised by the RBI to the
authorized dealers from time to time.
Question 65] An Indian company engaged in software business intends to adjust the value of its exports towards
the value of imported items. Comment. CS (Executive) - Dec 2010 (1 Mark)
Ans.: Any arrangement involving adjustment of value of goods imported into India against value of goods exported
from India shall require prior approval of the RBI.
Thus, an Indian company engaged in software business can adjust the value of its exports towards the value of
imported items only by taking prior approval of the RBI.
Question 66] Naresh, an Indian citizen, enters into an agreement for the lease of machinery to a foreign party
and intends to ship the machinery abroad. CS (Executive) - Dec 2010 (1 Mark)
Ans.: Prior approval of the RBI is required for export of machinery, equipment, etc., on lease, hire basis under
agreement with the overseas lessee against collection of lease rentals/hire charges and ultimate re-import.
Exporters should apply for necessary permission, through an AD Category-I, to the Regional Office concerned of the
RBI, giving full particulars of the goods to be exported.
Thus, Naresh can enter into an agreement for the lease of machinery to a foreign party by taking prior approval of
RBI.
Question 67] Tomco Ltd. A vehicles manufacturing company situate at Pune, Maharashtra has received an order
from a transport company in Italy for supply of 100 Trucks on lease. You are required to state, how the said Tomco
Ltd. can accept such an order.
CA (Final) - Nov 2004 (3 Marks), May 2007 (3 Marks)
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Ans.: Prior approval of the RBI is required for export of machinery, equipment, etc., on lease, hire basis under
agreement with the overseas lessee against collection of lease rentals/hire charges and ultimate re-import.
Exporters should apply for necessary permission, through an AD Category-I, to the Regional Office concerned of the
RBI, giving full particulars of the goods to be exported.
Accordingly, if Tomco Ltd. can accept the order for dispatching 100 trucks to Italy on lease basis after taking prior
Question 68] What are the obligations of exporter when he receives advance payment against export under the
FEM (Export of Goods & Services) Regulation, 2000?
Ans.: Advance payment against exports [Regulation 16]: Where an exporter receives advance payment from a
buyer outside India, the exporter shall be under an obligation to ensure that -
(i) The shipment of goods is made within 1 year from the date of receipt of advance payment
(ii) The rate of interest payable on advance payment does not exceed LIBOR + 100 basis points
(iii) The documents covering the shipment are routed through the authorized dealer
If the exporter's not enable to make the shipment within 1 year, no remittance towards refund of unutilized portion
of advance payment or towards payment of interest, shall be made after the expiry of the period of 1 year without
the prior approval of the RBI.
Where the export agreement provides for shipment of goods extending beyond the period of 1 year from the date
of receipt of advance payment, the exporter shall require the prior approval of the RBI.
Question 69] Write a short note on: Project Exports
Ans.: Project Exports [Regulation 18]: Where an export of goods or services is proposed to be made on deferred
payment terms or in execution of a turnkey project or a civil construction contract, the exporter shall, before
entering into any such export arrangement, submit the proposal for prior approval of the approving authority, which
shall consider the proposal in accordance with the guidelines issued by the RBI from time to time.
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4
CHAPTER
FEIYIA - FOREIGN DIRECT INUESTMENT IN INDIA
INTRODUCTION: Foreign Investment in India is regulated in terms of Section 6(3)(a) and Section 47 of the Foreign
Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of a Security by a
Person resident Outside India) Regulations, 2017.
FEM (TRANSFER OR ISSUE OF SECURITY BY A PERSON RESIDENT OUTSIDE INDIA) REGULATIONS, 2017 [FOREIGN
DIRECT INVESTMENT IN INDIA]
Question 1] What are the restriction on issue or transfer of Security by/to a person resident outside India under
the FEMA?
Ans.: Restriction on issue or transfer of Security by a person resident outside India [Regulation 3]: No
person resident outside India shall issue or transfer any security. However, the RBI may, on an application made to
it and for sufficient reasons, permit a person resident outside India to issue or transfer any security subject to certain
conditions.
Restriction on an Indian entity to issue security to a person resident outside India or to record a transfer of
security from or to such a person in its books [Regulation 4]: An Indian entity shall not issue any security to a person
resident outside India or shall not record in its books any transfer of security from or to such person. However, the
RBI may, on an application made to it and for sufficient reasons, permit an entity to issue any security to a person
resident outside India or to record in its books transfer of security from or to such person subject to certain
conditions.
Question 2] Mehta Investments Ltd., a company incorporated in India, wishes to issue shares to its employees
who are residents outside India. Comment. CS (Executive) - Dec 2007 (1 Mark)
Ans.: As per Regulation 4 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2017, an Indian entity shall not issue any security to a person resident outside India or
shall not record in its books any transfer of security from or to such person. However, the RBI may, on an application
made to it and for sufficient reasons, permit an entity to issue any security to a person resident outside India or to
record in its books transfer of security from or to such person subject to certain conditions. Thus, Mehta Investments
Ltd. can issue shares to its employees who are residents outside India subject permission of RBI and compliance
with other conditions laid down in above stated Regulation.
Question 3] Write a short note on: Purchase of shares by certain persons resident outside India under the FEMA.
Ans.: Permission for purchase of shares by certain persons resident outside India [Regulation 5]: Any
investment made by a person resident outside India shall be subject to the entry routes, sectoral caps or the
investment limits, as the case may be, and the attendant conditionalities for such investment as laid down in these
Regulations. A person resident outside India may make investment as under:
(1) A person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in
the manner and subject to the terms and conditions specified in Schedule 1.
'Capital Instruments' means equity shares, debentures, preference shares and share warrants issued by an Indian
company.
A person who is a citizen of Bangladesh/Pakistan or is an entity incorporated in Bangladesh/ Pakistan cannot
purchase capital instruments without prior approval of Government of India.
A person who is a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government
route, in sectors/activities other than defence, space, atomic energy and sectors/ activities prohibited for foreign
investment.
(2) A Foreign Portfolio Investor (FPI) may purchase or sell capital instruments of a listed Indian company on a
recognized stock exchange in India in the manner and subject to the terms and conditions specified in Schedule 2.
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(3) A Non-Resident Indian or an Overseas Citizen of India may on repatriation basis purchase or sell capital
instruments of a listed Indian company on a recognized stock exchange in India, in the manner and subject to the
terms and conditions specified in Schedule 3.
(4) A Non-Resident Indian or an Overseas Citizen of India may, on non-repatriation basis, purchase or sell capital
instruments of an Indian company or purchase or sell units or contribute to the capital of a LLP or a firm or
proprietary concern, in the manner and subject to the terms and conditions specified in Schedule 4.
(5) A person resident outside India, permitted for the purpose by the RBI in consultation with Central
Government, may purchase or sell securities other than capital instruments in the manner and subject to the terms
and conditions specified in Schedule 5.
Note: A Foreign Portfolio Investor or a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) may trade or
invest in all exchange traded derivative contracts approved by SEBI from time to time subject to the limits prescribed
by the SEBI and conditions specified in Schedule 5.
(6) A person resident outside India, other than a citizen of Bangladesh/Pakistan or an entity incorporated in
Bangladesh/Pakistan, may invest, either by way of capital contribution or by way of acquisition/transfer of profit
shares of an LLP, in the manner and subject to the terms and conditions as specified in Schedule 6.
(7) A Foreign Venture Capital Investor may make investment in the manner and subject to the terms and
conditions specified in Schedule 7.
(8) A person resident outside India, other than a citizen of Bangladesh or Pakistan or an entity incorporated in
Bangladesh/Pakistan, may invest in units of an Investment Vehicle, in the manner and subject to the terms and
conditions specified in Schedule 8.
(9) A person resident outside India may invest in the Depository Receipts (DRs) issued by foreign depositories
against eligible securities in the manner and subject to the terms and conditions as specified in Schedule 9.
(10) A Foreign Portfolio Investor or Non-Resident Indian or an Overseas Citizen of India may purchase, hold or sell
Indian Depository Receipts (IDRs) of companies resident outside India and issued in the Indian capital market, in the
manner and subject to the terms and conditions specified in Schedule 10.
Question 4] Ram, an NRI resident in Nepal, is interested to invest in shares and convertible debentures of an
Indian company. Advice with reference to FEMA. CS (Executive) - June 2009 (1 Mark)
Ans.: As per Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2017, a person resident outside India may subscribe, purchase or sell capital instruments
of an Indian company in the manner and subject to the terms and conditions specified in Schedule 1.
A person who is a citizen of Bangladesh/Pakistan or is an entity incorporated in Bangladesh/Pakistan cannot
route, in sectors/activities other than defence, space, atomic energy and sectors/ activities prohibited for foreign
investment.
NRI resident in Nepal is not prohibited in making FDI in India. Thus, Ram can invest in shares and convertible
debentures of an Indian company.
Question 5] A Bangladeshi millionaire is interested to invest in India subject to FDI policy of the Government of
India. Advice with reference to FEMA. CS (Executive) - June 2009 (1 Mark)
Ans.: As per Regulation 5 of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations
2017, a person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in
A person who is a citizen of Bangladesh/Pakistan or is an entity incorporated in Bangladesh/Pakistan cannot
route, in sectors/ activities other than defence, space, atomic energy and sectors/activities prohibited for foreign
investment.
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Thus, citizens of Bangladesh are prohibited from making FDI. They can do so only with prior approval of Government
of India.
Question 6] A foreign investor is interested to invest in an Indian company which is a small scale industrial unit.
Advice with reference to FEMA.
CS (Executive) - June 2009 (1 Mark), June 2013 (1 Mark)
Infotech Ltd., an Indian company owning a small enterprise, intends to issue shares against foreign direct
investment. CS (Executive) - Dec 2011 (1 Mark)
Ans.: As per Regulation 5 of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations,
2017, a person resident outside India may subscribe, purchase or sell capital instruments of an Indian company in
Any investment made by a person resident outside India shall be subject to the entry routes, sectoral caps or the
investment limits.
A company which is reckoned as Micro & Small Enterprise (MSE) [earlier Small Scale Industrial Unit] in terms of the
Micro, Small & Medium Enterprises Development Act, 2006 and which is not engaged in any prohibited
activity/sector may issue shares or convertible debentures, subject to the prescribed limits in accordance with the
Entry Routes specified and the provision of the FDI Policy.
Thus, subject to compliance of sectoral cap/investment limits and other prescribed conditions by the RBI, an Indian
company which is a small scale industrial unit may issue shares to foreign investor.
Question 7] ABC Ltd., a company incorporated in India, is eligible to issue shares to persons resident outside India
under the FDI policy and intends to retain the share subscription amount in a foreign currency account. Advice
with reference to FEMA. CS (Executive) - June 2013 (1 Mark)
Ans.: As per Schedule I of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations
2017, an Indian company issuing capital instruments may open a foreign currency account with an Authorized
Dealer in India in accordance with Foreign Exchange Management (Foreign currency accounts by a person resident
in India) Regulations, 2016.
RBI may on an application made to it and on being satisfied that it is necessary so to do, permit an Indian company
issuing shares to persons resident outside India, to retain the subscription amount in a foreign currency account,
subject to such terms and conditions as it may stipulate. Thus, ABC Ltd. can retain the share subscription amount in
a foreign currency account with approval of RBI.
Question 8] You are the Company Secretary of United Holding Ltd. Your company is about issue right shares to
existing shareholders. Some the shareholders of your company are the persons resident outside India. State the
provisions to be complied in this regard under the FEMA?
An Indian public limited company wants to issue bonus shares to an existing non-resident shareholder. Comment.
Ans.: Acquisition through a rights issue or a bonus issue [Regulation 6]: A person resident outside India and having
investment in an Indian company may make investment in capital instruments (other than share warrants) issued
by such company as a rights issue or a bonus issue provided that:
1. The offer made by the Indian company is in compliance with the provisions of the Companies Act, 2013.
2. Such issue shall not result in a breach of the sectoral cap applicable to the company.
3. The shareholding on the basis of which the rights issue or the bonus issue has been made must have been
acquired and held as per the provisions of these Regulations.
4. In case of a listed Indian company, the rights issue to persons resident outside India shall be at a price
determined by the company.
5. In case of an unlisted Indian company, the rights issue to persons resident outside India shall not be at a price
less than the price offered to persons resident in India.
6. Such investment made through rights issue or bonus issue shall be subject to the conditions as are applicable
at the time of such issue.
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7. The amount of consideration shall be paid as inward remittance from abroad through banking channels or
out of funds held in NRE/FCNR(B) account maintained in accordance with the Foreign Exchange Management
(Deposit) Regulations, 2016.
Renunciation of rights: A person resident in India and a person resident outside India may subscribe for additional
shares over and above the shares offered on rights basis by the company and also renounce the shares offered
either in full or part thereof in favour of a person named by them.
A person resident outside India who has acquired a right from a person who has renounced it may acquire capital
instruments (other than share warrants) against the said rights.
Question 9] A non-resident shareholder has applied for the issue of additional shares over and above his
entitlement of rights shares in an Indian company. Comment.
Ans.: As per Regulation 6 of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations,
2017, the existing non-resident shareholders may apply for issue of additional shares and
the investee company may allot the same subject to condition that overall issue of shares to non-resident in the
total paid-up capital does not exceed the sectoral cap.
Question 10] Briefly discuss the provisions of the FEMA relating to issue of shares to under 'employees' stock
option' or 'sweat equity shares' to the person resident outside India.
XYZ Ltd., a company listed on the Bombay Stock Exchange Ltd., wants to issue shares under the ESOS to the
employees of its joint venture abroad. CS (Executive) - June 2009 (1 Mark)
Ans.: Issue of shares under Employees Stock Options Scheme to persons resident outside India [Regulation 7]: An
Indian company may issue "employees' stock option" or "sweat equity shares" to its employees/ directors or
employees/ directors of its holding company or joint venture or wholly owned overseas subsidiary who are resident
outside India subject to compliance of following conditions:
1. The scheme has been drawn either in terms of regulations issued under the SEBI Act, 1992 or the Companies
(Share Capital & Debentures) Rules, 2014 notified by the Central Government under the Companies Act, 2013.
2. The 'employees stock option' or 'sweat equity shares' so issued under the applicable rules/regulations are in
compliance with the sectoral cap applicable to the said company.
3. Issue of 'employee's stock option' or 'sweat equity shares' in a company where investment by a person
resident outside India is under the approval route shall require prior Government approval.
4. Issue of 'employees stock option' or 'sweat equity shares' to a citizen of Bangladesh/ Pakistan shall require
prior Government approval.
An individual who is a person resident outside India exercising an option which was issued when he/ she was a
person resident in India shall hold the shares so acquired on exercising the option on a nonrepatriation basis.
Question 11] State the provisions of FEMA relating to issue of convertible notes to person resident outside India
by the Indian Startup Company.
Ans.: Issue of Convertible Notes by an Indian startup company [Regulation 8]:
(1) A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity
which is registered/incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian
startup company for an amount of ` 25 lakh or more in a single tranche.
(2) A startup company, engaged in a sector where investment by a person resident outside India requires
Government approval, may issue convertible notes to a person resident outside India only with such approval.
Further, issue of equity shares against such convertible notes shall be in compliance with the entry route, sectoral
caps, pricing guidelines and other attendant conditions for foreign investment.
(3) A startup company issuing convertible notes to a person resident outside India shall receive the amount of
consideration by inward remittance through banking channels or by debit to the NRE/ FCNR(B)/Escrow account
maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations,
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2016. Repayment or sale proceeds may be remitted outside India or credited to NRE/FCNR(B) account maintained
by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
(4) A NRI or an OCI may acquire convertible notes on non-repatriation basis in accordance with Schedule 4.
(5) A person resident outside India may acquire or transfer by way of sale, convertible notes, from or to, a person
resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing
guidelines as prescribed for capital instruments.
Startup company means a private company incorporated under the Companies Act, 2013 and recognized as such in
accordance with notification number G.S.R. 180(E) dated February 17,2016 issued by the Department of Industrial
Policy & Promotion, Ministry of Commerce & Industry, Government of India and complies with the conditions laid
down by it.
Question 12] Where there is merger or amalgamation of two or more Indian companies, can the transferee
company issue shares/debentures to the existing holders of the transferor company who are resident outside
India?
Ans.: Merger or demerger or amalgamation of Indian companies [Regulation 9]:
(1) Where a Scheme of merger or amalgamation of two or more Indian companies or a reconstruction by way
of demerger or otherwise of an Indian company, has been approved by NCLT/ Competent Authority, the transferee
company or the new company, as the case may be, may issue capital instruments to the existing holders of the
transferor company resident outside India, subject to the following conditions, namely:
(a) The transfer or issue is in compliance with the entry routes, sectoral caps or investment limits, as the case
may be, and the attendant conditionalities of investment by a person resident outside India. However, where the
percentage is likely to breach the Sectoral caps or the attendant conditionalities, the transferor company or the
transferee or new company may obtain necessary approvals from the Central Government.
(b) The transferor company or the transferee company or the new company shall not engage in any sector
prohibited for investment by a person resident outside India.
(2) Where a Scheme of Arrangement for an Indian company has been approved by NCLT/Competent Authority,
the Indian company may issue non-convertible redeemable preference shares or non- convertible redeemable
debentures out of its general reserves by way of distribution as bonus to the shareholders resident outside India,
subject to the following conditions, namely:
(a) The original investment made in the Indian company by a person resident outside India is in accordance with
conditions specified in the relevant Schedule of the these Regulations.
(b) The said issue is in accordance with the provisions of the Companies Act, 2013 and the terms and conditions
stipulated in the scheme approved by NCLT/ Competent Authority have been complied with.
(c) The Indian company shall not engage in any activity/ sector in which investment by a person resident outside
India is prohibited.
Question 13] Briefly discuss the provisions of the FEMA relating to transfer of Capital Instruments of an Indian
company by or to a person resident outside India.
Ans.: Transfer of capital instruments of an Indian company by or to a person resident outside India [Regulation
10]: A person resident outside India holding capital instruments of an Indian company or units in accordance with
these Regulations or a person resident in India, may transfer such capital instruments or units so held by him in
compliance with the conditions, if any, specified in the respective Schedules of these Regulations and subject to the
terms and conditions specified hereunder.
(1) A person resident outside India, not being a non-resident Indian or an overseas citizen of India or an erstwhile
overseas corporate body may transfer by way of sale or gift the capital instruments of an Indian company or units
held by him to any person resident outside India.
Explanation: It shall also include transfer of capital instruments of an Indian company pursuant to liquidation,
merger, de-merger and amalgamation of entities/ companies incorporated or registered outside India subject to
following conditions -
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(i) Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector
which requires Government approval.
(ii) Where the person resident outside India is an FPI and the acquisition of capital instruments made under Schedule
2 has resulted in a breach of the applicable aggregate FPI limits or sectoral limits, the FPI shall sell such capital
instruments to a person resident in India eligible to hold such instruments within the time stipulated by RBI in
consultation with the Central Government. The breach of the said aggregate or sectoral limit on account of such
acquisition for the period between the acquisition and sale, provided the sale is within the prescribed time limit,
shall not be reckoned as a contravention of any provision. The guidelines issued by SEBI in this regard shall be
applicable.
(2) An NRI or an OCI holding capital instruments of an Indian company or units on repatriation basis may transfer
the same by way of sale or gift to any person resident outside India subject to following condition:
(i) Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which
requires Government approval.
(ii) Where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 has
resulted in a breach of the applicable aggregate NRI/OCI limit or sectoral limits, the NRI or the OCI shall sell such
capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by
Reserve Bank in consultation with the Central Government. The breach of the said aggregate or sectoral limit on
account of such acquisition for the period between the acquisition and sale, provided the sale is within the
prescribed time, shall not be reckoned as a contravention of any provision.
(3) A person resident outside India, holding capital instruments of an Indian company or units in accordance
with these Regulations may transfer the same to a person resident in India by way of sale/ gift or may sell the same
on a recognized stock exchange in India in the manner prescribed by SEBI subject to following conditions:
(i) The transfer by way of sale shall be in compliance with and subject to the adherence to pricing guidelines,
documentation and reporting requirements for such transfers as may be specified by RBI from time to time.
(ii) Where the capital instruments are held by the person resident outside India on a non-repatriable basis,
conditions at (i) above shall not apply.
(4) A person resident in India holding capital instruments of an Indian company or units, or an NRI or an OCI or
an eligible investor under Schedule 4, holding capital instruments of an Indian company or units on a non-
repatriation basis, may transfer the same to a person resident outside India by way of sale, subject to the adherence
to entry routes, sectoral caps/investment limits, pricing guidelines and other attendant conditions as applicable for
investment by a person resident outside India and documentation and reporting requirements for such transfers as
may be specified by RBI from time to time.
However, entry routes, sectoral caps/investment limits, pricing guidelines and other attendant conditions shall not
apply in case the transfer is to an NRI or an OCI or an eligible investor under Schedule 4 of these Regulations
acquiring such investment on non-repatriation basis.
(5) A person resident in India holding capital instruments or units of an Indian company or an NRI or an OCI an
eligible investor under Schedule 4 holding capital instruments or units of an Indian company on a non-repatriation
basis may transfer the same to a person resident outside India by way of gift with the prior approval of the RBI, in
the manner prescribed, and subject to the following conditions:
(zz) The donee is eligible to hold such a security under relevant schedules of these Regulations.
(b) The gift does not exceed 5% of the paid up capital of the Indian company/each series of debentures/each
mutual fund scheme. The 5% will be on cumulative basis by a single person to another single person.
(c) The applicable sectoral cap in the Indian company is not breached.
(d) The donor and the donee shall be 'relatives' within the meaning in Section 2(77) of the Companies Act, 2013.
(e) The value of security to be transferred by the donor together with any security transferred to any person
residing outside India as gift during the financial year does not exceed the rupee equivalent of US$ 50,000.
(f) Such other conditions as considered necessary in public interest by the RBI.
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(6) An NRI or an OCI or an eligible investor under Schedule 4 holding capital instruments of an Indian company
or units on a non-repatriation basis, may transfer the same by way of gift to an NRI or an OCI or an eligible investor
under Schedule 4 of these Regulations who shall hold it on a non- repatriable basis.
(7) A person resident outside India holding capital instruments of an Indian company containing an optionality
clause in accordance with these Regulations and exercising the option/ right, may exit without any assured return,
subject to the pricing guidelines and a minimum lock-in period of 1 year or minimum lock-in period as prescribed in
these Regulations, whichever is higher.
(8) An erstwhile OCB may transfer capital instruments subject to directions issued by the RBI from time to time
in this regard.
(9) In case of transfer of capital instruments between a person resident in India and a person resident outside
India, an amount not exceeding 25% of the total consideration
(a) can be paid by the buyer on a deferred basis within a period not exceeding 18 months from the date of the
transfer agreement; or
(b) can be settled through an escrow arrangement between the buyer and the seller for a period not exceeding
eighteen months from the date of the transfer agreement; or
(c) can be indemnified by the seller for a period not exceeding 18 months from the date of the payment of the
full consideration, if the total consideration has been paid by the buyer to the seller.
However, the total consideration finally paid for the shares shall be compliant with the applicable pricing guidelines.
(10) In case of transfer of capital instruments between a person resident in India and a person resident outside
India, a person resident outside India may open an Escrow account in accordance with the FEM (Deposit)
Regulations, 2016. Such Escrow account may be funded by way of inward remittance through banking channels
and/or by way of guarantee issued by an authorized dealer bank, subject to terms and conditions as specified in the
FEM (Guarantees) Regulations, 2000.
(11) The pricing guidelines prescribed in these Regulations shall not be applicable for any transfer by way of sale
done in accordance with SEBI regulations where the pricing is prescribed by SEBI.
(12) The transfer of capital instruments of an Indian company or units of an Investment Vehicle by way of pledge
is subject to the following terms and conditions:
(a) Any person being a promoter of a company registered in India (borrowing company), which has raised
external commercial borrowing (ECB) in compliance with the Foreign Exchange Management (Borrowing and
Lending in Foreign Exchange) Regulations, 2000 may pledge the shares of the borrowing company or that of its
associate resident companies for the purpose of securing the external commercial borrowing (ECB) raised by the
borrowing company subject to the following conditions:
(i) the period of such pledge shall be co-terminus with the maturity of the underlying external commercial
borrowing;
(ii) in case of invocation of pledge, transfer shall be in accordance with these Regulations and directions issued by
the RBI;
(iii) the Statutory Auditor has certified that the borrowing company will utilize/ has utilized the proceeds of the
external commercial borrowing for the permitted end use only;
(iv) no person shall pledge any such share unless a no-objection has been obtained from an Authorized Dealer bank
that the above conditions have been complied with.
(b) Any person resident outside India holding capital instruments in an Indian company or units of an investment
vehicle may pledge the capital instruments or units, as the case may be:
(i) in favour of a bank in India to secure the credit facilities being extended to such Indian company for bona fide
purposes,
(ii) in favour of an overseas bank to secure the credit facilities being extended to such person or a person
resident outside India who is the promoter of such Indian company or the overseas group company of such Indian
company,
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(iii) in favour of NBFC registered with the RBI to secure the credit facilities being extended to such Indian company
for bona fide purposes,
(iv) subject to the Authorized Dealer bank satisfying itself of the compliance of the conditions stipulated by the
RBI in this regard.
(c) In case of invocation of pledge, transfer of capital instruments of an Indian company or units shall be in
accordance with entry routes, sectoral caps/investment limits, pricing guidelines and other attendant conditions at
the time of creation of pledge.
Question 14] Can a person resident in India gift or sale the shares to person resident outside India?
Girish intends to transfer his shareholding in as gift to his son who is a resident outside India. Advise with
reference to FEMA. CS (Executive) - Dec 2008 (1 Mark)
Ans.: As per Regulation 10 of the FEM (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2017, a person resident in India holding capital instruments or units of an Indian company or an NRI
or an OCI an eligible investor holding capital instruments or units of an Indian company on a non-repatriation basis
may transfer the same to a person resident outside India by way of gift with the prior approval of the RBI, in the
manner prescribed, and subject to the following conditions:
(a) The donee is eligible to hold such a security under relevant schedules of these Regulations.
(b) The gift does not exceed 5 % of the paid up capital of the Indian company/ each series of debentures/ each
mutual fund scheme. The 5% will be on cumulative basis by a single person to another single person.
(c) The applicable sectoral cap in the Indian company is not breached.
(d) The donor and the donee shall be 'relatives' within the meaning in Section 2(77) of the Companies Act, 2013.
(e) The value of security to be transferred by the donor together with any security transferred to any person
residing outside India as gift during the financial year does not exceed the rupee equivalent of US$ 50,000.
(f) Such other conditions as considered necessary in public interest by the RBI.
Girish intends to transfer his shareholding in as gift to his son who is a resident outside India. Son is relative within
the meaning in Section 2(77) of the Companies Act, 2013 and hence girish can gift his shares subject to compliance
of other provisions of Regulation 10 of the FEM (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2017.
Question 15] State the pricing guidelines for issue of capital instrument by Indian Company to a person resident
outside India.
Ans.: Pricing Guidelines [Regulation 11]: Pricing guideline in relation to issue of capital instrument to a person
resident outside India is as follows:
(1) Price of capital instrument issued by a company to a person resident outside India shall not be less than:
(a) The price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company or
in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2009.
(b) The valuation of capital instruments done as per any internationally accepted pricing methodology for
valuation on an arm's length basis duly certified by CA or registered Merchant Banker or a practicing Cost
Accountant, in case of an unlisted Indian Company.
Explanation: In case of convertible capital instruments, the price/conversion formula of the instrument should be
determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any
case be lower than the fair value worked out, at the time of issuance of such instruments.
(2) Price of capital instruments transferred from a person resident in India to a person resident outside India
shall not be less than:
(a) The price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company.
(b) The price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable,
in case of a listed Indian company or in case of a company going through a delisting process as per the SEBI (Delisting
of Equity Shares) Regulations, 2009.
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(c) The valuation of capital instruments done as per any internationally accepted pricing methodology for
(3) Price of capital instruments transferred by a person resident outside India to a person resident in India shall
not exceed:
(a) The price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company.
(b) The price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable,
in case of a listed Indian company or in case of a company going through a delisting process as per the SEBI (Delisting
of Equity Shares) Regulations, 2009. However, the price is determined for such duration as specified in the SEBI
Guidelines, preceding the relevant date, which shall be the date of purchase or sale of shares.
(c) The valuation of capital instruments done as per any internationally accepted pricing methodology for
(4) The price of capital instruments of an Indian company in case of swap of capital instruments, valuation of
swap arrangement will have to be made by a registered Merchant Banker or an Investment Banker outside India
registered with the appropriate regulatory authority in the host country.
(5) Where shares in an Indian company are issued to a person resident outside India in compliance with the
provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments
shall be made at face value subject to entry route and sectoral caps.
(6) In case of share warrants, their pricing and the price/conversion formula shall be determined upfront.
However, these pricing guidelines shall not be applicable for investment in capital instruments by a person resident
outside India on non-repatriation basis.
Question 16] What are the provisions relating to 'taxes and remittance of sale proceeds' of capital instrument
issued by the Indian Company under the FEMA?
Ans.: Taxes and remittance of sale proceeds [Regulation 12]:
Taxes: All transaction in relation to issue and transfer of capital instrument of Indian company to or by person
resident outside India shall be undertaken through banking channels in India and subject to payment of applicable
taxes and other duties in India.
Remittance of sale proceeds: No remittance of sale proceeds of an Indian security held by a person resident outside
India shall be made otherwise than in accordance with these Regulations and the conditions specified in the relevant
Schedule.
An Authorized Dealer may allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller
of shares resident outside India subject to conditions that -
(i) The security was held by the seller on repatriation basis and
(ii) The security has been sold in compliance with the pricing guidelines or the RBI approval has been obtained in
other cases for sale of the security and remittance of the sale proceeds.
Question 17] What are the reporting requirements for any investment in capital instrument in India by a person
resident outside India under the FEMA?
Ans.: Reporting requirements [Regulation 13]: The reporting requirement for any investment in India by a person
resident outside India shall be as follows:
(1) Advance Remittance Form (ARF): An Indian company which has received amount of consideration for issue
of capital instruments and where such issue is reckoned as FDI, shall report such receipt (including each upfront/call
payment) in ARF to the Regional Office concerned of the RBI, not later than 30 days from the date of receipt.
(2) Form Foreign Currency - Gross Provisional Return (FC-GPR): An Indian company issuing capital instruments
to a person resident outside India and where such issue is reckoned as FDI, shall report such issue in Form FC-GPR
to the Regional Office concerned of the RBI under whose jurisdiction the Registered office of the company operates,
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not later than 30 days from the date of issue of capital instruments. Issue of 'participating interest/rights' in oil fields
shall be reported in Form FC-GPR.
(3) Annual Return on Foreign Liabilities and Assets (FLA): An Indian company which has received FDI or an LLP
which has received investment by way of capital contribution in the previous years including the current year should
submit form FLA to the RBI on or before the 15th day of July of each year.
(4) Form Foreign Currency-Transfer of Shares (FC-TRS):
(a) Form FCTRS shall be filed for transfer of capital instruments between:
1. A person resident outside India holding capital instruments in an Indian company on a repatriable basis and
person resident outside India holding capital instruments on a non-repatriable basis.
2. A person resident outside India holding capital instruments in an Indian company on a repatriable basis and
a person resident in India.
The onus of reporting shall be on the resident transferor/transferee or the person resident outside India holding
capital instruments on a non-repatriable basis, as the case may be.
Note: Transfer of capital instruments in accordance with these Regulations by way of sale between a person resident
outside India holding capital instruments on a non-repatriable basis and person resident in India is not required to
be reported in Form FC-TRS.
(b) Transfer of capital instruments on a recognized stock exchange by a person resident outside India shall be
reported by such person in Form FC-TRS to the Authorized Dealer.
(c) Transfer of capital instruments prescribed in regulation 10(9), shall be reported in Form FC- TRS to the
Authorized Dealer on receipt of every tranche of payment. The onus of reporting shall be on the resident
transferor/transferee.
(d) Transfer of 'participating interest/rights' in oil fields shall be reported Form FC-TRS The form FCTRS shall be
filed with the Authorized Dealer bank within 60 days of transfer of capital instruments or receipt/remittance of
funds whichever is earlier.
(5) Form Employees' Stock Option (ESOP): An Indian company issuing employees' stock option to persons
resident outside India who are its employees/directors or employees/directors of its holding company/JV/WOS shall
submit Form-ESOP to the Regional Office concerned of the RBI under whose jurisdiction the registered office of the
company operates, within 30 days from the date of issue of employees stock option.
(6) Form Depository Receipt Return (DRR): The Domestic Custodian shall report in Form DRR, to the RBI, the
issue/ transfer of depository receipts issued in accordance with the Depository Receipt Scheme, 2014 within 30 days
of close of the issue.
(7) Form LLP (I): A Limited Liability Partnerships receiving amount of consideration for capital contribution and
acquisition of profit shares shall submit Form LLP(I) to the Regional Office of the RBI under whose jurisdiction the
Registered Office of the LLP is situated, within 30 days from the date of receipt of the amount of consideration.
(8) Form LLP (II): The disinvestment/transfer of capital contribution or profit share between a resident and a
non-resident (or vice versa) shall be reported in Form LLP(II) to the Authorized Dealer Bank within 60 days from the
date of receipt of funds.
(9) LEC(FII): The Authorized Dealer Category-I shall report to the RBI in Form LEC(FII) the purchase/ transfer of
capital instruments by FPIs on the stock exchanges in India.
(10) LEC(NRI): The Authorized Dealer Category-I shall report to the RBI in Form LEC(NRI) the purchase/ transfer
of capital instruments by NRI or OCI stock exchanges in India.
(11) Downstream Investment: An Indian company making downstream investment in another Indian company
which is considered as indirect foreign investment for the investee company in terms of these Regulations, shall
notify the Secretariat for Industrial Assistance, DIPP and file Form DI within 30 days of such investment and, even if
capital instruments have not been allotted along with the modality of investment in new/existing ventures
(with/without expansion programme).
(12) Form Convertible Notes (CN):
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(a) The Indian startup company issuing Convertible Notes to a person resident outside India shall report such
inflows to the Authorized Dealer bank in Form CN within 30 days of such issue.
(b) A person resident in India, who may be a transferor or transferee of Convertible Notes issued by an Indian
startup company shall report such transfers to or from a person resident outside India, as the case may be, in Form
CN to the Authorized Dealer bank within 30 days of such transfer.
(c) The Authorized Dealer bank shall submit consolidated statements to the RBI.
The format, periodicity and manner of submission of such reporting shall be as prescribed by RBI in this regard.
Unless otherwise specifically stated all reporting shall be made through or by an Authorized Dealer bank.
Delays in reporting [Regulation 13(2)]: The person/entity responsible for filing the reports above shall be liable for
payment of late submission fee, as may be decided by the RBI, in consultation with the Central Government, for any
delays in reporting.
'Downstream Investment' shall mean investment made by an Indian entity in the capital instruments of another
Indian entity.
Question 18] What do you understand by 'downstream investment' under the provisions of the FEMA? What are
the conditions for making downstream investment?
Ans.: Conditions for downstream investment [Regulation 14]: Downstream investment made into Indian
companies will be subject to the following conditions:
(а) The downstream investment should have the approval of the Board of Directors as also a Shareholders'
Agreement.
(b) The Indian entity making the downstream investment shall bring in requisite funds from abroad and not use
funds borrowed in the domestic markets. Downstream investments can be made through internal accruals. For this
purpose, internal accruals will mean profits transferred to reserve account after payment of taxes.
(c) Capital instrument of an Indian company held by another Indian company which has received foreign
investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons
resident outside India may be transferred to:
(i) A person resident outside India, subject to reporting requirements in Form FC-TRS.
(ii) A person resident in India subject to adherence to pricing guidelines.
(iii) An Indian company which has received foreign investment and is not owned and not controlled by resident
Indian citizens or owned or controlled by persons resident outside India.
(d) The first level Indian company making downstream investment shall be responsible for ensuring compliance
with the provisions of the downstream investment made by it at second level and so on and so forth. Such first level
company shall obtain a certificate to this effect from its statutory auditor on an annual basis. Such compliance shall
be mentioned in the Director's report in the Annual Report of the Indian company. In case statutory auditor has
given a qualified report, the same shall be immediately brought to the notice of the Regional Office of the RBI in
whose jurisdiction the Registered Office of the company is located and shall also obtain acknowledgement from the
RO.
(e) The provisions at (c) and (d) above shall be construed accordingly for an LLP.
Question 19] Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as
under the Government Route?
Ans.: Prohibited activities for investment by a person resident outside India [Regulation 15]: Investment by a
person resident outside India is prohibited in:
(1) Lottery Business including Government/private lottery, online lotteries
(2) Gambling and betting including casinos
(3) Chit funds
(4) Nidhi company
(5) Trading in Transferable Development Rights (TDRs)
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(б) Real estate business or construction of farm houses
(7) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(8) Activities/sectors not open to private sector investment e.g. atomic energy & railway operations
(9) Foreign technology collaboration in any form including licensing for franchise, trademark, brand name,
management contract is also prohibited for lottery business and gambling and betting activities.
Explanation 1: The Registrar of Chits or an officer authorized by the State Government in this behalf, may, in
consultation with the State Government, permit any chit fund to accept subscription from Non-resident Indians and
Overseas Citizens of India who shall be eligible to subscribe, through banking channel and on non-repatriation basis,
to such chit funds, without limit subject to the conditions stipulated by the RBI from time to time.
Explanation 2: "Real Estate Business" shall not include development of townships, construction of
residential/commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and
regulated under the SEBI (REITs) Regulations, 2014.
Question 20] Brown, a UK citizen, is interested to make investment in the form of foreign direct investment (FDI)
in retail trading business. Comment with reference to FEMA.
Ans.: Regulation 15 of the FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations,
2017, do not provide any prohibition on Foreign Direct Investment in Retail Trading.
Under Schedule I to the Single Brand Product Retail Trading & Multiple Brand Product Retail Trading specifically
permitted for investment by person resident outside India under FDI. Thus, Brown, a UK citizen, can to make
investment in the form of FDI in retail trading business.
Question 21] What do you understand by 'Automatic Route' and 'Government Route' under the FEMA?
Discuss the method of funding of foreign direct investment under the Foreign Exchange Management Act, 1999.
Ans.: Automatic & Government Route [Regulation 16]: There are two methods of funding foreign direct investment
(FDI). They are discussed below:
Automatic Route: Automatic Route means the entry route through which investment by a person resident outside
India does not require the prior RBI approval or Government approval.
Government Route: Government Route means the entry route through which investment by a person resident
outside India requires prior Government approval. Foreign investment received under this route shall be in
accordance with the conditions stipulated by the Government in its approval.
Question 22] Distinguish between: Automatic Route & Government Route
Ans.: Following are the main points of difference between automatic & government route:
Points Automatic Route Government Route
Meaning Automatic Route means the entry route Government Route means the entry route
through which investment by a person resident through which investment by a person resident
outside India does not require the prior RBI outside India requires prior Government
approval or Government approval. approval.
Conditions Foreign investment received under this route Foreign investment received under this route
shall be in accordance with the FEM (Transfer shall be in accordance with the FEM (Transfer
or issue of security by a person resident outside or issue of security by a person resident outside
India) Regulations, 2017. India) Regulations, 2017 along with additional
conditions stipulated by the Government in its
approval.
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Points Automatic Route Government Route
Citizen of Person resident outside Indian who is a citizen Person residentoutside Indian who is a citizen
Bangladesh/ of Bangladesh/Pakistan or is an entity of Bangladesh/Pakistan or is an entity
incorporated in Bangladesh/Pakistan cannot incorporated in Bangladesh/Pakistan can make
Pakistan
avail the Automatic Route. investment in India in permitted
activities/sector only under Government
Route.
Procedure The investors are only required to notify the Such proposals are considered by the
regional office concerned of RBI after receipt of Government body that offers single window
inward remittances and file the required clearance for proposals on foreign investment
documents with that office. in the country that are not allowed access
through the automatic route.
Question 23] Desire Ltd., a company incorporated outside India, wants to buy shares up to 10% of paid-up capital
of an Indian company engaged in infrastructure development. Comment.
Ans.: As per Schedule I of the FEM (Transfer or issue of security by a person resident outside India) Regulations,
2017, 100% FDI is allowed in infrastructure development. Thus, Desire Ltd., a company incorporated outside India,
can buy shares up to 10% of paid-up capital of an Indian company engaged in infrastructure development subject
to fulfilment of other conditions laid down in Regulation.
Question 24] Vijeta Ltd., a company incorporated in India, is interested in issuing 'foreign currency convertible
bonds' (FCCBs) for US$ 500 million to a person resident outside India. Comment.
Ans.: As per Schedule I of the FEM (Transfer or issue of security by a person resident outside India) Regulations,
2017, FCCBs/DRs may be issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds &
Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and Depository Receipt Scheme, 2014
respectively, as per the guidelines issued by the Government of India there under from time to time.
Thus, Vijeta Ltd., a company incorporated in India, can issue 'foreign currency convertible bonds' (FCCBs) for US$
500 million to a person resident outside India subject to compliance of conditions stated above.
Question 25] Write a short note on: Depository Receipts CS (Executive) - Dec 2012 (3 Marks)
Ans.: The Depository Receipts are physical certificates, which allow investors to hold shares in equity of other
countries. These types of instruments first started in USA in late 1920 and are commonly known as American
Depository Receipt (ADR). Later on these have become popular in other parts of the world also in the form of Global
Depository Receipts (GDRs).
ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the
American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the London Stock
Exchange. Both ADRs and GDRs are usually denominated in US dollars, but these can also be denominated in Euros.
Question 26] What is meant by Foreign Currency Convertible Bond (FCCB)?
Ans.: Foreign Currency Convertible Bonds (FCCB) means a bond issued by an Indian company expressed in foreign
currency, the principal and interest of which is payable in foreign currency. FCCBs are issued in accordance with the
Foreign Currency Convertible Bonds and ordinary shares (through depository receipt mechanism) Scheme, 1993
and subscribed by a non-resident entity in foreign currency and convertible into ordinary shares of the issuing
company in any manner, either in whole, or in part.
Question 27] Distinguish between: Depository Receipt & Foreign Currency Convertible Bonds
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Ans.: Following are the main points of difference between Depository Receipt & Foreign Currency Convertible
Bonds:
Points Depository Receipt Foreign Currency Convertible Bonds
Meaning Depository Receipts are physical certificates, Foreign Currency Convertible Bonds (FCCBs)
which allow investors to hold shares in equity means a bond issued by an Indian company
of other countries and are commonly known as expressed in foreign currency, and the principal
American Depository Receipts (ADRs) & Global and interest in respect of which is payable in
Depository Receipts (GDRs). foreign currency.
Trading ADRs are typically traded on a US national FCCBs are not traded in foreign stock
stock exchange, such as the New York Stock exchanges.
Exchange while GDRs are commonly listed on
European stock exchanges such as the London
Stock Exchange.
Type of Depository Receipts are is basically a A Foreign Currency Convertible Bond (FCCB) is
instrument negotiable instrument denominated in foreign a quasi debt instrument.
currency i.e. US dollars.
Nature Depository Receipts represents the beneficial FCCBs can be exchanged for equity shares at
interest in shares issued by the company. later date after the issue of the bond.
Investors Depository Receipts are nothing but the shares Investors have option to convert FCCBs into
option denominated in foreign currency and investor shares or GDRs. If investors choose to hold the
get the return just like dividend. Investor can bond till maturity, the company has to redeem
also sale or transfer it other person and get them at maturity date.
back the money invested by him.
Question 28] Discuss conditions of Foreign Direct Investment in E-Commerce activities.

Ans.: E-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to
Consumer (B2C) E-commerce.
E-commerce means buying and selling of goods and services including digital products over digital & electronic
network.
E-commerce entity means a company incorporated under the Companies Act or a foreign company covered the
Companies Act or an office, branch or agency in India as provided in Section 2(v)(iii) of FEMA, 1999, owned or
controlled by a person resident outside India and conducting the e-commerce business.
Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is
owned by e-commerce entity and is sold to the consumers directly.
Marketplace based model of e-commerce means providing of an information technology platform by an e-
commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
Conditions of Investment in E-Commerce activities:
♦ 100% FDI under automatic route is permitted in 'marketplace model' of e-commerce.
♦ FDI is not permitted in 'inventory based model' of e-commerce.
♦ Digital & electronic network will include network of computers, television channels and any other internet
application used in automated manner such as web pages, extranets, mobiles etc.
♦ Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its
platform on B2B basis.
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♦ E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order
fulfilment, call centre, payment collection and other services.
♦ E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods
purported to be sold. Such an ownership over the inventory will render the business into inventory based model.
♦ An e-commerce entity will not permit more than 25% of the sales value on financial year basis affected
through its marketplace from one vendor or their group companies.
♦ In marketplace model goods/services made available for sale electronically on website should clearly provide
name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer
satisfaction will be responsibility of the seller.
♦ In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the
guidelines of the RBI.
♦ In marketplace model, any warrantee/guarantee of goods and services sold will be responsibility of the seller.
♦ E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or
services and shall maintain level playing field.
♦ Guidelines on cash and carry wholesale trading of FDI Policy will apply on B2B e-commerce.
♦ Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and other
conditionalities, sale of services through e-commerce will be under automatic route.
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5
CHAPTER
FEMA - DIRECT IHUESTMEHT OUTSIDE IHDIfl
INTRODUCTION: The Overseas Direct Investment Outside India is regulated in terms of Section 6(3) and Section 47 of
the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or Issue of Foreign
Securities) Regulations, 2004.
FOREIGN EXCHANGE MANAGEMENT (TRANSFER OR ISSUE OF FOREIGN SECURITIES) REGULATIONS, 2004
Question 1] What is direct investment outside India?
Ans.: Direct investment outside India means investments, either under the Automatic Route or the Approval Route,
by way of contribution to the capital or subscription to the MOA of a foreign entity or by way of purchase of existing
shares of a foreign entity either by market purchase or private placement or through stock exchange, signifying a
long-term interest in the foreign entity (JV or WOS).
Question 2] Are overseas investments freely allowed in all the countries and are there any restrictions regarding
the currency of investment?
Ans.: Investment in Pakistan is allowed under the Approval Route. Investments in Nepal can be only in Indian
Rupees. Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies.
Question 3] State the prohibition on issue or transfer of foreign security by a person resident in India. Also state
for what purposes he can purchase or sale a foreign security.
Ans.: Prohibition on issue or transfer of foreign security [Regulation 3]: No person resident in India shall issue or
transfer any foreign security. However, the RBI may permit any person resident in India to issue or transfer any
foreign security on application made to it.
Purchase and sale of foreign security by a person resident in India [Regulation 4]: A person resident in India may -
(a) Purchase a foreign security out of funds held in RFC Account
(b) Acquire bonus shares on the foreign securities
(c) Purchase a foreign security from out of his foreign currency resources outside India (when not permanently
resident in India)
(d) Sell the foreign security purchased or acquired under clause (a), (b) or (c).
Explanation: 'Not permanently resident' means a person resident in India for employment of a specified duration
or for a specific job or assignment, the duration of which does not exceed 3 years.
Question 4] An Indian resident wants to purchase foreign securities by making remittances from his resident
foreign currency (RFC) Account. Advise with reference to FEMA
Ans.: As per Regulation 4 of FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a
person resident in India may purchase a foreign security out of funds held in RFC Account.
Thus, an Indian resident can purchase foreign securities by making remittances from his RFC Account.
Question 5] Ashok, a person resident in India, has been offered bonus shares of the value of US$
20,000 by a company incorporated outside India. Advise with reference to FEMA.
Ans.: As per Regulation 4 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a person resident
in India may acquire bonus shares on the foreign securities.
Thus, Ashok may acquire bonus shares of the value of US$ 20,000 of a company incorporated outside India.
Question 6] State the provisions relating to making direct investment outside India under the FEMA. Can an Indian
party issue performance guarantee in favour of overseas JV/WOS?
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Discuss the method of funding of foreign direct investment under the Foreign Exchange Management Act, 1999.
Ans.: Prohibition on Direct Investment outside India [Regulation 5]: Without prior approval of RBI -
(1) No person resident in India shall make any direct investment outside India and
(2) No Indian party shall make any direct investment in a foreign entity engaged in real estate business or
banking business.
Permission for Direct Investment in certain cases [Regulation 6]: An Indian Party may make investment in Joint
Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to fulfilment of specified conditions.
Conditions for making direct investment outside India [Regulation 6(2)]:
(a) The total financial commitment of the Indian Party in JV/WOS shall not exceed 100%, or as decided by the
RBI from time to time, of the net worth of the Indian Party as on the date of the last audited balance sheet.
(b) The direct investment is made in an overseas JV or WOS engaged in a bona fide business activity.
(c) The Indian Party is not on the Reserve Bank's Exporters caution list/list of defaulters to the banking system
circulated by the RBI or under investigation by any investigation/enforcement agency or regulatory body.
(d) The Indian party has submitted up to date returns in form APR in respect of all its overseas investments.
(e) The Indian Party routes all transactions relating to the investment in JV/WOS through only one branch of an
authorized dealer to be designated by it. However, the Indian Party may designate different branches of authorized
dealers for different JV/WOS outside India.
(f) The Indian Party submits Form ODA, duly completed, to the designated branch of an authorized dealer.
Permissible sources for funding overseas direct investment [Regulation 6(3)]: Investment or financial commitment
in an overseas JV /WOS may be funded out of one or more of the following sources:
(i) Drawal of foreign exchange from an AD bank in India
(ii) Capitalization of exports
(iii) Swap of shares
(iv) Proceeds of ECBs/FCCBs
(v) In exchange of ADRs/GDRs issued in accordance with the Scheme/Guidelines/Rules & Regulations
(vi) Balances held in EEFC account of the Indian party and
(vii) Proceeds of foreign currency funds raised through ADR/GDR issues.
Loan or a guarantee to or on behalf of the JV/WOS [Regulation 6(4)]: An Indian Party may extend a loan or a
guarantee to or on behalf of the JV/WOS abroad, within the permissible financial commitment, provided that the
Indian Party has made investment by way of contribution to the equity capital of the Joint Venture.
Direct investment out of the proceeds ADR/GDR [Regulation 6(5)]: An Indian Party may make direct investment
without any limit in any foreign security out of the proceeds of its international offering of shares through the
mechanism of ADR/GDR subject to following conditions:
(a) The ADR/ GDR issue has been made in accordance with relevant the Scheme/ Guidelines/Rules &
Regulations.
(b) The Indian Party files with the designated authorized dealer in Form ODA full details of the investment
proposed.
Valuation of investment [Regulation 6(3)]: For the purposes of direct investment outside India by way of remittance
from India in an existing company outside India, the valuation of shares of the company outside India shall be made
-
(a) Where the investment is more than US$ 5 Million, by Registered Category-I Merchant Banker or an
Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host
country.
(b) In all other cases, by a Chartered Accountant or a Certified Public Accountant.
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For the purposes of investment by acquisition of shares of an existing company outside India where the
consideration is to be paid fully or partly by issue of the Indian party's shares, the valuation of shares of the company
outside India shall in all cases, be carried out by a Registered Category-I Merchant Banker or an Investment
Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country.
Question 7] ABC Ltd., a company listed on the National Stock Exchange, is interested in investing in a company in
the USA. CS (Executive) - June 2009 (3 Marks)
Ans.: As per Regulation 6 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, an
Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. If an Indian
Party does not satisfy the eligibility norms it may apply to the RBI for approval.
Question 8] An Indian company intends to make direct investment in a joint venture outside India. Advise with
Ans.: As per Regulation 6(1) of the FEM (Transfer or Issue of Foreign Securities) Regulation, 2004, an
Indian Party may make investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to conditions
specified in Regulation 6(2).
Thus, an Indian company can make direct investment in a joint venture outside India subject to compliance of above
stated provisions.
Question 9] An Indian company engaged in financial sector is interested in making investment in banking business
abroad. Advise with reference to FEMA. CS (Executive) - June 2010 (1 Mark)
Ans.: As per Regulation 5 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, without prior
approval of RBI no Indian party shall make any direct investment in a foreign entity engaged in real estate business
or banking business.
Thus, an Indian company can make investment in banking business abroad after obtaining prior approval of RBI.
Question 10] What is 'Financial Commitment' for the purpose of direct investments outside India?
Ans.: Financial commitment means the amount of direct investments outside India by an Indian Party -
(a) by way of contribution to equity shares or CCPS of the JV/WOS abroad
(b) contribution to the JV/WOS as preference shares
(c) as loans to its the JV/WOS abroad
(id) 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS
(e) 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS
(f) bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV/ WOS of the Indian
party, which is backed by a counter guarantee/collateral by the Indian party
(g) amount of fund based or non fund based credit facility availed by creation of charge (pledge/
mortgage/hypothecation) on the movable/immovable property or other financial assets of the Indian party/its
group companies.
Question 11] Whether partnership firm registered in India undertake agricultural operations outside India as per
the provisions of the FEMA?
Ans.: General permission for investment in agricultural operations overseas directly or through overseas offices
[Regulation 6A]: A person resident in India being a company incorporated in India or a partnership firm registered
under Partnership Act, 1932, may undertake agricultural operations including purchase of land incidental to such
activity either directly or through their overseas offices. Such investment is subject to following conditions:
(a) The Indian party is otherwise eligible to make investment under Regulation 6 and that such investment is
within the overall limits as specified in Regulation 6.
(b) For the purposes of investment by acquisition of land overseas the valuation of the land is certified by a
certified valuer registered with the appropriate valuation authority in the host country. * (i)
Question 12] Referring to the provisions of the FEMA, answer the following:
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(i) Which types of entities are allowed to make investment in overseas companies that are listed on a
recognized stock exchange?
(ii) Can such entities make investment in rated bonds or fixed income securities?
(iii) State the conditions to be complied in this regard.
Ans.: General Permission for investment in Equity of a Company Registered Overseas [Regulation 6B]: A person
resident in India, being an individual or a listed Indian company may invest in -
(a) The shares of an overseas company which is listed on a recognized stock exchange
(b) The rated bonds/fixed income securities issued by companies at (a) above.
The investments are subject to following conditions:
(i) In the case of investment by a listed Indian company, the investment shall not exceed 50% of its net worth as on
the date of its last audited balance sheet.
(ii) Every transaction relating to purchase and sale of shares of the overseas company or bonds/ securities shall
be routed through the designated branch of an authorized dealer in India.
Question 13] A mutual fund, registered in India, is interested to invest in the rated bonds of a listed overseas
company which has shareholding of 5% in a listed Indian company. Comment.
Ans.: Investment by mutual funds [Regulation 6C]: Mutual funds registered with the SEBI may invest within
specified limits, in the shares or rated bonds/fixed income securities of an overseas company listed on a recognized
stock exchange or in exchange traded funds or in other securities as may be stipulated by the RBI from time to time.
Every transaction relating to purchase and sale of foreign security by mutual funds shall be routed through the
designated branch of an authorized dealer in India.
Indian Mutual Funds registered with SEBI are permitted to invest within the overall cap of US$ 7 billion in:
(a) ADR/GDR of the Indian and foreign companies.
(b) Equity of overseas companies listed on recognized overseas stock exchanges; initial and follow on public
offerings for listing at recognized overseas stock exchanges.
(c) Foreign debt securities- short term as well as long term with rating not below investment grade - in the
countries with fully convertible currencies.
(d) Money market investments not below investment grade; repos where the counter party is not below
investment grade.
(e) Government securities where countries are not rated below investment grade.
(f) Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with
underlying as securities.
(g) Short term deposits with banks overseas where the issuer is rated not below investment grade.
(h) Units/securities issued by overseas Mutual Funds/Unit Trusts registered with overseas regulators.
Question 14] Can Indian party engaged in the financial services activities make investment in an entity outside
India engaged in financial services activities? If yes, also state the conditions to be complied in this regard under
the FEMA.
Ans.: Investment in Financial Services Sector [Regulation 7]: An Indian party engaged in the financial services
activities may make investment in an entity outside India engaged in financial services activities subject to following
conditions:
(i) Indian party has earned net profit during the preceding 3 financial years from the financial services activities.
(ii) Indian party is registered with the regulatory authority in India for conducting the financial services activities.
(iii) Indian party has obtained approval from the concerned regulatory authorities both in India and abroad, for
venturing into such financial sector activity.
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(iv) Indian party has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned
regulatory authority in India.
Any additional investment by an existing JV/WOS or its step down company in the Financial Services Sector shall be
made only after complying with the conditions stipulated.
Question 15] State the provisions for making direct investment outside India as per "Approval Route" under the
FEMA.
Ans.: Approval of RBI in certain cases [Regulation 9]:
(1) An Indian Party which does not satisfy the eligibility norms under Regulation 6 or 7 or 8, may apply to the
RBI for approval.
(2) Application for direct investment in JV/WOS outside India, or by way of exchange for shares of a foreign
company, shall be made in Part I of the Form ODI, as prescribed by the RBI from time to time.
(3) An application in Form ODI, as prescribed by the RBI from time to time:
(a) For the purpose of investment by way of remittance from India, in an existing company outside India, shall
be accompanied, by the valuation of shares of the company outside India, made -
(i) where the investment is more than US$ 5 million, by a registered Category-I Merchant Banker or an
Investment Banker/Merchant Banker registered with the appropriate regulatory authority in the host country; and
(ii) in all other cases, by a Chartered Accountant or a Certified Public Accountant.
(b) For the purposes of investment by acquisition of shares of an existing company outside India where the
consideration is to be paid fully or partly by issue of the Indian party's shares, shall be accompanied by the valuation
carried out by a Category I Merchant Banker registered with the SEBI or an Investment Banker/Merchant Banker
registered with the appropriate regulatory authority in the host country.
(4) RBI may take into account following factors while considering the application:
(a) Prima facie viability of the JV/WOS outside India
(ib) Contribution to external trade and other benefits which will accrue to India
(c) Financial position and business track record of the Indian Party and the foreign entity
(d) Expertise and experience of the Indian Party in the same or related line of activity of the JV/ WOS outside
India.
Question 16] Aadarsh Education Society, engaged in education sector, intends to make investment in the
education sector in a joint venture in USA. Comment. CS (Executive) - June 2012 (1 Mark)
Ans.: Overseas Investments by Registered Trust/Society [Regulation 9A]: Registered Trusts and Societies engaged
in the manufacturing/ educational sector satisfying the criteria as per Schedule III may invest in the same sector in
JV/WOS outside India with the prior approval of the RBI.
Thus, Aadarsh Education Society, engaged in education sector can make investment in the education sector in a
joint venture in USA by taking prior approval of RBI.
Question 17] On which type of documents 'Unique Identification Number' is required to indicated under the
FEMA.
Ans.: Unique Identification Number [Regulation 10]: RBI will allot a unique Identification Number for each JV /WOS
outside India and the Indian Party shall quote such number in all its communications and reports to the RBI and the
authorized dealer.
Question 18] Your Company has exported some goods to foreign entity located in USA. Amount to be received
on account of such export has to be used for making direct investment outside India. State the compliance to be
made in this behalf under the FEMA.
Can an Indian Party capitalize the proceeds of the exports to its overseas JV/WOS?
Ans.: Method of investment by capitalization [Regulation 11]:
(1) An Indian Party may also make direct investment outside India in accordance with the Regulations in Part I
by way of capitalization in full or part of the amount due to the Indian Party from the foreign entity as follows:
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(i) Payment for export of plant, machinery, equipment and other goods/ software to the foreign entity
(ii) Fees, royalties, commissions or other entitlements of the Indian Party due from the foreign entity for the
supply of technical know-how, consultancy, managerial or other services.
Capitalization of export proceeds remaining unrealized beyond the prescribed period: Where the export proceeds
have remained unrealized beyond a period of 6 months from the date of export, such proceeds shall not be
capitalized without the prior permission of RBI.
(2) An Indian Software exporter may receive in the form of shares up to 25% of the value of exports to an
overseas software start-up company without entering into JV agreement by filing an application with the RBI
through the Authorized Dealer.
Question 19] Microtech Ltd., a software exporter company, desires to receive 25% of the value of its exports in
the form of shares in an overseas software company without entering into joint venture agreement. Advise with
Ans.: As per Regulation 11 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004,
an Indian Software exporter may receive in the form of shares up to 25% of the value of exports to an overseas
software startup company without entering into JV agreement by filing an application with the RBI through the
Authorized Dealer.
Thus, Microtech Ltd. can receive 25% of the value of its exports in the form of shares in an overseas software
company without entering into joint venture agreement.
Question 20] What are the provisions for exporting goods or software or plant & machinery from India towards
equity contribution in a JV/WOS outside India under the FEMA?
Ans.: Export of Goods towards Equity [Regulation 12]:
(1) An Indian Party exporting goods or software or plant and machinery from India towards equity contribution
in a JV/WOS outside India shall declare it on GR/SDF/SOFTEX Form, which shall be superscribed as "Exports against
equity participation in the JV/WOS abroad" and also quoting unique Identification Number allotted by RBI.
(2) The Indian Party within 15 days of the shipment of the goods shall submit to the RBI a custom certified copy
of the invoice through the branch of an authorized dealer.
(3) An Indian Party capitalizing exports under Regulation 11 shall, within 6 months from the date of export, or
any further time as allowed by RBI, submit to RBI copies of the share certificates or any document issued by the JV/
WOS outside India to the RBI evidencing the investment together with the duplicate of GR/SDF/SOFTEX form
through the branch of an authorized dealer.
Question 21] State the provisions of FEMA relating to acquisition of foreign company through biding or tender
procedure.
Ans.: Acquisition of a foreign company through bidding or tender procedure [Regulation 14]:
(1) On being approached by an Indian Party, which is eligible to make investment outside India, an authorized
dealer may allow remittance towards earnest money deposit or issue a bid bond guarantee on its behalf for
participation in bidding or tender procedure for acquisition of a company incorporated outside India.
(2) On the Indian Party winning the bid -
(i) The authorized dealer may allow further remittances towards acquisition of the foreign company, subject to the
ceilings specified in Regulation 6.
(ii) The Indian Party shall submit through the authorized dealer concerned a report to the RBI in Form ODA
within 30 days of effecting the final remittance.
(3) For participation in bidding or tender procedure for acquisition of a company incorporated outside India
which does not fall within the provisions of clause (1), the RBI may, on application in Form ODI, allow remittance of
foreign exchange towards earnest money deposit or permit the authorized dealer in India to issue a bid bond
guarantee, subject to such terms and conditions as the RBI may stipulate.
Question 22] Abhay Ltd., an Indian company, which won the bid, has approached the authorized dealer for further
remittance towards acquisition of a company in Romania. Comment.
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CS (Inter) - June 2006 (2 Marks), Dec 2006 (2 Marks)
Ans.: As per Regulation 14 of the FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004, an
Indian party may remit earnest money deposit or issue a bid bond guarantee for acquisition of a foreign company
through bidding/ tender procedure and also make subsequent remittances through an AD Bank subject to
conditions that may be specified by the RBI from time to time.
Question 23] What are the obligations cast on Indian party making direct investment outside India and acquiring
foreign security?
Ans.: Obligations of the Indian Party [Regulation 15]: An Indian Party which has acquired foreign security shall -
(i) Receive share certificates or any other document as an evidence of investment in the foreign entity to the
satisfaction of the RBI within 6 months or such further period as RBI may permit, from the date of effecting
remittance or the date on which the amount to be capitalized became due to the Indian Party or the date on which
the amount due was allowed to be capitalized.
(ii) Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc.,
within 60 days of its falling due, or such further period as the RBI may permit.
(iii) Submit to the RBI every year within 60 days from the date of expiry of the statutory period as prescribed by the
respective laws of the host country for finalization of the audited accounts of the JV/WOS outside India or such
further period as may be allowed by RBI, an annual performance report in Form APR in respect of each JV/WOS
outside India set up or acquired by the Indian Party and other reports or documents as may be stipulated by the
RBI.
(iv) Where the law of host country does not mandatorily require auditing of the books of account of JV/WOS, the
Annual Performance Report (APR) may be submitted by the Indian Party based on unaudited annual accounts of
the JV/WOS. In such case -
(a) The statutory auditor of the Indian Party must certify that "the unaudited annual accounts of the JV/WOS
reflect true and fair picture of the affairs of the JV/WOS".
(b) That the unaudited annual accounts of the JV/WOS has been adopted by and ratified by the board of the
Indian Party.
Explanation: It will be in order for individual partners to hold shares for and behalf of the firm in an overseas JV/WOS
in the individual name if the host country regulations warrant such holdings, subject to the conditions that entire
funding for such investment is done by the firm.
Question 24] Write a short note on: Pledge of shares of JV/WOS
Ans.: Pledge of shares of joint venture, wholly owned subsidiary & step down subsidiary [Regulation 18]: An
Indian Party may create charge, by way of pledge, on the shares JV/WOS or Step Down Subsidiary outside India
(held directly by the Indian party in JV/WOS and indirectly in SDS) as a security in favour of an Authorized Dealer or
a public financial institution in India or an overseas lender, for availing of fund based or non-fund based facility for
itself (i.e. the Indian party) or for its JV/WOS/SDS whose shares have been pledged, or for any other JV/WOS/SDS
of the Indian party.
Conditions for creating pledge:
(a) The value of the fund based or non-fund based facility is reckoned as financial commitment for the Indian
party and the total financial commitment of the Indian party remains within the limit stipulated by the RBI for
overseas direct investments in the JV/WOS from time to time.
(b) In case of the facility from an overseas lender, it should be regulated and supervised as a bank.
(c) Such pledge shall be subject to the additional terms and conditions as may be prescribed by the RBI from
time to time.
Question 25] An Indian Party desires to create a charge in order to make available fund based and non-fund based
facility to its Joint Venture/Wholly Owned Subsidiary outside India. As a Company Secretary of the Indian Party
advise the board of directors regarding the following:
(i) On which type of assets charge can be created (domestic assets or foreign assets)?
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(ii) Conditions required to be complied in order to create such valid charge?
Ans.: Creation of charge on domestic assets [Regulation 18A(1)]: An Indian party may create charge (by way of
mortgage, pledge, hypothecation or otherwise) on its assets including the assets of its group company, sister
concern or associate company in India, promoter/ director in favour of an overseas lender as security for availing of
the fund based or non-fund based facility for its JV/WOS/SDS outside India.
Conditions for creating charge:
(a) The value of the facility is reckoned as financial commitment for the Indian party and the total financial
commitment of the Indian party remains within the limit stipulated by the RBI from time to time for overseas direct
investments in the JV/WOS.
(b) The overseas lender is regulated and supervised as a bank as per the law of the host country.
(c) A 'No Objection' is obtained from the domestic lender in whose favour if charge is already created on the
domestic assets.
(d) Such charge shall be subject to the additional terms and conditions as may be prescribed by the RBI from
time to time.
Creation of charge on foreign assets [Regulation 18A(2)]: An Indian party may create charge (by way of mortgage,
pledge, hypothecation or otherwise) on the assets of its overseas JV/WOS/SDS in favour of an AD bank in India as
security for availing of the fund based or non-fund based facility for itself or its JV/WOS/SDS outside India.
Conditions for creating charge:
(a) The value of the facility is reckoned as financial commitment for the Indian party and the total financial
commitment of the Indian party remains within the limit stipulated by the Reserve Bank from time to time for
overseas direct investments in the JV /WOS.
(b) The overseas lender is regulated and supervised as a bank as per the law of the host country.
(c) A 'No Objection' is obtained from the overseas lender or domestic AD bank in whose favour if charge is
already created on the overseas assets.
(d) The facility extended by the domestic AD bank to the Indian party/JV/WOS/SDS is governed by the prudential
norms and other guidelines issued by the Department of Banking Operations and Development, RBI.
(e) Such charge shall be subject to the additional terms and conditions as may be prescribed by the RBI from
time to time.
Question 26] Can resident individuals acquire shares of a foreign entity in lieu of the professional services
rendered by them or in lieu of Director's remuneration under the General Permission?
Mr. Raman, architect by profession, has agreed to accept shares in lieu of professional fee in relation to services
rendered by him to the company incorporated in USA. Total amount of professional due is US$ 10,000 and as per
agreement shares of company having value US$ 4,000 will be received in shares of the company and rest in foreign
currency. Whether this permissible as per FEMA?
Ans.: Prior permission for direct investment by a proprietary concern in India [Regulation 19]: A proprietary
concern in India may apply to the RBI in Form ODB for permission to accept shares of a company outside India in
lieu of fees due to it for professional services rendered to the said company.
Conditions:
(a) The value of the shares accepted from each company outside India shall not exceed 50% of the fees
receivable by the Indian concern from that company.
(b) The Indian concern's shareholding in any one company outside India by virtue of shares accepted as aforesaid
shall not exceed 10% of the paid-up capital of the company outside India, whose shares are accepted.
Thus, resident individuals are allowed under General Permission to acquire shares of a foreign entity in part/full
consideration of professional services rendered to the foreign entity or in lieu of Director's remuneration.
Question 27] Can a proprietorship concern in India set up or acquire a Joint Venture or Wholly Owned Subsidiary
outside India?
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Ans.: Overseas Direct Investment by Proprietorship concern or an unregistered Partnership Firm in India
[Regulation 19A]: A proprietorship concern or an unregistered partnership firm in India, satisfying the criteria for
Overseas Direct Investment as prescribed by the RBI from time to time, may set up/ acquire a JV/WOS with prior
Question 28] Briefly discuss the provisions of the FEMA relating to issue of FCCB/FCEB by Indian Company to a
person resident outside India. 1
Ans.: Prohibition on issue of foreign security by a person resident in India [Regulation 21]:
(1) Save as otherwise provided in the Act or in regulation (2), no person resident in India shall issue or transfer
a foreign security.
(2) A person resident in India, being an Indian Company or a Body Corporate created by an Act of Parliament -
(i) may issue Foreign Currency Convertible Bonds (FCCB) not exceeding US$ 750 million to a person resident outside
India in accordance with and subject to the conditions stipulated in Schedule I.
(ii) may issue FCCBs beyond US$ 750 million with the specific approval of RBI.
(iii) may issue Foreign Currency Exchangeable Bonds (FCEB) to a person resident outside India in accordance with
and subject to conditions specified in Schedule IV with specific approval of RBI.
(3) The company/body corporate issuing the FCCBs within 30 days from the date of issue shall furnish a report
to the RBI giving the details and documents as under:
(a) Total amount for which FCCBs have been issued.
(b) Names of the investors resident outside India and number of FCCBs issued to each of them.
(c) The amount repatriated to India through normal banking channels and/or the amount received by debit to
NRE/FCNR accounts in India of the investors (duly supported by bank certificate).
Question 29] Aadarsh Ltd., an India Company, wants to use issue of FCCB for the purpose of investing in the stock
market. CS (Executive) - Dec 2010 (1 Mark)
Ans.: Prohibited end use of Foreign Security: Indian Party has been prohibited from making end use of proceeds
received by issuing foreign securities in following activities or area:
♦ Investment in real estate excluding integrated townships.
♦ On-lending
♦ Investment in capital markets
♦ Acquisitions
♦ As working capital
♦ For general corporate purposes
♦ For repayment of rupee loans
Thus, Aadarsh Ltd. cannot use issue of FCCB for the purpose of investing in the stock market.
Question 30] State the provisions of FEMA relating to acquiring foreign securities by person resident in India by
way of gift or under ESOS?
Ans.: Acquisition of foreign securities by way of gift/ESOS/inheritance [Regulation 22(1)]: A person resident in
India being an individual may acquire foreign securities:
(i) by way of gift from a person resident outside India or
(ii) issued by a company incorporated outside India under cashless Employees Stock Option Scheme, provided it
does not involve any remittance from India, or
(iii) by way of inheritance from a person whether resident in or outside India.
Acquisition of foreign securities by person resident in India who is employee/director [Regulation 22(2)]: A person
resident in India, being an individual, who is an employee or a director of Indian office or branch of a foreign entity
or of a subsidiary in India of a foreign entity or of an Indian company in which foreign entity has direct or indirect
equity holding, may accept the shares offered by such foreign entity.
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Conditions:
(i) The shares under the ESOP Scheme are offered by the issuing company globally on uniform basis.
(ii) An Annual Return is submitted by the Indian company to the RBI through the AD bank giving details of
remittances/beneficiaries etc.
An authorized dealer may allow the remittance by the person eligible to purchase the foreign securities if above
specified conditions are fulfilled.
Question 31] Zenith Ltd., a foreign company is interested in purchasing its shares issued to some of its employees,
who are residents in India, under the ESOP scheme. Advise with reference to FEMA.
Ans.: As per RBI circular, foreign companies are permitted to repurchase the shares issued to residents in India
under any ESOP Scheme provided:
(i) The shares were issued in accordance with provisions of FEMA
(ii) The shares are being repurchased in terms of the initial offer document and,
(iii) An annual return is submitted through the Authorized Bank giving details of remittances/ beneficiaries, etc.
Thus, Zenith Ltd., a foreign company can re-purchase the shares issued to its employees, who are residents in India,
under the ESOP scheme.
Question 32] Can a person holding foreign security pledge it for obtaining funds based or non-fund based facilities
in India?
Ans.: Transfer of a foreign security by a person resident in India [Regulation 23]: A person resident in India, who
has acquired or holds foreign securities in accordance with FEMA, may transfer them by way of pledge for obtaining
fund based or non-fund based facilities in India from an authorized dealer.
Question 33] State the provisions of FEMA relating to following
(i) Acquiring qualification shares of a foreign company
(ii) Acquiring right shares of a foreign company
(iii) Purchase of shares by employees or directors of an Indian promoter company of a JV/WOS outside India in
the field of software * (i)
Ans.: General permission for acquisition of qualification shares [Regulation 24(l)(a)]: A person resident in India
being individual may acquire foreign security as qualification shares issued by an entity incorporated outside India
for holding the post of a director in the entity.
Conditions:
(i) The extent of acquiring the qualification shares is as per the law of the host country where the entity is
located.
(ii) The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed
for the resident individuals under the Liberalized Remittance Scheme in force at the time of acquisition.
General permission for acquisition of right shares [Regulation 24(l)(b)]: A person resident in India being individual
may acquire securities by way of right shares in a company incorporated outside India.
General permission for acquisition of shares JV/WOS outside India in the field of software [Regulation 24(l)(c)]: A
person resident in India who is employee or director of the Indian promoter company may acquire by way of JV/WOS
outside India of the Indian promoter company in the field of software.
Conditions:
(i) The consideration for purchase does not exceed the ceiling as stipulated by RBI from time to time.
(ii) The shares so acquired do not exceed 5% of the paid-up capital of the JV/WOS.
(iii) After allotment of such shares, the percentage of shares held by the Indian Promoter Company, together with
shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company
prior to such allotment.
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Sale of qualification shares [Regulation 24(2)]: A person resident in India holding qualification shares may sell such
shares without prior approval of RBI. However, sale proceeds should be repatriated to India through banking
channel and documentary evidence is submitted to the authorized dealer.
Purchase foreign securities under the ADR/GDR linked stock option schemes [Regulation 24(3)]: An
Indian Company in the knowledge based sector may allow its resident employees (including working directors) to
purchase foreign securities under the ADR/GDR linked stock option schemes.
Conditions:
(i) The issue of employee stock option by a listed company shall be governed by the SEBI (Share Based Employee
Benefits) Regulations, 2014 and the issue of employee stock option by an unlisted
company shall be governed by the guideline/rules issued by the Government of India for issue of ADR/GDR linked
stock options.
(ii) The consideration for the purchase does not exceed the ceiling as stipulated by the RBI from time to time.
Question 34] Rajiv, a person resident in India, wishes to acquire foreign securities as qualification shares issued
by a company incorporated outside India for holding the position of a director in the company. Advise with
reference to FEMA. CS (Inter) - June 2008 (2 Marks)
CS (Executive) - Dec 2011 (1 Mark), Dec 2012 (1 Mark)
Ans.: As per Regulation 24 of the FEM (Transfer or Issue of Foreign Securities) Regulations, 2004, a person resident
in India being individual may acquire foreign security as qualification shares issued by an entity incorporated outside
India for holding the post of a director in the entity.
Conditions:
(i) The extent of acquiring the qualification shares is as per the law of the host country where the entity is located.
(ii) The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for
the resident individuals under the Liberalized Remittance Scheme in force at the time of acquisition.
Thus, Rajiv can acquire foreign securities as qualification shares issued by a company incorporated outside India for
holding the position of a director subject to compliance of above stated provisions.
Question 35] Can a mutual fund registered in India purchase foreign securities?
Ans.: Investment by Mutual Funds and other Funds [Regulation 26]: The purchase of foreign securities by Mutual
Funds, Venture Capital Funds (VCF) and Alternative Investment Funds (AIF) shall be subject to these regulations,
and such other terms and conditions as may be notified by the RBI and SEBI from time to time.
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6
CHAPTER
EXTERNAUiOMMERCIA!. BORROWINGS (EGB)
INTRODUCTION: The Transactions on account of External Commercial Borrowings (ECB) are governed by Section
6(3)(d) of the Foreign Exchange Management Act, 1999. Various provisions in respect ofECBs are included in the
following three regulations framed under FEMA:
(a) FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000, notified vide;
(b) FEM (Transfer or Issue of any Foreign Security) Regulations, 2004;
(c) FEM (Guarantees) Regulations, 2000
Within the contours of the Regulations, RBI also issues directions, circulars and under FEMA. These regulations,
directions, circulars lay down the modalities as to ECBs can be availed, repaid, its end use and reporting to be
made to the RBI by the Indian Party.
Question 1] Write a short note on: External Commercial Borrowings
CS (Executive) - Dec 2010 (4 Marks), Dec 2012 (4 Marks)
What do you understand by 'external commercial borrowings' (ECBs)? Discuss the type of ECB?
Ans.: External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from
recognized non-resident entities.
ECB should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum
all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.
ECB can be accessed under two routes:
(i) Automatic Route
(ii) Approval Route
Regulation of ECB: The Department of Economic Affairs (DEA), Ministry of Finance, Government of India along with
RBI, monitors and regulates ECB guidelines and policies.
The framework for raising loans through ECB comprises the following three tracks:
Track I Medium term foreign currency denominated ECB with minimum average maturity of 3 to 5 years.
Track II Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III Indian Rupee (INR) denominated ECB with minimum average maturity of 3 to 5 years.
Question 2] What are the advantages of External Commercial Borrowings?
Ans.: Advantages of External Commercial Borrowings are as follows:
♦ ECBs provide opportunity to borrow large volume of funds.
♦ Funds are available for relatively long term for 3 to 10 years.
♦ Interest rate on ECB is lower compared to domestic funds which reduces the cost of the funds.
♦ ECBs in form of foreign currencies enable the corporate to make fast imports.
♦ Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies,
international capital markets etc.
Question 3] Discuss the type of External Commercial Borrowings?
Ans.: Forms of ECB: The ECB Framework enables permitted resident entities to borrow from recognized non-
resident entities in the following forms:
(1) Loans including bank loans
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(2) Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible
or partially convertible preference shares/debentures)
(3) Buyers' credit
(4) Suppliers' credit
(5) Financial Lease
(6) Foreign Currency Convertible Bonds (FCCBs)
(7) Foreign Currency Exchangeable Bonds (FCEBs)
However, ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in
India made by Registered Foreign Portfolio Investors (RFPIs).
Question 4] Write a short note on: Foreign Currency Convertible Bond (FCCB)
CS (Inter) - Dec 2007 (4 Marks) CS (Executive) - Dec 2008 (3 Marks)
Ans.: Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign
currency, and the principal and interest in respect of which is payable in foreign currency.
Peculiarities of FCCB:
♦ FCCB is hybrid instrument. It is issued as bond but later it is converted into shares.
♦ FCCB carry a fixed rate of interest until bond is converted into shares.
♦ FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured.
♦ FCCBs are denominated foreign currency.
♦ Interest is payable in foreign currency.
♦ Redemption price is payable in foreign currency (if option of conversion is not exercised).
Question 5] Briefly discuss the benefits of FCCB to the issuer company and investor.
Ans.: Benefits of FCCB to the issuer company:
♦ FCCB generally has low rate of interest as compared to pure debt instrument. Thus, it reduces the debt
financing cost.
♦ FCCB does not require credit rating.
♦ FCCB saves risks of immediate equity dilution as in the case of public shares.
♦ FCCB can be raised within a month while pure debt takes a longer period to raise.
Benefits of FCCB to investors:
♦ FCCB has advantage of both equity and debt.
♦ FCCB gives the investor much of the upside of investment in equity, and the debt portion protects the
downside.
♦ Assured return on bond in the form of fixed interest payments.
♦ Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds,
which are activated when price of a stock reaches a certain point.
♦ Significant Yield to maturity (YTM) is guaranteed at maturity.
♦ Lower tax liability as compared to pure debt instruments due to lower interest rate.
Question 6] What do you understand by Foreign Currency Exchangeable Bonds (FCEB)? Distinguish between: FCCB
& FCEB
Ans.: Foreign Currency Exchangeable Bonds (FCEB) as defined includes the following:
♦ A bond expressed in foreign currency.
♦ The principal and the interest of which is payable in foreign currency.
♦ The issuer of the bond is an Indian company.
♦ The bonds are subscribed by a person resident outside India.
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♦ The bonds are exchangeable into equity shares of another company which is also called the offered company.
An FCEB involves three parties:
- Issuer Company
- Offered Company (OC) and
- An Investor
Under this option, an issuer company may issue FCEBs in foreign currency, and these FCEBs are convertible into
shares of another company (offered company) that forms part of the same promoter group as the issuer company.
Example: ABC Ltd. issues FCEBs, then these FCEBs will be convertible into shares of company XYZ Ltd. that is held
by company ABC Ltd, and where companies ABC Ltd, and XYZ Ltd, form part of the same promoter group.
Foreign Currency Exchangeable Bonds (FCEB) v. Foreign Currency Convertible Bonds (FCCB):
FCCBs are issued by a company to non-residents giving them the option to convert them into shares of the same
company at a predetermined price. On the other hand, FCCBs are issued by the investment or holding company of
a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined
price.
The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies - the
bonds are usually of the parent company while the shares offered are of the operating company which must be a
listed company.
Question 7] Distinguish between: External Commercial Borrowings and Foreign Currency Convertible Bonds
FCCB and ECB are different modes for raising foreign capital.
Ans.: Following are the main points of difference between ECB and FCCB:
Points External Commercial Borrowings (ECBs) Foreign Currency Convertible Bonds (FCCBs)
Meaning ECBs refer to commercial loans in the form of bank FCCBs mean a bond issued by an Indian company
loans, securitized instruments, buyer's credit, expressed in foreign currency, and the principal
supplier's credit availed of from non-resident and interest in respect of which is payable in
lenders with a minimum average maturity of 3 foreign currency.
years.
Nature ECB is borrowing and is thus purely debt finance. FCCB is hybrid instrument. It is issued as bond
but later it is converted in to equity.
Procedure ECBs are to be availed as per the relevant FCCBs are required to be issued in accordance
guideline, notification and circulars issued by the with the scheme viz., Issue of Foreign Currency
RBI from time to time. Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993.
Listing Since ECB is borrowing/loan it cannot be listed at FCCBs can be listed in stock exchange after their
all in stock exchange. conversion into shares.
Question 8] Write a short note on: Available routes for raising ECB
Ans.: Under the ECB framework, ECBs can be raised either under the- («) Automatic route or
(b) Approval route.
Automatic Route: The cases are examined by the AD Category-I banks.
Approval Route: In such cases the prospective borrowers are required to send their requests to the RBI through
their Authorized Dealers for examination.
Route available for different kinds of external commercial borrowings:
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Nature of borrowings Automatic Approval
Loans including bank loans ✓
Securitized instruments y V
Buyers' credit y y
Suppliers' credit y
Financial Lease y
Foreign Currency Convertible Bonds (FCCBs) y y
Foreign Currency Exchangeable Bonds (FCEBs) X y
While the regulatory provisions are mostly similar, there are some differences in the form of amount of borrowing,
eligibility of borrowers, permissible end-uses, etc. under the two routes. While the first six forms of borrowing, can
be raised both under the automatic and approval routes, FCEBs can be issued only under the approval route.
Question 9] Who are the 'Eligible Borrowers' for the purpose of external commercial borrowings?
Who can access external commercial borrowings (ECB) as per the guideline/directions issued by the Reserve Bank
of India? CS (Executive) - Dec 2009 (5 Marks)
Ans.: The list of entities eligible to raise ECB under the three tracks is set out below:
Track I Medium term foreign currency denominated ECB with minimum average maturity of 3 to 5 years.
Such
ECBs can be raised by following entities:
(1) Companies in manufacturing and software development sectors.
(2) Shipping and airlines companies.
(3) Small Industries Development Bank of India (SIDBI).
(4) Units in Special Economic Zones (SEZs).

(5) Export Import Bank of India (Exim Bank) (only under the approval route).
(6) Companies in infrastructure sector, Non-Banking Financial Companies-Infrastructure Finance
Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core
Investment Companies.
(7) Housing Finance Companies, regulated by the National Housing Bank, Port Trusts constituted
under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908.
Track II Long term foreign currency denominated ECB with minimum average maturity of 10 years. Such ECBs
can be raised by following entities:
(1) All entities listed under Track I above.
(2) Real Estate Investment Trusts & Infrastructure Investment Trusts coming under the regulatory
framework of the SEBI.
Track III Indian Rupee (INR) denominated ECB with minimum average maturity of 3 to 5 years.
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Such ECBs can be raised by following entities:
(1) All entities listed under Track II above.
(2) All NBFCs coming under the regulatory purview of the RBI.
(3) NBFCs - Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under
the Companies Act, 1956/2013, Societies, trusts and cooperatives, Non-Government Organizations
(NGOs) which are engaged in micro finance activities.
(4) Companies engaged in miscellaneous services viz. research & development (R&D), training
(other than educational institutes), companies supporting infrastructure, companies providing
logistics services. Also, companies engaged in maintenance, repair and overhaul and freight
forwarding.
(5) Developers of SEZs/National Manufacturing & Investment Zones (NMIZs).
It may be noted that entities engaged in micro-finance activities to be eligible to raise ECB:
(i) should have a satisfactory borrowing relationship for at least three years with an AD Category-I bank in India, and
(ii) should have a certificate of due diligence on 'fit and proper' status from the AD Category-I bank. Question 10]
Whether all companies operating in software sector space eligible to raise ECBs?
Ans.: No, only those companies in software sector space who are into development of software are eligible to raise
ECB. Companies who are into designing and engineering consultancy, servicing of third- party software, providing
ancillary IT related services etc., are not considered as software development companies for ECB purposes.
Question 11] Whether educational institutes/universities/deemed universities are eligible to raise ECB?
Ans.: If the educational institute/university/deemed university is registered as a company under the Companies Act,
1956/2013, it can raise ECB as a part of infrastructure sub-sector. ECB guidelines as applicable for infrastructure
companies would be applicable for such ECBs.
Question 12] Whether the restrictions in respect of the eligibility of borrowing entities also applicable to
Startups?
Ans.: No, any entity which is recognized as a Startup by the Central Government as on date of raising ECB, would be
eligible to raise ECB, irrespective of its business activities.
Question 13] Who are the recognized lenders or investors for availing external commercial borrowings?
Ans.: Recognized Lenders/Investors: The list of recognized lenders or investors for the three tracks will be as
follows:
(1) International banks
(2) International capital markets
(3) Multilateral Financial Institutions such as IFC, ADB, etc.
(4) Regional financial institutions
(5) Government owned (either wholly or partially) financial institutions
(6) Export credit agencies
(7) Suppliers of equipment
(8) Foreign equity holders
(9) Overseas long term investors such as:
(a) Prudentially regulated financial entities
(b) Pension funds
(c) Insurance companies
(d) Sovereign Wealth Funds
(e) Financial institutions located in International Financial Services Centres in India
(f) Overseas branches/subsidiaries of Indian banks.
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Question 14] There are certain restrictions on the use of proceeds of External Commercial Borrowings. Comment.
Discuss the end use of external commercial borrowings.
CS (Executive) - June 2009 (5 Marks), June 2014 (5 Marks)
Ans.: End-use prescriptions: The end-use prescriptions for ECB i.e. negative list for all Tracks would include the
following:
(a) Investment in real estate or purchase of land except when used for affordable housing as defined in
Harmonized Master List of Infrastructure Sub-sectors notified by Government of India, construction and
development of SEZ and industrial parks/integrated townships.
(b) Investment in capital market.
(c) Equity investment.
Additionally for Tracks I & III, the following negative end-uses will also apply except when raised from Direct and
Indirect equity holders or from a Group company, and provided the loan is for a minimum average maturity of 5
years.
(d) Working capital purposes.
(e) General corporate purposes.
(f) Repayment of Rupee loans.
Finally, for all Tracks, the following negative end use will also apply.
(g) On-lending to entities for the above activities from (a) to (f).
Question 15] XYZ Ltd. has availed External Commercial Borrowings of US$ 100 million. For the project in India it
needs US$ 80 million. The Board of Directors of the company desires to use remaining US$ 20 million for
investment in Stock Market in India. Decide.
Ans.: RBI has prescribed negative list for use of proceeds of ECB. Proceeds received out of ECB cannot be utilized
for investment in Capital Market/Stock Market. Hence, XYZ Ltd. cannot invest US$ 20 million in Stock Market.
Question 16] What are the limits up to which ECB can be availed by the eligible Indian Entities?
Ans.: Individual Limits: The individual limits refer to the amount of ECB which can be raised in a financial year under
the automatic route.
(1) The individual limits of ECB that can be raised by eligible entities under the automatic route per financial year
for all the three tracks are set out as under:
Type of entity ECB it can avail
Companies in infrastructure & manufacturing sectors, Non-Banking Financial Companies- US$ 750 million
Infrastructure Finance Companies (NBFC-IFCs), NBFCs-AssetFinance Companies (NBFC- AFCs),
Holding Companies & Core Investment Companies.
Companies in software development sector US$ 200 million
Entities engaged in micro finance activities US$ 100 million
Remaining entities US$ 500 million
(2) ECB proposals beyond aforesaid limits will come under the Approval Route. For computation of individual
limits under Track III, exchange rate prevailing on the date of agreement should be taken into account.
(3) In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB
liability, equity ratio requirement. The ECB liability of the borrower (including all outstanding ECBs and the proposed
one) towards the foreign equity holder should not be more than 7 times of the equity contributed by the latter. This
ratio will not be applicable if total of all ECBs raised by an entity is up to US$ 5 million or equivalent.
For the purpose of ECB liability:
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- Equity ratio, the paid-up capital, free reserves (including the securities premium received in foreign currency)
as per the latest audited balance sheet can be reckoned for calculating the 'equity' of the foreign equity holder.
- Where there are more than one foreign equity holders in the borrowing company, the portion of the
securities premium in foreign currency brought in by the lenders concerned shall only be considered for calculating
the ratio.
Question 17] Reliance Infrastructure Ltd. is planning to avail external commercial borrowings from the
International Bank to the tune of US$ 1,000 million. State with reason, how much ECB it can avail under the
Automatic Route.
Ans.: The individual limit of ECB that can be raised by companies in infrastructure is US$ 750 million.
ECB proposals beyond aforesaid limits will come under the Approval Route.
Question 18] ECB can be raised only is US$ currency. Comment.
What are the requirements in respect of currencies of ECB?
Ans.: Currency of Borrowing: ECB can be raised in any freely convertible foreign currency as well as in
Indian Rupees. Further details are given below:
(1) In case of Rupee denominated ECB, the non-resident lender, other than foreign equity holders, should
mobilize Indian Rupees through swaps/outright sale undertaken through an AD Cate- gory-I bank in India.
(2) Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency
as well as to INR is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.
(3) Change of currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement
between the parties concerned for such change or at an exchange rate which is less than the rate prevailing on the
date of agreement if consented to by the ECB lender.
Question 19] Uncertain Ltd. has availed € 500 million external commercial borrowings from Europe.
In order import certain equipment and plant from USA it requires US$ 400 million. Can it convert ECB availed in
Euro Currency into Dollar Currency?
Ans.: As per RBI directions, change of currency of ECB from one convertible foreign currency to any other convertible
foreign currency as well as to INR is freely permitted.
Thus, Uncertain Ltd. can convert ECB availed in Euro Currency into Dollar Currency for the purpose of importing
equipment and plant from USA.
Question 20] What is parking of external commercial borrowings (ECB) proceeds?
Ans.: Parking of ECB proceeds: ECB proceeds are permitted to be parked abroad as well as domestically in the
manner given below:
(1) Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked
abroad pending utilization. Till utilization, these funds can be invested in the following liquid assets -
(a) Deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard
and Poor/Fitch IBCA or Aa3 by Moody's.
(b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated
above.
(c) Deposits with overseas branches/ subsidiaries of Indian banks abroad.
(2) Parking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated
immediately for credit to their Rupee accounts with AD Category-I banks in India. ECB borrowers are also allowed
to park ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months. These
term deposits should be kept in unencumbered position.
Question 21] State the conditions required to be fulfilled for conversion of external commercial borrowings (ECBs)
into equity. CS (Executive) - June 2010 (4 Marks) * 1 2 3
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Ans.: Conversion of ECB into equity: Conversion of ECBs, including those which are matured but unpaid, into equity
is permitted subject to the following conditions:
(1) The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment
(FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity
participation has been obtained as per the extant FDI policy.
(2) The conversion, which should be with the lender's consent and without any additional cost, will not result in
breach of applicable sector cap on the foreign equity holding.
(3) Applicable pricing guidelines for shares are complied with.
(4) Reporting requirements under ECB framework are complied with.
(5) If the borrower concerned has availed of other credit facilities from the Indian banking system, including
overseas branches/subsidiaries, the applicable prudential guidelines issued by the Department of Banking
Regulation of RBI, including guidelines on restructuring are complied with.
(6) Consent of other lenders, if any, to the same borrower is available or at least information regarding
conversions is exchanged with other lenders of the borrower.
Question 22] What exchange rate is applicable when eligible Indian Entity issued equity shares against the
external commercial borrowings?
Ans.: Exchange rate for conversion of ECB dues into equity: For conversion of ECB dues into equity, the exchange
rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate
can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares
to be issued shall be worked out with reference to the date of conversion only.
Question 23] Discuss briefly procedure applicable for raising external Commercial Borrowings. Ans.: Procedure of
raising ECB:
(1) For Approval Route cases, the borrowers may approach the RBI with an application in prescribed format
Form ECB for examination through their AD Category-I bank.
(2) Such cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits
of the specific proposals.
(3) ECB proposals received before RBI would be placed before the Empowered Committee set up by the RBI.
(4) The Empowered Committee will have external as well as internal members and the RBI will take a final
decision in the cases taking into account recommendation of the Empowered Committee.
(5) Entities desirous to raise ECB under the Automatic Route may approach an AD Category-I bank with their
proposal along with duly filled in Form 83.
Question 24] Discuss in brief reporting requirements in respect of external commercial borrowings.
Ans.: Reporting Requirements: Borrowings under ECB Framework are subject to reporting requirements in respect
of the following:
(1) Loan Registration Number (LRN): Any draw-down in respect of an ECB as well as payment of any
fees/charges for raising an ECB should happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers
are required to submit duly certified Form 83, which also contains terms and conditions of the ECB, in duplicate to
the designated AD Category I bank. In turn, the AD Category-I bank will forward one copy to the Director, Balance
of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of
India. Copies of loan agreement for raising ECB are not required to be submitted to the RBI.
(2) Changes in terms and conditions of ECB: Permitted changes in ECB parameters should be reported to the
DSIM through revised Form 83 at the earliest, in any case not later than 7 days from the changes effected. While
submitting revised Form 83 the changes should be specifically mentioned in the communication.
(3) Reporting of actual transactions: The borrowers are required to report actual ECB transactions through ECB
2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the
close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return.
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Format of ECB 2 Return is available at Annex III of Part V of Master Directions - Reporting under Foreign Exchange
Management Act.
(4) Reporting on account of conversion of ECB into equity: In case of partial or full conversion of ECB into equity,
the reporting to the RBI will be as under:
(a) Partial conversion: For partial conversion the converted portion is to be reported to the concerned Regional
Office of the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while
monthly reporting to DSIM in ECB 2 Return will be with suitable remarks "ECB partially converted to equity".
(b) Full conversion: For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to
DSIM in ECB 2 Return should be done with remarks "ECB fully converted to equity". Subsequent filing of ECB 2
Return is not required.
(c) For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.
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7
CHAPTER
FOREIGN CONTRIBUTION (REGULATION) ACT, 2010
INTRODUCTION: The object of the Foreign Contribution (Regulation) Act, 2010 is to regulate the acceptance and
utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to
prohibit acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to the
national interest and for matters connected therewith or incidental thereto.
The Foreign Contribution (Regulation) Act, 2010 was enacted to regulate the acceptance and utilization of foreign
contribution or hospitality with a view to ensuring that the Parliamentary institutions, political associations,
academic and other voluntary organizations as well as individuals working in important areas of national life may
function in a manner consistent with the values of sovereign democratic republic. The Act was amended in 1984 to
extend it provisions to cover second and subsequent recipients of foreign contribution and to the members of higher
judiciary, besides introducing the system of grant of registration to the association receiving foreign contribution.
The Act extends to the whole of India. It came into force on 1.5.2011.
OBJECT, SCOPE, APPLICABILITY & DEFINITIONS
Question 1] Discuss the objects, scope & applicability of Foreign Contribution (Regulation) Act, 2010. CS (Inter) -
June 2005 (3 Marks)
Ans.: The objects of the Act are:
♦ To regulate the acceptance and utilization of foreign contribution or foreign hospitality and
♦ To ensure that parliamentary institutions, political associations, academic and other voluntary organisations
as well as individuals working in the important areas of national life may function in a manner consistent with the
values of a sovereign democratic republic.
Application of the Act [Section 1(2)]: The Act extends to the whole of India and also applies -
- To citizens of India outside India and
- Associates, branches or subsidiaries outside India of companies or bodies corporate registered or
incorporated in India.
The provisions of the Act are not applicable to any transaction between the Government of India and the
Government of any foreign country or territory.
Act not to apply to certain Government transactions [Section 51]: The Act does not apply to any transaction
between the Government of India and the Government of any foreign country or territory.
Application of other laws not barred [Section 52]: The provisions of this Act shall be in addition to, and not in
derogation of, the provisions of any other law for the time being in force
Question 2] Define 'foreign contribution' under the Foreign Contribution (Regulation) Act, 2010.
Ans.: Foreign Contribution [Section 2(l)(h)]: Foreign Contribution means the donation, delivery or transfer made
by any foreign source, of any -
(i) Article not being an article given as a gift for his personal use, if the market value of such article is not more than
specified sum [Currently ` 25,000 as per Rule 6A];
(ii) Currency, whether Indian or foreign;
(iii) Security and includes any foreign security
Explanation 1: A donation, delivery or transfer of any article, currency or foreign security by any person who has
received it from any foreign source, either directly or through one or more persons, shall also be deemed to be
foreign contribution.
Explanation 2: The interest and other income derived from foreign contribution deposited in any bank shall also be
deemed to be foreign contribution.
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Explanation 3: Any amount received, by any person from any foreign source in India, by way of fee (including fees
charged by an educational institution in India from foreign student) or towards cost in lieu of goods or services
rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside
India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from
the definition of foreign contribution.
Question 3] Define: Foreign Hospitality
Ans.: Foreign Hospitality [Section 2(l)(i)]: Foreign hospitality means any offer made by a foreign source for providing
a person with the costs of travel to any foreign country or with free board, lodging, transport or medical treatment.
Question 4] Define: Foreign Source
Ans.: Foreign Source [Section 2(l)(j)]: Foreign source includes:
(i) Government of any foreign country or territory and any agency of such Government;
(ii) Any international agency, not being the UN or any of its specialized agencies, the World Bank, IMF or such
other agency notified by the Central Government;
(iii) A foreign company;
(iv) A corporation incorporated in a foreign country or territory;
(v) A multi-national corporation;
(vi) A company within the meaning of the Companies Act, 2013, and more than one-half of the nominal value of
its share capital is held, either singly or in the aggregate, by one or more of the following, namely -
(a) The Government of a foreign country or territory
(b) The citizens of a foreign country or territory
(c) Corporations incorporated in a foreign country or territory
(d) Trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in
a foreign country or territory
(e) Foreign company
(vii) A foreign trade union;
(viii) A foreign trust or a foreign foundation;
(ix) A society, club or other association of individuals formed or registered outside India; (x) A citizen of a foreign
country.
REGULATION OF FOREIGN CONTRIBUTION & HOSPITALITY
Question 5] Which organizations/individuals are specifically prohibited from receiving foreign contributions
under the Foreign Contribution (Regulation) Act, 2010?
CS (Executive) - Dec 2015 (3 Marks), June 2016 (5 Marks)
Ans.: Prohibition to accept foreign contribution [Section 3(1)]: Following person or organization cannot accept
foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body
controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & MLA)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audio visual news or
current affairs programmes through any electronic mode, or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).
Prohibition for indirect acceptance or delivery of foreign contribution/foreign currency [Section 3(2)]:
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(a) A person resident in India, and citizen of India resident outside India, shall not accept any foreign contribution
or acquire or agree to acquire any currency from a foreign source, on behalf of any political party or any person
referred to Section 3(1).
(b) Person resident in India shall not deliver any currency which has been accepted from foreign source to any
person if he knows or has reasonable cause to believe that such other person intends or is likely to deliver such
currency to any political party or any person referred to in Section 3(1).
(c) Citizen of India resident outside India shall not deliver any currency, whether Indian or foreign, which has
been accepted from any foreign source, to -
(i) Any political party or any person referred to in Section 3(1) or
(ii) Any other person, if he knows or has reasonable cause to believe that such other person intends, or is likely, to
deliver such currency to a political party or to any person referred to in Section 3(1).
Foreign currency received from foreign source must be delivered to proper person [Section 3(4)]: Person receiving
any currency from a foreign source on behalf of any person or class of persons, referred to in Section 9, shall not
deliver such currency -
(a) To any person other than a person for which it was received, or
(b) To any other person, if he knows or has reasonable cause to believe that such other person intends or is
likely to deliver such currency to a person other than the person for which such currency was received.
Question 6] Mention the provisions of the Foreign Contribution (Regulation) Act, 2010 in respect of exemptions
from accepting foreign contributions.
Ans.: Persons to whom Section 3 shall not apply [Section 4]: Following transactions does not come within the
purview of Section 3 if foreign contribution is accepted subject to the provisions of Section 10:
(a) Salary, wages or other remuneration received from any foreign source by way of payment in the ordinary
course of business.
(b) Payment in the course of international trade or commerce, or in the ordinary course of business transacted
outside India.
(c) Transaction made as an agent of foreign source in relation to any transaction made by such foreign source
with the Central or State Government.
(d) Gift or presentation made to a member of any Indian delegation, (however such gift or present was accepted
in accordance with the rules made by the Central Government)
(e) Foreign contribution received from relative.
(f) Remittance received, in the ordinary course of business through any official channel, post office, or any
authorized person in foreign exchange under the FEMA.
(g) Scholarship, stipend or any payment of like nature.
Intimation on receiving foreign contribution from relatives [Rule 6 of Foreign Contribution (Regulation) Rules,
2011]: Any person receiving foreign contribution in excess of ` 1 lakh in a financial year from any of his relatives
shall inform the Central Government in Form FC-1 within 30 days from the date of receipt of such contribution.
Question 7] Gabbar is a local level leader of a regional party in Haryana. He received a sum of US $ 5,000 as an
agent of foreign source in relation to transaction made by the foreign source with the government of Haryana.
Did he contravene the provisions of the Foreign Contribution (Regulation) Act, 2010?
Ans.: Section 3 of the Foreign Contribution (Regulation) Act, 2010 prohibits acceptance of foreign contribution.
However, Section 4 provides certain exemption to certain transaction from the provisions of Section 3.
As per Section 4 acceptance of foreign for transaction made as an agent of foreign source in relation to any
transaction made by such foreign source with the Central or State Government is exempt.
Therefore, Gabbar has not contravened the provisions of the Foreign Contribution (Regulation) Act, 2010.
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Question 8] Modern Educational Institute, New Delhi is a non-profit organization engaged in building students
careers. Four of its brilliant students are in receipt of scholarships directly from a US based educational
foundation. Discuss whether there has been any violation of the provisions of the Foreign Contribution
(Regulation) Act, 2010. CS (Inter) - Dec 2004 (4 Marks)
Receipt of foreign contribution in form of scholarship, stipend or any payment of like nature is covered in Section 4
and hence exempt. Thus, students of Modern Educational Institute can receive the scholarships directly from a US
based educational foundation. It will not amount to violation of any provisions of the Foreign Contribution
(Regulation) Act, 2010.
Question 9] Do the following transactions amount to contravention of the Foreign Contribution (Regulation) Act,
2010? Give reasons in support of your answer and refer to relevant provisions:
(i) Abhay, general secretary, Loktantrik Sangathan, Moradabad (UP) receives a sum of US $ 1,000 by way of
payment in the ordinary course of business transacted by him outside India.
(ii) Avtar, a government servant, is in receipt of contribution by way of gift as a member of Indian delegation.
(iii) Vidur, a District and Sessions Judge, accepts a diamond studded watch from his relative residing in UK.
(iv) Sanjay, a private school teacher, is given a gift by his student living in USA for his personal use and the market
value of the article is ` 2,200 only.
CS (Inter) - Dec 2006 (1 x4 = 4 Marks)
Keeping in view the provisions of the Sections 3 & 4 validity of given transaction under the Foreign Contribution
(Regulation) Act, 2010 can be discussed as follows:
(1) Payment received in the ordinary course of business is exempt u/s 4, hence there is no contravention by Mr.
Abhay.
(2) Gift or presentation as a member of any Indian delegation is exempt u/s 4, provided that it was accepted in
accordance with the regulations made by the Central Government.
(3) As per Section 4, foreign contribution received from relative is exempt.
As per Rule 6 of the Foreign Contribution (Regulation) Rules, 2011, any person receiving foreign contribution in
excess of ` 1 lakh in a financial year from any of his relatives shall inform the Central Government in Form FC-1
within 30 days from the date of receipt of such contribution.
As per Rule 6A of the Foreign Contribution (Regulation) Rules, 2011, any article gifted to a person for his personal
use whose market value in India on the date of such gift does not exceed ` 25,000 shall not be a foreign contribution.
Considering the above provision if a diamond studded watch is received from relative residing in UK will not amount
to foreign contribution if its value is less than 125,000.
However, if its value is above ` 1,00,000 then Vidur is required to inform the Central Government in Form FC-1
within 30 days from the date of receipt of gift.
(4) As per Rule 6A of the Foreign Contribution (Regulation) Rules, 2011, any article gifted to a person for his
personal use whose market value in India on the date of such gift does not exceed ` 25,000 shall not be a foreign
contribution. Thus, Sanjay a private school teacher can accept a gift by his student living in USA for his personal use
as the market value of the article is ` 2,200. (i.e. below ` 25,000)
Question 10] What are the restrictions on acceptance of foreign hospitality under the Foreign Contribution
(Regulation) Act, 2010? CS (Inter) - June 2003 (3 Marks), June 2004 (3 Marks)
Ans.: Foreign Hospitality [Section 2(i)]: Foreign hospitality means any offer made by a foreign source for providing
a person with the costs of travel to any foreign country or with free board, lodging, transport or medical treatment.
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Restrictions on acceptance of foreign hospitality [Section 6]: Following person cannot receive foreign hospitality
visiting any country without prior permission of the Central Government:
(a) Member of a Legislature or office-bearer of a political party or
(b) Judge or
(c) Government servant or
(d) Employee of any corporation or any other body owned or controlled by the Government
Permissible foreign hospitality: It shall not be necessary to obtain any permission for an emergent medical aid
needed on account of sudden illness contracted during a visit outside India. However, where such foreign hospitality
has been received, the person receiving such hospitality shall give, within 1 month from the date of receipt of such
hospitality an intimation to the Central Government as to the receipt of such hospitality, and the source from which,
and the manner in which, such hospitality was received by him.
Question 11] Aditya, a director of Amex Ltd., visited Germany thrice in 2015 on invitations and free air-tickets,
board and lodging extended to Amex Ltd. by the Chamber of Commerce and Industry, Germany. Has Aditya or
the company contravened the provisions of the Foreign Contribution (Regulation) Act, 2010? Mention relevant
provisions. CS (Inter) - June 2006 (5 Marks)
Points Foreign Contribution Foreign Hospitality
Meaning Foreign Contribution means the donation, Foreign hospitality means any offer made by a
delivery or transfer made by any foreign foreign source for providing a person with the
source, of any - costs of travel to any foreign country or with free
(i) Article not being an article given as a board, lodging, transport or medical treatment.
gift for his personal use, if the market value
of such article is not more than specified
sum
(ii) Currency, whether Indian or foreign;
(iii) Security and includes any foreign
security
Prohibition Foreign contribution cannot be accepted by Following person cannot receive foreign
political parties or persons/institutions hospitality visiting any country or territory
prohibited u/s 3. outside India without prior permission of the
Central Government:
(a) Member of a Legislature or office-bearer
of a political party or
(b) Judge or
(c) Government servant or
(d) Employee of any corporation or any other
body owned or controlled by the Government
Question 13] What are the prohibitions under the Foreign Contribution (Regulation) Act, 2010 regarding the
transfer of foreign contributions to other person?
Ans.: Prohibition to transfer foreign contribution to other person [Section 7]: A person who -
(a) is registered and granted a certificate or has obtained prior permission under this Act; and
(b) receives any foreign contribution,
shall transfer such foreign contribution to any other person only if such other person is also registered and had been
granted the certificate or obtained the prior permission under the Act.
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However, such person may transfer, with the prior approval of the Central Government, a part of such foreign
contribution to any other person who has not been granted a certificate or obtained permission under this Act in
accordance with the rules made by the Central Government.
Question 14] What are the restrictions to utilize foreign contribution for administrative purpose under the
Foreign Contribution (Regulation) Act, 2010?
Ans.: Restriction to utilize foreign contribution for administrative purpose [Section 8]: Every person, who is
registered and granted a certificate or given prior permission to receive foreign contribution, shall utilize such
contribution for the purposes for which the contribution has been received.
Any foreign contribution or any income arising out of it shall not be used for speculative business.
Every person receiving any foreign contribution shall not defray sum exceeding 50 % of foreign contribution received
in a financial year to meet administrative expenses without prior approval of the Central Government.
Question 15] What are the powers of Central Government regarding receipt of foreign contributions under the
CS (Inter) - June 2007 (5 Marks), June 2008 (4 Marks)
Ans.: Power of Central Government to prohibit receipt of foreign contribution in certain cases [Section 9]: The
Central Government may -
(a) Prohibit any person or organization from accepting any foreign contribution.
(b) Require any person to obtain prior permission of the Central Government before accepting any foreign
hospitality.
(c) Require any person to furnish intimation within prescribed time and in prescribed manner of the source,
purpose and manner of utilization of any foreign contribution received.
(d) Require specified person to obtain prior permission of the Central Government before accepting any foreign
contribution.
(e) Require any person to furnish intimation, within prescribed time and in prescribed manner as to the source
and manner of receipt of any foreign hospitality.
However above prohibition shall be made by the Central Government only if it is satisfied that the acceptance of
foreign contribution or foreign hospitality by such person, is likely to affect prejudicially -
(i) Sovereignty and integrity of India or
(ii) Public interest or
(zn) Freedom or fairness of election to any Legislature or
(iv) Friendly relations with any foreign State or
(v) Harmony between religious, racial, social, linguistic or regional groups, castes or communities.
REGISTRATION OF CERTAIN PERSONS WITH CENTRAL GOVERNMENT
Question 16] Who are required to be registered with the Central Government for accepting foreign contribution?
Can unregistered person accept foreign contribution? If yes, then how?
Ans.: Registration of certain persons with Central Government [Section 11(1)]: Person having a definite cultural,
economic, educational, religious or social programme can accept foreign contribution only after obtaining a
certificate of registration from the Central Government.
Unregistered person can accept foreign contribution after permission [Section 11(2)]: Every person referred to in
Section 11(1) if it is not registered with the Central Government may accept any foreign contribution only after
obtaining the prior permission of the Central Government. Such prior permission shall be valid for the specific
purpose for which it is obtained and from the specific source
Every other person who is not registered with the Central Government as stated above can accept foreign
contribution only after obtaining the prior permission of the Central Government and such permission shall be valid
for the specific purpose for which it is obtained and from the specific source.
The Central Government may specify, by notification in the Official Gazette -
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(a) The person or class of persons who shall obtain its prior permission before accepting the foreign
contribution.
(b) The area or areas in which the foreign contribution shall be accepted and utilized with the prior permission
of the Central Government.
(c) The purpose or purposes for which the foreign contribution shall be utilized with the prior permission of the
Central Government.
(d) The source or sources from which the foreign contribution shall be accepted with the prior permission of the
Central Government.
Question 17] Sarva Kalyan Morcha, an organization pursuing a definite social programme, is in receipt of $ 5,000
from a charitable trust in Canada. Does this transaction amount to contravention of the Foreign Contribution
(Regulation) Act, 2010? Give reasons in support of your answer and refer to relevant provisions.CS (Inter) - Dec
2006 (2 Marks)
Ans.: As per Section 11(1) of the Foreign Contribution (Regulation) Act, 2010, person having a definite cultural,
Section 11(2) provides that every person referred to in Section 11(1) if it is not registered with the Central
Government may accept any foreign contribution only after obtaining the prior permission of the Central
Government. Such prior permission shall be valid for the specific purpose for which it is obtained and from the
specific source.
Thus, Sarva Kalyan Morcha is advised to register with the Central Government before it receives foreign contribution
or take permission of the Central Government for receiving the contribution from foreign source for specific
purpose.
Question 18] Ananda Swar Mondal, a cultural association in Kolkata formed for the sole purpose of promoting
Rabindra Sangeet, has been offered gift of $ 5,000 by a society in USA. Can the association receive it without
violating the provisions of the Foreign Contribution (Regulation) Act, 2010?
Gurukul Vidyarthi Manch, a body formed for the purposes of imbibing patriotism and characterbuilding among
students, receives a grant of £1,500 from Struarts, a British philanthropist. Does it violate the provisions of the
Destitutes Rehabilitation (India), an NGO devoted to the cause of ameliorating the lot of destitutes and the needy,
has been offered a contribution of $ 5,000 by an American foundation. Mention the provisions of the Foreign
Contribution (Regulation) Act, 2010 regulating the receipt of foreign contribution by an organization pursuing a
definite social, cultural, economic, educational or religious programme.
Ans.: As per Section 11(1) of the Foreign Contribution (Regulation) Act, 2010, person having a definite cultural,
Section 11(2) provides that every person referred to in Section 11(1) if it is not registered with the Central
Government may accept any foreign contribution only after obtaining the prior permission of the Central
Government. Such prior permission shall be valid for the specific purpose for which it is obtained and from the
specific source.
Thus, all the organization in given cases are advised to register with the Central Government before it receives
foreign contribution or alternatively they can take permission of the Central Government for receiving the
contribution from foreign source for specific purpose.
Question 19] State the formalities to be observed under the Foreign Contribution (Regulation) Act, 2010 relating
to "grant of certificate of registration"?
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Ans.: Grant of certificate of registration [Section 12(1)]: An application by a person, referred to in Section 11 for
grant of certificate or giving prior permission, shall be made to the Central Government in prescribed form and in
prescribed manner and along prescribed fee. As per the rules framed in this behalf such application has to be made
in electronic form.
Power of Central Government to refuse application [Section 12(2)]: On receipt of an application the Central
Government shall by an order reject the application if the application is not in the prescribed form or does not
contains specified particulars.
Grant of registration/permission by the Central Government [Section 12(3)]: If application for grant of certificate
or giving prior permission is in order and fulfils the prescribed conditions, then after making inquiry the Central
Government within 90 days from the date of receipt of application, register such person and grant him a certificate
or give him prior permission.
If certificate or permission is not granted within 90 days then the Central Government shall communicate the
reasons for refusal to the applicant.
A person shall not be eligible for grant of certificate or giving prior permission, if his certificate has been suspended
and such suspension of certificate continues on the date of making application.
Conditions for grant of registration/permission [Section 12(4)]: The following shall be the conditions for the
purposes of Section 12(3), namely:-
(a) The person making an application for registration or grant of prior permission -
(i) is not fictitious or benami;
(ii) has not been prosecuted or convicted for indulging in activities aimed at conversion through inducement or
force, either directly or indirectly, from one religious faith to another;
(Hi) has not been prosecuted or convicted for creating communal tension or disharmony in any specified district or
any other part of the country;
(iv) has not been found guilty of diversion or mis-utilization of its funds;
(») is not engaged or likely to engage in propagation of sedition or advocate violent methods to achieve its ends;
(vi) is not likely to use the foreign contribution for personal gains or divert it for undesirable purposes;
(vii) has not contravened any of the provisions of this Act;
(viii) has not been prohibited from accepting foreign contribution.
(b) The person making an application for registration has undertaken reasonable activity in its chosen filed for
the benefit of the society for which the foreign contribution is proposed to be utilized.
(c) The person making an application for giving prior permission has prepared a reasonable project for the
benefit of the society for which the foreign contribution is proposed to be utilized.
(d) In case the person being an individual, such individual has neither been convicted under any law for the time
being in force nor any prosecution for any offence pending against him.
(e) In case the person being other than an individual, any of its directors or office bearers has neither been
convicted under any law for the time being in force nor any prosecution for any offence is pending against him.
(f) The acceptance of foreign contribution by the person is not likely to affect prejudicially - (i) the sovereignty and
integrity of India or
(ii) the security, strategic, scientific or economic interest of the State or
(iii) the public interest or
(iv) freedom or fairness of election to any Legislature or ('v) friendly relation with any foreign State or
(vi) harmony between religious, racial, social, linguistic, regional groups, castes or communities, (g) The
acceptance of foreign contribution -
- shall not lead to incitement of an offence;
- shall not endanger the life or physical safety of any person.
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Reasons to be recorded in writing on refusal to grant registration/permission [Section 12(5)]: Where the Central
Government refuses the grant of certificate or does not give prior permission, it shall record in its order the reasons
and furnish a copy thereof to the applicant.
However, the Central Government may not communicate the reasons in cases where is no obligation to give any
information or documents or records or papers under the Right to Information Act, 2005.
Validity of registration certificate [Section 12(6)]: The certificate of registration shall be valid for a period of 5 years
and the prior permission shall be valid for the specific purpose or specific amount of foreign contribution proposed
to be received.
Question 20] Under what circumstances the Central Government can suspend the certificate granted as per the
Ans.: Suspension of certificate [Section 13]: Where the Central Government is satisfied that pending consideration
of the question of cancelling the certificate, it is necessary so to do, it may, by order in writing, suspend the
certificate not exceeding 180 days.
Every person whose certificate has been suspended shall -
(a) Not receive any foreign contribution during the period of suspension of certificate
(b) Utilize the foreign contribution in his custody with the prior approval of the Central Government.
However, the Central Government on an application made by such person may allow receipt of any foreign
contribution by such person on certain terms and conditions.
Question 21] Write a short note on: Cancellation of certificate under the Foreign Contribution (Regulation) Act,
2010 CS (Executive) - Dec 2013 (5 Marks)
Ans.: Cancellation of certificate [Section 14]: The Central Government by an order may cancel the certificate, if it
is satisfied after making such inquiry that -
(a) The holder of the certificate has made incorrect or false statement for the grant of registration or renewal.
(b) The holder of the certificate has violated any of the terms and conditions of the certificate or renewal.
(c) In the opinion of the Central Government, it is necessary in the public interest to cancel the certificate.
(id) The holder of certificate has violated any of the provisions of this Act or rules or order made thereunder.
(e) The holder of the certificate has not been engaged in any reasonable activity in its chosen field for the benefit
of the society for 2 consecutive years or has become defunct.
The person concerned has to be been given a reasonable opportunity of being heard before cancellation of
certificate.
Any person whose certificate has been cancelled shall not be eligible for registration or grant of prior permission for
a period of 3 years from the date of cancellation of such certificate.
Question 22] State the provision relating to management of foreign contribution of person whose certificate has
been cancelled under the Foreign Contribution (Regulation) Act, 2010.
Ans.: Management of foreign contribution of person whose certificate has been cancelled [Section 15]: The
foreign contribution and assets created out of the foreign contribution in the custody of person whose certificate
has been cancelled shall vest in prescribed authority.
The authority may manage the activities for such period and in such manner as the Central Government may direct.
Such authority may utilize the foreign contribution or dispose of the assets created out of it in case adequate funds
are not available for running such activity.
The authority shall return the foreign contribution and the assets vested upon it to the person, if such person is
subsequently registered under the Act.
Question 23] State the procedure for making an application for renewal of certificate under the Foreign
Contribution (Regulation) Act, 2010. CS (Executive) - Dec 2015 (3 Marks) * 1 2 3 4 5
Ans.: Renewal of certificate [Section 16]:
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(1) Every person who has been granted a certificate shall have such certificate renewed within 6 months before
the expiry of the period of the certificate.
(2) The application for renewal of the certificate shall be made to the Central Government in prescribed form
and along with prescribed fee.
(3) The Central Government shall renew the certificate within 90 days from the date of receipt of application
for renewal and grant a certificate of renewal for a period of 5 years.
(4) In case the Central Government does not renew the certificate within 90 days, it shall communicate the
reasons to the applicant.
(5) The Central Government may refuse to renew the certificate in case where a person has violated any
provisions of the Act or rules made thereunder.
Question 24] How foreign contribution should be received by the person to whom certificate is granted or prior
permission has been given to receive foreign contribution?
Ans.: Foreign contribution through scheduled bank [Section 17(1)]: Every person who has been granted a
certificate or given prior permission shall receive foreign contribution in a single account only through one of the
branches of a bank as specified in his application for grant of certificate.
However, such person may open one or more accounts in one or more banks for utilizing the foreign contribution
received by him.
Only foreign contribution shall be received or deposited in such account. Thus, other funds cannot be deposited in
such accounts.
Reporting by bank/authorized person to prescribed authority [Section 17(2)]: Every bank or Authorized Person in
foreign exchange shall report the following to prescribed authority
(a) Specified amount of foreign remittance;
(f?) The source and manner in which the foreign remittance was received; and
(c) Other prescribed particulars.
Question 25] Write a short note on: Intimation to Central Government regarding foreign contribution
Ans.: Intimation [Section 18]: Every person who has been granted a certificate or given prior approval has to provide
an intimation to the Central Government and other specified authority within prescribed time as to the -
♦ Amount of foreign contribution received
♦ Source from which foreign contribution was received
♦ Purposes for which foreign contribution was received
♦ Manner in which foreign contribution was utilized
Every person receiving foreign contribution is required to submit a copy of a statement of foreign contribution
received duly certified by officer of the bank or authorized person in foreign exchange and furnish the same to the
Central Government along with the intimation.
Question 26] What are the provisions relating to 'maintenance of accounts' under the Foreign Contribution
(Regulation) Act, 2010
Ans.: Maintenance of accounts [Section 19]: Every person who has been granted a certificate or given prior
approval shall maintain -
(a) An account of foreign contribution received and
(b) A record as to utilization foreign contribution.
Such accounts and record has to be maintained in prescribed form and in prescribed manner.
Question 27] What are the provisions relating to 'audit of accounts' under the Foreign Contribution (Regulation)
Act, 2010?
Ans.: Audit of accounts [Section 20]: In following case the audit of accounts can be ordered by the Central
Government:
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(a) Where any person who has been granted a certificate or given prior permission, fails to furnish any intimation
under the Act within specified time or
(b) The intimation furnished is not as per law or
(c) The Central Government has any reasonable cause to believe that any provision of the Act has been, or is
being, contravened.
Such audit can be ordered by the Central Government by issuing general or special order.
Audit can be conducted by the Authorized Gazette Officer holding Group-A post or any other officer or authority or
organization as the Central Government may think fit.
Every authorized officer appointed for the purpose of audit shall have the right to enter in or upon any premises at
any reasonable hour, before sunset and after sunrise, for the purpose of auditing the said books of account.
Any information obtained from such audit shall be kept confidential and shall not be disclosed except for the
purposes of the Act.
Question 28] Is it obligatory for candidate for election to give intimation to Central Government regarding receipt
of foreign contribution?
Ans.: Intimation by candidate for election [Section 21]: Every candidate for election, who had received any foreign
contribution at any time before 180 days of his nomination as candidate for election shall give, within prescribed
time and manner an intimation to the Central Government or prescribed authority or both as to the -
♦ Amount of foreign contribution received
♦ Source from foreign contribution received
♦ Manner in which foreign contribution was received
♦ Purposes for which foreign contribution was utilized.
Question 29] A person who was permitted to accept foreign contribution, ceases to exist or has become defunct.
What are the provisions relating to disposal of assets of such person as made under the Foreign Contribution
(Regulation) Act, 2010?
Ans.: Disposal of assets created out of foreign contribution [Section 22]: Where any person who was permitted to
accept foreign contribution, ceases to exist or has become defunct then all the assets of such person shall be
disposed as per law in which the person was registered or incorporated.
In the absence of any such law, the Central Government may by notification specify the manner and procedure for
disposal all such assets.
Question 30] What are the provisions relating to 'inspection of accounts' under the Foreign Contribution
Ans.: Inspection of accounts or records [Section 23]: If Central Government has reason to believe that any provision
of the Act has been or is being contravened then it order inspection of -
(a) Any political party or
(b) Any person or
(c) Any organization or (id) Any association
Such inspection can be ordered by the Central Government by issuing general or special order.
Inspection any account or record can be conducted by the Authorized Gazette Officer holding Group-A post or any
other officer or authority or organization as the Central Government may think fit.
Every authorized officer appointed for the purpose of inspection shall have the right to enter in or upon any
premises at any reasonable hour, before sunset and after sunrise, for the purpose of inspecting of the said accounts
or records.
Question 31] What are the provisions relating to 'seizure of accounts and records' under the Foreign Contribution
Ans.: Seizure of accounts or records [Section 24]: If after inspection of an account or record, the inspecting officer
has any reasonable cause to believe that any provision of the Act or of any other law relating to foreign exchange
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has been, or is being, contravened, he may seize such account or record and produce the same before the Court,
Authority or Tribunal in which any proceeding is brought for such contravention.
However, the authorized officer shall return account or record to the person from whom it was seized if no
proceeding is brought within 6 months from the date of such seizure for the contravention disclosed by such
account or record.
Question 32] What are the provisions relating to seizure of article or currency or security received in
contravention of the Foreign Contribution (Regulation) Act, 2010?
Ans.: Seizure of article or currency or security received in contravention of the Act [Section 25]: If any
Gazetted officer, authorized in this behalf by the Central Government by general or special order, has any reason to
believe that any person has in his possession or control any article exceeding the value specified in Section 2(1 )(h)(i)
or currency or security whether Indian or foreign, in relation to which any provision of this Act has been or is being,
contravened, he may seize such article or currency or security.
CONFISCATION, APPEAL & PENALTIES
Question 33] Discuss briefly provisions relating to confiscation of article/currency/security obtained in
contravention of the Foreign Contribution (Regulation) Act, 2010.
Ans.: Confiscation of article or currency or security obtained in contravention of the Act [Section 28]:
Any article or currency or security which is seized u/s 25 shall be liable to confiscation if such article or currency or
security has been adjudged u/ s 29 to have been received or obtained in contravention of the Act.
Adjudication of confiscation [Section 29]: Any confiscation may be adjudged without limit by the Court of Session
within the local limits of whose jurisdiction the seizure was made.
Cases of adjudication of confiscation can also be dealt by officer not below the rank of an Assistant Sessions Judge
as the Central Government may by notification in the Official Gazette specify in this behalf.
The Sessions Judge or Assistant Sessions Judge may make such order as he thinks fit.
Procedure for confiscation [Section 30]: No order of adjudication of confiscation shall be made unless a reasonable
opportunity of making a representation against such confiscation has been given to the person from whom any
article or currency or security has been seized.
'Seizure' means to take possession contrary to the wishes of the owner of the property.
'Confiscation' means to take possession & ownership contrary to the wishes of the owner the property.
In the context of the Foreign Contribution (Regulation) Act, 2010, it could be seen that article or currency or security
obtained in contravention of the Act and which has been seized could be confiscated. Therefore, confiscation is an
action posterior to the seizer. Article or currency that cannot be seized cannot be confiscated.
Question 34] Briefly discuss the provisions relating to appeal under the Foreign Contribution (Regulation) Act,
2010.
Ans.: Appeal [Section 31]: Any person aggrieved by order made u/s 29 may prefer an appeal -
(a) Where the order has been made by the Court of Session, to the High Court to which such Court is subordinate
or
(b) Where the order has been made by any other officer, to the Court of Session within the local limits of whose
jurisdiction such order of adjudication of confiscation was made.
The appeal has to be filed within 1 month from the date of communication of the order.
Extension of further 1 month for filing appeal on showing sufficient cause: The Appellate Court may, if it is satisfied
that the appellant was prevented by sufficient cause from preferring the appeal within the said period of 1 month,
allow such appeal to be preferred within a further period of 1 month, but not thereafter.
Provisions of the CPC will apply to the appeal: Every appeal preferred under this section shall be deemed to be an
appeal from an original decree and the provisions of the Code of Civil Procedure, 1908 shall apply thereto as they
apply to an appeal from an original decree.
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Question 35] State the penalty for making of false statement or delivering false accounts under the Foreign
Contribution (Regulation) Act, 2010.
Ans.: Making of false statement, declaration or delivering false accounts [Section 33]: A person who knowingly -
(a) gives false intimation under section 9(c) or section 18 or
(b) seeks prior permission or registration by means of fraud, false representation or concealment of material
fact, shall, on conviction by a Court, be liable to imprisonment for a term which may extend to 6 months or with
fine or with both.
Question 36] State the penalty for foreign currency obtained in contravention of the Foreign Contribution
(Regulation) Act, 2010.
Ans.: Penalty for article or currency or security obtained in contravention of Section 10 [Section 34]:
Any person, on whom any prohibitory order has been served u/s 10, pays, delivers, transfers or otherwise deals
with, in any manner whatsoever, any article or currency or security, whether Indian or foreign, in contravention of
such prohibitory order, he shall be punished -
- with imprisonment for a term which may extend to 3 years or
- with fine or
- with both.
The Court trying such contravention may also impose on the person convicted an additional fine equivalent to the
market value of the article or the amount of the currency or security in respect of which the prohibitory order has
been contravened by him or such part thereof as the court may deem fit.
Question 37] What is the penalty for contravening any provision of the Foreign Contribution (Regulation) Act,
2010.
Ans.: Punishment for contravention of any provision of the Act [Section 35]: Whoever accepts, or assists any
person, political party or organization in accepting, any foreign contribution or any currency or security from a
foreign source, in contravention of any provision of the Act or any rule or order made thereunder, shall be punished
-
- with imprisonment for a term which may extend to 5 years or
- with fine or
- with both.
Question 38] State the provisions relating to 'offence by companies' under the Foreign Contribution (Regulation)
Act, 2010.
Ans.: Offences by companies [Section 39]: Where an offence under the Act or any rule or order made thereunder
has been committed by a company, every person who, at the time the offence was committed,
was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as
the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly.
However, nothing shall render such person liable to any punishment if he proves that the offence was committed
without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
Where an offence under this Act or any rule or order made thereunder has been committed by a company and it is
proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on
the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or
other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.
Explanation: For the purposes of this section,-
(a) Company means any body corporate and includes a firm, society, trade union or other association of
individuals; and
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(b) Director in relation to a firm, society, trade union or other association of individuals, means a partner in the
firm or a member of the governing body of such society, trade union or other association of individuals.
Question 39] Joseph, a resident in India has failed to comply with some provisions of the Foreign Contribution
(Regulation) Act, 2010 in relation to receipt of foreign contribution and in this regard a complaint has been filed
in a Court by somebody inimical to Joseph. Explain briefly whether Court can take cognizance of violation of the
provisions of the Foreign Contribution (Regulation) Act, 2010?
Ans.: Bar on prosecution of offences under the Act [Section 40]: No Court shall take cognizance of any offence
under the Act, except with the previous sanction of the Central Government or any officer authorized by that
Government in this behalf.
In present case, the complaint against Joseph has been made by a person who is inimical to Joseph and not by taking
previous sanction of the Central Government or any officer authorized by that Government in this behalf. Therefore,
Court cannot take cognizance of offence under the Foreign Contribution (Regulation) Act, 2010.
Question 40] State the provisions for compounding of offences under the Foreign Contribution (Regulation) Act,
2010.
Ans.: Composition of certain offences [Section 41]: Any offence punishable under the Act (whether committed by
an individual or association or any officer or employee thereof), not being an offence punishable with
imprisonment only, may, before the institution of any prosecution, be compounded by such officers or authorities
and for such sums as the Central Government may, by notification in the Official Gazette, specify in this behalf.
No compounding if similar offence is committed within a period of 3 years [Section 41]: Once an offence is
compounded, similar offence committed within period of 3 years cannot be compounded. Thus, similar offence can
be compounded only once in 3 years.
Every officer or authority compounding the offence shall exercise the powers to compound an offence, subject to
the direction, control and supervision of the Central Government.
Every application for the compounding of an offence shall be made in prescribed form and manner along with
prescribed fee.
Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in
relation to such offence, against the offender in relation to whom the offence is so compounded.
Compounding Explained: Instead of going to Court, the offender may agree to pay composition amount and in
return administrator of enactment agrees not to prosecute the person who has committed an offence. This is called
as compounding. Generally offences which are of private nature and relatively not serious are made compoundable.
After payment of composition amount, prosecution will not be launched or if already launched, it will be withdrawn.
Following offences are compoundable:
S Offences punishable with fine only S Offences punishable with fine or imprisonment S Offences punishable with
fine or imprisonment or both.
Following offences are not compoundable:
Offences punishable with imprisonment only x Offences punishable with fine and imprisonment
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8
Chapter
FOREIGN TRADE POLICY & PROCEDURE
INTRODUCTION: Aiming to nearly double India's exports of goods and services to $900 billion by 2020, the
government has announced several incentives in the 5 year Foreign Trade Policy for exporters and units in the
Special Economic Zones.
Unveiling the first trade policy of the NDA government, Commerce Minister Nirmala Sitharaman said the FTP (2015-
20) will introduce Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS) to
boost outward shipments.
Following are the highlights of the Foreign Trade Policy 2015-2020 announced by Commerce & Industry Minister:
♦ Increase exports to $900 billion by 2019-2020, from $466 billion in 2013-2014.
♦ Raise India's share in world exports from 2% to 3.5%.
♦ Merchandise Export from India Scheme (MEIS) and Service Exports from India Scheme (SEIS) launched.
♦ Higher level of rewards under MEIS for export items with High domestic content and value addition.
♦ Incentives extended to units located in SEZs.
♦ Export obligation under EPCG scheme reduced to 75% to promote domestic capital goods manufacturing.
♦ FTP to be aligned to Make in India, Digital India & Skills India Initiatives.
♦ Duty credit scrip's made freely transferable and usable for payment of custom duty, excise duty and service
tax.
♦ Export promotion mission to take on board State Governments.
♦ Unlike annual reviews, FTP will be reviewed after two-and-half years.
♦ Higher level of support for export of defence, farm produce and eco-friendly products.
Question 1] What are the objectives of Foreign Trade Policy (FTP)? What strategies are adopted by Government
to achieve these objectives?
Explain briefly the principal objective of FTP. CS (Final) - Dec 1995 (5 Marks)
Ans.: The FTP has following objectives:
(1) To double India's exports to $900 billion by 2020.
(2) To provide a stable and sustainable policy environment for foreign trade in merchandise and services.
(3) To link rules, procedures and incentives for exports and imports with other initiatives such as "Make in India",
"Digital India" and "Skill India" to create more export opportunities.
(4) To promote diversification of India's export.
(5) To help the various sectors of the Indian economy to gain global competitiveness.
(6) To expand the Indian export market in order to boost "Make in India" scheme.
(7) To rationalize import and reduce trade imbalances.
(8) To increase economic growth and create additional employment opportunities.
Strategies to achieve objectives: With a view to achieve the defined objectives of FTP, the Government has devised
and adopted the following strategies:
♦ To create an atmosphere of trust and transparency.
♦ To simplify procedures and bringing down transaction costs.
♦ To neutralize incidence of duties on inputs used in export products.
♦ To facilitate development for manufacturing, trading and services.
♦ To generate additional employment in semi-urban and rural areas.
♦ To facilitate technological and infrastructural up-gradation.
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♦ To upgrading the infrastructural network.
♦ To redefine role of Board of Approval.
♦ To activate Indian Embassies as key players in the export strategy.
Question 2] Write a short note on: Legal Framework of Foreign Trade Policy
Ans.:
(1) Legal Basis of Foreign Trade Policy: The Foreign Trade Policy, 2015-2020, is notified by Central Government,
in exercise of powers conferred under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992, as
amended.
(2) Duration of FTP: The Foreign Trade Policy, 2015-2020, incorporating provisions relating to export and import
of goods and services shall come into force with effect from the date of notification and shall remain in force up to
31st March, 2020, unless otherwise specified. All exports and imports made up to the date of notification shall,
accordingly, be governed by the relevant FTP, unless otherwise specified.
(3) Amendment to FTP: Central Government, in exercise of powers conferred by Section 5 of Foreign Trade
(Development & Regulation) Act, 1992, as amended from time to time, reserves the right to make any amendment
to the FTP, by means of notification, in public interest.
Question 3] Who is empowered to decide questions arising in respect of interpretation of Foreign Trade Policy?
Ans.: The Foreign Trade Policy 2015-2020 empowers the Director General of Foreign Trade (DGFT) to decide on any
question or doubt arising in respect of the interpretation of any provision contained in the Policy, or regarding the
classification of any item in the ITC (HS) or procedures, any scheme, or Schedule of DEPB Rate.
Question 4] Every licence valid for a specified period under Foreign Trade Policy. Comment.
Ans.: Yes, Foreign Trade Policy 2015-2020 provides that every licence/ certificate/ permission/ authorization shall
be valid for the period of validity specified in the licence/certificate/permission/authorization shall contain such
terms and conditions as may be specified by the licensing authority.
Question 5] Write a short note on: E-governance of Foreign Trade Ans.:
(a) DGFT delivers most of its services on a transparent and efficient EDI platform using tools like Online filing of
Applications, Message Exchange with Community Partners, Digital Signatures and Electronic payment of application
fee. Use of EDI at DGFT has enabled faster processing, speedier communication by e-mail and online availability of
application processing status. The endeavour is to achieve higher level of information sharing through SMS.
(b) Export Import related information including Acts, Rules, Policy & Procedures thereof including online DGFT
portal can be accessed at http:/ /dgft.gov.in/.
(c) All the DGFT Regional Authorities are EDI enabled and connected with the DGFT Central Server to provide
online connectivity to EXIM community in a 24 x 7 environment.
(id) DGFT keeps expanding the scope and domain of EDI on a continuous basis. The endeavour is to achieve higher
level of integration with community partners.
Procedure: An exporter shall file his application online on DGFT website at http:/ / dgft.gov.in/. Application will then
be processed in accordance with prevalent rules and regulations. The processing of applications will be made online.
DGFT shall issue deficiency letters, if any, in online mode or through use of e-mail.
No communication shall be issued by DGFT in manual mode.
Question 6] Write a short note on: Indian Trade Classification (Harmonized System)
Ans.: Indian Trade Classification (Harmonized System) [ITC (HS)] of Exports and Imports
(a) ITC(HS) is a compilation of codes for all merchandise/goods for export and import. Goods are classified based
on their group or sub-group at 2/4/6/8 digits.
(b) ITC(HS) is aligned at 6 digit level with international Flarmonized System goods nomenclature maintained by
World Customs Organization. However, India maintains national Harmonized System of goods at 8 digit level.
(c) The import and export policies for all goods are indicated against each item in ITC(HS) in schedules. Schedule
1: It lays down the Import Policy regime
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Schedule 2: It details the Export Policy regime.
(d) Except where it is clearly specified, Schedule 1 of ITC (HS), Import Policy is for new goods and not for the
Second Hand goods. For Second Hand goods, the Import Policy regime is given in elsewhere FTP.
Question 7] What do you understand by Importer Exporter Code Number? Who are exempted from taking it? To
whom application for grant of IEC Number should be made? How duplicate copy of IEC No. can be obtained?
When IEC Number is required to be surrendered?
Explain the procedure for obtaining importer exporter code number?
CS (Final) - June 1994 (7 Marks), June 2000 (8 Marks)
Ans.: Importer-Exporter Code (IEC): An IEC is a 10-digit number allotted to a person that is mandatory for
undertaking any export and import activities. Now the facility for IEC in electronic form or e-IEC has also been
operationalised.
Application for IEC/e-IEC: Exporters and Importers shall file an application in ANF 2A format for grant of e-IEC.
Those who have digital signatures can sign and submit the application online along with the requisite documents.
Others may take a printout of the application, sign the undertaking or declaration, upload the same with other
requisite documents and thereafter submit the signed copy of the online application form to concerned
jurisdictional Regional Authorities (RA) either through post or by hand.
No Export/Import without IEC:
(a) No export or import shall be made by any person without obtaining an IEC number unless specifically
exempted.
(b) Exempt categories and corresponding permanent IEC numbers are given in Handbook of Procedures.
Only one IEC against one Permanent Account Number: Only one IEC is permitted against on Permanent Account
Number (PAN). If any PAN card holder has more than one IEC, the extra IECs shall be disabled.
Duplicate copy of IEC No.: In case the IEC No. is lost or misplaced, the issuing authority may consider requests for
grant of a duplicate copy of IEC No., if accompanied by an affidavit.
Surrender of IEC No.: If an IEC holder does not wish to operate allotted IEC, he may surrender the same to the
issuing authority. On receipt, the issuing authority shall immediately cancel the IEC and electronically transmit it to
DGFT and Customs authorities.
Validity of IEC: An IEC allotted to an applicant shall have permanent validity unless cancelled by the competent
authority. The IEC will cover all branches/divisions/units/factories of the applicant.
Question 8] Who are exempted from obtaining IEC number under the Foreign Trade Policy?
Ans.: No export or import shall be made by any person without obtaining an Importer-Exporter Code Number unless
specifically exempted. The following categories of importers or exporters are exempted from obtaining IEC.
Categories Exempted from obtaining IEC:
(1) Importers covered by Clause 3(1) [except sub- clauses (e) and (1)] and exporters covered by clause 3(2)
[except sub-clauses (i) and (k)] of Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993.
(2) Ministries/Departments of Central or State Government
(3) Persons importing or exporting goods for personal use not connected with trade or manufacture or
agriculture.
(4) Persons importing/exporting goods from/ to Nepal, Myanmar through Indo-Myanmar border areas and
China (through Gunji, Namgaya Shipkila and Nathula ports), provided CIF value of a single consignment does not
exceed Indian ` 25,000. In case of Nathula port, the applicable value ceiling will be ` 1,00,000.
Question 9] State the documents which are mandatory:
(a) For export of goods from India;
(b) For import of goods into India.
Ans.: Mandatory documents required for export of goods from India:
(a) Bill of Lading/ Airway Bill
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(ib) Commercial Invoice cum Packing List
(c) Shipping Bill/Bill of Export
Mandatory documents required for import of goods into India
(a) Bill of Lading/Airway Bill
(b) Commercial Invoice cum Packing List
(c) Bill of Entry
Question 10] Write a short note on: Restriction on export and import goods and services
Enumerate the cases in which Director General of Foreign Trade (DGFT) has power to impose restriction on export
and import.
Ans.: DGFT may impose restrictions on export and import through a Notification in following cases:
(i) Protection of public morals.
(ii) Protection of human, animal or plant life or health.
(iii) Protection of patents, trademarks and copyrights and the prevention of deceptive practices.
(iv) Prevention of use of prison labour.
(v) Protection of national treasures of artistic, historic or archaeological value.
(vi) Conservation of exhaustible natural resources.
(vii) Protection of hade of fissionable material or material from which they are derived.
Export or Import of restricted goods or services: Any goods/service, the export or import of which is 'Restricted'
may be exported or imported only in accordance with an Authorization/Permission or in accordance with the
procedure prescribed in a Notification/Public Notice issued in this regard.
EXPORTS FROM INDIA SCHEMES
Question 11] Write a short note on: Exports from India Schemes
Ans.: The objective of the Export from India Schemes is to provide rewards to exporters to offset infrastructural
inefficiencies and associated costs involved and to provide exporters a level playing field.
Exports from India Schemes: There shall be following two schemes for exports of Merchandise and Services
respectively:
(a) Merchandise Exports from India Scheme (MEIS)
(b) Service Exports from India Scheme (SEIS).
Nature of Rewards: Duty Credit Scrips shall be granted as rewards under MEIS and SEIS. The Duty Credit Scrips and
goods imported or domestically procured against them shall be freely transferable. The Duty Credit Scrips can be
used for:
(a) Payment of Customs Duties for import of inputs or goods, including capital goods, as per DOR notification,
except items listed in Appendix 3A.
(b) Payment of excise duties on domestic procurement of inputs or goods, including capital goods as per DOR
notification.
(c) Payment of service tax on procurement of services as per DOR notification.
(d) Payment of Customs Duty and fee as per Foreign Trade Policy.
Duty Credit Scrips explained: Duty credit scrip is the most important export promotion incentive provided by the
government at present to exporters. The approach of the scheme is to promote exports by giving tax incentives to
the exporters.
The duty credit scrip is a pass that allows the holder to import commodities by not paying a specified amount in
import duties.
Following are the main features of duty credit scrip:
1. They are issued to exporters.
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2. The scrip allows duty deduction (non-payment of taxes) of a specified amount in the scrip. The scrip value
or the amount of tax deduction will be specified in the scrip.
3. The scrip value or tax reduction is expressed as a percentage of export turnover of the exporter.
4. The scrip value usually varies from 3% to 5% under FTP 2015.
Basically, duty free scrips are paper authorizations that allow the holder to import inputs that go into manufacture
of products that are exported or machinery used for producing such goods without paying duties equivalent to the
printed value. The scrips are given to exporters for meeting certain goods and exporting it to specific markets. Main
objective of the scrip is to incentivize the exporters to make more exports of specific commodities or services and
those to specific markets. The FTP usually mentions the schemes eligible for scrips.
It is also used to reimburse duties on imported inputs under schemes such as the Export Promotion Capital Goods
Scheme (EPCG), the Duty Free Import Authorization Scheme and the Advance Authorization Scheme.
Working of the scrip: For example, if duty free scrip is valued at ` 10 lakh, the holder can use it to import goods
without paying duties up to ` 10 lakh. It is issued to the exporter allowing him to import a given percentage of his
export value without levying any import duty. The scrip value can be deducted from import duty.
As per the new FTP, the scrip can be transferred to other persons.
The Duty CreditScrip is granted from Regional Offices of DGFT. The duty free scrip can also be utilized for payment
of excise duty on such "inputs" that are permitted for imports Foreign Trade Policy.
Question 12] Write a short note on: Merchandise Exports from India Scheme
Ans.: Merchandise Exports from India Scheme (MEIS) has replaced 5 different schemes of earlier FTP (Focus Product
Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, Vishesh
Krishi & Gram Udyog Yojana) for rewarding merchandise exports which had varying conditions (sector specific or
actual user only) attached to their use.
Objective: Objective of Merchandise Exports from India Scheme (MEIS) is to offset infrastructural inefficiencies and
associated costs involved in export of goods/products, which are produced or manufactured in India, especially
those having high export intensity, employment potential and thereby enhancing India's export competitiveness.
Entitlement under MEIS: Exports of notified goods or products with ITC[HS] code, to notified markets shall be
rewarded under MEIS.
Question 13] State at least eight export categories or sectors that are ineligible for Duty Credit Scrip entitlement
under Merchandise Exports from India Scheme.
Ans.: Ineligible categories under MEIS: The following exports categories or sectors shall be ineligible for Duty Credit
Scrip entitlement under MEIS:
(a) EOUs/EHTPs/BTPs/STPs who are availing direct tax benefits or exemption.
(b) Supplies made from DTA units to SEZ units.
(c) Export of imported goods.
(d) Exports through trans-shipment, meaning thereby exports that are originating in third country but trans-
shipped through India.
(e) Deemed Exports.
(f) SEZ/EOU/EHTP/BPT/FTWZ products exported through DTA units.
(g) Restricted Items of export.
(h) Service Export.
(i) Red sanders and beach sand.
(j) Export products which are subject to minimum export price or export duty.
(k) Diamond Gold, Silver, Platinum, other precious metal in any form including plain and studded jewellery and
other precious and semi-precious stones.
(l) Ores and concentrates of all types and in all formations.
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(m) Cereals of all types.
(n) Sugar of all types and all forms.
(o) Crude/petroleum oil and crude/primary and base products of all types and all formulations.
(p) Export of milk and milk products.
(q) Export of Meat and Meat Products.
(r) Products wherein precious metal/ diamond are used or Articles which are studded with precious stones.
(s) Exports made by units in FTWZ.
(f) Prohibited Items under Schedule-2 of Export Policy in ITC(HS)
Question 14] Write a short note on: Service Exports from India Scheme (SEIS)
Ans.: Served from India Scheme (SFIS) has been replaced with Service Exports from India Scheme (SEIS).
Objective: Objective of Service Exports from India Scheme is to encourage export of notified Services from India.
Eligibility:
(a) Service Providers of notified services, located in India, shall be rewarded under SEIS, subject to conditions as
may be notified.
(b) Such service provider should have minimum net free foreign exchange earnings of US$ 15,000 in preceding
financial year to be eligible for Duty Credit Scrip. For Individual Service Providers and sole proprietorship, such
minimum net free foreign exchange earnings criteria would be US$ 10,000 in preceding financial year.
(c) Net Foreign exchange earnings for the scheme are defined as under:
Net Foreign Exchange = Gross Earnings of Foreign Exchange minus Total expenses/payment/ remittances of foreign
exchange by the IEC holder, relating to service sector in the financial year.
(d) If the IEC holder is a manufacturer of goods as well as service provider, then the foreign exchange earnings
and Total expenses/payment/remittances shall be taken into account for service sector only.
(e) In order to claim reward under the scheme, Service provider shall have to have an active IEC at the time of
rendering such services for which rewards are claimed.
Entitlement under SEIS: Service Providers of eligible services shall be entitled to Duty Credit Scrip at notified rates
on net foreign exchange earned.
Ineligible categories under SEIS: (All the Schemes under the FTP are formed with a view that the export may bring
more foreign exchange in India. If there is receipt of foreign exchange but it does not gain to India then there is no
logic to grant any benefit on such receipt. For example, if loan is received in foreign exchange then it has to be paid
at maturity so there is flow back of that foreign currency along with some extra flow on account interest on such
loan.) Thus, some flows must be kept as ineligible under the various schemes under the FTP. For SEIS scheme
following are the ineligible categories:
(1) Foreign exchange remittances other than those earned for rendering of notified services would not be
counted for entitlement. Thus, other sources of foreign exchange earnings such as equity or debt participation,
donations, receipts of repayment of loans etc. and any other inflow of foreign exchange, unrelated to rendering of
service, would be ineligible.
(2) Following shall not be taken into account for calculation of entitlement under the scheme
(a) Foreign Exchange remittances:
I. Related to Financial Services Sector
(i) Raising of all types of foreign currency Loans;
(ii) Export proceeds realization of clients;
(iii) Issuance of Foreign Equity through ADRs/GDRs or other similar instruments;
(iv) Issuance of foreign currency Bonds;
(v) Sale of securities and other financial instruments;
(vi) Other receivables not connected with services rendered by financial institutions; and
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II. Earned through contract/regular employment abroad (e.g. labour remittances).
(b) Payments for services received from EEFC Account.
(c) Foreign exchange turnover by Healthcare Institutions like equity participation, donations etc.
(d) Foreign exchange turnover by Educational Institutions like equity participation, donations etc.
(e) Export turnover relating to services of units operating under SEZ/EOU/EHTP/STPI/BTP Schemes or supplies
of services made to such units;
(f) Clubbing of turnover of services rendered by SEZ/ EOU/ EHTP/ STPI / BTP units with turnover of DTA Service
Providers.
(g) Exports of Goods.
(h) Foreign Exchange earnings for services provided by Airlines, Shipping lines service providers plying from any
foreign country X to any foreign country Y routes not touching India at all.
(i) Service providers in Telecom Sector.
Question 15] Distinguish between: Merchandise Exports from India Scheme (MEIS) & Service Exports from India
Scheme (SEIS)
Ans.: Following are the main points of distinction between Merchandise Exports from India Scheme & Service
Exports from India Scheme:
Points Merchandise Exports from India Scheme Service Exports from India Scheme (SEIS)
(MEIS)
Who can take Exporters of notified goods/products can take Service Providers of notified services who are
benefit the benefit of the scheme. located in India can take the benefit of SEIS
Scheme.
Objective Objective of Merchandise Exports from India Objective of Service Exports from India Scheme
Scheme is to accelerate the export of goods is to accelerate export of notified Services from
produced or manufactured in India. India.
Entitlement Exports of notified goods or products with Service Providers of eligible services shall be
ITC[HS] code, to notified markets shall be entitled to Duty Credit Scrip at notified rates on
rewarded under MEIS. net foreign exchange earned.
Scheme Merchandise Exports from India Scheme Served from India Scheme (SFIS) has been
replacement (MEIS) has replaced 5 different schemes of replaced with Service Exports from India
earlier FTP Scheme (SEIS).
STATUS HOLDER
Question 16] Write a short note on: Star Export House CS (Executive) - Dec 2008 (3 Marks)
Write a short note on: Privileges to Star Export House CS (Executive) - June 2010 (3 Marks)
Ans.:
(1) Meaning: "Status holder" means an exporter recognized as One Star Export House/Two Star Export
House/Three Star Export House/Four Star Export House/Five Star Export House by DGFT or Development
Commissioner.
(2) Who can apply: All exporters of goods, services and technology having an import-export code number shall
be eligible for recognition as a status holder. Status recognition depends upon export performance. An applicant
shall be categorized as status holder upon achieving export performance during current and previous two financial
years. The export performance will be counted on the basis of FOB value of export earnings in free foreign exchange.
(3) Status Category: For granting status, export performance is necessary in at least 2 out of 3 years:
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Category Export Performance FOB/FOR Value (in US$ million)
1 Star Export House 3
(4) Grant of double weightage: The exports by IEC holders under the following categories shall be granted
double weightage for calculation of export performance for grant of status.
(a) Micro, Small & Medium Enterprises (MSME) as defined in Micro, Small & Medium Enterprises Development
Act, 2006.
(b) Manufacturing units having International Organization for Standardization (ISO)/Bureau of Indian Standards
(BIS).
(c) Units located in North Eastern States including Sikkim and Jammu & Kashmir.
(d) Units located in Agri Export Zones.
Double Weightage shall be available for grant of One Star Export House Status category only. Such benefit of double
weightage shall not be admissible for grant of status recognition of other categories namely Two Star Export House,
Three Star Export House, Four Star export House and Five Star Export House.
A shipment can get double weightage only once in any one of above categories.
(5) Conditions for grant of status:
(a) Export performance of one IEC holder shall not be permitted to be transferred to another IEC holder.
(b) Exports made on re-export basis shall not be counted for recognition.
(c) Export of items under authorization, including Special Chemicals, Organisms, Materials, Equipment and
Technologies (SCOMET) items, would be included for calculation of export performance.
(6) Privileges to Status Holders: A Status Holder shall be eligible for privileges as under:
(a) Authorization and Customs Clearances for imports and exports may be granted on selfdeclaration basis.
(b) Input-Output norms may be fixed on priority within 60 days by the Norms Committee.
(c) Exemption from furnishing of Bank Guarantee for Schemes under FTP, unless specified otherwise anywhere
in FTP or HBP.
(d) Exemption from compulsory negotiation of documents through banks. Remittance, however, would be
received through banking channels.
(e) Two star and above Export houses shall be permitted to establish Export Warehouses as per Department of
Revenue guidelines.
(f) Three Star and above Export House shall be entitled to get benefit of Accredited Clients Programme (ACP) as per
the guidelines of CBEC.
(g) The status holders would be entitled to preferential treatment and priority in handling of their consignments
by the concerned agencies.
(h) Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as
originating from India with a view to qualify for preferential treatment under different preferential trading
agreements, Free Trade Agreements, Comprehensive Economic Cooperation Agreements & Comprehensive
Economic Partnership Agreements. Subsequently, the scheme may be extended to remaining Status Holders.
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(i) Manufacturer exporters who are also Status Holders shall be eligible to self-certify their goods as originating from
India as per of Hand Book of Procedures.
(j) Status holders shall be entitled to export freely exportable items on free of cost basis for export promotion
subject to an annual limit of ` 10 lakh or 2% of average annual export realization during preceding three licensing
years whichever is higher.
DUTY EXEMPTION/REMISSION SCHEMES
Duty Exemption Schemes & Duty Remission Scheme enables duty free import of inputs for export production,
including replenishment of input or duty remission.
(a) Duty Exemption Schemes: It consist of the following - (i) Advance Authorization
(ii) Duty Free Import Authorization
(b) Duty Remission Scheme
Question 17] What do you understand by 'Advance Authorization' under the Foreign Trade Policy? Which type of
exporter can apply for Advance Authorization Scheme? What are the conditions for obtaining Advance
Authorization for Annual Requirement?
Ans.: Under Advance Authorization Scheme, exporter can import raw-materials and related inputs by claiming 100%
duty exemption from import duty on the condition that final product made by using such imported raw material or
input is exported.
Advance Authorization:
(a) Advance Authorization is issued to allow duty free import of input, which is physically incorporated in export
product (making normal allowance for wastage). In addition, fuel, oil, catalyst which is consumed/utilized in the
process of production of export product, may also be allowed.
(b) Advance Authorization is issued for inputs in relation to resultant product, on the following basis:
(i) As per Standard Input Output Norms (SION) notified
(ii) On the basis of self declaration as per Handbook of Procedures.
Eligible Applicant/Export/Supply:
(a) Advance Authorization can be issued to -
(i) Manufacturer Exporter or
(ii) Merchant Exporter tied to Supporting Manufacturer.
(b) Advance Authorization for pharmaceutical products manufactured shall be issued to manufacturer exporter
only.
(c) Advance Authorization shall be issued for:
- Physical export (including export to SEZ).
- Intermediate supply
- Supply under Deemed Exports.
- Supply of 'stores' on board of foreign going vessel or aircraft.
Advance Authorization for Annual Requirement:
(i) Advance Authorization for Annual Requirement shall be issued for the items for which Standard Input Output
Norms (SION) are notified.
(ii) Advance Authorization for Annual Requirement shall not be available in case of ad hoc norms under FTP.
Eligibility condition to obtain Advance Authorization for Annual Requirement:
(i) Exporters having past export performance (in at least preceding 2 financial years) shall be entitled for Advance
Authorization for Annual requirement.
(ii) Entitlement in terms of CIF value of imports shall be up to 300% of the FOB value of physical export and/or FOR
value of deemed export in preceding financial year or ` 1 Crore, whichever is higher.
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Question 18] What constitute 'value addition' for the purpose of claiming benefits of Duty Exemp- tion/Remission
Schemes under the Foreign Trade Policy?
Ans.: Value Addition: Value Addition for the Duty Exemption/Remission Schemes (except for Gems and Jewellery
sector for which value addition is prescribed in FTP) shall be:
Valuation Addition = A-B/B x 100

Where,
A = FOB value of export realized/FOR value of supply received.
B = CIF value of inputs covered by Authorization, plus value of any other input used on which benefit of DBK is
claimed or intended to be claimed.
Free of cost supply by foreign buyer: Advance Authorization shall also be available where some or all inputs are
supplied free of cost to exporter by foreign buyer. In such cases, notional value of free of cost input shall be added
in the CIF value of import and FOB value of export for the purpose of computation of value addition. However,
realization of export proceeds will be equivalent to an amount excluding notional value of such input.
Question 19] How much minimum value addition is required for availing the benefits under various schemes
under the Foreign Trade Policy? * 1
Ans.: Minimum Value Addition:
(1) Minimum value addition required to be achieved under Advance Authorization is 15%.
(2) Value addition could be less than 15% for some Export Products as specified in FTP.
(3) For physical exports for which payments are not received in freely convertible currency, value addition shall
be as may be specified.
(4) Minimum value addition for Gems & Jewellery Sector is given in Handbook of Procedures.
(5) In case of Tea, minimum value addition shall be 50%.
Question 20] Which type of duties are exempted under Advance Authorization as per Foreign Trade Policy?
Ans.: Imports under Advance Authorization are exempted from payment of -
♦ Basic Customs Duty
♦ Additional Customs Duty
♦ Education Cess
♦ Anti-dumping Duty
♦ Safeguard Duty
♦ Transition Product Specific Safeguard Duty, wherever applicable.
However, Import against supplies covered under certain category of supply under Deemed Exports will not be
exempted from payment of applicable Anti-dumping Duty, Safeguard Duty and Transition Product Specific
Safeguard Duty.
Question 21] What is the validity period for import under Advance Authorization as per Foreign Trade Policy?
Ans.: Validity period for Import:
(1) Validity period for import of Advance Authorization shall be 12 months from the date of issue of
Authorization.
(2) Advance Authorization for Deemed Export shall be co-terminus with contracted duration of project
execution or 12 months from the date of issue of Authorization, whichever is more.
Question 22] Which type of items cannot be imported or exported against Advance Authorization or Duty Free
Import Authorization under the Foreign Trade Policy?
Ans.: Importability/Exportability of items that is prohibited or restricted:
(1) No export or import of an item shall be allowed under Advance Authorization (AA)/Duty Free Import
Authorization (DFIA) if the item is prohibited for exports or imports respectively. Export of a prohibited item may
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be allowed under Advance Authorization provided it is separately so notified, subject to the conditions given
therein.
(2) Items reserved for imports by State Trading Enterprises (STEs) cannot be imported against Advance
Authorization/ DFIA.
(3) Items reserved for export by STE can be exported under AA/DFIA only after obtaining a 'No Objection
Certificate' from the concerned STE.
(4) Import of restricted items shall be allowed under AA/DFIA.
(5) Export of restricted/Special Chemicals, Organisms, Materials, Equipment and Technology items however,
shall be subject to all conditionalities or requirements of export authorization or permission, as may be required,
under the FTP.
Question 23] For the purpose of Duty Exemption/Remission Schemes in which currency export proceeds are
required to be realized? Also state whether export to SEZ can be taken into account for discharge of export
obligation?
Ans.: Currency for realization of export proceeds:
(1) Export proceeds shall be realized in freely convertible currency except otherwise specified.
(2) Export to Rupee Payment Area (RPA) (for which payments are not received in freely convertible currency)
shall be subject to minimum value addition.
(3) Export to SEZ Units shall be taken into account for discharge of export obligation provided payment is realized
from Foreign Currency Account of the SEZ unit.
(4) Export to SEZ Developers/ Co-developers can also be taken into account for discharge of export obligation
even if payment is realized in Indian Rupees.
(5) Authorization holder needs to file Bill of Export for export to SEZ unit/developer/co-developer in accordance
with the procedures given in SEZ Rules, 2006.
Question 24] How much period is available for fulfilment of export obligation under Advance Authorization as
per the Foreign Trade Policy?
Ans.: Export Obligation:
(1) Period for fulfilment of export obligation under Advance Authorization shall be 18 months from the date of
issue of Authorization or as notified by DGFT.
(2) In cases of supplies to turnkey projects in India under deemed export category or turnkey projects abroad,
the Export Obligation period shall be co-terminus with contracted duration of the project execution or 18 months
whichever is more.
(3) Export Obligation for items falling in categories of defence, military store, aerospace and nuclear energy shall
be 24 months from the date of issue of authorization or co-terminus with contracted duration of the export order
whichever is more.
(4) Export Obligation Period for inputs, as specified in Appendix 4-J, shall be as mentioned in the relevant column
of the said Appendix.
Question 25] Write a detailed note on: Duty Free Import Authorization Scheme * 1
Ans.: Duty Free Import Authorization is issued to allow duty free import of inputs. In addition, import of oil and
catalyst which is consumed or utilized in the process of production of export product, may be allowed to be
imported free of duty.
Duty Free Import Authorization shall be exempted only from payment of Basic Customs Duty. Additional customs
duty/excise duty, being not exempt, shall be adjusted as CENVAT credit. Eligibility for DFIA:
(1) Duty Free Import Authorization shall be issued on post export basis for products for which Standard Input
Output Norms have been notified.
(2) Merchant Exporter shall be required to mention name and address of supporting manufacturer of the export
product on the export document viz. Shipping Bill/Airway Bill/Bill of Export/ ARE-1/ ARE-3.
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(3) Application is to be filed with concerned Regional Authority before effecting export under Duty Free Import
Authorization.
Minimum Value Addition: Minimum value addition of 20% shall be required to be achieved. For items where higher
value addition has been prescribed under Advance Authorization, the same value addition shall be applicable for
Duty Free Import Authorization also.
Validity & Transferability of DFIA:
(1) Applicant shall file online application to Regional Authority concerned before starting export under DFIA.
(2) Export shall be completed within 12 months from the date of online filing of application and generation of
file number.
(3) While doing export/ supply, applicant shall indicate file number on the export documents viz. Shipping
Bill/Airway Bill/Bill of Export/ARE-1/ARE-3, Central Excise certified Invoice.
(4) After completion of exports and realization of proceeds, request for issuance of transferable Duty Free
Import Authorization may be made to concerned Regional Authority within a period of 12 months from the date of
export or 6 months (or additional time allowed by RBI for realization) from the date of realization of export proceeds,
whichever is later.
(5) Applicant shall be allowed to file application beyond 24 months from the date of generation of file number.
(6) Separate DFIA shall be issued for each SION and each port.
(7) Exports under DFIA shall be made from a single port.
(8) No Duty Free Import Authorization shall be issued for an export product where SION prescribes 'Actual User'
condition for any input.
(9) Regional Authority shall issue transferable DFIA with a validity of 12 months from the date of issue. No further
revalidation shall be granted by Regional Authority.
EPCG SCHEME
Question 26] What do you understand by EPCG Scheme as per the Foreign Trade Policy?
Ans.: Export Promotion Capital Goods (EPCG) Scheme enables the Indian manufacturer to obtain capital
goods at Nil rate of custom duty against commitment of export obligation.
EPCG Scheme allows importer of capital goods for pre-production, production and post-production at
Zero customs duty. For this purpose, capital goods include the following:
(i) Capital Goods including in Completely Knocked down (CKD) / Semi- Knocked Down (SKD) condition thereof.
(ii) Computer software systems.
(ii) Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare refractories.
(iv) Catalysts for initial charge plus one subsequent charge.
Features of EPCG Scheme:
(i) Import of capital goods for 'Project Imports' is also permitted under EPCG Scheme.
(ii) Import under EPCG Scheme shall be subject to an export obligation equivalent to 6 times of duty saved on capital
goods, to be fulfilled in 6 years reckoned from date of issue of Authorization.
(iii) Authorization shall be valid for import for 18 months from the date of issue of Authorization. Revalidation of
EPCG Authorization shall not be permitted.
(iv) In case countervailing duty (CVD) is paid in cash on imports under EPCG, incidence of CVD would not be taken
for computation of net duty saved, provided CENVAT is not availed.
(v) Second hand capital goods shall not be permitted to be imported under EPCG Scheme.
(vi) Import of capital goods for production/ transmission of energy (power) is not eligible under EPCG Scheme.
(vii) Import of items which are restricted for import shall be permitted under EPCG Scheme only after approval from
EXIM Facilitation Committee.
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(viii) If the goods proposed to be exported under EPCG authorization are restricted for export, the EPCG
authorization shall be issued only after approval for issuance of export authorization from EXIM Facilitation
Committee.
Coverage of the EPCG Scheme:
(a) EPCG scheme covers manufacturer exporters with or without supporting manufacturer, merchant exporters
tied to supporting manufacturer and service provider. Name of supporting manufacturer shall be endorsed on the
EPCG authorization before installation of the capital goods in the factory/ premises of the supporting manufacturer.
In case of any change in supporting manufacturer the RA shall intimate such change to jurisdictional Central Excise
Authority of existing as well as changed supporting manufacturer and the Customs at port of registration of
Authorization.
(b) EPCG Scheme also covers a service provider who is designated/certified as a Common Service Provider by
the DGFT or State Industrial Infrastructural Corporation in a Town of Export Excellence subject to following
conditions:
(i) Export by users of the common service, to be counted towards fulfilment of EO of the Common Service Provider
shall contain the EPCG authorisation details of the Common Service Provider in the respective Shipping bills and
concerned RA must be informed about the details of the Users prior to such export.
(ii) Such export will not count towards fulfilment of specific export obligations in respect of other EPCG
authorizations (of the CSP/User).
(iii) Authorization holder shall be required to submit Bank Guarantee which shall be equivalent to the duty saved.
Bank Guarantee can be given by Common Service Provider or by any one of the users or a combination thereof, at
the option of the Common Service Provider.
Actual user condition: Import of capital goods shall be subject to Actual User condition till export obligation is
completed.
Export Obligation: Following conditions shall apply to the fulfilment of Export Obligation:
(i) Export Obligation shall be fulfilled by the authorization holder through export of goods which are manufactured
by him or his supporting manufacturer/services rendered by him, for which the EPCG authorization has been
granted.
(ii) Export obligation under the scheme shall be, over and above, the average level of exports achieved by the
applicant in the preceding 3 licensing years for the same and similar products within the overall export obligation
period including extended period, if any.
(iii) In case of indigenous sourcing of capital goods, specific export obligation shall be 25% less than the export
obligation stipulated in EPCG scheme.
(iv) Shipments under Advance Authorization, DFIA, Drawback Scheme or Reward Schemes under FTP would also
count for fulfilment of export obligation under EPCG Scheme.
(v) Export shall be physical export. However, deemed exports as specified FTP shall also be counted towards
fulfilment of export obligation, along with usual benefits available under Actual user condition of EPCG scheme.
(vi) Royalty payments received by the Authorization holder in freely convertible currency and foreign exchange
received for R&D services shall also be counted for discharge under EPCG.
(vii) Payment received in rupee terms for certain services can also be counted towards discharge of export
obligation under the EPCG scheme.
EOU/EHTP/STP/BTP SCHEME
Question 27] Write a short note on: Export Oriented Unit (EOU) Scheme
Ans.: Export Oriented Unit (EOU) can import inputs and capital goods without payment of custom duty. They can
procure indigenous inputs and capital goods without payment of excise duty (GST). Their final product is normally
exported but they are allowed to sale part of their production within the India, which is termed as 'DTA Sale' i.e.
sale to Domestic Tariff Area.
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EOU units are closely connected with Custom Law and Excise Law/GST. They have to follow the prescribed
procedure and statutory exemptions given under notifications under the various laws applicable to them. Besides,
Income Tax Act, 1961 and Foreign Exchange Management Act, 1999 are also very relevant for EOU units.
Only projects having a minimum investment of ` 1 Crore in plant & machinery shall be considered for establishment
as EOUs. However, Board of Approval may allow establishment of EOUs with a lower investment criteria.
Basic provisions of the Export Oriented Unit (EOU), Electronics Hardware Technology Park (EHTP), Software
Technology Park (STP) and Bio -Technology Park (BTP) are identical except few variations.
Thus, units undertaking to export their entire production of goods and services (except permissible sales in DTA),
may be set up under the EOU Scheme, EHTP Scheme, STP Scheme or BTP Scheme.
Such units can be set up for manufacture of goods, including repair, re-making, reconditioning, re-engineering,
rendering of services, development of software, agriculture including agro-processing, aquaculture, animal
husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture.
Trading units are not covered under these schemes.
Objectives of these schemes are to promote exports, enhance foreign exchange earnings, attract investment for
export production and employment generation.
Question 28] Write a short note on: Software Technology Park (STP) Scheme
Ans.: Software Technology Park (STP) is set up for development of software exports. The concept is similar to
concept of EOU/SEZ and provisions applicable to EOU are also applicable to STP.
STP scheme is administered by Ministry of Information Technology.
An STP unit may be a standalone unit by itself (like EOU) or it may be one of such units located in area designated
as STP Complex. Thus, it is not essential that STP unit must be located in designated area.
The units in STP can import their inputs and capital goods (except prohibited list of import) without payment of
custom duty. Goods in negative list can also be imported. These units can export software through data
communication channel or through physical transport. Exports of professional services are also included.
Question 29] Write a short note on: Electronics Hardware Technology Park (EHTP) Scheme
Ans.: Electronics Hardware Technology Park (EHTP) is set up for manufacture and development of hardware
exports. The concept is similar to concept of EOU/SEZ and provisions applicable to EOU are also applicable to EHTP.
EHTP scheme is administered by Ministry of Information Technology.
An EHTP unit may be a standalone unit by itself (like EOU) or it may be one of such units located in area designated
as EHTP Complex. Thus, it is not essential that EHTP unit must be located in designated area.
The units in EHTP can import their inputs and capital goods (except prohibited list of import) without payment of
custom duty.
Provisions relating to sale in DTA (Domestic Tariff Area) are similar to those of EOU.
The unit in EHTP should have positive 'Net Foreign Exchange Earnings' as a percentage of exports.
Question 30] Which type of goods and services may be imported and exported by EOU/EHTP/STP/ BTP units?
Ans.: Export and import of goods by EOU/EHTP/STP/BTP units:
(a) An EOU/EHTP/STP/BTP units may export all kinds of goods and services except items that are prohibited in
ITC(HS).
(b) Export of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) shall be subject
to fulfilment of the conditions indicated in ITC(HS). In respect of an EOU, permission to export a prohibited item
may be considered, by Board of Approval, on a case to case basis, provided such raw materials are imported and
there is no procurement of such raw material from Domestic Tariff Area.
(c) Procurement and supply of export promotion material like brochure/ literature, pamphlets, hoardings,
catalogues, posters etc. up to a maximum value limit of 1.5% of FOB value of previous year's exports shall also be
allowed.
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(d) An EOU/EHTP/STP/BTP unit may import or procure, from Domestic Tariff Area or bonded warehouses in
Domestic Tariff Area/international exhibition held in India, without payment of duty, all types of goods, including
capital goods, required for its activities, provided they are not prohibited items of import in the ITC(HS). Any
permission required for import under any other law shall be applicable. Units shall also be permitted to import
goods including capital goods required for approved activity, free of cost or on loan/lease from clients. Import of
capital goods will be on a self certification basis. Goods imported by a unit shall be with actual user condition and
shall be utilized for export production.
(e) EOU/EHTP/STP/BTP units may import/procure from Domestic Tariff Area, without payment of duty, certain
specified goods for creating a central facility. Software EOU/DTA units may use such facility for export of software.
(f) An EOU engaged in agriculture, animal husbandry, aquaculture, floriculture, horticulture, pisciculture, viticulture,
poultry or sericulture may be permitted to remove specified goods in connection with its activities for use outside
bonded area.
(g) Gems and jewellery EOUs may source gold/ silver/platinum through nominated agencies on loan/ outright
purchase basis. Units obtaining gold/silver/platinum from nominated agencies, either on loan basis or outright
purchase basis shall export gold/silver/platinum within 90 days from date of release.
(h) EOU/EHTP/STP/BTP units, other than service units, may export to Russian Federation in Indian Rupees
against repayment of State Credit/ Escrow Rupee Account of buyer subject to RBI clearance.
(i) Procurement and export of spares/components, up to 5% of FOB value of exports, may be allowed to same
consignee/buyer of the export article, subject to the condition that it shall not count for Net Foreign Exchange (NFE)
and direct tax benefits.
(j) BOA may allow, on a case to case basis, requests of EOU/EHTP/STP/BTP units in sectors other than Gems &
Jewellery, for consolidation of goods related to manufactured articles and export thereof along with manufactured
article. Such goods may be allowed to be imported/procured from DTA by EOU without payment of duty, to the
extent of 5% FOB value of such manufactured articles exported by the unit in preceding financial year. Details of
procured/imported goods and articles manufactured by the EOU will be listed separately in the export documents.
In such cases, value of procured/imported goods will not be taken into account for calculation of NFE and DTA sale
entitlement. Such procured/imported goods shall not be allowed to be sold in DTA. BOA may also specify any other
conditions.
Secondhand Capital Goods: EOU/EHTP/STP/BTP units may also be import secondhand capital goods duty free
without any age limit.
Question 31] State the provisions of the Foreign Trade Policy pertaining to 'leasing of capital goods' by
EOU/EHTP/STP/BTP units.
Ans.: Leasing of Capital Goods by EOU/EHTP/STP/BTP units:
(1) EOU/EHTP/STP/BTP unit may, on the basis of a firm contract between parties, source capital goods from a
domestic or foreign leasing company without payment of customs or excise duty (GST). In such a case,
EOU/EHTP/STP/BTP unit and domestic/foreign leasing company shall jointly file documents to enable import of
capital goods without payment of duty.
(2) EOU/EHTP/BTP/STP units may sell capital goods and lease back the same from NBFC, subject to the following
conditions:
(a) The unit should obtain permission from the jurisdictional Deputy/Assistant Commissioner of Customs or
Central Excise, for entering into transaction of 'Sale & Lease Back of Assets', and submit full details of the goods to
be sold and leased back and the details of NBFC.
(b) The goods sold and leased back shall not be removed from the unit's premises.
(c) The unit should be NFE positive at the time when it enters into sale and lease back transaction with NBFC.
(id) A joint undertaking by the unit and NBFC should be given to pay duty on goods in case of violation or
contravention of any provision of the notification under which these goods were imported or procured.
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Question 32] Is it necessary for EOU unit to have positive net foreign exchange earnings? If such unit is not able
to achieve the positive net foreign exchange earnings what it should do to continue to avail the benefits under
the FTP?
Ans.: Net Foreign Exchange Earnings: EOU/EHTP/STP/BTP units shall have positive net foreign exchange earnings
except for specific sector where a higher value addition shall be required.
Net Foreign Exchange (NFE) Earnings shall be calculated cumulatively in blocks of 5 years, starting from
commencement of production.
Whenever a unit is unable to achieve NFE due to prohibition or restriction imposed on export of any product
mentioned in Letter of Permit, the 5 year block period for calculation may be suitably extended by Board of
Approval.
Wherever a unit is unable to achieve NFE due to adverse market condition or any grounds of genuine hardship
having adverse impact on functioning of the unit, the 5 years block period for calculation of NFE earnings may be
extended by Board of Approval for a period of up to 1 year, on a case to case basis.
Question 33] For how much period letter of permission issued to EOU/EHTP/STP/BTP unit to construct and install
plant and machinery is valid? Whether any extension is available if the such unit not able to commence the
production within validity period of letter of permission?
Ans.: Letter of Permission, Letter of Intent and Legal Undertaking:
(a) On approval, a Letter of Permission/ Letter of Intent shall be issued by Development Commissioner or Designated
Officer to EOU/EHTP/STP/BTP unit. Initially it shall have a validity of 2 years to enable the Unit to construct the plant
& install the machinery and by this time the unit should have commenced production. In case the unit is not able to
commence production in initial valid
ity of 2 years further extension of 1 year may be given for valid reasons to be recorded in writing. Subsequent
extension of year may be given by the Unit Approval Committee subject to condition that 2/3rd of activities including
construction, relating to the setting up of the Unit are complete and Chartered Engineer's certificate to this effect
is submitted by the Unit. Further extension, if necessary, will be granted by the Board of Approval. Once unit
commences production, permission shall be valid for a period of 5 years for its activities. This period may be
extended further by DC for a period of 5 years at a time.
(b) Letter of Permission/ Letter of Intent issued to EOU/ EHTP/ STP/ BTP units by concerned authority, subject
to compliance of provision pertaining to export and import of goods under EOU/EHTP/ STP/BTP Scheme above,
would be construed as an Authorization for all purposes.
(c) Failure to ensure positive NFE or to abide by any of the terms and conditions of Letter of Permission/ Letter
of Intent/Legal Undertaking shall render the unit liable to penal action under provisions of the Foreign Trade
(Development & Regulation) Act, 1992 and Rules and Orders made thereunder without prejudice to action under
any other law/rules and cancellation or revocation of Letter of Permission/Letter of Intent.
Question 34] Write a short note on: Investment Criteria for setting up EOU unit
Ans.: Investment Criteria: Only projects having a minimum investment of ` 1 Crore in plant & machinery
shall be considered for establishment as EOUs.
However, this shall not apply to existing units, units in EHTP/STP/BTP, and EOUs in
Handicrafts/Agriculture/Floriculture/Aquaculture/Animal Husbandry/Information Technology, Services,
BrassHardware and Handmade jewellery sectors.
Board of Approval may allow establishment of EOUs with a lower investment criteria.
Question 35] Who grants the approval for setting up of units under EOU Scheme under the Foreign Trade Policy?
Ans.: Applications & Approvals:
(a) Applications for setting up of units under EOU scheme shall be approved or rejected by the Units Approval
Committee within 15 days as per criteria indicated in Handbook of Procedures.
(,b) In other cases, approval may be granted by Board of Approval as indicated in Handbook of Procedures.
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(c) Proposals for setting up EOU requiring industrial licence may be granted approval by Development
Commissioner after clearance of proposal by Board of Approval and Department of Industrial Policy & Promotion
within 45 days.
(d) Applications for conversion into an EOU/ EHTP/STP/ BTP unit from existing DTA units, having an investment
of ` 50 Crores and above in plant and machinery or exporting ` 50 Crore and above annually, shall be placed before
Board of Approval for a decision.
Question 36] Discuss the various benefits/entitlements available to EOU/EHTP/STP/BTP units under the Foreign
Trade Policy.
Ans.: EOU/EHTP/STP/BTP units can import inputs and capital goods without payment of custom duty.
In additions to this some other benefits are also available to them which are discussed below:
Other Entitlements: Other entitlements of EOU/EHTP/STP/BTP units are as under:
(a) Exemption from industrial licensing for manufacture of items reserved for SSI sector.
(b) Export proceeds can be realized within 9 months.
(c) Units will be allowed to retain 100% of its export earnings in the EEFC account.
(d) 100% FDI investment permitted through automatic route similar to SEZ units.
(e) Units shall be allowed to pay duty on the goods produced or manufactured and cleared into DTA on monthly
basis.
(f) The Units Approval Committee may consider on a case-to-case basis request for sharing of infrastructural
facilities among EOUs and it shall forward its recommendation to the Board of Approval for its consideration. While
accepting such proposals, the NFE obligations of the Units shall not be altered. However, sharing of facilities
between EOUs and SEZ Units shall not be permitted.
(g) Unit will not be required to furnish bank guarantee at the time of import or going for job work in DTA, where:
(i) The unit has turnover of ` 5 Crore or above.
(if) The unit is in existence for at least 3 years.
(iii) The unit has achieved positive NFE/export obligation wherever applicable.
(iv) The unit has not been issued a show cause notice or a confirmed demand, during the preceding 3 years, on
grounds other than procedural violations under the penal provisions applicable to it under various laws.
Question 37] Whether it is possible to transfer goods manufactured by one unit of EOU to another unit of EOU
under the Foreign Trade Policy?
Ans.: Inter Unit Transfer:
(a) Transfer of manufactured goods from one EOU/EHTP/STP/BTP unit to another EOU/EHTP/ STP/BTP unit is
allowed with prior intimation to concerned Development Commissioners of the transferor and transferee units as
well as concerned Customs authorities, following procedure of in-bond movement of goods. Transfer of
manufactured goods shall also be allowed from EOU/ EHTP/STP/BTP unit to a SEZ developer or unit as per procedure
prescribed in SEZ Rules, 2006.
(b) Capital goods may be transferred or given on loan to other EOU/EHTP/STP/BTP/SEZ units, with prior
intimation to concerned Development Commissioner and Customs Authorities. Such transferred goods may also be
returned by the second unit to the original unit in case of rejection or for any reason without payment of duty.
(c) Goods supplied by one unit of EOU/EHTP/STP/BTP to another unit shall be treated as imported goods for
second unit for payment of duty, on DTA sale by second unit.
(d) In respect of a group of EOUs/EHTPs/STPs/BTP Units which source inputs centrally in order to obtain bulk
discount and/or reduce cost of transportation and other logistics cost and/or to maintain effective supply chain,
inter unit transfer of goods and services may be permitted on a case-to-case basis by the Unit Approval Committee.
In case inputs so sourced are imported and then transferred to another unit, then value of the goods so transferred
shall be taken as inflow for the unit transferring these goods and as outflow for the unit receiving these goods, for
the purpose of calculation of NFE.
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Question 38] Write a short note on: Exit from EOU Scheme
Ans.: Important points relating to exit from EOU Scheme is as under:
♦ The EOU unit can opt out of scheme with approval of Development Commissioner.
♦ Such exit shall be subject to payment of Customs and other applicable duties and industrial policy in force.
♦ If unit has not achieved obligations, it shall also be liable to penalty at the time of exit.
♦ An EOU/ EHTP/ STP/ BTP unit may also be permitted by Development Commissioner to exit from the scheme
at any time on payment of duty on capital goods under the prevailing EPCG Scheme for DTA Units.
♦ Unit proposing to exit out of EOU scheme shall intimate to Development Commissioner Customs and Central
Excise (GST) authorities in writing.
♦ After payment of duty and clearance of all dues, unit shall obtain "No Dues Certificate" from Customs and
Central Excise (GST) authorities.
♦ On the basis of "No Dues Certificate" so issued by the Customs and Central Excise authorities, unit shall apply
to Development Commissioner for final de-bonding.
♦ In case there is no proceeding pending, Development Commissioner shall issue final de-bonding order within
a period of 7 working days.
Question 39] Can existing DTA units be converted into an EOU/EHTP/STP/BTP units?
Ans.: Conversion:
(a) Existing DTA units may also apply for conversion into an EOU/EHTP/STP/BTP unit.
(b) Existing EHTP/STP units may also apply for conversion/merger to EOU unit and vice-versa. In such cases, units
will remain in bond and avail exemptions in duties and taxes as applicable.
Question 40] State the facility available to EOU/EHTP/STP/BTP units to export its goods through exhibitions,
promotional tours, duty free shops etc. under the FTP.
Ans.: Export through exhibitions/export promotion tours/showrooms abroad/duty free shops: EOU/ EHTP/STP/
BTP units are permitted to:
(1) Export goods for holding or participating in Exhibitions abroad with permission of DC.
(2) Personal carriage of gold/silver/platinum jewellery, precious, semi-precious stones, beads and articles.
(3) Export goods for display or sale in permitted shops set up abroad.
(4) Display or sell in permitted shops set up abroad, or in showrooms of their distributors or agents.
(5) Set up showrooms or retail outlets at International Airports.
QUALITY COMPLAINTS & TRADE DISPUTES
Question 41] Write a short notes on: Quality complaints and trade disputes
Ans.: Exporters need to project a good image of the country abroad to promote exports. Maintaining an enduring
relationship with foreign buyers is of utmost importance, and complaints or trade disputes, whenever they arise,
need to be settled amicably as soon as possible. Importers too may have grievances as well.
In an endeavour to resolve such complaints or trade disputes and to create confidence in the business environment
of the country, a mechanism is being laid down to address such complaints and disputes in an amicable way.
Quality complaints/trade disputes: The following type of complaints may be considered under the FTP:
(1) Complaints received from foreign buyers in respect of poor quality of the products supplied by exporters
from India.
(2) Complaints of importers against foreign suppliers in respect of quality of the products supplied.
(3) Complaints of unethical commercial dealings categorized mainly as non-supply/partial supply of goods after
confirmation of order; supplying goods other than the ones as agreed upon; nonpayment; non-adherence to
delivery schedules, etc.
Question 42] What are the obligations of importer and exporter under the Foreign Trade (Regulation) Rules, 1993
Ans.: Obligation on the part of importer/exporter:
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(1) Rule 11 of the Foreign Trade (Regulation) Rules, 1993, requires that on the importation into, or exportation
out of, any customs ports of any goods, the owner of such goods shall in the Bill of Entry or the Shipping Bill or any
other documents prescribed under the Customs Act, 1962, state the value, quality and description of such goods to
the best of his knowledge and belief and in case of exportation of goods.
He should also certify that the quality and specification of the goods as stated in those documents, are in accordance
with the terms of the export contract entered into with the buyer or consignee in pursuance of which the goods are
being exported and shall subscribe a declaration of the truth of such statement at the foot of such Bill of Entry or
Shipping Bill or any other documents. Violation of this provision renders the exporter liable for penal action.
(2) Certain export commodities have been notified for Compulsory Quality Control & Pre-shipment Inspection
prior to their export. Penal action can be taken under the Export (Quality Control & Inspection) Act, 1963, against
exporters who do not conform to these standards and/or provisions of the Act as laid down for such products.
Question 43] Briefly discuss the Mechanism for handling of complaints and disputes under the Foreign Trade
Policy. 1 2 3 4 5 6 7 8 9 10
Ans.: Mechanism for handling of Complaints/Disputes:
(a) Committee on Quality complaints and Trade Disputes (CQCTD): To deal effectively with the increasing
number of complaints and disputes, a 'Committee on Quality Complaints and Trade Disputes' (CQCTD) will be
constituted in the 22 offices of the Regional Authority of DGFT.
(b) Composition of the CQCTD: The CQCTD would be constituted under the Chairpersonship of the Head of
Office. The CQCTD may comprise of the following members:
1. Additional DGFT/Joint DGFT: Chairperson
2. Representative of Bureau of India Standard (BIS): Member
3. Representative of Agricultural and Processed Food Products Export Development Authority:
Member
4. Representative of the Branch Manager of the concerned Bank: Member
5. Representative of Federation of Indian Exporter Organization/Export Promotion Council:
Member
6. Representative of Export Inspection Agency: Member
7. Nominee of Director of Industries of State Government: Member
8. Nominee of Development Commissioner of MSME: Member
9. Officer as nominated by Chairperson: Member Secretary
10. Any other agency, as co-opted by Chairperson: Member.
(c) Functions of CQCTD: The Committee (CQCTD) will be responsible for enquiring and investigating into all
Quality related complaints and other trade related complaints falling under the jurisdiction of the respective RAs. It
will take prompt and effective steps to redress and resolve the grievances of the importers, exporters and overseas
buyers, preferably within three months of receipt of the complaint. Wherever required, the Committee (CQCTD)
may take the assistance of the Export Promotion Councils/FIEO/Commodity Boards or any other agency as
considered appropriate for settlement of these disputes.
(d) Proceedings under CQCTD: CQCTD proceedings are only reconciliatory in nature and the aggrieved party,
whether the foreign buyer or the Indian importer, is free to pursue any legal recourse against the other erring party.
Procedures to deal with complaints and trade disputes The procedure for making an application for such complaints
or trade disputes and the procedure to deal with such quality complaints and disputes is given in the Handbook of
Procedures.
(e) Corrective Measures: The Committee at RA level can authorize the Export Inspection Agency or any technical
authority to assess whether there has been any technical failure of not meeting the standards,
manufacturing/design defects, etc. for which complaints have been received.
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(f) Nodal Officer: Director General of Foreign Trade would appoint an officer, not below the rank of Joint Director
General, in the Headquarters, to function as the 'Nodal Officer' for coordinating with various Regional Authorities
of DGFT.
Question 44] What type of action can be taken against erring exporters/importers under the Foreign Trade
(Development & Regulation) Act, 1992?
Ans.: Action against erring exporters can be taken under the Foreign Trade (Development and Regulation) Act, 1992,
as amended and under Foreign Trade (Regulation) Rules, 1993, as follows:
(1) Suspension/cancellation of IEC Number [Section 8]: The Director General of Foreign Trade or any other
person authorized by may suspend or cancel the Importer Exporter Code (IEC) Number.
(2) Refusal to grant or renew a license, certificate, scrip [Section 9(2)]: The Director General of Foreign Trade
or an officer authorized by has been given a power to refuse to grant or renew a license, certificate, scrip or any
other instrument bestowing financial or fiscal benefit granted under the Act.
(3) Suspension or cancel any License, certificate, scrip [Section 9(4)]: The Director General of Foreign Trade or
the officer authorized by him to suspend or cancel any License, certificate, scrip or any instrument bestowing
financial or fiscal benefit granted under the Act.
(4) Imposition of fiscal penalty [Section 11(2)]: Fiscal penalty can be imposed in cases where a person makes or
abets or attempts to make any import or export in contravention of any provision of the Act, any Rules or Orders
made there under or the Foreign Trade Policy.
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9
Chapter
HOH-BAHKMG FIHAHCE COMPANIES (HBFC)
INTRODUCTION: The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-
Banking Financial Companies.
With the amendment of the RBI Act, 1934 in January 1997, in terms of Section 45-IA, all Non-Banking Financial
Companies have to be mandatorily registered with the RBI.
As part of regulation and supervision ofNBFCs, the RBI has been conferred with the statutory powers to regulate or
prohibit issue of prospectus or advertisements soliciting deposits of money by NBFCs, power to determine policy
and issue directions to NBFCs etc.
The RBI has been empowered under Section 45-L of the RBI Act, 1934 to call for information and issue directions to
NBFCs for the reasons stated therein.
As a part of the supervisory control over the non-banking financial companies, the RBI has powers to inspect NBFCs
under Section 45-N of RBI Act, 1934.
The RBI shall exercise all above powers in the public interest or to regulate the financial system of the country to its
advantage or to prevent the affairs of any NBFC being conducted in a manner detrimental to the interest of the
depositors or in a manner prejudicial to the interest of the NBFC.
INTRODUCTION & TYPES OF NBFCs
Question 1] Discuss briefly the regulatory framework governing the Non-Banking Finance Companies (NBFC) in
India.
Ans.: With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45-IA, all
Non-Banking Financial Companies have to be mandatorily registered with the RBI.
The Reserve Bank of India (RBI) is entrusted with the responsibility of regulating and supervising the Non-Banking
Financial Companies by virtue of powers vested in Chapter III-B of the Reserve Bank of India Act, 1934. The
regulatory and supervisory objective is:
♦ To ensure healthy growth of the financial companies;
♦ To ensure that these companies function as a part of the financial system within the policy framework, in
such a manner that their existence and functioning do not lead to systemic aberrations.
The quality of surveillance and supervision exercised by the RBI over the NBFCs is sustained by keeping pace with
the developments that take place in non-banking sector of the financial system.
Ans.: Non-Banking Financial Company (NBFC) -
- is a company registered under the Companies Act, 1956/2013
- engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures and
securities issued by Government or local authority or other marketable securities of a like nature
- engaged in the business of leasing, hire-purchase, insurance business and chit business.
NBFC but does not include any institution whose principal business is that of -
♦ Agriculture activity,
♦ Industrial activity,
♦ Purchase or sale of any goods or providing any services and
♦ Sale/purchase/construction of immovable property.
Residuary Non-Banking Company: It is a non-banking institution which is a company and has principal business of
receiving deposits under any scheme/arrangement in lump sum or in instalments by way of contributions or in any
other manner is also a non-banking financial company. Such company is also termed as Residuary Non-Banking
Company.
Question 3] NBFCs are doing functions similar to banks. Comment.
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Ans.: NBFCs are doing functions similar to banks. NBFCs lend and make investments and hence their activities are
akin to that of banks; however there are a few differences as given below:
♦ NBFC cannot accept demand deposits.
♦ NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
♦ Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks.
Question 4] Distinguish between: Banks and Non Banking Financial Companies
Ans.: Following are the main points of distinction between Banks and Non Banking Financial Companies:
Points Banks Non Banking Financial Companies
Meaning Bank is a RBI authorized financial institution NBFC is a company engaged in the business of
that aims at providing banking services to the loans and advances, acquisition of shares,
general public. stocks, bonds, debentures and securities
issued by Government or local authority or
other marketable securities of a like nature,
leasing, hire-purchase, insurance business
and chit business.
Demand Banks can accept terms deposits as well as NBFCs can accept only term deposit but not
deposits demand deposits. demand deposits.
Payment & Banks form part of the payment and NBFCs do not form part of the payment and
settlement settlement system. settlement system.
system
Cheque Banks can issue cheques drawn on itself. NBFCs cannot issue cheques drawn on itself.
Credit creation Banks are termed as creators of credit NBFCs cannot be termed as creators of credit.
through money multiplier activity.
Transaction Banks provides a variety of transaction NBFCs do not facilitate transaction services.
services services.
Reserve ratios Banks are required to maintain reserve ratios NBFCs are not required to maintain reserve
with RBI. ratios with RBI.
Is it necessary that every NBFC should be registered with RBI? What are the requirements for registration with
RBI?
Ans.: A company desirous of commencing business of Non-Banking Financial Institution as defined in Section 45-
I(a) of the RBI Act, 1934 should comply with the following:
(1) It should be a company registered under the Companies Act, 1956/2013 and
(2) It should have a minimum net owned fund.
As per RBIs current directions net owned funds requirement for NBFC is ` 200 lakhs.
Thus, no Non-banking Financial Company can commence or carry on business of a non-banking financial institution
without obtaining a certificate of registration from the RBI.
However, in terms of the powers given to the RBI, to avoid dual regulation, certain categories of NBFCs which are
regulated by other regulators are exempted from the requirement of registration with RBI.
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Thus, following types of Non-banking Financial Institutions if registered under other regulators then again they are
not required to be registered with RBI:
- Venture Capital Fund,
- Merchant Banking companies,
- Stock broking companies registered with SEBI,
- Insurance Company holding a valid Certificate of Registration issued by IRDA,
- Nidhi companies as notified under the Companies Act,
- Chit companies as defined in Section 2(b) of the Chit Funds Act, 1982,
- Housing Finance Companies regulated by National Housing Bank,
- Stock Exchange or a Mutual Benefit company.
Owned Fund: 'OivnedFund' means aggregate of the paid-up equity capi tal, preference shares which are
compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves
representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after
deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
Net Owned Fund: Net Owned Fund is the amount as arrived at above, minus the amount of investments in shares
of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds,
outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries
and companies in the same group, to the extent it exceeds 10% of the owned fund.
Question 6] What are the different categories of NBFCs that are operating in India?
Ans.: NBFCs are broadly categorized in three types:
(a) In terms of the type of liabilities, NBFCs are dividend in following two parts -
- Deposit accepting NBFCs.
- Non-Deposit accepting NBFCs
(b) Non deposit taking NBFCs are further classified by their size into -
- Systemically important non-deposit holding companies (NBFC-ND-SI) and
- Non-deposit holding companies (NBFC-ND)
(c) By the kind of activity they conduct.
Within this broad categorization the different types of NBFCs are as follows:
(1) Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal
business the financing of physical assets which supports productive or economic activity of the organization to be
financed.
Such type of NBFC may finance large number of assets such as -
♦ Automobiles,
♦ Tractors,
♦ Lathe machines,
♦ Generator sets,
♦ Earth moving and material handling equipments,
♦ Moving on own power and
♦ General purpose industrial machines.
Principal business for this purpose is defined as aggregate of financing real or physical assets supporting economic
activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
Asset finance company can either be deposit-taking or non-deposit taking.
(2) Investment Company: Investment Company means any company which is a financial institution carrying on
as its principal business the acquisition of securities.
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(3) Loan Company: Loan Company means any company which is a financial institution carrying on as its principal
business the providing of finance whether by making loans or advances or otherwise for any activity other than its
own but does not include an Asset Finance Company.
(4) Infrastructure Finance Company (IFC): IFC is a non-banking finance company -
(a) which deploys at least 75% of its total assets in infrastructure loans,
(b) has a minimum Net Owned Funds of ` 300 Crore,
(c) has a minimum credit rating of ‘A 'or equivalent and
(d) a CRAR of 15%. [CRAR means capital to risk weighted assets ratio]
(5) Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the
business of acquisition of shares and securities. It should also satisfy following conditions:
(a) At least 90% of its Total Assets are in form of investment in equity shares, preference shares, debt or loans
in group companies.
(b) Its investments in the equity shares (including instruments compulsorily convertible into equity shares within
a period not exceeding 10 years from the date of issue) in group companies constitutes 60% or more of its Total
Assets.
(c) It does not trade in its investments in shares, debt or loans in group companies except through block sale for
the purpose of dilution or disinvestment.
(d) It does not carry on any other financial activity referred to in Section 45-I(c) and 45-I(f) of the RBI Act, 1934
except investment in bank deposits, money market instruments, government securities, loans to and investments
in debt issuances of group companies or guarantees issued on behalf of group companies.
(e) Its asset size is ` 100 Crore or above and
(f) It accepts public funds.
(6) Infrastructure Debt Fund - Non-Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered
as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue
of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC)
can sponsor IDF-NBFCs.
(7) Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a nondeposit taking
NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
(i) Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ` 1,00,000
or urban and semi-urban household income not exceeding ` 1,60,000.
(ii) Loan amount does not exceed ` 50,000 in the first cycle and ` 1,00,000 in subsequent cycles.
(iii) Total indebtedness of the borrower does not exceed ` 1,00,000.
(iv) Tenure of the loan not to be less than 24 months for loan amount in excess of ` 15,000 with prepayment without
penalty.
(v) Loan to be extended without collateral.
(vi) Aggregate amount of loans, given for income generation, is not less than 50% of the total loans given by the
MFI.
(vii) Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
(8) Non-Banking Financial Company - Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC
engaged in the principal business of factoring. The financial assets in the factoring business should constitute at
least 50% of its total assets and its income derived from factoring business should not be less than 50% of its gross
income.
(9) Mortgage Guarantee Companies (MGC): MGC are financial institutions for which at least 90% of the business
turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business
and net owned fund is ` 100 Crore.
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(10) Non-Operative Financial Holding Company (NOFHC): It is financial institution through which
promoter/promoter groups will be permitted to set up a new bank. It's a wholly-owned Non- Operative Financial
Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by
RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
Question 7] Discuss the power of RBI to regulate NBFCs.
Ans.: Powers of RBI: The Reserve Bank has been given the powers under the RBI Act, 1934 to register, lay down
policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50
criteria of principal business.
Power of RBI to take action: The RBI can penalize NBFCs for violating the provisions of the RBI Act, 1934 or the
directions or orders issued by RBI under the Act. The penal action can also result in RBI cancelling the Certificate of
Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a
winding-up petition.
Prudential Regulations applicable to NBFCs: The RBI has issued detailed directions on prudential norms. These
directions are as follows:
♦ Non-Banking Financial Company - Non-Systemically Important Non-Deposit taking Company (Reserve Bank)
Directions, 2016.
Directions, 2016.
♦ Non-Banking Financial Company Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
♦ Core Investment Companies (Reserve Bank) Directions, 2016.
♦ Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017. These
directions inter-alia, prescribe guidelines and covers the following:
- Income recognition
- Asset classification and provisioning requirements applicable to NBFCs
- Exposure norms
- Disclosures in the balance sheet
- Requirement of capital adequacy
- Restrictions on investments in land and building and unquoted shares
- Loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery
Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.
Question 8] What guidelines are prescribed by the Reserve Bank for acceptance of deposits by the Non Banking
Financial Companies?
Ans.: Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
(1) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot accept deposits repayable on demand.
(2) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The
present ceiling is 12.5% p.a. The interest may be paid or compounded at rests not shorter than monthly rests.
(3) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
(4) NBFCs should have minimum investment grade credit rating.
(5) The deposits with NBFCs are not insured.
(6) The repayment of deposits by NBFCs is not guaranteed by RBI.
(7) Certain mandatory disclosures are to be made about the company in the Application Form issued by the
company soliciting deposits.
Question 9] State the returns that are required to be filed with RBI by deposit taking NBFCs.
Ans.: Deposit accepting NBFCs are required to submit following returns/documents to the RBI:
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NBS-1 Quarterly returns on deposits in First Schedule.
NBS-2 Quarterly return on Prudential Norms.
NBS-3 Quarterly return on Liquid Assets
NBS-4 Annual return of critical parameters by a rejected company holding public deposits.
NBS-5 This return stands withdrawn.
NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ` 100
Crore and above.
A L M Half-yearly return by NBFC holding public deposits of more than ` 20 Crore or asset size of more
Return than ` 100 Crore. (ALM means Assets Liability Management)
In addition to above deposit accepting NBFCs are required to file following returns with the RBI:
♦ Audited Balance sheet and Auditor's Report by NBFC accepting public deposits.
♦ Branch Information Return.
Question 10] State the returns to be submitted by "Non Banking Financial Companies - Systemically Important
Non-Deposit Holding Companies" (NBFC-ND-SI).
Ans.: Returns to be submitted by NBFCs-ND-SI:
♦ NBS-7 Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC- ND-SI.
♦ Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
♦ ALM returns such as:
(1) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] - Monthly
(2) Statement of structural liquidity in format ALM [NBS-ALM2] - Half yearly
(3) Statement of Interest Rate Sensitivity in format ALM [NBS-ALM3] - Half yearly
(4) Branch Information return
Question 11] Is there any ceiling on interest rate charged by the NBFCs to their borrowers?
Ans.: Interest rate charge by NBFC: RBI has deregulated interest rates to be charged to borrowers by financial
institutions (other than NBFC - Micro Finance Institution). The rate of interest to be charged by the company is
governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs.
However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest
to different categories of borrowers should be in the application form and communicated explicitly in the sanction
letter etc.
CORE INVESTMENT COMPANIES (RESERVE BANK) DIRECTIONS, 2016
Question 12] Describe the provisions relating registration of the 'Systemically Important Core Investment
Company (CIC-ND-SI)' under the Core Investment Companies (Reserve Bank) Directions, 2016.
Ans.: Registration of "Systemically Important Core Investment Company (CIC-ND-SI)":
(1) Every CIC-ND-SI shall apply to the RBI for grant of Certificate of Registration, irrespective of any advice in the
past, issued by the RBI, to the contrary.
(2) Every CIC shall apply to the RBI for grant of Certificate of Registration within a period of 3 months from the
date of becoming a CIC-ND-SI.
(3) Every CIC exempted from registration requirement with RBI shall pass a Board Resolution that it will not, in
the future, access public funds.
Question 13] Write a short note on: Capital Requirements 'Systemically Important Core Investment Company
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Ans.: Capital Requirements for 'Systemically Important Core Investment Company (CIC-ND-SI)':
Adjusted Net Worth of a CIC-ND-SI should at no point of time be less than 30% of its aggregate risk weighted assets
on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet
as at the end of the financial year prescribed under the Core Investment Companies (Reserve Bank) Directions,
2016.
Question 14] How the investment is required to be accounted by the CIC-ND-SI under the Core Investment
Companies (Reserve Bank) Directions, 2016
Ans.: Accounting of investments by Systemically Important Core Investment Company (CIC-ND-SI):
(1) The Board of Directors of every CIC-ND-SI shall frame investment policy for the company and shall implement
the same.
(2) The criteria to classify the investments into current and long term investments shall be spelt out by the Board
of the company in the investment policy.
(3) Investments in securities shall be classified into current and long term, at the time of making each
investment.
(4) In case of inter-class transfer -
(a) There shall be no such transfer on ad-hoc basis;
(ib) Such transfer, if warranted, shall be effected only at the beginning of each half year, on April 1 or October 1,
with the approval of the Board;
(c) The investments shall be transferred scrip-wise, from current to long-term or vice-versa, at book value or
market value, whichever is lower,
(d) The depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be ignored;
(e) The depreciation in one scrip shall not be set off against appreciation in another scrip, at the time of such
inter-class transfer, even in respect of the scrips of the same category.
Categories Quoted Current Investments: Quoted current investments shall, for the purposes of valuation, be
grouped into the following categories, viz.
(a) Equity shares
(h) Preference shares
(c) Debentures and bonds
(d) Government securities including treasury bills
(e) Units of mutual fund
(f) Other investments.
Valuation of Quoted Current Investments: Quoted current investments for each category shall be valued at cost or
market value whichever is lower. Rules for such valuation are as follows:
(a) The investments in each category shall be considered scrip-wise and the cost and market value aggregated
for all investments in each category.
(b) If the aggregate market value for the category is less than the aggregate cost for that category, the net
depreciation shall be provided for or charged to the profit and loss account.
(c) If the aggregate market value for the category exceeds the aggregate cost for the category, the net
appreciation shall be ignored.
(d) Depreciation in one category of investments shall not be set off against appreciation in another category.
Valuation of Unquoted Current Investments:
(1) Unquoted equity shares in the nature of current investments shall be valued at cost or breakup value,
whichever is lower. However, CICs-ND-SI may substitute fair value for the breakup value of the shares, if considered
necessary. Where the balance sheet of the investee company is not available for 2 years, such shares shall be valued
at one Rupee only.
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(2) Unquoted preference shares in the nature of current investments shall be valued at cost or face value,
whichever is lower.
(3) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at
carrying cost.
(4) Unquoted investments in the units of mutual funds in the nature of current investments shall be valued at
the net asset value declared by the mutual fund in respect of each particular scheme.
Valuation of Commercial Papers: Commercial papers shall be valued at carrying cost.
Valuation of long term investments: A long term investment shall be valued in accordance with the
Accounting Standard -13 issued by ICAI.
Valuation of long term investment as perAS-13 issued by ICAI:
Long-term investments are usually carried at cost.
Decline in Value:
(a) Permanent Decline: When there is a permanent decline in the value of a long term investment, the carrying
amount is reduced to recognize the decline. The carrying amount of long term investments is determined on an
individual basis.
(b) Temporary Decline: Where there is a temporary decline in the carrying amounts of long term investments,
the resultant reduction in the carrying amount is charged to the P&L A/c. The reduction in carrying amount is
reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist.
Question 15] Sundaram Finance Ltd. (NBFC) wants to re-classify its investment. Following details are available for
this purpose.
(i) A portion of current investments purchased for ` 20 lakhs to be reclassified as long-term Investments, as
the company has decided to retain them. The market value as on the date of balance sheet was ` 25 lakhs.
(ii) Another portion of current investments purchased for ` 15 lakhs has to be reclassified as longterm
investments. The market value of these investments as on the date of balance sheet was ` 6.5 lakhs.
(iii) Certain long-term investments no longer considered for holding purposes have to be reclassified as current
investments. The original cost of these was ` 18 lakhs but they had been written down to ` 12 lakhs to recognize
permanent decline.
Decide on the treatment to be given in each of the above case keeping in view relevant directions of the RBI.
Ans.: As per RBI's directions, in case of inter-class transfer by NBFC, the investments shall be transferred scrip-wise,
from current to long-term or vice-versa, at book value or market value, whichever is lower.
(i) In the first case, the market value of the investment is ` 25 lakhs, which is higher than its cost (book value) i.e. `
20 lakhs. Therefore, the transfer to long term investments should be carried at cost i.e. ^ 20 lakhs.
(ii) In the second case, the market value of the investment is ` 6.5 lakhs, which is lower than its cost (book value) i.e.
` 15 lakhs. Therefore, the transfer to long term investments should be carried in the books at the market value i.e.
` 6.5 lakhs. The loss of ` 8.5 lakhs should be charged to profit and loss account.
(iii) In the third case, the book value of the investment is ` 12 lakhs, which is lower than its cost i.e. ` 18 lakhs.
Here, the transfer should be at carrying amount and hence this reclassified current investment should be carried at
` 12 lakhs.
Question 16] Anischit Finance Ltd. is a non-banking finance company. It makes available to you the costs and
market price of various current investments held by it as on 31.3.2018:
Scrip: Cost (` in lakhs) Market Price
Equity Shares
A 60.00 61.20
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B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00
Mutual Funds
MF-1 39.00 24.00
MF-2 30.00 21.00
MF-3 6.00 9.00
Government securities
GV-1 60.00 66.00
GV-2 75.00 72.00
(i) Can the company adjust depreciation of a particular item of investment within a category?
(ii) What should be the value of investments as on 31.3.2018?
Is it possible to off-set depreciation in investment in mutual funds against appreciation of the value of investment
in equity shares and government securities?
Ans.: Valuation:
(a) Current Investments: Quoted current investments for each category shall be valued at cost or market value
whichever is lower. The investments in each category shall be considered scrip-wise and the cost and market value
aggregated for all investments in each category. Hence, net depreciation can be computed after comparing the
aggregate market value with aggregate cost.
(b) Long Term Investment: Long term investments are to be valued at Cost unless there is permanent diminution
in value of such investment.
Computation of carrying amount of investment:
Type of investment Nature Valuation Principle Value (? in lakhs)
Equity Shares Current investment Lower of cost or market value 406.50
Mutual Funds Current investment At Cost 54.00
Government Securities Current investment Lower of cost or market value 135.00

595.50
Inter Category Adjustment: Depreciation in value of investment in one category cannot be set-off against the
appreciation in the value of investment falling in other category. Hence, it is not possible to off-set depreciation in
investment in Mutual Fund against appreciation of value of investment in Government Securities.
Question 17] Rukmini Finance Ltd. (NBFC) has made following investments:
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Details of investment Date of Cost of purchase (`) Market value on
purchase 31.3.2019(`)
1. Equity Shares: 1.6.2018
- Scrip A 1,80,000 1,90,000
- Scrip B 50,000 40,000
- Scrip C 1,70,000 70,000
Sub-total 4,00,000 3,00,000
2. Gold 1.4.2015 3,00,000 5,00,000
3. Mutual Funds 31.3.2018 6,00,000 4,50,000
4. Government Securities 1.4.2018 5,00,000 7,00,000
How you will value these investments as per RBI Directions in the books of the company for the year ended
31.3.2019? Also explain whether it is possible to off-set depreciation in investment in Mutual Fund Category
against appreciation of value of investment in Government Securities.
Note: Equity shares are of companies which are listed on Bombay Stock Exchange.
Ans.: Valuation:
(a) Current Investments: Quoted current investments for each category shall be valued at cost or market value
whichever is lower. The investments in each category shall be considered scrip-wise and the cost and market value
aggregated for all investments in each category. Hence, net depreciation can be computed after comparing the
aggregate market value with aggregate cost.
(b) Long Term Investment: Long term investments are to be valued at Cost unless there is permanent diminution
in value of such investment.
Computation of carrying amount of investment:
Type of investment Nature Valuation Principle Value (`)
Equity Shares Current investment Lower of cost or market value 3,00,000
Gold Long term investment At Cost 3,00,000
Mutual Funds Current investment Lower of cost or market value 4,50,000
Government Securities Current investment Lower of cost or market value 5,00,000

15,50,000
Inter Category Adjustment: Depreciation in value of investment in one category cannot be set-off against the
appreciation in the value of investment falling in other category. Hence, it is not possible to off-set depreciation in
investment in Mutual Fund against appreciation of value of investment in Government Securities.
Question 18] Following details are available in respect of XYZ Ltd. (NBFC):
(f) Investment in unquoted preference shares purchased at ` 50 lakh whose face value is ` 40 lakh and market
value at the end of the year is ` 45 lakh.
(ii) Investment in unquoted Government securities purchased at ` 8 lakh whose face value is ` 8.25 lakh and market
value at the end of the year is ` 8.30 lakh.
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(iii) Investment in commercial papers having carrying cost ` 25 lakh and market value at the end of the year is `
24.90 lakh.
State with reason how you will value investment in each of the above case.
Ans.: Considering the Directions issued by the RBI, valuation will be done as follows:
(i) Unquoted preference shares in the nature of current investments should be valued at cost or face value,
whichever is lower. The face value of the investment in unquoted preference shares is ` 40 lakhs, which is less than
its cost i.e. ` 50 lakhs. Therefore, they should be carried at ` 40 lakhs in balance sheet.
(ii) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying
cost. Thus, investment in unquoted Government securities will be carried at ` 8 lakh in balance sheet.
(iii) Commercial papers shall be valued at carrying cost. Thus, investment in commercial papers will be carried at `
25 lakh in balance sheet.
Question 19] Write a short note on: Demand loan or call loan policy by Systemically Important Core Investment
Company (CIC-ND-SI)
Ans.: Need for policy on demand loans or call loans: The Board of Directors of every CIC-ND-SI granting demand/call
loans should frame a policy and implement for the company.
Such policy shall, inter alia, stipulate the following:
(1) A cut-off date within which the repayment of demand or call loan be demanded or called up.
(2) The sanctioning authority is required to record specific reasons in writing at the time of sanctioning demand
or call loan.
(3) The rate of interest to be payable on such loans.
(4) Interest on such loans. (Interest can made payable either at monthly or quarterly rests)
(5) The sanctioning authority to record specific reasons in writing at the time of sanctioning demand or call loan,
if no interest is stipulated or a moratorium is granted for any period.
(6) A cut-off date, for review of performance of the loan, not exceeding 6 months commencing from the date of
sanction.
(7) Such demand or call loans need not be renewed unless the periodical review has shown satisfactory
compliance with the terms of sanction.
Moratorium Period explained: A moratorium period is a time during the loan term when the borrower is not
required to make any repayment. It is a waiting period before which repayment by way ofEMIs begins. Norinally,
the repayment begins after the loan is disbursed and the payments have to be made each month. However due to
this moratorium period, the payment starts after some time. Education loans provide this feature. This is because
education loans are repaid by the students after they start earning and build their finances.
Question 20] Whether permission of RBI is necessary in case of acquisition by Systemically Important Core
Investment Company of other Core Investment Company if the acquisition do not result change in management?
Ans.: Acquisition/Transfer of Control of Systemically Important Core Investment Company (CIC-ND- SI): A
systemically important CIC, shall require prior written permission of the RBI for the following:
(1) Any takeover or acquisition of control of CIC, which may or may not result in change of management.
(2) Any change in the shareholding of CIC, including progressive increases over time, which results in
acquisition/transfer of shareholding of 26% or more of the paid up equity capital of the CIC. However, prior approval
shall not be required in case of any shareholding going beyond 26% due to buyback of shares/reduction in capital
where it has approval of a competent Court. The same is to be reported to the RBI not later than 1 month from its
occurrence.
(3) Any change in the management of the CIC which results in change in more than 30% of the directors,
excluding independent directors. However, prior approval shall not be required in case of directors who get re-
elected on retirement by rotation.
(4) CICs shall continue to inform the RBI regarding any change in their directors/management not later than 1
month from the occurrence of any change.
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Question 21] State with reason whether in each of following case the CIC-ND-SI (NBFC) is required to take prior
permission of the Reserve Bank of India.
(i) The company is about replace 40% of its director by appointing new directors.
(ii) More than 15% change in shareholding the company.
(iii) Acquisition of another systemically important CIC where same directors are in charge.
Ans.:
(i) A systemically important CIC, shall require prior written permission of the RBI for any change in the
management of the CIC which results in change in more than 30% of the directors, excluding independent directors.
However, prior approval shall not be required in case of directors who get re-elected on retirement by rotation. As
per facts given in case, there is 40% change in number of directors and hence prior permission of RBI will be required.
(ii) A systemically important CIC, shall require prior written permission of the RBI for any change in the
shareholding of CIC, including progressive increases over time, which results in acquisition/ transfer of shareholding
of 26% or more of the paid up equity capital of the CIC. As per facts given in case, there is more than 15% change in
shareholding the company (and not 26% change) and hence prior permission of RBI will not be required.
(iii) A systemically important CIC, shall require prior written permission of the RBI for any takeover or acquisition
of control of CIC, which may or may not result in change of management. Thus, prior permission will be required for
acquiring another systemically important CIC.
Question 22] What provisions are required to be complied in relation to notice when there is change in control
or management of the Systemically Important Core Investment Company (CIC-ND-SI)?
Ans.: Requirement of prior public notice about change in control or management:
(1) A public notice of at least 30 days is to be given before effecting the sale of, or transfer of the ownership by
sale of shares, or transfer of control, whether with or without sale of shares. Such public notice be given by the CIC
and also by the other party or jointly by the parties concerned, after obtaining prior permission of the RBI.
(2) The public notice should indicate -
- the intention to sell or transfer ownership/control,
- the particulars of transferee and
- the reasons for such sale or transfer of ownership/control.
The notice be published in at least one leading national and in one leading local (covering the place of registered
office) vernacular newspaper.
SYSTEMICALLY IMPORTANT NON-DEPOSIT TAKING COMPANY AND DEPOSIT TAKING COMPANY (RESERVE BANK)
DIRECTIONS, 2016
Question 23] State the applicability of Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016.
Ans.: Applicability [Direction 2]: The provisions of Non-Banking Financial Company - Systemically Important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 shall apply to the following:
(1) Every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND- SI) registered
with the RBI under the provisions of RBI Act, 1934.
(2) Every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the RBI under the provisions
of RBI Act, 1934.
(3) Every NBFC-Factor registered with the RBI u/s 3 of the Factoring Regulation Act, 2011 and having an asset
size of ` 500 Crore and above.
(4) Every Infrastructure Debt Fund - Non-Banking Finance Company (IDF-NBFC) registered with the RBI under
the provisions of RBI Act, 1934.
(5) Every Non-Banking Finance Company - Micro Finance Institutions (NBFC-MFIs) registered with the RBI under
the provisions of RBI Act, 1934 and having an asset size of ` 500 Crore and above.
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(6) Every Non-Banking Finance Company - Infrastructure Finance Company (NBFC-IFC) registered with the RBI
under the provisions of RBI Act, 1934 and having an asset size of ` 500 Crore and above.
Important Note:
The Category of NBFCs mentioned at Points (1) to (6) above are referred as "Applicable NBFCs".
Question 24] State the provisions relating to registration of the Systemically Important Non-Deposit taking
Company and Deposit taking Company under the relevant directions issued by the Reserve Bank of India.
Ans.: Registration: In exercise of the powers conferred under section 45-IA(l)(b) of the RBI Act, 1934 and all the
powers enabling it in that behalf, the RBI, has specified ` 200 lakhs as the Net Owned Fund (NOF) for a non-banking
financial company to commence or carry on the business of non-banking financial institution, except wherever
otherwise a specific requirement as to NOF is prescribed by the RBI.
A non-banking financial company holding a Certificate of Registration issued by the RBI and having net owned fund
of less than ` 200 lakhs, may continue to carry on the business of non-banking financial institution, if such company
achieves net owned fund of ` 200 lakhs before April 1, 2017.
It will be incumbent upon such NBFCs, the NOF of which currently falls below ` 200 lakhs, to submit a statutory
auditor's certificate certifying compliance with the prescribed levels by the end of the period as given above.
NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold the Certificate
of Registration as NBFCs.
Question 25] What are the capital requirements for 'Applicable NBFCs' under the Systemically Important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016?
Ans.: Capital Requirements: Every 'Applicable NBFC' shall maintain a minimum capital ratio consisting of Tier I and
Tier II capital which shall not be less than -
15% x (Aggregate risk weighted assets on-balance sheet + Risk adjusted value of off-balance sheet items)
The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDF-NBFC), at any point of time, shall not
be less than 10% by March 31, 2017.
Applicable NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50% or more of their
financial assets) shall maintain a minimum Tier 1 capital of 12%.
Question 26] Write a short note on: Prudential Regulations for 'Applicable NBFCs'
Ans.: Prudential Regulations: Every applicable NBFC shall comply with prudential regulations such as:
♦ Income recognition
♦ Income from investments
♦ Accounting standards
♦ Accounting of investments
♦ Need for policy on demand loans/call loans
♦ Asset classification
♦ Provisioning requirements
♦ Standard asset provisioning
♦ Disclosure in the balance sheet
♦ Accounting year
♦ Information with respect to change of address, directors, auditors, etc. to be submitted
♦ Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries etc.
Question 27] As a part of Corporate Governance each 'Applicable NBFC' has to constitute some committees.
Explain the role each such committee.
Ans.: Constitution of Committees of the Board:
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(1) Audit Committee: All applicable NBFCs shall constitute an Audit Committee, consisting of not less than 3
members of its Board of Directors. The Audit Committee constituted u/s 177 of the Companies Act, 2013 shall be
the Audit Committee for this purpose.
The Audit Committee shall have the same powers, functions and duties as laid down in Section 177 of the Companies
Act, 2013.
The Audit Committee must ensure that an Information System Audit of the internal systems and processes is
conducted at least once in two years to assess operational risks faced by the applicable NBFCs.
(2) Nomination Committee: All applicable NBFCs shall form a Nomination Committee to ensure 'fit and proper'
status of proposed/existing directors.
The Nomination Committee shall have the same powers, functions and duties as laid down in Section 178 of the
Companies Act, 2013.
(3) Risk Management Committee: To manage the integrated risk, all applicable NBFCs shall form a Risk
Management Committee, besides the Asset Liability Management Committee.
Question 28] Write a short note on: Fit and Proper Criteria for 'Applicable NBFCs'
Discuss briefly about 'fit and proper' criteria that is required to be followed by the Applicable NBFCs for appointing
any person on the Board of the company. * 1 2 3
Ans.: Fit and Proper Criteria: All 'Applicable NBFCs' shall -
(1) Ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit and
proper criteria of the directors at the time of appointment, and on a continuing basis.
(2) Obtain complete personal and professional details from directors. Director giving such information should
certify that the information given by him is true and complete.
(3) Obtain a Deed of Covenant signed by the directors, (by making such deed, the director acknowledges that
his appointment as director on the Board of the NBFC is subject to applicable laws and regulations including the MO
A and AO A of the NBFC and the provisions in the Deed)
(4) Furnish to the RBI a quarterly statement on change of directors, and a certificate from the Managing Director
of the applicable NBFC that 'fit and proper' criteria in selection of the directors have been followed.
The statement must reach the Regional Office of the RBI where the company is registered, within 15 days of the
close of the respective quarter. The statement shall also be certified by the auditors.
The RBI, if it deems fit and in public interest, reserves the right to examine the fit and proper criteria of directors of
any NBFC irrespective of the asset size of such NBFC.
Question 29] Referring the relevant directions of the RBI pertaining to 'Applicable NBFCs', answer the following:
(i) Disclosure that are required to be made to the Board of NBFCs;
(ii) Disclosure required to be made in Annual Financial Statements.
Ans.: Disclosure and transparency: Every 'Applicable NBFC' is required to put before the Board of Directors
following information at regular intervals.
(1) The progress made in putting in place a progressive risk management system and risk management policy
and strategy followed by the applicable NBFC.
(2) Conformity with corporate governance standards viz., in composition of various committees, their role and
functions, periodicity of the meetings and compliance with coverage and review functions, etc.
Disclosure in Annual Financial Statements: All 'Applicable NBFCs' shall disclose the following in their Annual
Financial Statements:
(1) Registration/ licence/ authorization obtained from other financial sector regulators.
(2) Ratings assigned by credit rating agencies and migration of ratings during the year.
(3) Penalties levied by any Regulator.
(4) Information with regard to joint ventures and overseas subsidiaries.
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(5) Asset-Liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details
of all off-balance sheet exposures.
Question 30] Write a short note on: Rotation of partners of Audit Firm of NBFCs
Ans.: Rotation of partners of the Statutory Auditors: All 'Applicable NBFCs' shall rotate the partners of the
Chartered Accountant firm conducting the audit, every 3 years so that same partner shall not conduct audit of the
company continuously for more than 3 years.
However, the partner so rotated shall be eligible for conducting the audit of the applicable NBFC after an interval
of 3 years, if the applicable NBFC, so decides. The applicable NBFC shall incorporate appropriate terms in the letter
of appointment of the firm of auditors and ensure its compliance.
Question 31] M/s XYZ & Co. a firm of statutory auditors, consisting three partners X, Y & Z are auditing the various
NBFCs from past 5 years. Mr. Y was appointed as auditor the Shreeram Finance Ltd. (NBFC) continuously for last
3 years. The Board of Directors of the Shreeram Finance Ltd. desires to appoint Mr. Y again for the 4th year as
auditor due to his experience and expertise in the field of audit of NBFC. Decide.
Ans.: All 'Applicable NBFCs' shall rotate the partners of the Chartered Accountant firm conducting the audit, every
3 years so that same partner shall not conduct audit of the company continuously for more than 3 years. Since Mr.
Y is already appointed as auditor for last 3 years, he will not eligible to be appointed as auditor for the 4th year.
NON-BANKING FINANCIAL COMPANY - PEER TO PEER LENDING PLATFORM (RESERVE BANK) DIRECTIONS, 2017
What is peer to peer lending?
Peer-to-peer lending, sometimes abbreviated P2P lending is the practice of lending money to individuals or
businesses through online services that match lenders with borrowers. Peer-to-peer lending removes the
middleman from the process.
Traditionally, individuals and small businesses who want a loan usually apply for one through the bank. The bank
would run extensive financial checks on the applicant's credit history to determine if the entity would qualify for a
loan and if yes, determines the interest rate that will be charged on the loan. Individuals that want to avoid being
charged high interest rates or that would otherwise be rejected for a loan application due to poor credit history,
may opt for an alternative way of borrowing funds - peer-to-peer lending.
With peer-to-peer lending, borrowers take loans from individual investors who are willing to lend their own money
for an agreed interest rate. The profile of a borrower is usually displayed on a peer-to-peer online platform where
investors can assess these profiles to determine whether they would want to risk lending money to a borrower. A
borrower might receive the full loan amount or only a portion of what he asked for from an investor. In the case of
the latter, the remaining portion of the loan may be funded by one or more investors in the peer lending
marketplace.
To regulate the transaction of such peer to peer lending platform, the RBI has issued "Non-Banking Financial
Company - Peer to Peer Lending Platform (RBI) Directions, 2017" on August 24, 2017.
Question 32] Define peer to peer lending. Also state the eligibility criteria to register with RBI as peer to peer
lending institution.
Ans.: 'Peer to Peer Lending Platform' means an intermediary providing the services of loan facilitation via online
medium or otherwise, to the 'Participants'.
'Participant' means a person who has entered into an arrangement with Peer to Peer Lending Institution (NBFC-
P2P) to lend on it or to avail of loan facilitation services provided by it.
Eligibility Criteria:
(1) No non-banking institution other than a company shall undertake the business of Peer to Peer Lending
Platform.
(2) No NBFC-P2P shall commence or carry on the business of a Peer to Peer Lending Platform without obtaining
a Certificate of Registration from the RBI.
(3) Every company seeking registration with the RBI as an NBFC-P2P shall have a net owned fund of not less than
` 20 million or such higher amount as the RBI may specify.
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Process of Registration: Every existing and prospective NBFC-P2P shall make an application for registration to the
Department of Non-Banking Regulation, Mumbai of the RBI, in the form specified by the RBI. Existing NBFC-P2Ps
shall apply within 3 months from the issuance of the Directions.
The RBI has to ensure about fulfilment of following conditions before it grants registration as NBFC-P2P to the
applicant company:
(a) The company is incorporated in India.
(b) The company has the necessary technological, entrepreneurial and managerial resources to offer such
services to the participants.
(c) The company has the adequate capital structure to undertake the business of Peer to Peer Lending Platform.
(d) The promoters and the Directors of the company are fit and proper.
(e) The general character of the management of the company is not prejudicial to the public interest.
(f) The company has submitted a plan for, or implemented, a robust and secure Information Technol- ogy system.
(g) The company has submitted a viable business plan for conducting the business of Peer to Peer Lending
Platform.
(h) Public interest shall be served by the grant of Certificate of Registration.
(i) Any other condition as the RBI may specify time to time.
Question 33] Write a short note on: Scope of activities for P2P lending by NBFC
Ans.: Scope of activities for P2P lending: Scope of activities i.e. activities that can be undertaken and that cannot
be undertaken by an NBFC-P2P are discussed below:
(a) It can act as an intermediary for providing an online marketplace or platform to the participants involved in
Peer to Peer lending.
(b) It cannot raise deposits as defined by or under Section 45-I(bb) of the RBI Act, 1936 or the Companies Act,
2013.
(c) It cannot lend on its own.
(d) It cannot provide or arrange any credit enhancement or credit guarantee.
(e) It cannot facilitate or permit any secured lending linked to its platform i.e. only clean loans will be permitted.
(f) It cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from
borrowers for servicing loans.
(g) It cannot cross sell any product except for loan specific insurance products.
(h) It cannot permit international flow of funds.
(i) It should ensure adherence to legal requirements applicable to the participants prescribed under relevant
laws.
(j) It should store and process all data relating to its activities and participants on hardware located within India.
To act within the scope permissible activities, an NBFC-P2P is responsible for the following:
♦ It should undertake due diligence on the participants.
♦ It should undertake credit assessment and risk profiling of the borrowers and disclose the same to their
prospective lenders.
♦ It should require prior and explicit consent of the participant to access its credit information.
♦ It should undertake documentation of loan agreements and other related documents.
♦ It should provide assistance in disbursement and repayments of loan amount.
♦ It should render services for recovery of loans originated on the platform.
Question 34] Write a short note on: Prudential Norms of NBFC-P2P
Ans.: Prudential Norms for NBFC-P2P:
(1) NBFC-P2P shall maintain a Leverage Ratio not exceeding 2.
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(2) The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject
to a cap of ` 10,00,000.
(3) The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of `
10,00,000.
(4) The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed ` 50,000.
(5) The maturity of the loans shall not exceed 36 months.
(6) P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above
are being adhered to.
Question 35] Write a short note on: Reporting Requirements for NBFC-P2P * 1 2 3 4 5 6
Ans.: Reporting Requirements for NBFC-P2P: Following types of documents/statements/returns are required to be
submitted by the NBFC-P2P to the RBI:
(1) The RBI may prescribe returns to be submitted by NBFC-P2P, as it deems fit.
(2) The quarterly statements shall be submitted to the Regional Office within 15 days after the quarter to which
it relates.
(3) A statement, showing the number and amount in respect of loans;
- disbursed during the quarter;
- closed during the quarter; and
- outstanding at the beginning and at the end of the quarter, including the number of lenders and borrowers
outstanding as at the end of the quarter
(4) The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and funds
received from borrowers, with credit and debit summations for the quarter.
(5) Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter,
bifurcated as received from lenders and borrowers.
(6) The Leverage Ratio, with details of its numerator and denominator.
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10
CHAPTER
SPECIAL ECONOMIC ZONES ACT, 2005
INTRODUCTION: The Special Economic Zone like a separate island within the country. These are treated as if they are
outside India for custom purposes. Goods can be brought in SEZ without payment of duties and taxes. Supplies to
SEZ from other parts of India are treated as 'exports' and entitled to all export benefits. On the other hand, supplies
from SEZ unit to any person outside SEZ is treated as 'import' by that person and normal custom duty is payable.
SEZ have full freedom of operations within the SEZ and all facilities of import and export are provided within the
zone itself.
SEZ are grown engines that can boost manufacturing, augment exports and generate employment.
SEZ units may be setup for manufacture of goods and rendering services. Trading units are also permitted.
The Government of India had announced a Special Economic Zone scheme in April, 2000 with a view to provide an
internationally competitive environment for exports.
To bring confidence in investors and with a view to impart stability to the SEZ regime thereby generating greater
economic activity and employment through the establishment ofSEZs, the Special Economic Zones Act, 2005, was
passed by Parliament in 2005.
SCOPE AND OBJECTIVES OF THE SEZ ACT, 2005
Question 1] State the salient features of the Special Economic Zones Act, 2005.
Ans.: The salient features of the Special Economic Zones Act, 2005 are as under:
♦ It deals with matters relating to establishment of Special Economic Zone (SEZ) and for setting up of units,
including requirements, obligations and entitlements.
♦ It deals with matters relating to requirements for setting up of off-shore banking units and units in
International Financial Service Center in SEZ.
♦ Single window clearance mechanism.
♦ Establishment of an Authority for each SEZ set up by the Central Government to impart greater
administrative autonomy.
♦ Designation of Special Courts and single enforcement agency to ensure speedy trial and investigation of
notified offences committed in SEZ.
Ans.: The objectives of the Special Economic Zones Act, 2005 are as under:
♦ To generate additional economic activities.
♦ To promote export of goods and services.
♦ To promote investment from domestic and foreign resources.
♦ To provide easy and single window clearance to the foreign investors.
♦ To create additional employment opportunities.
♦ To develop infrastructure facilities.
Question 3] Write a short note on: Special Economic Zone (SEZ)
CS (Inter) - Dec 2005 (3 Marks), Dec 2006 (3 Marks) CS (Inter) - June 2007 (5 Marks)
Special Economic Zones are engines of growth. Discuss. CS (Executive) - June 2014 (5 Marks)
Ans.: It is not the first time that India has tried to develop its SEZs. The first wave of export zones started in year
1965 and ended in year 2000 with little success. The prospects are better this time. The current policy targets private
investment in SEZ development and offers several lucrative incentives and features that were not available in
previous initiatives.
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These early initiatives were also not supported by any legislative framework. Special legislation, the SEZ Act, was
enacted for the first time in 2005. The Act evoked immense interest among investors as it provided confidence,
stability and the correct incentives.
But the government dealt a significant blow to SEZs in 2012 when it rolled back key tax incentives, including the
Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT), offered to investors.
SEZs are strategic locations which address structural and institutional bottlenecks arising from infrastructural
deficiencies, procedural complexities, bureaucratic hassles and other restrictive policies common in developing
countries like India. They offer an enabling investment climate to attract both off-shoring and outsourcing activities.
Reviving manufacturing is one of the biggest development challenges that India faces today. The entry and
integration of its firms into global value chains can help create the industrial dynamism that India needs.
Even though 60% of zones are in the IT sector, almost 85% of SEZ land is used in manufacturing. SEZs have been
instrumental in promoting new industries such as biotechnology, renewable energy, aviation, electronic and sports
shoes. Thus, SEZs have the potential to be a major growth engine for India.
Question 4] Discuss the scope and applicability of the Special Economic Zones Act, 2005.
Ans.: Extent and Scope [Section 1]: The Special Economic Zones Act, 2005 is an Act to provide for the establishment,
development and management of the Special Economic Zones for the promotion of exports and for matters
connected therewith or incidental thereto. It extends to the whole of India.
Act to have overriding effect [Section 52]: The provisions of the Special Economic Zones Act, 2005 shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any
instrument having effect by virtue of any law.
DEFINITIONS
Question 5] Define the term 'export' as per the Special Economic Zones Act, 2005.
Ans.: Export [Section 2(m)]: Export means -
(i) Taking goods, or providing services, out of India, from SEZ, by land, sea or air or by any other mode, whether
physical or otherwise or
(ii) Supplying goods, or providing services, from the DTA to a Unit or Developer or
(iii) Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different
SEZ.
Clause (i): In order to constitute export, goods or services must be taken out of India.
Clause (ii): It is the case of deemed export where goods and services are provided by unit in DTA to unit in SEZ.
Clause (iii): Supplying goods or providing services one unit in SEZ to another unit in SEZ or units in other SEZ is treated
as export though the goods or services are not taken outside the India.
Question 6] Define the term 'import' as per the Special Economic Zones Act, 2005.
Ans.: Import [Section 2(o)]: Import means -
(i) Bringing goods or receiving services, in SEZ, by a Unit or Developer from a place outside India by land, sea or
air or by any other mode, whether physical or otherwise or
(ii) Receiving goods, or services by a Unit or Developer from another Unit or Developer of the same SEZ or a
different SEZ.
Clause (i): In order to constitute import, goods or services must be taken to India from the foreign country.
Clause (ii): Receiving goods or services from one unit in SEZ by another unit in SEZ or by units in other SEZ is treated
as import though the goods or services are not taken outside the India.
Reading Clauses (iii) and (ii) of the definition of'export' and 'import' supply of goods or services from one unit in SEZ
to another unit in SEZ is a import for the unit receiving such goods or services and export for the unit which supply
goods or services.
Question 7] Define the term 'infrastructure facilities' as per the Special Economic Zones Act, 2005.
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Ans.: Infrastructure Facilities [Section 2(p)]: Infrastructure facilities mean industrial, commercial or social
infrastructure or other facilities necessary for the development of SEZ or such other facilities which may be
prescribed.
Question 8] Define the term 'manufacture' as per the Special Economic Zones Act, 2005.
Ans.: Manufacture [Section 2(r)]: Manufacture means to make, produce, fabricate, assemble, process or bring into
existence, by hand or by machine, a new product having a distinctive name, character or use and shall include
processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes
agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture
and mining.
The term 'manufacture' has been given extended meaning under the Act and includes certain process which really
does not amount to manufacture in general parlance. For example refrigeration is really not a 'manufacture' as no
new product emerges yet it is treated as manufacture under the Act.
Question 9] Define the term 'offshore Banking Unit' as per the Special Economic Zones Act, 2005.
Ans.: Offshore Banking Unit [Section 2(u)]: Offshore Banking Unit means a branch of a bank located in SEZ and
which has obtained the permission under Section 23(l)(a) of the Banking Regulation Act, 1949.
In simple words, branch in Special Economic of bank which is incorporated under the laws of foreign country is
known as Offshore Banking Unit. Such foreign bank has to take a permission of RBI to open a branch in SEZ under
the Banking Regulation Act, 1949.
Ans.: Person [Section 2(v)]: Person includes -
(a) An individual, whether resident in India or outside India,
(b) HUF
(c) Cooperative society
(d) A company, whether incorporated in India or outside India
(e) A firm
(f) Proprietary concern
(g) An association of persons or body of individuals, whether incorporated or not
(h) Local authority
(i) Any agency, office or branch owned or controlled by individual, HUF, co-operative, association, body, authority
or company.
Question 11] Define the term 'Service' as per the Special Economic Zones Act, 2005.
Ans.: Services [Section 2(z)]: Services means such tradable services -
(i) which are covered under the General Agreement on Trade in Services annexed as IB to the Agreement
establishing the WTO concluded at Marrakesh on the 15th day of April, 1994;
(ii) which may be prescribed by the Central Government for the purposes of the Act and
(iii) which earn foreign exchange.
ESTABLISHMENT OF SPECIAL ECONOMIC ZONE
Question 12] Who can set up SEZs? Also state the procedure for setting up Special Economic Zone? * 1
Ans.: Procedure for making proposal to establish Special Economic Zone [Section 3]:
(1) A SEZ may be established, either jointly or severally by the Central/State Government, or any person for
manufacture of goods or rendering services or for both or as a Free Trade and Warehousing Zone.
(2) Any person, who intends to set up SEZ may make a proposal to the State Government for the purpose of
setting up the SEZ after identifying the area.
(3) A person who intends to set up SEZ, may make a proposal to the Board for the purpose of setting up the SEZ.
In case where a proposal is directly received from a person, the Board may grant approval and after receipt of such
approval, the person concerned shall obtain the concurrence of the State Government within the prescribed period.
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(4) A State Government can also set up SEZ. It should identify the area for SEZ and forward the proposal to the
Board for the purpose of setting up the SEZ.
However, the Central Government may suo motu set up and notify the Special Economic Zone -
(a) After consulting the State Government concerned;
(b) Without referring the proposal for setting up the SEZ to the Board;
(c) After identifying the area.
(5) Every proposal shall be made in prescribed form and in prescribed manner.
(6) If the State Government receives the proposal for SEZ, it has to forward the same to the Board along with its
recommendations within prescribed period.
(7) The Board may approve the proposal subject to such terms and conditions as it may deem fit. The Board can
also modify or reject the proposal.
(8) The Central Government may prescribe the following requirement for establishment of a SEZ, namely:
(a) The minimum area of land and other terms and conditions subject to which the Board shall approve, modify
or reject any proposal.
(b) The terms and conditions, subject to which the Developer shall undertake the authorized operations and his
obligations and entitlements. However, different minimum are of land and other terms and conditions may be
prescribed by the Central Government for a class or classes of SEZs.
(9) If the Board approves the proposal without any modification, it shall communicate the same to the Central
Government.
If the Board approves the proposal with modifications, it shall communicate such modifications to the person or the
State Government concerned and if such modifications have been accepted by such person or the State
Government, the Board shall communicate the approval to the Central Government.
If the Board rejects the proposal, it shall record the reasons and communicate the rejection to the Central
Government which shall intimate to the State Government or the person concerned.
(10) The Central Government shall, on receipt of communication under clause (9), grant within prescribed time,
a letter of approval on such terms and conditions and obligations and entitlements as may be approved by the
Board. However, the Central Government may, on the basis of approval of the Board, approve more than one
Developer in SEZ in cases where one Developer does not have in his possession the minimum area of contiguous
land for setting up SEZ and in such cases, each Developer shall be considered as a Developer in respect of the land
in his possession.
(11) Any person who, or a State Government which, intends to provide any infrastructure facilities in the
identified area, or undertake any authorized operation may, after entering into an agreement with the Developer,
make a proposal for the same to the Board for its approval.
(12) Every person or a State Government, whose proposal has been approved by the Board and who, or which,
has been granted letter of approval by the Central Government, shall be considered as a Co-Developer of the SEZ.
(13) After receiving the letter of approval, the Developer may allocate space or built up area or provide
infrastructure services to the approved units in accordance with the agreement entered into by him with the
entrepreneurs of such units.
As on 4.6.2018 there was 419 SEZs in India with 5,146 approved units.
Establishment of SEZ and approval and authorization to operate to, Developer [Section 4]:
After the grant of letter of approval u/s 3(10), the Developer has to submit the exact particulars of the identified
area to the Central Government.
Central Government after satisfying that the requirements u/s 3(8) and other requirements are fulfilled may notify
the specifically identified area in the State as SEZ.
However, existing SEZ shall be deemed to have been notified and established in accordance with the provisions
of the Act and the provisions of the Act shall apply to such SEZ accordingly.
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Question 13] What factors are taken into consideration by the Central Government while notifying any area as
SEZ and discharging its functions under the Special Economic Zones Act, 2005?
Ans.: Guidelines for notifying special Economic Zone [Section 5]: The Central Government, while notifying any area
as SEZ or an additional area to be included in the SEZ and discharging its functions under the Act, shall be guided by
the following:
(a) Generation of additional economic activity.
(b) Promotion of exports of goods and services.
(c) Promotion of investment from domestic and foreign sources.
(d) Creation of employment opportunities.
(e) Development of infrastructure facilities.
(f) Maintenance of sovereignty and integrity of India.
(g) Maintenance of the security of the State.
(h) Maintenance of friendly relations with foreign States.
Question 14] Write a short note on: Processing and non-processing areas in SEZ
Ans.: Processing and non-processing areas [Section 6]: The areas falling within the SEZs may be demarcated by the
Central Government or any authority specified by it as -
(a) The processing area for setting-up Units for activities, being the manufacture of goods, or rendering services;
or
(b) The area exclusively for trading or warehousing purposes; or
(c) The non-processing areas for activities other than those specified in (a) or (b).
Question 15] Briefly discuss the provisions relating to exemption from taxes and duties available to unit in SEZ
and Developer of SEZ under the Special Economic Zones Act, 2005. * (i)
Ans.: Exemption from taxes, duties or cess [Section 7]: Any goods or services exported out of, or imported into, or
procured from the Domestic Tariff Area by -
(i) A Unit in SEZ or (ii) A Developer shall be exempt from the payment of taxes, duties or cess under all
enactments specified in the First Schedule. However, such exemption is subject to such terms, conditions and
limitations, as may be prescribed.
Amendment to First Schedule [Section 54]:
♦ The Central Government after considering the objects of the Act and by issuing notification add or omit from
the First Schedule any enactment specified therein.
♦ A copy of every notification proposed to be issued shall be laid in draft before each House of Parliament
while it is in session.
♦ If both houses agree in disapproving the issue of the notification then such notification shall not be issued.
♦ If both Houses agree in making any modification, the notification shall be issued only in such modified form
as may be agreed upon by both the House.
FIRST SCHEDULE [Sections 7 & 54]
1. Agricultural Produce Cess Act, 1940
2. Coffee Act, 1942
3. Mica Mines Labour Welfare Fund Act, 1946
4. Rubber Act, 1947
5. Tea Act, 1953
6. Salt Cess Act, 1953
7. Medicinal & Toilet Preparations (Excise Duties) Act, 1955
8. Additional Duties of Excise (Goods of Special Importance) Act, 1957
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9. Sugar (Regulation of Production) Act, 1961
10. Textiles Committee Act, 1963
11. The Produce Cess Act, 1966
12. Marine Products Export Development Authority Act, 1972
13. Coal Mines (Conservation & Development) Act, 1974
14. Oil Industry (Development) Act, 1974
15. Tobacco Cess Act, 1975
16. Additional Duties of Excise (Textile & Textile Articles) Act, 1978
17. Sugar Cess Act, 1982
18. Jute Manufactures Cess Act, 1983
19. Agricultural and Processed Food Products Export Cess Act, 1985
20. Spices Cess Act, 1986
21. Research & Development Cess Act, 1986
CONSTITUTION OF BOARD OF APPROVAL
Question 16] Referring to the provisions of the SEZ Act, 2005, answer the following:
(i) Who is empowered to constitute 'Board of Approval' under the Act?
(ii) What is the duty of the Board?
(iii) What are the power and functions of the Board under the Act?
(iv) Can Board delegate any of its power? If yes, to whom?
Ans.: Constitution of Board of Approval [Section 8]: The Central Government shall, within fifteen days of the
commencement of the Act, by notification, constitute, for the purposes of this Act, a Board to be called the Board
of Approval. This section also provides for composition of Board, term of office of Members, co-option of certain
persons as Members of the Board, its meetings and quorum, etc.
Duties of Board [Section 9(1)]: The Board shall have the duty to promote and ensure orderly development of the
SEZs.
Powers and functions of Board [Section 9]: The powers and functions of the Board are as follows -
(a) To grant approval or reject proposal or to modify proposals for establishment of the SEZ.
(b) To grant approval of authorized operations that can be carried out in the SEZs by the Developer.
(c) To grant of approval to the Developers or Units for foreign collaborations and foreign direct investments, in
the SEZ for its development, operation and maintenance.
(d) To grant approval or reject the proposal for providing infrastructure facilities in SEZ or to modify such
proposals.
(e) To grant a licence to an industrial undertaking subject to provisions of the Industries (Development &
Regulation) Act, 1951.
(f) To suspend the letter of approval granted to Developer and appointment of an Administrator u/s 10(1).
(g) To dispose appeals under sections 15(4) & 16(4) of the Act.
(h) To perform such other functions as may be assigned to it by the Central Government.
Power of Board to decide whether particular activity amounts to manufacture or not [Section 9(3)]: The
Board may decide as to whether a particular activity constitutes manufacture or not if it is required to do so for
purposes of the Act or any other law for the time being in force relating to SEZs. Such decision of the Board shall be
binding on all Ministries and Departments of the Central Government.
Delegation of power to Development Commissioners by the Board [Section 9(4)]: The Board may delegate such
powers and functions as it may deem fit to one or more Development Commissioners for effective and proper
discharge of the functions of the Board.
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Board to be bound by questions of policy of the Central Government [Section 9(5) & (6)]: The Board shall, in
exercise of its powers or the performance of its functions under this Act, be bound by such directions on the
questions of policy as the Central Government may give in writing to it from time to time.
The decision of the Central Government whether a question is one of policy or not shall be final.
Question 17] State the circumstances under which letter of approval granted to the Developer of SEZ can be
suspended? Also discuss the procedure to be adopted by the Board before such suspension.
When Board of Approval is empowered to suspend the letter of approval granted to the Developer under the
Special Economic Zones Act, 2005? CS (Executive) - Dec 2017 (3 Marks)
Ans.: Suspension of letter of approval [Section 10(1)]: The Board shall have a power to suspend the letter
of approval granted to the Developer for a whole or part of his area established as SEZ for a period not exceeding 1
year and appoint an Administrator to discharge the functions of the developer in accordance with the terms and
conditions of the letter of approval and manage the SEZ accordingly. The suspension may be ordered by the Board,
if in its opinion following circumstances exist:
(a) Developer is unable to discharge the functions or perform the duties imposed on him or
(b) Developer has persistently defaulted in complying with any direction given by the Board under this Act; or
(c) Developer has violated the terms and conditions of the letter of approval; or
(d) Developer's financial position is such that he is unable to fully and efficiently discharge the duties and
obligations imposed on him by the letter of approval.
Management of the SEZ to vest in Administrator [Section 10(2)]: Upon appointment of an Administrator, the
management of the SEZ of the Developer shall vest in the Administrator.
Notice to Developer [Section 10(3)]: Letter of approval to Developer cannot be suspended unless the Board gives
him 3 months time to reply. The notice shall specify the grounds on which letter of approval is to be suspended. If
Developer gives reply within period of 3 months, it should be taken into consideration before suspending the letter
of approval.
Imposition of conditions instead of suspension of letter of approval [Section 10(3)]: Instead of suspending the
letter of approval the Board may permit it to remain in force subject to such further terms and conditions as it thinks
fit to impose. Any terms or conditions so imposed shall be binding upon and be complied with by the Developer and
shall be of like force and effect as if they were contained in the letter of approval.
Notice of suspension [Section 10(4)]: In case the Board suspends a letter of approval, it shall serve a notice of
suspension upon the Developer and fix a date on which the suspension shall take effect.
Special Economic Zone to vest in Administrator [Section 10(5)]: Upon suspension of the letter of approval, the SEZ
shall vest in the Administrator for a period not exceeding 1 year or up to the date on which his letter of approval for
such SEZ is transferred, whichever is earlier.
Transfer to another Developer [Section 10(6)]: Where the Board has given notice for suspension of letter of
approval, the Developer may, after prior approval of the Board, transfer his letter of approval to any person who is
found eligible by the Board for grant of such approval.
DEVELOPMENT COMMISSIONER
Question 18] Who can appoint the Development Commissioner for the Special Economic Zone?
Ans.: Development Commissioner [Section 11]:
(1) The Central Government may appoint any of its officers not below the rank of Deputy Secretary to the
Government of India as the Development Commissioner of one or more SEZs.
(2) The Central Government may appoint such officers and other employees as it considers necessary to assist
the Development Commissioner in the performance of his functions in the SEZs established by a Developer on such
terms and conditions as it deems fit.
(3) Every Development Commissioner, officers and other employee shall be entitled to such salary and
allowances and subject to such terms and conditions of service in respect of leave, pension, provident fund and
other matters as may, from time to time, be specified by the Central Government.
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Question 19] Discuss briefly powers and functions of the Development Commissioner under the Special Economic
Zones Act, 2005.
Discuss the functions of the Development Commissioner under the Special Economic Zones Act, 2005.
Ans.: Every Development Commissioner shall take all steps in order to discharge his functions under the Act to
ensure speedy development of the SEZ and promotion of exports. [Section 12(1)]
Functions of Development Commissioner [Section 12(2)]: Functions of Development Commissioner are as follows
-
(a) To guide the entrepreneurs for setting up of Units in the SEZ.
(b) To ensure and take suitable steps for effective promotion of exports from the SEZ.
(c) To ensure proper co-ordination with Central or State Government Departments or agencies.
(d) To monitor the performance of the Developer and the Units in SEZ.
(e) To discharge such other functions as may be assigned to him by the Central Government under the Act or
any other law for the time being in force.
(f) To discharge such other functions as may be delegated to him by the Board.
Development Commissioner to be in overall charge of the SEZ [Section 12(3)]: Every Development Commissioner
shall be overall in charge of the SEZ.
He shall exercise administrative control and supervision over the officers and employees including the officials
deputed to such Special Economic Zone to discharge any of the functions under the Act.
Delegation of powers to Development Commissioner by the Government [Section 12(4)]: Every Development
Commissioner shall discharge such functions and exercise such powers as may be delegated to him by a general or
special order by the Central Government or the State Government concerned.
Power to call information from Developer or unit in SEZ [Section 12(5)]: Every Development Commissioner may
call for such information from a Developer or Unit from time to time as may be necessary to monitor the
performance of the Developer or the Unit in SEZ.
Delegation of powers to subordinates by the Development Commissioner [Section 12(6)]: The
Development Commissioner, may, delegate any or all of his powers or functions to any of the officers employed
under him.
SINGLE WINDOW CLEARANCE
Question 20] Examining the provisions of the Special Economic Zones Act, 2005, answer the following:
(i) Who has power to constitute Approval Committee?
(iit) Whether Approval Committee can invite to its meetings any expert or any other persons?
(ii) What is the quorum for the meeting of Approval Committee?
(iv) Who can authenticate the orders and decisions of the Approval Committee?
Ans.: Constitution of Approval Committee [Section 13(1)]: The Central Government shall, by notification,
constitute Approval Committee for every SEZ to exercise the powers and perform the functions specified in Section
14.
Composition of Approval Committee [Section 13(2)]: Every Approval Committee shall consist of -
(a) The Development Commissioner - Chairperson, ex-officio.
(b) Two officers of the Central Government to be nominated by the Central Government - Members, ex-officio.
(c) Two officers of the Central Government to represent the Ministry or Department dealing with revenue -
Members, ex-officio.
(d) One officer of the Central Government to be nominated by that Government to represent the Ministry or
Department dealing with the economic affairs (financial services) - Members, ex-officio;
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(e) Two officers of the State Government concerned to be nominated by that Stated Government - Member, ex-
officio.
(f) A representative of the Developer concerned - Special invitee.
Invitees at the meeting of Approval Committee [Section 13(3)]: For the purpose of exercising its powers and
performing its functions, the Approval Committee may invite to its meetings, such persons as the Committee deems
fit, whose assistance or advice it may consider necessary.
Procedure [Section 13(4)]: Every Approval Committee shall meet at such times and places as it considers necessary
and shall have the power to regulate its own procedure.
Quorum & decision at the meeting [Section 13(5)]: One half of the total Members of the Approval Committee shall
form a quorum, and all the acts of the Approval Committee shall be decided by a general consensus of the Members
present.
However, in case the Approval Committee is unable to decide any matter by a general consensus, such matter shall
stand referred to the Board of Approval.
Vacancy in Approval Committee [Section 13(6)]: No act of the Approval Committee shall be called in question on
the ground merely of existence of any vacancy in, or any defect in the constitution of, the Approval Committee.
Orders and decisions of the Approval Committee to be authenticated by the Chairperson [Section 13(7)]: All orders
and decisions of the Approval Committee and all other communications issued by it shall be authenticated by the
signature of the Chairperson or any other member as may be authorized by the Approval Committee in this behalf.
The term of office of an ex-officio Member shall come to an end as soon as he ceases to hold the office by virtue of
which he was so nominated.
Question 21] Briefly discuss the powers and functions of the Approval Committee under the Special Economic
Zones Act, 2005.
Ans.: Powers and functions of Approval Committee [Section 14]: Every Approval Committee may discharge the
functions and exercise the powers in respect of the following matters, namely:
(a) Approve the import or procurement of goods from the Domestic Tariff Area, in the SEZ for carrying on the
authorized operations by a Developer.
(b) Approve the providing of services by a service provider, from outside India, or from the DTA, for carrying on
the authorized operations by the Developer, in the SEZ.
(c) Monitor the utilization of goods or services or warehousing or trading in the SEZ.
(d) Approve, modify or reject proposals for setting up Units for manufacturing or rendering services or
warehousing or trading in the SEZ. However, where the Approval Committee is unable to decide whether a
particular process constitutes manufacture or not, it shall refer the same to the Board of Approval for a decision.
(e) Allow, on receipt of approval u/s 9(2) (c), foreign collaborations and foreign direct investments (including
investments by a person outside India) for setting up a Unit.
(f) Monitor and supervise compliance of conditions subject to which the letter of approval or permission, if any, has
been granted to the Developer or entrepreneur.
(g) Perform such other functions as may be entrusted to it by the Central Government or the State Government
concerned, as the case may be.
In case the developer is Central Government, the approval committee has been empowered to exercise all powers
of the approval committee, until the constitution of Approval Committee.
Question 22] State the provisions of the Special Economic Zones Act, 2005 relating setting up of unit in a special
economic zone.
Ans.: Setting up of Unit [Section 15(1)]: Any person, who intends to set up a Unit for carrying on the authorized
operations in a SEZ, may submit a proposal to the Development Commissioner concerned prescribed form and
containing prescribed particulars.
However, an existing Unit shall be deemed to have been set up in accordance with the provisions of the Act and
such Units shall not require approval again under the Act.
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Submission of proposal by Development Commissioner to Approval Committee [Section 15(2)]: On
receipt of the proposal, the Development Commissioner shall submit the same to the Approval Committee for its
approval.
Procedure to be adopted by Approval Committee [Section 15(3)]: The Approval Committee may, either approve
the proposal without modification, or approve the proposal with modifications subject to such terms and conditions
as it may deem fit to impose. It can also reject the proposal.
However, the Approval Committee shall afford a reasonable opportunity of being heard to the person concerned
while modifying or rejecting a proposal. The Approval Committee must record the reasons in writing if it modify or
reject the proposal.
Appeal to Board on refusal of proposal by the Approval Committee [Section 15(4) to (7)]: Any person aggrieved,
by an order of the Approval Committee, may prefer an appeal to the Board within prescribed time.
No appeal shall be admitted if it is preferred after the expiry of prescribed time. However, an appeal may be
admitted after the expiry of prescribed period if the appellant satisfies the Board that he had sufficient cause for
not preferring the appeal within the prescribed time.
Every appeal shall be in such form and shall be accompanied by a copy of the order appealed against and by
prescribed fees.
The procedure for disposing of an appeal shall be such as may be prescribed. However, before disposing of an
appeal, the appellant shall be given a reasonable opportunity of being heard.
Power of Central Government to prescribe certain requirements [Section 15(8)]: The Central Government may
prescribe -
(a) The requirements (including the period for which a Unit may be set up) subject to which the Approval
Committee shall approve, modify or reject any proposal.
(b) The terms and conditions, subject to which the Unit shall undertake the authorized operations and its
obligations and entitlements.
Grant a letter of approval [Section 15(9)]: The Development Commissioner may, after approval of the proposal,
grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the
Development Commissioner may authorize. Every such operation so authorized shall be mentioned in the letter of
approval.
Question 23] Under what circumstances letter of approval granted to the entrepreneur in SEZ can be cancelled?
What is responsibility of such entrepreneur on cancellation of letter of approval? Can he make an appeal against
such cancellation?
Ans.: Cancellation of letter of approval to entrepreneur [Section 16(1)]: The Approval Committee may, at any time,
if it has any reason or cause to believe that the entrepreneur has persistently contravened any of the terms and
conditions or its obligations subject to which the letter of approval was granted to the entrepreneur, cancel the
letter of approval.
However, no such letter of approval shall be cancelled unless the entrepreneur has been afforded a reasonable
opportunity of being heard.
No benefits under the Act available after cancellation of approval [Section 16(2)]: Where the letter of approval
has been cancelled, the Unit shall not from the date of such cancellation, be entitled to any exemption, concession,
benefit or deduction available to it, being a Unit, under the Act.
Remission of benefit after cancellation of approval [Section 16(3)]: The entrepreneur whose letter of approval has
been cancelled, shall remit, the exemption, concession, drawback and any other benefit availed by him in respect
of the capital goods, finished goods lying in stock and unutilized raw materials relatable to his Unit, in such manner
as may be prescribed.
Appeal against the cancellation [Section 16(4) & (7)]: Any person aggrieved by an order of the Approval Committee
made, may prefer an appeal to the Board within such time as may be prescribed.
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No appeal shall be admitted if it is preferred after the expiry of prescribed time. However, an appeal may be
admitted after the expiry of the prescribed period if the appellant satisfies the Board that he had sufficient cause
for not preferring the appeal within the prescribed time.
Every appeal shall be in such form and shall be accompanied by a copy of the order appealed against and by such
fees as may be prescribed.
The procedure for disposing of an appeal shall be such as may be prescribed. Before disposing of an appeal, the
appellant shall be given a reasonable opportunity of being heard.
Question 24] Discuss briefly provisions relating to setting up of an Offshore Banking Unit in SEZ as per the
provisions of the Special Economic Zones Act, 2005.
Ans.: Setting up and operation of Offshore Banking Unit [Section 17(1)]: An application for setting up and operation
of an Offshore Banking Unit in SEZ may be made to the RBI in prescribed form and in prescribed manner.
On receipt of an application, the RBI shall, grant permission to such applicant for setting up and operation of an Off-
shore Banking Unit if the RBI is satisfied that the applicant fulfils all the specified conditions.
The RBI may specify the terms and conditions subject to which an Offshore Banking Unit may be set up and operated
in the SEZ by issuing notification.
Question 25] Write a short note on: Setting up of International Financial Services Centre
Ans.: Setting up of International Financial Services Centre [Section 18(1)]: The Central Government may approve
the setting up of an International Financial Services Centre in SEZ and may prescribe the requirements for setting
up and operation of such Center.
However, the Central Government shall approve only one International Financial Services Centre in a Special
Economic Zone.
Guideline for setting up of IFSC [Section 18(2)]: The Central Government may, subject to such guidelines as may be
framed by the RBI, the SEBI, the IRDA and such other concerned authorities, as it deems fit, prescribe the
requirements for setting up and the terms and conditions of the operation of Units in an International Financial
Services Centre.
Question 26] International Financial Services Centre (IFSC) companies are attractive for foreign investment.
Comment. CS (Executive) - June 2018 (5 Marks)
Ans.: Meaning of IFSC: An International Financial Services Centre (IFSC) caters to customers outside the jurisdiction
of the domestic economy. IFSCs are set up in special economic zones as a unit of SEZ or as a special economic zone
after approval from central government, and deal with flows of finance, financial products and services across
borders.
Specified IFSC Public Company: It is an unlisted public company which is licensed to operate by the RBI or the SEBI
or the IRDA from the International Financial Services Centre located in an approved multi services SEZ set-up under
the Special Economic Zones Act, 2005.
Specified IFSC Private Company: It is a private company which is licensed to operate by the RBI or the SEBI or the
IRDA from the International Financial Services Centre located in an approved multi services SEZ set-up under the
Special Economic Zones Act, 2005.
Services offered by IFSC(s):
1. Fund raising services for individuals, corporations and governments.
2. Asset management and global portfolio diversification undertaken by pension funds, insurance companies
and mutual funds.
3. Wealth management.
4. Global tax management and cross-border tax liability optimization, which provides a business opportunity
for financial intermediaries, accountants and law firms.
5. Global and regional corporate treasury management operations that involve fundraising, liquidity
investment and management and asset liability matching.
6. Risk management operations such as insurance and reinsurance.
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7. Merger and acquisition activities among transnational corporations.
In exercise of powers u/s 462(1) of Companies Act, 2013, the MCA has exempted several exemptions to such
International Financial Services Centre companies.
Question 27] Whether it is possible to make single application to obtain licence or permission under one or more
Central Acts for the purpose of setting of SEZ or unit in SEZ?
Ans.: Single application form, return etc. [Section 19]: The Central Government may, if required -
(a) Prescribe a single application form for obtaining any licence, permission or registration or approval by a
Developer, or an entrepreneur under one or more Central Acts.
(b) Authorize the Board, the Development Commissioner or Approval Committee, to exercise the powers of the
Central Government on matters relating to the development of SEZ or setting up and operation of units.
(c) Prescribe a single form for furnishing returns or information by a Developer or an entrepreneur under one
or more Central Acts.
Question 28] Who has power to appoint agency or officer to see that whether there is compliance with the
provisions of the Central Acts by the Developer or an entrepreneur of unit in SEZ?
Ans.: Agency to inspect [Section 20]: The Central Government may specify any officer or agency to carry out surveys
or inspections by issuing notification for securing of compliance with the provisions of any Central Act by a Developer
or an entrepreneur. Such officer or agency shall submit verification and compliance reports in specified manner and
within specified time as per the said notification.
Single enforcement officer or agency for notified offences [Section 21]: The Central Government may, by
notification, specify any act or omission made punishable under any Central Act, as notified offence for purposes of
the Act.
The Central Government may, by general or special order, authorize any officer or agency to be the enforcement.
Question 29] Describe the provisions relating to investigation and search of a unit in SEZ under the Special
Economic Zones Act, 2005.
Ans.: Investigation, inspection and search or seizure [Section 22]: The agency or officer, specified u/s 20 or 21 may
carry out the investigation or search or seizure in SEZ or in Unit in SEZ if such agency or officer has reasons to believe
that a notified offence has been committed or is likely to be committed in the Special Economic Zone. Reasons for
such investigation or search must be recorded in writing.
No investigation, search or seizure shall be carried out in SEZ by any agency or authorized officer other without prior
approval of the Development Commissioner concerned.
However, prior approval is not required in cases where such investigation or search authorized by the Central
Government.
Question 30] Write a short note on: Designated Courts
Ans.: Designated Courts to try suits and notified offences [Section 23]: The State Government designate one or
more Courts for SEZ located in that State with the concurrence of the Chief Justice of the High Court of that State -
(a) To try all suits of a civil nature arising in the SEZ, and
(b) To try notified offences committed in the SEZ.
No Court other than the Designated Court shall try any suit or conduct the trial of any notified offence.
Question 31] XYZ Ltd. having a unit in Special Economic Zone is not satisfied with the order passed by the
Designated Court. The Company has decided to go for appeal. As Company Secretary of the Company advise the
board of directors your company provisions relating to filing of an appeal under the Special Economic Zones Act,
2005.
Ans.: Appeal to High Court [Section 24]: Any person aggrieved by any decision or order of the Designated Court
may file an appeal to the High Court within 60 days from the date of communication of the decision or order of the
Designated Court. Such appeal can be filed on any 'question of fact' or 'question of law' arising out of orders of
Designated Court.
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However, the High Court may allow a further period not exceeding 60 days to file an appeal if it is satisfied that the
appellant was prevented by sufficient cause from filing an appeal within the said period of 60 days.
Question 32] What are the liabilities and penalties for offences by company under the Special Economic Zones
Act, 2005?
Ans.: Offences by companies [Section 25]: Where an offence has been committed by a company, every person,
who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct
of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly
However, nothing shall render any such person liable to any punishment provided for the offence, if he has proved
that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the
commission of such offence.
Where an offence has been committed by a company and it is proved that the offence has been committed with
the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of
the offence and shall be liable to be proceeded against and punished accordingly.
(a) Company means any body corporate and includes a firm or other association of individuals.
(b) Director in relation to a firm means a partner in the firm.
SPECIAL FISCAL PROVISIONS FOR SPECIAL ECONOMIC ZONES
Question 33] Prepare a brief note for the directors of your company regarding exemption or benefits available to
the Developer and entrepreneur under the Special Economic Zones Act, 2005.
Ans.: Exemptions, drawbacks and concessions to Developer and entrepreneur [Section 26(1)]: Every Developer
and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions:
(а) Exemption from import duties: Exemption is available to Developer and the entrepreneur in respect of
duties of customs under the Customs Act, 1962 or the Custom Tariff Act, 1975 or any other law for the time being
in force on goods imported into or service provided in a SEZ or to a Unit in SEZ and to carry on the authorized
operations.
(б) Exemption from export duties: Exemption is available to Developer and the entrepreneur in respect of
duties of customs under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law for the time being
in force on goods exported from or services provided from SEZ or from by a Unit in SEZ to any place outside India.
(c) Exemption for Excise Duty: Exemption is available from duties of excise under the Central Excise Act, 1944
or the Central Excise Tariff Act, 1985 or any other law for the time being in force, on goods brought from DTA to
SEZ/Unit in SEZ to carry on the authorized operations.
(d) Drawbacks: Drawback and other benefits are available on goods brought or services provided from the DTA
into SEZ/Unit in SEZ. Similar benefits are also available for services provided in SEZ/ Unit in SEZ by the service
providers located outside India to carry on the authorized operations by the Developer or entrepreneur.
(e) Exemption from Service Tax: Exemption is available from service tax under Chapter-V of the Finance Act,
1994 on taxable services provided to a Developer or Unit to carry on the authorized operations in SEZ.
(f) Exemption from Securities Transaction Tax (STT): Exemption is available from the STT leviable u/s 98 of the
Finance Act, 2004 in case the taxable securities transactions are entered into by a nonresident through the
International Financial Services Centre.
(g) Exemption from Central Sales Tax (CST): Exemption is available from the levy of taxes on the sale or purchase
of goods other than newspapers under the Central Sales Tax Act, 1956 if such goods are meant to carry on the
authorized operations by the Developer or entrepreneur.
Conditions for availing exemptions [Section 26(2)]: The Central Government may prescribe the manner in which
and the terms and conditions subject to which the exemptions, concessions, drawback or other benefits shall be
granted to the Developer or entrepreneur.
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Question 34] Provisions of the Income-tax Act, 1961 applies to unit in SEZ subject to certain modification.
Comment.
Ans.: Provisions of the Income-tax Act, 1961 to apply with certain modification [Section 27]: The provisions of the
Income-tax Act, 1961 shall apply to or in relation to the Developer or entrepreneur for carrying on the authorized
operations in SEZ or Unit in SEZ subject to the modifications specified in the Second Schedule.
Question 35] "Goods brought into SEZ can be kept in SEZ for unlimited time without any conditions". Do you
agree with this statement?
Ans.: Duration of goods/services in Special Economic Zones [Section 28]: The Central Government may prescribe
the period during which any goods brought into, or services provided in, any Unit or SEZ without payment of taxes,
duties or cess shall remain or continue to be provided in such Unit or SEZ.
Question 36] Goods manufactured in SEZ can be removed without any restriction. Do you agree?
Ans.: Transfer of ownership and removal of goods [Section 29]: The transfer of ownership in any goods brought
into, or produced or manufactured in, any Unit or SEZ or removal thereof from such Unit or Zone shall be allowed,
subject to such terms and conditions as the Central Government may prescribe.
Question 37] Goods removed from DTA to SEZ is chargeable to import duties. Comment.
Ans.: Domestic clearance by Units [Section 30]: If any goods are removed from SEZ to DTA it is deemed import.
Such deemed import shall be chargeable to import duties including anti-dumping, countervailing and safeguard
duties equivalent to duties that are levied for the goods imported from outside the India.
Rate and tariff valuation on date of removal will have to be taken into account for the purpose of calculation of
duties on such deemed import. If the date of removal is not ascertainable duties will be levied as applicable on the
date of payment such duties.
SPECIAL ECONOMIC ZONE AUTHORITY
Question 38] Write a short note on: Special Economic Zone Authority
Ans.: Constitution of Authority [Section 31(1)]: The Central Government shall constitute by notification in the
Official Gazette for every Special Economic Zone an Authority to be called the (name of the Special Economic Zone)
Authority to exercise the powers and functions assigned to it under the Act.
Authority to be body corporate [Section 31 (2)]: Every Authority shall be a body corporate having perpetual
succession and a common seal, with a power to acquire, hold and dispose of property, both movable and
immovable, and to contract and shall by the said name sue and be sued.
Head Office [Section 31(3)]: The head office of every Authority shall be at such place as the Central Government
may specify in the notification.
Branch Office [Section 31(4)]: Any Authority may, with the previous approval of the Central Government, establish
branch offices at other places in India.
Composition of the Authority [Section 31(5)]: Every Authority shall consist of -
(a) The Development Commissioner of the SEZ over which the Authority exercises its jurisdiction - Chairperson,
ex-officio.
(b) Two officers of the Central Government to be nominated by that Government having knowledge of, or
experience in, dealing with matters relating to SEZs - Members, ex-officio;
(c) An officer of the Government of India in the Ministry or Department dealing with Commerce on matters
relating to Special Economic Zone - Member, ex-officio;
(d) Not more than two persons being entrepreneurs or their nominee, to be nominated by the Central
Government - Members, ex-officio.
Term of office & vacancy [Section 31(6)]: The term of office of the Members of an Authority (other than ex-officio
Members) and the manner of filling of vacancies shall be such as may be prescribed.
Assistance by the Authority [Section 37(7)]: An Authority may associate with itself in such manner, subject to such
conditions and for such purposes as may be prescribed, any person whose assistance or advice it requires in
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discharging its functions effectively and that person shall be entitled to receive such allowances or fees as may be
fixed by the Authority.
Quorum and decision by Authority [Section 31(8)]: One third of the total Members of the Authority shall form a
quorum and all the acts of the Authority shall be decided by a majority of the Members present.
Act of an Authority not invalidated due to defect etc. [Section 31(9)]: Act or proceeding of an Authority shall not
be invalidated merely by reason of -
(a) Any vacancy in, or any defect in the constitution of, the Authority; or
(b) Any defect in the appointment of a person acting as a Member of the Authority; or
(c) Any irregularity in procedure of Authority (not affecting the merits of the case).
Meetings of Authority [Section 31(10)]: Every Authority shall meet at such times and places and shall observe
prescribed rules of procedure in regard to the transaction of business at its meetings (including quorum at such
meetings).
Question 39] Write a short note on: Functions of Special Economic Zone Authority
Ans.: Functions of Authority [Section 34]: Subject to the provisions of the Act, it shall be the duty of each Authority
to undertake such measures as it thinks fit for the development, operation and management of the SEZ for which it
is constituted.
In addition to above, the Authority shall discharge following functions:
(a) To develop infrastructure in the SEZ.
(b) To promote exports from the SEZ.
(c) To reviewing the functions and performance of the SEZ.
(d) To levy user or service charges or fees or rent for the use of properties belonging to the Authority.
(e) To perform other prescribed functions.
Question 40] Write a short note on: Submission of return by SEZ Authority
Ans.: Returns & Reports [Section 39]: Every Authority shall furnish to the Central Government within prescribed
time and in prescribed form such returns/statements/particulars in regard to the promotion and development of
exports and the operation and maintenance of the SEZ and Units as directed by the Central Government.
Every Authority shall submit to the Central Government a report in prescribed form and before prescribed date
giving a true and full account of its activities, policy and its programmes during the financial year after the end of
such financial year
After receipt of such report the Central Government shall lay the report before each House of Parliament.
Question 41] Under which circumstances the Central Government can supersede the SEZ Authority as per the
provisions of the Special Economic Zones Act, 2005?
Ans.: Power to supersede Authority [Section 40(1)]: The Central Government shall have power to supersede the
SEZ Authority by issuing notification for a period not exceeding 6 months if the Central Government is of the opinion
that, the Authority
♦ is unable to perform duties imposed on it by or under the Act;
♦ has persistently made default in the performance of the duties.
♦ has exceeded or abused its powers;
♦ has wilfully or without sufficient cause has failed to comply with any direction issued by the Central
Government u/s 38
Opportunity of being heard: Before issuing such notification, the Central Government shall give reasonable time to
that Authority to make representation against the proposed supersession and shall consider the representations of
the Authority.
Effect of notification [Section 40(2)]: Upon the publication of a notification superseding the Authority -
(a) The Chairperson and other Members of the Authority shall vacate their offices.
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(b) All the powers, functions and duties of the Authority shall be exercised and performed by such person(s) as
the Central Government may direct.
(c) All property vested in the Authority shall vest in the Central Government.
Extension of the period of supersession and reconstitution of Authority [Section 40(3)]: On the expiration of the
period of supersession, the Central Government may -
(a) Extend the period of supersession for such further period not exceeding 6 months; or
(b) Reconstitute the Authority.
Question 42] When and which type of dispute can be referred to arbitration under the Special Economic Zones
Act, 2005?
Ans.: Reference of dispute [Section 42(1)]: Following disputes of civil nature shall be referred to arbitration if Special
Court to try suits in respect of such dispute had not been designated -
(a) Any dispute arising among two or more entrepreneurs
(.b) Any dispute arising among two or more Developers
(c) Any dispute arising between an entrepreneur and a Developer in SEZ.
However, no dispute shall be referred to the arbitration on or after the date of the designation of Special Court(s)
u/s 23.
Appointment of arbitrator by the Central Government [Section 42(2)]: Where a dispute has been referred to
arbitration, the same shall be settled or decided by the arbitrator to be appointed by the Central Government.
Application of provisions of the Arbitration & Conciliation Act, 1996 [Section 42(3)]: The provisions of the
Arbitration & Conciliation Act, 1996 shall apply to all arbitration under the Act as if the proceedings for arbitration
were referred in settlement or decision under provisions of that Act.
Limitation for dispute required to be referred for arbitration [Section 43]: The period of limitation in the case of
any dispute which is required to be referred to arbitration shall be regulated by the provisions of the Limitation Act,
1963, as if the dispute was a suit and the arbitrator is Civil Court.
The arbitrator may admit a dispute after the expiry of the period of limitation, if the applicant satisfies the arbitrator
that he had sufficient causes for not referring the dispute within such period.
Question 43] To whom the competent authority should communicate if anything is required to be communicated
under the SEZ Act, 2005?
Ans.: Person to whom a communication may be sent [Section 45]: A communication by any competent authority
or person under the Act may be sent to the person who has the ultimate control over the affairs of the SEZ or Unit
or where the said affairs are entrusted to a manager, director, chairperson, or managing director, or to any other
officer, such communication may be sent to them.
Question 44] Write a short note on: Requirement as to identity card under the SEZ Act, 2005
Ans.: Identity Card [Section 46]: Every person, whether employed or residing or required to be present in SEZ, shall
be provided an identity card by every Development Commissioner of such SEZ, in prescribed form and containing
prescribed particulars.
Question 45] Explain the provisions relating to power of Central Government to modify the provisions of the SEZ
Act.
Ans.: Power to modify provisions of the SEZ Act or other enactments in relation to SEZs [Section 49(1)]: The Central
Government may direct by notification that any of the provisions of the Act (other than Sections 54 & 56) or any
other Central Act or any rules or regulations made thereunder or any notification or order issued or direction given
thereunder (other than the provisions relating to making of the rules or regulations) specified in the notification—
(a) shall not apply to SEZ or a class of SEZs or all SEZs; or
(b) shall apply to SEZ or a class of SEZs or all SEZs only with such exceptions, modifications and adaptation, as
may be specified in the notification.
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Power do not include to modify labour laws: Power stated above do not include to modify any Central Act or any
rules or regulations of the matters relating to trade unions, industrial and labour disputes, welfare of labour
including conditions of work, provident funds, employers' liability, workmen's compensation, invalidity and old age
pensions and maternity benefits.
Procedure for approval of notification by Parliament [Section 49(2)]: A copy of every notification proposed shall
be laid in draft before each House of Parliament, while it is in session, for a total period of 30 days.
♦ If both houses agree in disapproving the issue of the notification then such notification shall not be issued.
♦ If both Houses agree in making any modification, the notification shall be issued only in such modified form as
may be agreed upon by both the House.
Question 46] Discuss the power of State Government to notify policies for the purpose giving effect to the
provisions of the Special Economic Zones Act, 2005.
Ans.: Power of State Government to grant exemption [Section 50]: For the purposes of giving effect to the
provisions of the Act, the State Government may notify policies for Developers and Units and take suitable steps for
enactment of any law -
(a) Granting exemption from the State taxes and duties to the Developer or the entrepreneur;
(b) Delegating the powers conferred upon any person or authority under any State Act to the Development
Commissioner in relation to the Developer or the entrepreneur.
Question 47] Special Economic Zone is territory within the India but treated as outside the India. Elaborate.
Ans.: SEZs to be ports, airports, inland container depots, land stations, etc. in certain cases [Section 53]: A Special
Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of
India for the purposes of undertaking the authorized operations.
A Special Economic Zone shall be deemed to be a port, inland container depot, land station and land customs
stations u/s 7 of the Customs Act, 1962 with effect from such date as Central Government may notify in this behalf.
The Central Government may notify different dates for different Special Economic Zones.
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11
CHAPTER
COMPETITION ACT, 2002
INTRODUCTION: The basic purpose of the Competition Act, 2002 is to ensure free and fair competition in market
and to prevent practices having adverse effect on competition. Thus, the Competition Act, 2002 was enacted to
make provision for anti-competitive agreements, prevent enterprises form abusing of its dominant position, to
regulate the Combination, Competition Advocacy, establishing Competition Commission of India. The Competition
Act also covers all commercial activities of Government-related bodies except sovereign functions of the
Government. The Act extends to the whole of India except the State of Jammu & Kashmir.
OBJECTIVE & DEFINITION
Question 1] What do you understand by the word 'competition' in the market? In what ways 'competition kills
competition'? Discuss briefly. CS (Executive) - Dec 2015 (8 Marks)
Ans.: The term 'competition' is not defined under the Competition Act, 2002. Competition is a complex and technical
subject which does not lend itself to easy summary or concise clarification. Competition can be defined as a process
of economic rivalry between market players to attract customers.
In the corporate world, the term is generally understood as a process whereby the economic enterprises compete
with each other to secure customers for their product. In the process, the enterprises compete to outsmart their
competitors, sometimes to eliminate their rivals. Competition in the sense of economic rivalry is unstable and has
a natural tendency to give way to a monopoly. Thus, competition kills competition.
Question 2] Write a note on the evolution and development of Indian competition laws.
Ans.: The first Indian competition law was the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act).
The genesis of the MRTP Act, 1969 is traceable to Articles 38 and 39 of the Constitution of India. The Directive
Principle of State Policy in those Articles lays down, inter alia that the State shall strive to promote the welfare of
the people by securing and protecting as effectively, as it may, a social order in which justice - social, economic and
political- shall inform all the institutions of the national life, and the State shall, in particular, direct its policy towards
securing:
1. That the ownership and control of material resources of the community are so distributed as best to subserve
the common good; and
2. That the operation of the economic system does not result in the concentration of wealth and means of
production to the common detriment.
Legal framework dealing with competition in India spread over other legislations, besides the Monopolies and
Restrictive Trade Practices Act, 1969, other legislations dealing with competition include Consumer Protection Act,
1986, the Patents Act, 1970 etc.
Question 3] Write a short note on: Objectives of the Competition Act, 2002
Ans.: The Competition Act, 2002 was enacted keeping in view of the economic development of the country:
♦ To ensure free and fair competition in market
♦ To prevent practices having adverse effect on competition
♦ To prevent abuse of dominant position
♦ To declare combination void if it has appreciable adverse effect on competition.
♦ To promote and sustain competition in markets
♦ To protect the interests of consumers
♦ To ensure freedom of trade to participants in markets
♦ To provide for the establishment of a Competition Commission
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♦ To deal with matters connected therewith or incidental thereto.
Question 4] Define the term: Acquisition CS (Inter) - June 2006 (2 Marks)
Ans.: Acquisition [Section 2(a)]: Acquisition means acquiring or agreeing to acquire- (i) Shares, voting rights or
assets of any enterprise or
(ii) Control management or assets of any enterprise The terms 'acquiring' or 'acquisition' are relevant for
"Regulation of Combinations".
Question 5] Define the term: Agreement
Ans.: Agreement [Section 2(b)]: Agreement includes any arrangement or understanding or action in concert
whether or not, such arrangement, understanding or action -
(i) is formal or in writing or
(ii) is intended to be enforceable by legal proceedings
The term 'Agreement' is relevant in the context of Section 3, which envisages that anti-competitive agreements
shall be void and thereby prohibited by the law.
Question 6] An arrangement has been made among the cotton producers that the cotton produced by them will
not be sold to mills below a certain price. The arrangement is in writing but it is not intended to be enforced by
legal proceeding. Examine whether the said arrangement can be considered as an agreement within the meaning
of Section 2(b) of the Competition Act, 2002.
CA (Final) -May 2007 (4 Marks), Nov 2009 (4 Marks)
The mango producers in Lucknow have entered into an arrangement among them whereby they have decided
not to sell the mango below certain price. This arrangement has been made in writing but not intended to be
enforced by any legal proceedings. Referring to the provisions of the Competition Act, 2002, examine whether
the said arrangement shall fall within the jurisdiction of the term "agreement" within the meaning of the said
Act. CA (Final) - Nov 2015 (4 Marks)
Ans.: As per Section 2(b), Agreement includes any arrangement or understanding or action in concert whether or
not, such arrangement, understanding or action is-
(i) formal or in writing or
(ii) intended to be enforceable by legal proceedings
Thus, arrangement between cotton producers that the cotton produced by them will not be sold to mills below a
certain price is an 'agreement' as per Section 2(b) of the Competition Act, 2002 even though it is not intended to be
enforced by legal proceeding. Further above agreement is anti-competitive as per Section 3.
Question 7] Define the term: Cartel CS (Inter) - June 2005 (3 Marks), June 2006 (2 Marks)
CS (Inter) - Dec 2006 (3 Marks), CS (Executive) - Dec 2013 (3 Marks)
Ans.: Cartel [Section2(c)j: Cartel includes an association of producers, sellers, distributors, traders or service
providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution,
sale or price of, or, trade in goods or provision of services.
An agreement in the nature of cartel which limits or controls production, supply, market, technical development,
investments etc. need to be looked as being anti competitive with reference to relevant market.
Examples of Cartel:
(1) All tyre manufacture increasing prices uniformly and simultaneously by mutual agreement.
(2) Association of transporter fixing prices and prohibiting its members from quoting price below the price fixed
by association.
(3) Trade association asking their members not to sell below the rates announced by it with threat of expulsion
in the event of non-compliance.
All above agreements or arrangements are cartels; they are anti competitive and hence are void.
Question 8] The coconut producers in Tirunelveli (Tamil Nadu) have formed an association to control the
production of coconuts. Referring to the provisions of the Competition Act, 2002, examine whether the said
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association to control the production of coconuts shall fall within the jurisdiction of the term 'Cartel' under the
provisions of the said Act. CA (Final) - Nov 2015 (4 Marks)
Ans.: As per Section 2(c) of the Competition Act, 2002, the term 'Cartel' includes an association of producers, sellers,
distributors, traders or service providers who, by agreement among themselves, limit, control or attempt to control
the production, distribution, sale or price of or trade in goods or provision of services.
The term 'cartel' has an inclusive meaning. Thus, an association formed to control the production of coconuts is
within the aforesaid definition of a cartel. Hence, the association of coconut producers in Tirunelveli in the given
case will be considered as a cartel under the provisions of the Competition Act, 2002.
Question 9] Write a short note on: Conditions conducive to cartelization
Ans.: Cartel includes an association of producers, sellers, distributors, traders or service providers who, by
agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of,
or, trade in goods or provision of services.
Cartels are anti competitive and hence are void.
Some of the conditions that are conducive to cartelization are:
♦ High concentration - few competitors
♦ High entry and exit barriers
♦ Homogeneity of the products (similar products)
♦ Similar production costs
♦ Excess capacity
♦ High dependence of the consumers on the product
♦ History of collusion
Question 10] Lorry Association of India restricted its members in transacting their business with other non-
members of association. Is it cartel agreement? CA (Final) - Nov 2008 (3 Marks)
Ans.: Lorry Association of India restricted its members in transacting their business with other nonmembers of
association is cartel agreement within the meaning of Section 2(c) of the Competition Act, 2002. Such cartel
agreement being anti competitive is void.
Question 11] The orange producers of Nagpur have formed an association to control the production of oranges.
Examine whether it will be considered as a cartel within the meaning of Section 2(c) of the Competition Act, 2002.
Ans.: An association formed to control the production of oranges is cartel agreement within the meaning of Section
2(c) of the Competition Act, 2002. Such cartel agreement being anti competitive is void.
Question 12] Explain the term 'Consumer' as per the Competition Act, 2002.
Whether a person purchasing goods not for personal use, but for resale can be considered as a 'consumer' under
the Competition Act, 2002? CA (Final) - May 2006 (3 Marks)
Ans.: Consumer [Section 2(f)]: Consumer means any person who:
(i) Buys goods for a consideration and includes user of goods whether such purchase of goods is for resale or for any
commercial purpose or for personal use or
(ii) Hires or avails of services for a consideration and includes beneficiary of services whether such hiring or availing
of services is for any commercial purpose or for personal use :
It is to be noted that consideration for goods or services may be paid or promised to be paid or partly paid and
partly promised. Consumer also includes a person who takes goods or services under deferred payment system.
Difference in definition of 'Consumer' as per Competition Act, 2002 & Consumer Protection Act, 1986: If a
person purchases goods or avails of services for commercial purpose, he will be a 'Consumer' as per Competition
Act, 2002, but will not be treated as 'Consumer' under the Consumer Protection Act, 1986.
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Question 13] Explain the term 'Enterprise' as per the Competition Act, 2002.
Ans.: Enterprise [Section 2(h)]: Enterprise means a person or a department of the Government engaged in
- production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of
services or
- investment or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other
securities of any other body corporate,
Enterprise does not include any activity of the Government related to the sovereign functions including all activities
carried on by the Government Departments dealing with atomic energy, currency, defence and space.
Judicial View:
Sovereign functions of Government are excluded from definition of enterprise but Government Departments
performing non-sovereign functions for consideration are subject to jurisdiction of Competition Commission.
Thus, supply of water for irrigation on charging water rate (not water tax) will be covered. [Gir Prasad v.
Government of UP, Comp. Cas. 623 (1996) 3 Comp LJ 286 (MRTPC)]
Question 14] Whether Government Department supplying water for irrigation to the Agriculturists after levying
charges for water supplied (and not a water tax) can be considered as an ‘'Enterprise'?
Ans.: Sovereign functions of Government are excluded from definition of 'Enterprise' but Government Departments
performing non-sovereign functions for consideration are subject to jurisdiction of Competition Commission. Thus,
supply of water for irrigation on charging water rate (not water tax) can be considered as an 'Enterprise' under the
Competition Act, 2002.
Question 15] Explain the term 'Goods' as per the Competition Act, 2002.
Ans.: Goods [Section 2(i)]: Goods means goods as defined in the Sale of Goods Act, 1930 and includes:
♦ Products manufactured, processed or mined
♦ Debentures, stocks and shares after allotment
♦ In relation to goods supplied, distributed or controlled in India, goods imported into India Judicial View:
Goods proposed to be imported in to India are not 'goods'. They become 'goods' only when they are actually
imported into India. [Haridas Exports v. All India Float Glass Manufacturers Association, 2002 AIR SCW 3077]
Question 16] ABC Ltd. made an initial public offer of certain number of equity shares. Examine whether these
shares can be considered as 'Goods' under the Competition Act, 2002 before allotment?
Ans.: As per Section 2(i), Shares after allotment can be considered as goods and not before allotment. Thus, an
initial public offer of certain number of equity shares cannot be considered as goods at the time issuance but after
allotment such shares can be treated as 'Goods' under the Competition Act, 2002.
Question 17] Define the term 'person' as per the Competition Act, 2002.
Ans.: Person [Section 2(p)]: Person includes -
(a) An individual
(b) A Hindu undivided family
(c) A company
(d) A firm
(e) An association of persons
(f) A corporation established under Central, State Act or a Government Company
(g) A body corporate incorporated by or under a law of a foreign country
(h) A co-operative society registered under any Law
(i) Local authority
(j) Every artificial juridical person.
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Meaning of 'Government Company' will be same as defined in the Companies Act, 2013.
Question 18] Define the term 'price' as per the Competition Act, 2002.
Ans.: Price [Section 2(0)]: Price, in relation to sale of goods or supply of services, includes every valuable
consideration, whether direct or indirect, or deferred, and includes any consideration, which relates to sale of any
goods or to performance of any services although ostensibly relating to any other matter or thing.
Question 19] Explain the term 'Relevant Market' as per the Competition Act, 2002.
Ans.: Relevant Market [Section 2(r)]: Relevant market means the market which may be determined by the
Commission with reference to the -
♦ Relevant product market or
♦ Relevant geographic market or
♦ Both the markets.
Relevant market is defined by consumer or purchaser preferences and actions. If purchasers consider two goods to
be close substitutes, those two goods are considered to be in the same relevant market. For example, butter and
margarine can be considered to be in the same relevant market.
In contrast, even if producers consider two goods to be very similar on the ground that they are manufactured on
the same machines, the goods may not be in the same relevant market. For example, even if 13-inch and 14-inch
automobile tyres are made on the same machine, purchasers do not substitute between 13-inch and 14-inch tyres
and thus the two sizes are in two different relevant markets.
Question 20] Explain the term 'Relevant Geographic Market' as per the Competition Act, 2002.
Ans.: Relevant Geographic Market [Section 2(s)]: Relevant geographic market means a market comprising the area
in which the conditions of competition for supply of goods or provision of services or demand of goods or services
are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas.
Question 21] Explain the term 'Relevant Product Market' as per the Competition Act, 2002.
Ans.: Relevant Product Market [Section 2(t)]: Relevant product market means a market comprising all those
products or services which are regarded as interchangeable or substitutable by the consumer, by reason of
characteristics of the products or services, their prices and intended use.
The terms "Relevant Market", "Relevant Geographical Market" & "Relevant Product Market" have relevance:
♦ In determination of the agreements being anti competitive.
♦ In evaluating combinations and dominance of an enterprise or group.
♦ In an agreement in the nature of cartel which limits or controls production, supply, market, technical
development, investments etc. need to be looked as being anti competitive with reference to relevant market
Similarly agreement to share the market or sources of production by way of allocation of geographical area of
market, types of goods or services or number of customers in the market or by any similar way and these need to
be interpreted in the context of the definition of relevant geographical market under Section 2(s).
Question 22] Distinguish between: Relevant Geographic Market & Relevant Product Market
Ans.: Following are the main points of distinction between relevant geographic market & relevant product market:
Points Relevant Geographic Market Relevant Product Market
Meaning The geographic market describes the locations The product market describes the goods or
of the producers or sellers of the product or service.
service.
Criteria The relevant geographic market is determined The relevant product market is determined
by the Competition Authority having regard to according to three criteria:
all or any of the following factors:
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♦ Regulatory trade barriers ♦ Demand-side substitution
♦ Local specification requirements ♦ Supply-side substitution
♦ Potential competition.
Points Relevant Geographic Market Relevant Product Market
♦ National procurement policies

♦ Adequate distribution facilities
♦ Transport costs
♦ Language
♦ Consumer preferences
♦ Need for secure or regular supplies or
rapid after-sales services
Coverage The relevant geographic market describes the The relevant product market dimension entails
geographic area over which substitution takes all those products that are sufficiently close
place. substitutes of the product under investigation.
Section Relevant geographic market is defined in Section Relevant product market is defined in Section
2(s) of the Competition Act, 2002. 2(t) of the Competition Act, 2002.
Question 23] Explain the term 'Service' as per the Competition Act, 2002.
Ans.: Service [Section 2(u)]: Service means service of any description which is made available to potential users and
includes the provision of services in connection with business of any industrial or commercial matters such as
banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material
treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement,
construction, repair, conveying of news or information and advertising.
Difference as per Competition Act, 2002 & Consumer Protection Act, 1986:
♦ The services of industrial or commercial nature are covered under the Competition Act, 2002, whereas
under the Consumer Protection Act, 1986 the services of industrial or commercial nature are not covered for
interpreting 'deficiency in service'. Thus, the relief under the Consumer Protection Act, 1986 has limited scope.
♦ Education has been specifically included in ambit of 'service' thus it comes within the jurisdiction of
Commission.
Question 24] Explain the term 'Shares' as per the Competition Act, 2002.
Ans.: Shares [Section 2(v)]: Shares means shares in the share capital of a company carrying voting rights and
includes-
(i) Any security which entitles the holder to receive shares with voting rights
(ii) Stock except where a distinction between stock and share is expressed or implied.
This definition of shares is much wider than what is provided under the Companies Act, 2013. It implies that not
only shares in the share capital of a company e.g. equity or preference shares are included in the definition of
shares but debentures convertible into shares with voting rights are also included.
Question 25] Explain the term 'turnover' and also state its significance under the Competition Act, 2002.
Ans.: Turnover [Section 2(y)]: Turnover includes value of sale of goods or services.
Significance of the term 'turnover': The definition of the term 'turnover', inter alia, is relevant and significant in
determining whether the combination of merging entities exceeds the threshold limit of the turnover specified in
Section 5. It is also relevant for the purpose of imposition of fines by the Commission.
ANTI COMPETITIVE AGREEMENTS
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Question 26] Write a short note on: Anti-competitive Agreements CS (Inter) - June 2006 (3 Marks)
Ans.: Prohibition on anti-competitive agreements [Section 3(1)]: Any enterprise or association of enterprises or
person or association of persons shall not enter into any agreement of production, supply, distribution, storage,
acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse
effect on competition within India.
Effects of anti-competitive agreements [Section 3(2)]: Any agreement entered into in contravention of the above
provision shall be void.
Question 27] What are the trade practices which are deemed to be anti-competitive agreements?
Mention any five anti-competitive agreements. CS (Executive) - Dec 2013 (5 Marks)
Ans.: Presumed/deemed anti-competitive agreements [Section 3(3)]: Following agreements shall be presumed to
be anti-competitive agreements:
♦ Agreement that directly or indirectly determines purchase or sale prices, (i.e. Resaleprice maintenance)
♦ Agreement that limits or controls production, supply, markets, technical development, investment or
provision of services.
♦ Agreement that shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the market or any other similar
way.
♦ Agreement that directly or indirectly results in bid rigging or collusive bidding.
However, any agreement entered into by way of joint ventures will not be presumed to anti competitive if such
agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or
Agreement that "directly or indirectly determines purchase or sale prices" includes 'retail sale price maintenance'
and hence it is presumed anti competitive agreement, though 'retail sale price maintenance' is covered u/s 3(4).
Question 28] State the type of agreements which are not presumed to be anti-competitive?
Ans.: No presumption as to anti-competitive agreements [Section 3(4)]: In following types of agreement burden is
on the complainant to prove that the agreement is adversely affecting the competition. Thus, there is no
presumption that the agreement is adversely affecting competition. Such agreements are:
♦ Tie-in arrangement
♦ Exclusive supply agreement
♦ Exclusive distribution agreement
♦ Refusal to deal
♦ Resale price maintenance
Question 29] Explain in brief anti-competitive under the Competition Act, 2002?
Ans.: See the answers of earlier three questions.
Question 30] Write a short note on: Resale Price Maintenance
CS (Inter) - Dec 1993 (5 Marks), June 1995 (5 Marks) CS (Inter) –
June 1996 (5 Marks) CS (Executive) - June 2009 (5 Marks)
Ans.: Agreement that directly or indirectly determines purchase or sale prices are known as resale price
maintenance. Such agreements are anti competitive as per Section 3(3).
Resale price maintenance is a form of price fixing. It is type of practice whereby a manufacturer sets the price and
requires wholesaler or retailer to resell products at price quoted by him. Resale price maintenance can be termed
as Vertical restriction'.
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Resale price maintenance means "not to allow resale below certain price or not to sell above a certain price. If the
maximum price is stated, it should be clearly indicated that dealer is free to charge below the maximum indicated
price.
Distinguish between 'Resale Price Maintenance' & 'Direct Price Maintenance': Resale price maintenance is
different from direct price maintenance. In direct price maintenance the manufacturer sells goods through its own
retail shop and fixes the price to be charged. Fixing such price is not prohibited.
Example of 'Resale Price Maintenance':
(1) Any stipulation that the cement dealer should not sell below the stipulated price is a resale price
maintenance practice and is an anti competitive.
(2) Association of lorry owners fixing freight rates and not allowing members of association to charge price
lowers than that fixed by association is anti competitive. [Calcutta Goods Transport Association vs. Truck operators
Union, 1984 CLJ 265]
Judicial Views:
♦ It was held that if any price list is issued it should be made clear that the prices indicated Maximum Retail
Sale Price, which means seller can sale below the price quoted. [DGJR v. Infar (India) Ltd., 1999 35 CLA 250]
♦ Where prices are fixed under the Drugs (Price Control) Order, it can be said to have the force of law and it
is not necessary to mention in the price list that the stockiest/dealers/retailers can sell at prices below the
maximum recommended. [DGIR v. Pfizer Ltd., 2000 37 CLA 364]
Question 31] A manufacture of electrical goods stipulated to his retailer that they should not sell the goods below
the minimum price, nor above the maximum price nor with variation in the stipulated price. Is it resale price
maintenance agreement? Explain. CS (Inter) - June 2000 (5 Marks)
Ans.: Resale price maintenance is a form of price fixing. Resale price maintenance means "not to allow resale below
certain price or not to sell above a certain price. If the maximum price is stated, it should be clearly indicated that
dealer is free to charge below the maximum indicated price. Such agreements are anti-competitive and are void as
per Section 3(3) of the Competition Act, 2002.
Thus, stipulation by manufacture of electrical goods that, "his retailer that they should not sell the goods below the
minimum price, nor above the maximum price nor with variation in the stipulated price" is anti-competitive and is
void as per Section 3(3) of the Competition Act, 2002.
Question 32] State the law relating to tie-up sales and full line forcing. Illustrate your answer to show as to how
a tying agreement affects competition. CS (Inter) - Dec 1993 (10 Marks)
Write a short note on: Full-line forcing CS (Inter) - June 1998 (5 Marks)
Ans.: The term tie-in agreement means any agreement requiring a purchaser of goods, as a condition of such
purchase, to purchase some other goods.
Tie-in agreements are anti competitive as per Section 3(4) and burden is on the complainant to prove that the
agreement is adversely affecting the competition. In such type of agreement there is no presumption that the
agreement is adversely affecting competition.
Examples:
(1) Where a gas distributor requires a consumer to buy a gas stove as a pre condition to obtain connection of
domestic cooking gas. [Chanakaya & Siddharth Gas company, In Re. RTP 11/1985]
(2) Bank asking person to keep fixed deposit with bank while allotting locker, when there is direction from the
RBI not to insist on bank deposit for locker. [In Bank of Rajasthan In Re. (1997) 88 Comp. Gas. 361]
(3) School making it compulsory to buy uniform and books only form its own shop. [Amur Jeevan Public School,
In Re. decided on 1.12.1992 by MRTPC]
(4) Compelling customers who is buying TV sets to also buy voltage stabilizer from the seller. [In Re. United Radio
& Television Co. - RTPE No. 73/1987]
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(5) Merely charging combined rates for advertisement in all editions of the newspaper does not by itself result
in tying-up or full line forcing as no detriment resulted to the party in advertising his product in different language
versions of the publication by paying a combined rate. [Bennett Coleman & Co. Ltd.]
Question 33] Write a short note on: Exclusive Dealing Agreement CS (Inter) - Dec 1996 (5 Marks)
Ans.: Exclusive dealing agreement includes any agreement restricting in any manner the purchaser in the course of
his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.
Examples:
(1) Manufacturer of scooter stipulating that dealer should not deal in any other type of scooter. [Bharatia Cutler
Hammer Ltd. In Re. 1997 24 CLA]
(2) Buyer asking manufacturer not to manufacture identical goods for any other buyer without consent of buyer.
[DGIR v. Studds Accessories Pvt. Ltd. - RTPE 331/1988]
(3) Producer entering into long term contract with artist from giving performance anywhere else.
(4) Agreement that distributor will purchase goods only from the manufacturer or from other as nominated by
him. [DGIR v. Mundipharma AG (1995) 18 CLA 272 (MRTPC)]
(5) Termination of service of agent as he is dealing in competitors goods. [Super Engg. Components In Re. 1997
5 CTJ 28]
Question 34] Write a short note on: Exclusive Distribution Agreement * 1 2
Ans.: Exclusive distribution agreement includes any agreement to limit, restrict or withhold the output or supply of
any goods or allocate any area or market for the disposal or sale of the goods.
Exclusive distribution agreements are anti competitive as per Section 3 (4) and burden is on the complainant to
prove that the agreement is adversely affecting the competition. In such type of agreement there is no presumption
that the agreement is adversely affecting competition.
Examples:
(1) Requiring a distributor not to sell the goods of the manufacturer beyond the prescribed territory is a good
example of exclusive distribution agreement.
(2) Requiring a wholesaler to clear the goods promptly and distribute them to the retailers as approved by the
company and as per the instructions issued by the company from time to time. It was held that such a clause restrict
the choice of the wholesaler to distribute goods to distribute to the retail-
ers approved by the company only and as such it is anti competitive. [DG v. Binny Ltd. & Another, RTP Enq.]
(3) Limiting the area of sales of a dealer by manufacturer through an agreement is anti competitive and
considered to be prejudicial to public interest. [Director General (I&R) v. Voltas Ltd.]
Question 35] Write a short note on: Refusal to deal CS (Inter) - Dec 2000 (5 Marks)
Ans.: Refusal to deal includes any agreement which restricts by any method the persons or classes of persons to
whom goods are sold or from whom goods are bought.
Refusal to deal is anti competitive as per Section 3(4) and burden is on the complainant to prove that the agreement
is adversely affecting the competition. In such type of agreement there is no presumption that the agreement is
adversely affecting competition.
In re: Bombay Footwear (P) Ltd. and Others (MRTP Case), the Commission stated that 'refusal to deal' may take in
its sweep the following types of trade practices:
(a) Horizontal Agreements: It is in the nature of a cartel amongst sellers not to sell goods to a particular person
or class of persons, and amongst the buyers not to purchase goods from a particular person or a class of persons,
or to be purchased only from a few to the exclusion of others.
(b) Vertical Agreement: It is agreement between the seller/manufacturer and the buyer that the latter will sell
the goods only to a particular person or class of persons and not to others. An agreement between manufacturer
and the supplier of raw material that the former shall purchase the raw material only from the latter and not from
any other supplier.
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Examples:
(1) An agreement which provides that the franchisees will not deal in products of goods of similar nature for a
period of 3 years from the date of termination of agreement within a radius of 5 km from showroom. [DGIR v. Titan
industries (2001) 43 CLA 293 MRTPC]
(2) Members of the association passed a resolution restricting its members from purchasing cotton wastes from
the merchants who are not members of the Association and from the mills which sells cotton wastes to such
merchants. [In Re. Bombay Cotton Waste Merchants Association, RTP Enquiry]
(3) The association deciding to boycott the products of Burroughs Welcome (India) Ltd. because of the dispute
over trade discounts. Such boycotts are nothing but refusal to deal which is statutorily recognized to be per se anti
competitive. [In Re. All India Organization of Chemists & Druggists]
Question 36] Poly Ltd., (hereinafter referred to as "purchaser") manufacturer of foot-wears entered into an
agreement with City Traders (hereinafter referred to as "purchaser"), for sale of its products. The agreement
includes, among others, the following clauses:
(i) That the Purchaser shall not deal with goods, products, articles, by whatever name called, manufactured
by any person other than the Seller.
(ii) That the Purchaser shall not sale the goods manufactured by the Seller outside the municipal limits of the
city of Secunderabad.
(iii) That the Purchaser shall sale the goods manufactured by the Seller at the price as embossed on the price
label of the footwear. However, the purchaser is allowed to sale the footwear at prices lower than those
embossed on the price label.
You are required to examine with relevant provisions of the Competition Act, 2002, the validity of above clauses.
Ans.: Keeping in view the provisions of the Section 3 of the Competition Act, 2002 the answers to given problem
are given hereunder:
(i) The agreement that the purchaser shall not deal with goods, products, articles manufactured by any person other
than the seller is exclusive supply agreement and is anti-competitive agreement.
(ii) The agreement that the purchaser shall not sale the goods manufactured by the Seller outside the municipal
limits of the city of Secunderabad is exclusive distribution agreement and is anticompetitive agreement.
(iii) The agreement that the purchaser shall sale the goods manufactured by the seller at the price as embossed on
the price label of the footwear amounts to resale price maintenance and is anticompetitive agreement. However,
if purchaser is allowed to sale the footwear at prices lower than those embossed on the price label then it do not
amounts to resale price maintenance and is not anti-competitive as per Section 3.
Question 37] A truck manufacturing company proposes to enter into distributorship agreement requiring dealer
not to sell trucks of other manufacturer and also not to sell the trucks outside the territory assigned to them.
Examine with reference to the provisions of the Competition Act, 2002 whether the proposed agreements will be
considered as anti-competitive agreements?
Ans.: A truck manufacturing company proposes to impose condition on its dealer not to sell trucks of other
manufacturer. Such condition amounts to exclusive supply agreement. As per Section 3(4), an exclusive supply
agreement is anti-competitive and thus it shall be void if such agreement causes or is likely to cause an appreciable
adverse effect on competition in India.
A truck manufacturing company proposes to impose condition on its dealer not to sell the trucks outside the
territory assigned to them. As per Section 3(4), an exclusive distribution agreement is anti-competitive and thus it
shall be void if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
Question 38] What is meant by 'bid rigging'? What are the most commonly used ways in which bid rigging may
occur? CS (Executive) - June 2016 (5 Marks)
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Ans.: As per Section 3(3), agreement that directly or indirectly results in bid rigging or collusive bidding are
presumed to be anti-competitive agreements.
Bid rigging means any agreement which has the effect of eliminating or reducing competition for bids or adversely
affecting or manipulating the process for bidding.
Bid rigging occurs when two or more competitors agree they will not compete genuinely with each other for
tenders, allowing one of the cartel members to 'win' the tender. Participants in a bid rigging cartel may take turns
to be the 'winner' by agreeing about the way they submit tenders, including some competitors agreeing not to
tender.
Bid rigging can take a variety of forms. They include:
♦ Cover Bidding: Where competitors choose a winner and everyone but the winner deliberately bids above
an agreed amount to establish the illusion that the winner's quote is competitive.
♦ Bid Suppression: Where a business agrees not to tender to ensure that the pre-agreed participant will win
the contract
♦ Bid Withdrawal: Where a business withdraws its winning bid so that an agreed competitor will be
successful instead
♦ Bid Rotation: Where competitors agree to take turns at winning business, while monitoring their market
shares to ensure they all have a predetermined slice of the pie
♦ Non-conforming Bids: Where businesses deliberately include terms and conditions that they know will not
be acceptable to the client.
Question 39] Mention the important factors which the Competition Commission of India will take into
consideration for determining whether an agreement has an 'appreciable adverse effect' on competition.
CS (Inter) - June 2007 (5 Marks) CS (Executive) - June 2013 (5 Marks), June 2016 (5 Marks)
Ans.: Factors to be considered to determine whether an agreement has an appreciable adverse effect on
competition [Section 19(3)]: The Commission shall, while determining whether an agreement has an appreciable
adverse effect on competition may consider the following factors, namely:
♦ Creation of barriers to new entrants in the market
♦ Driving existing competitors out of the market
♦ Foreclosure of competition by hindering entry into the market
♦ Accrual of benefits to consumers
♦ Improvements in production or distribution of goods or provision of services
♦ Promotion of technical, scientific and economic development by means of production or distribution of
goods or provision of services.
ABUSE OF DOMINANT POSITION
Question 40] What constitutes abuse of dominance?
Ans.: Dominance refers to a position of strength which enables an enterprise to operate independently of
competitive forces or to affect its competitors or consumers or the market in its favour.
Abuse of dominant position impedes fair competition between firms, exploits consumers and makes it difficult for
the other players to compete with the dominant undertaking on merit.
Abuse of dominant position includes:
♦ Imposing unfair conditions or price.
♦ Predatory pricing.
♦ Limiting production or market or
♦ Limiting technical development.
♦ Creating barriers to entry.
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♦ Applying dissimilar conditions to similar transactions.
♦ Denying market access.
♦ Using dominant position in one market to gain advantages in another market.
Question 41] The Competition Act, 2002 does not prohibit dominance but the abuse of dominant position.
Discuss. CS (Executive) - June 2015 (7 Marks)
State the provisions relating to 'abuse of dominant position' under the Competition Act, 2002.
Ans.: Abuse of dominant position [Section 4]: No enterprise shall abuse its dominant position. (Note that 'dominant
position' is not prohibited. What is prohibited is its misuse)
There shall be an abuse of dominant position, if an enterprise -
(a) Directly or indirectly, imposes unfair or discriminatory
♦ condition in purchase or sale of goods or services or
♦ price in purchase or sale (including predatory price) of goods or services.
(b) Limits or restricts -
♦ production of goods or provision of services or market or
♦ technical or scientific development relating to goods or services to the prejudice of consumers or
(c) indulges in practice or practices resulting in denial of market access or
(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which,
by their nature or according to commercial usage, have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other relevant market.
Meaning of certain terms:
(1) Dominant Position: Dominant position means a position of strength, enjoyed by an enterprise, in the
relevant market, in India, which enables it to-
♦ operate independently of competitive forces prevailing in the relevant market or
♦ affect its competitors or consumers or the relevant market in its favour
(2) Predatory Price: Predatory price means the sale of goods or provision of services, at a price which is below
the cost with a view to reduce competition or eliminate the competitors.
Example: Microsoft has used its dominant position Disk Operating System (DOS) to dominate the browser market
and ruined Netscape.
Question 42] Write a short note: Predatory Pricing
CS (Inter) - June 1999 (5 Marks), June 2005 (5 Marks) CS (Inter) - June 2008 (5 Marks)
Ans.: Predatory price means the sale of goods or provision of services, at a price which is below the cost with a view
to reduce competition or eliminate the competitors. [Explanation to Section 4]
As per Section 4, predatory pricing is 'abuse of dominant position' and following provisions gets attracted:
♦ The Commission may inquire into any alleged contravention of Section 4 i.e. abuse of dominant position.
[Section 19]
♦ The Commission after any inquiry into alleged abuse of dominant position may pass Cease & Desist order or
any other appropriate orders. [Section 27]
♦ The Commission may direct division of an enterprise enjoying dominant position to ensure that there is no
abuse its dominant position. [Section 28]
Question 43] A shoe manufacturer is offering its products to its customers at price less than its cost of production.
State with reasons whether it amounts to abuse of dominant position.
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Ans.: Offering products to its customers at price less than its cost of production amounts to predatory pricing which
is abuse of dominant position; hence prohibited under Section 4 of the Competition Act, 2002.
Question 44] MNO Tyres Ltd. is in the business of manufacture of automotive tyre for the past one year. To
increase its market share, the company has decided to reduce the prices of tyres. The cost structure of the
passenger car tyre is as under:
♦ Cost of production ` 5,000 per tyre
♦ Selling price ` 6,000 per tyre
The company started selling tyres @ ` 5,200 per tyre and other tyre manufacturer made a complaint to the
Competition Commission of India stating that MNO Tyre Ltd. is guilty of predatory pricing having effect of
reducing the competition or eliminating the competition. Whether MNO Tyres Ltd. had contravened in any
provisions of the Competition Act, 2002?
Ans.: As per Section 4, no enterprise shall abuse its dominant position. There shall be abuse of dominant position if
an enterprise directly or indirectly, imposes unfair or discriminatory price in purchase or sale (including predatory
price) of goods or services.
Predatory price means the sale of goods or provision of services, at a price which is below the cost with a view to
reduce competition or eliminate the competitors.
In the given case, MNO Tyres Ltd. sold tyres @ ` 5,200 per tyre, which is not below the cost i.e. ` 5,000. So, MNO
Tyres Ltd. has not indulged in predatory pricing and therefore MNO Tyres Ltd. has not abused its position.
Question 45] Mrs. Arshi filed a complaint in the Competition Commission of India against Modern Hospitals, New
Delhi for abusing its dominance. She stated in her complaint that she was refused maternity services by the
hospital during the 38th week of her pregnancy because she declined to avail the stem cell banking services
offered by Celbanks International India, with which the hospital has an exclusive partnership. She contended that
the hospital indulged in unfair practices because the arrangement restricts the choice of consumers. Was her
petition maintainable under the Competition Act, 2002? CA (Final) - Nov 2017 (4 Marks)
Ans.: As per Section 4 of the Competition Act, 2002, there shall be abuse of dominant position if an enterprise or a
group makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by
their nature or according to commercial usage, have no connection with the subject of such contracts.
In given case, Mrs. Arshi filed a complaint in the Competition Commission of India against Modern Hospitals for
refusal of maternity services because she declined to avail the stem cell banking services offered by Celbanks
International India, with which the hospital has an exclusive partnership, which is anti competitive and amounts to
abuse of dominant position. The Modern hospital has abused its dominant position and hence, petition by Mrs.
Arshi is maintainable.
Question 46] Discuss the power of Competition Commission relating to inquiry into anti-competitive agreements
and abuse of dominant position. CS (Inter) - Dec 2001 (5 Marks)
Ans.: Inquiry into certain agreements and dominant position of enterprise [Section 19(1)]: The Commission may
inquire into any alleged contravention of the provisions contained in Section 3(1) or Section 4 either on its own
motion or on-
(a) Receipt of a complaint, accompanied by prescribe fee from any person, consumer or their association or
trade association or
(ib) A reference made to it by the Central or State Government or a statutory authority.
Question 47] What are factors that CCI will take into account to ascertain whether any enterprise enjoys a
dominant position in the industry or not?
Ans.: Factors to be considered to determine whether any enterprise enjoys a dominant position [Section 19(4)]:
The Commission while inquiring whether an enterprise enjoys a dominant position or not under section 4 may
consider following factors:
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♦ market share
♦ size and importance
♦ economic power
♦ commercial advantages
♦ vertical integration of the enterprises or sale or service network of such enterprises
♦ dependence of consumers
♦ monopoly or dominant position
♦ entry barriers (including barriers such as regulatory barriers, financial risk, high capital cost of entry,
marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or services
for consumers)
♦ countervailing buying power
♦ market structure and size of market
♦ social obligations and social costs
♦ relative advantages
Question 48] What type of orders can be made by Competition Commission after inquiry into anticompetitive
agreements or abuse of dominant position?
Write a short note on: Cease & Desist Order CS (Inter) - June 1995 (5 Marks)
Ans.: Orders by Commission [Section 27]: If after inquiry the Commission finds that any agreement is in
contravention of Section 3 or Section 4, it may pass all or any of the following orders:
(a) Cease & Desist Order: Direct to discontinue and not to re-enter such agreement or discontinue such abuse
of dominant position (known as Cease & Desist Order)
(b) Penalty Order: The Commission may impose penalty not exceeding 10% of the average turnover of last 3
financial years, upon each parties to agreement.
In case any agreement has been entered by any cartel, the Commission may impose a penalty which may higher of
following two amounts:
♦ 3 times of its profits for each year of the continuance of such agreement or
♦ 10% of its turnover for each year of the continuance of such agreement
(c) Compensation Order: The Commission may award compensation to parties as per Section 34.
(d) Order to modify agreement: The Commission may direct that the agreements shall stand modified to the
extent and in the manner as specified in the order.
(e) Compliance Order: The Commission may direct the enterprises to comply with other orders and directions,
including payment of cost, if any, as it deems fit.
(f) Division of an enterprise abusing dominant position: The Commission may make recommendation to the Central
Government for the division of an enterprise abusing its dominant position
(g) Other Orders: The Commission may Pass such other order as it may deem fit.
Question 49] Who is empowered to order division of enterprise enjoying dominant position? Explain the
provisions applicable when order for division is passed?
Upon an enquiry made by the Competition Commission of India it was found that Huge Limited is enjoying
dominant position in the market and there is every possibility that the company may abuse its dominant position.
In order to overcome such a possible situation, the Competition Commission of India wants to order for division
of Huge Limited. Referring to the provisions of the Competition Act, 2002, describe the matters which may be
provided in the said order.
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Ans.: Division of enterprise enjoying dominant position [Section 28]: The Commission is empowered to order
division of enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant
position.
Such order must in writing and may provide for all or any of the following matters:
(a) Transfer or vesting of property, rights, liabilities or obligations
(b) Adjustment of contracts either by discharge or reduction of any liability or obligation
(c) The creation, allotment, surrender or cancellation of any shares, stocks or securities
(id) The payment of compensation to any-persorr-who suffered any loss due to dominant position of such enterprise
[Deleted by the Competition (Amendment) Act, 2007]
(e) The formation or winding up of an enterprise or the amendment of the memorandum of association or
articles of association or any other instruments regulating the business of any enterprise
(f) The extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be
altered by the enterprise and the registration thereof
(g) Any other matter which may be necessary to give effect to the division of the enterprise.
No compensation to officers: An officer of a company who ceases to hold office in consequence of the division of
an enterprise shall not be entitled to claim any compensation for such cessation.
COMBINATIONS
Question 50] State the provisions relating to 'Combinations' under the Competition Act, 2002.
Ans.: Combination [Section 5]: The acquisition of one or more enterprises by one or more persons or merger or
amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises. If after
acquisition, the joint assets/turnover increases the following limits, it will be 'combination'.
Summary of combination provisions are as follows:
Types of Combinations Asset & turnover in India Asset & turnover outside India
Acquisition by Acquisition by Acquisition by Acquisition by

Single acquirer Group Single acquirer Group
Acquisition by acquirer Joint assets over ` Group assets ` 4,000 Joint assets US $ Group assets US$2
dealing in different 1,000 Crores or Crores or turnover ` 500 Crores or billion or turnover
goods or services turnover ` 3,000 12,000 Crores turnover US $ 1,500 US $ 6 billion
[Section 5(a) (i) & (ii)] Crores Crores
Acquisition by acquirer Joint assets ` 1,000 Group assets 7 Joint assets US $ Group assets US $ 2
dealing in similar goods crores or turnover ` 4,000 crores or 500 crores or billion or turnover
[Section 5(b)(i) & (ii)] 3,000 crores turnover ` 12,000 turnover US $ 1,500 US $ 6 billion
crores crores
Merger & amalgamation Combined assets ` Combined assets ` Combined assets US Combined assets
[Section 5(c)(i) & (ii)] 1,000 crores or 4,000 crores or $ 500 crores or US $ 2 billion or
turnover ` 3,000 turnover ` 12,000 turnover US $ 1,500 turnover US $ 6
crores crores crores billion
Group: Group means two or more enterprises which, directly or indirectly, are in a position to:
- Exercise 26% or more of the voting rights in the other enterprise or
- Appoint more than 50% of the members of the board of directors in the other enterprise or
- Control the management or affairs of the other enterprise;
How to determine value for above provisions:
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♦ The value of assets shall be determined by taking the book value of the assets as per the audited books of account
of the preceding the financial year in which the date of proposed merger falls.
♦ The value of assets shall be reduced by depreciation.
♦ The value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted
use, collective mark, registered proprietor, registered trade mark, registered user, homonymous geographical
indication, geographical indications, design or layout design or similar other commercial rights.
Question 51] Mention the provisions of the Competition Act, 2002 relating to 'regulation of combinations'.
CS (Inter) - Dec 2006 (3 Marks), Dec 2007 (3 Marks)
Ans.: Regulation of combinations [Section 6]: No person or enterprise shall enter into a combination which causes
or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a
combination shall be void. (Thus, combination in itself is not prohibited. It will be held void only if it adversely affects
competition.)
Notice to Commission on optional basis: Any person or enterprise, who or which proposes to enter into a
combination may at his option give notice to the Commission, in the prescribed form along with prescribed fees,
disclosing the details of the proposed combination, within 7 days of-
(a) Approval of the proposal relating to merger or amalgamation by the board of directors
(b) Execution of any agreement or other document for acquisition.
After receipt of notice, the Commission shall deal with such notice in accordance with the provisions contained in
Sections 29, 30 & 31.
Provisions not to apply to PFI & FII: The provisions of this section shall not apply to share subscription or financing
facility or any acquisition, by a public financial institution, foreign institutional investor, bank or venture capital fund,
pursuant to any covenant of a loan agreement or investment agreement.
However, such PFI/FII etc. are put under obligation to file with the Commission the details of the acquisition in
specified Form within 7 days from the date of the acquisition.
Question 52] A Ltd. & G Ltd. are two consumer goods manufacturing companies. The two companies are
proposing for amalgamation after which their combined market share will be 80% for soap and 70% for detergent.
Does this amalgamation eliminate competition or anti competitive?
Ans.: The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises
shall be a combination of such enterprises.
As per Section 5, any merger or amalgamation shall be 'Combination' if combined assets are more than ` 1,000
Crores or turnover more than ` 3,000 Crores.
Thus, if combined assets or turnover after merger or amalgamation crosses above limits it is 'Combination' and if it
is likely to cause an appreciable adverse effect on competition within the relevant market in India, then such
combination shall be void as per Section 6.
Question 53] Bombay Textiles Ltd. and Gujarat Textiles Ltd. marketing their products in India proposes to be
amalgamated. The enterprise created as a result of the said amalgamation will have assets of value of ` 300 Crores
and turnover of ` 1,000 Crores. Examine whether the proposed amalgamation attracts the provisions of the
Competition Act, 2002. CA (Final) - May 2013 (5 Marks)
Ans.: The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises
shall be a combination of such enterprises.
As per Section 5, any merger or amalgamation shall be 'combination' if combined assets are more than ` 1,000
Crores or turnover more than ` 3,000 Crores.
In given case combined assets or turnover after merger or amalgamation do not cross above limits and hence it is
not 'combination' and it does not attract the provisions of the Competition Act, 2002.
Question 54] When can Competition Commission make an enquiry into Combination?
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Ans.: Inquiry into combination by Commission [Section 20]: The Commission may make inquire to determine as to
whether a combination has caused or is likely to cause an appreciable adverse effect on competition in India.
The Commission may make inquire upon
- its own knowledge or information
- receipt of a notice u/s 6(2)
However, the Commission shall not initiate any inquiry after the expiry of 1 year from the date on which combination
has taken effect.
Question 55] What are the factors taken into consideration by Competition Commission to determine whether
any combination have appreciable adverse effect on competition in the relevant market?
Ans.: Factors taken into consideration by Commission to determine whether any combination would have
appreciable adverse effect on competition [Section 20(4)]: For the purposes of determining whether a combination
would have an appreciable adverse effect on competition in the relevant market, the Commission shall have due
regard to following factors:
(a) actual and potential level of competition through imports in the market
(b) extent of barriers to entry into the market
(c) level of combination in the market
(d) degree of countervailing power in the market
(e) likelihood that the combination would result in the parties to the combination being able to significantly and
sustainably increase prices or profit margins
(f) extent of effective competition likely to sustain in a market
(g) extent to which substitutes are available or are likely to be available in the market
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually and as a
combination
(i) likelihood that the combination would result in the removal of a vigorous and effective competitor or
competitors in the market
(j) nature and extent of vertical integration in the market
(k) possibility of a failing business
(l) nature and extent of innovation
(m) relative advantage, by way of the contribution to the economic development, by any combination having or
likely to have appreciable adverse effect on competition
(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any.
Question 56] Explain the procedure to be adopted by the Competition Commission for 'investigation of
Combination' under the Competition Act, 2002.
Ans.: Procedure for investigation of combinations [Section 29]:
(l) Issuance of show cause notice: Where the Commission is of the opinion that a combination is likely to cause,
or has caused an appreciable adverse effect on competition, it shall issue show cause notice to the parties to
respond within 30 days, as to why investigation in respect of combination should not be conducted.
(2) Direction to publish the details of combination to public: If the Commission prima facie is of the opinion
that the combination has, or is likely to have an appreciable adverse effect on competition, it shall within 7 days
from the response of the parties, direct to publish details of the combination within 10 days of direction for bringing
the combination to the knowledge or information of the public and persons affected or likely to be affected by such
combination.
(3) Invite objection: The Commission may invite any person or member of the public, affected or likely to be
affected by the said combination, to file his written objections within 15 days from the date of publication of details
of combination to public.
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(4) Calling additional information from the public: The Commission may call additional information from the
parties to the said combination. The parties have to furnish such additional information within 15 days to the
Commission.
(5) Passing of orders: After receipt of all information and within a period of 45 days, the Commission shall
appropriate order as per Section 31.
Question 57] Explain the powers of Commission to approve, modify or disapprove a combination.
Ans.: Orders of Commission on certain combinations [Section 31]:
(1) Approval of combination: Where the Commission is of the opinion that any combination does not have an
appreciable adverse effect on competition, it shall approve that combination.
(2) Disapproval of combination: Where the Commission is of the opinion that the combination has an
appreciable adverse effect on competition, it shall direct that the combination shall not take effect.
(3) Modification to the combination: The Commission may propose appropriate modification to the
combination when it is of the opinion that adverse effect can be eliminated by making suitable modification to such
combination.
The parties shall carry out such modification within specified period by the Commission.
If the parties fail to carry out the modification within specified period, such combination shall be deemed to have
an appreciable adverse effect on competition.
If the parties to the combination do not accept the modification, such parties may within 30 days of the modification,
submit amendments to the Commission.
If the Commission agrees with the amendment it shall by order approve the combination.
If the Commission does not accept the amendment, then the parties shall be allowed a further period of 30 days to
accept the modification proposed by the Commission.
If the parties fail to accept the modification within 30 days, the combination shall be deemed to have appreciable
adverse effect on competition.
(4) Order that - combination shall not take effect: Where the Commission has directed that the combination is
deemed to have an appreciable adverse effect on competition, then Commission may order that the combination
shall not be given effect to.
COMPETITION COMMISSION OF INDIA
Question 58] How is the Competition Commission of India established?
State the provisions relating to composition Competition Commission of India?
State the composition of Competition Commission of India under Competition Act, 2002.
Ans.: Establishment of Commission [Section 7]: The Central Government has established a Competition
Commission of India by notification in year 2003.
The Commission shall be a body corporate having perpetual succession and a common seal with power, to acquire,
hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be
sued.
The head office of the Commission is situated at New Delhi. The Commission may establish offices at other places
in India.
Composition of Commission [Section 8]:
(1) Chairperson & Members: The Commission shall consist of a Chairperson and two to ten other Members to
be appointed by the Central Government.
(2) Qualification & Experience: The Chairperson and every other Member shall be a person of ability, integrity
and standing and who has special knowledge of, and professional experience of not less than 15 years in
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international trade, economics, business, commerce, law, finance, accountancy, management, industry, public
affairs, administration or in any other matter which may be useful to the Commission in the opinion of the Central
Government.
(3) Terms of employment: The Chairperson and other Members shall be whole-time Members.
Question 59] Discuss the procedure laid down for the selection of Chairperson and other members along with
their term of office under the provisions of the Competition Act, 2002.
Ans.: Selection of Chairperson & Members [Section 9]: The Chairperson and other Members shall be selected in
the manner as may be prescribed.
Term of office of Chairperson & Members [Section 10]:
(1) The Chairperson and Members shall hold office for a term of 5 years and shall be eligible for reappointment.
No Chairperson or other Member shall hold office after he has attained:
- in the case of the Chairperson, the age of 67 years
- in the case of any other Member, the age of 65 years.
(2) A vacancy caused by the resignation or removal of the Chairperson or any other Member or by death or
otherwise shall be filled by fresh appointment.
(3) The Chairperson and every other Member shall, before entering upon his office, make and subscribe to an
oath of office and of secrecy.
(4) In the event of the occurrence of a vacancy in the office of the Chairperson by reason of his death, resignation
or otherwise, the senior-most Member shall act as the Chairperson, until the date on which a new Chairperson is
appointed.
(5) When the Chairperson is unable to discharge his functions owing to absence, illness or any other cause, the
senior-most Member shall discharge the functions of the Chairperson.
Question 60] Hon'ble Justice Mr. HCJ, a retired High Court Judge, attained the age of 62 years on 31.12.2014. The
Central Government appointed him as the Chairperson of the Competition Commission of India with effect from
1.1.2015. You are required to state, with reference to the provisions of the Competition Act, 2002, the term for
which he may be appointed as Chairperson of the Competition Commission of India. Whether he can be
reappointed as Chairperson of the Competition Commission on India?
What will happen to the place of office of the chairperson, in case vacancy arises due to resignation or death of
the Chairperson during the tenure of his office?
What will happen to the place of office of the Chairperson, in case the Chairperson is unable to discharge his
functions owing to illness? CA (Final) - May 2007 (3 Marks), May 2018 (4 Marks)
Ans.: As per Section 10, the Chairperson shall hold office for a term of 5 years and shall be eligible for re-
appointment. Further no Chairperson shall hold office after he has attained the age of 67 years.
Keeping in view above provisions, Mr. HCJ can be appointed as chairperson since at the date of appointment he has
attained age of 62 years. However, on attainment of age of 67 years, Mr. HCJ shall have to vacate the office of
Chairperson and he shall not be reappointed as Chairperson.
In the event of the occurrence of a vacancy in the office of the Chairperson by reason of his death, resignation or
otherwise, the senior-most Member shall act as the Chairperson, until the date on which a new Chairperson,
appointed in accordance with the provisions of this Act to fill such vacancy, enters upon his office. [Section 10(4)]
When the Chairperson is unable to discharge his functions owing to illness, the senior-most Member shall discharge
the functions of the Chairperson until the date on which the Chairperson resumes the charge of his functions.
[Section 10(5)]
Question 61] State the provisions relating to resignation, removal and suspension of Chairperson and other
Member of Competition Commission of India.
Ans.: Resignation, removal and suspension of Chairperson and other Members [Section 11]:
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(1) Resignation: The Chairperson or any other Member may resign by notice in writing addressed to the Central
Government from his office. However, the Chairperson or a Member shall continue to hold office until the expiry of
3 months from the date of receipt of notice or until a person duly appointed as his successor or until the expiry of
his term of office, whichever is the earliest, unless he is permitted by the Central Government to relinquish his office
sooner
(2) Removal: The Central Government may by order remove from the office if the Chairperson or any other
Member:
(a) has been adjudged as an insolvent
(b) has engaged in any paid employment
(c) has been convicted of an offence of moral turpitude
(d) has acquired financial or other interest likely to affect prejudicially his functions as a Member
(e) has so abused his position in office prejudicial to the public interest
(f) has become physically or mentally incapable
However, Member shall be removed from his office under clause (d) or (e) only if following procedure is adopted:
♦ The Central Government makes a reference to the Supreme Court.
♦ The enquiry is held in accordance with the procedure prescribed by the Supreme Court
♦ The Supreme Court makes an order that the member ought to be removed.
Question 62] X a member of the Competition Commission of India was removed by the Central Governmen t on
the grounds that he had acquired financial interest likely to affect prejudicially his functions as a member. X
challenged his removal by the Central Government claiming that the Central Government had no authority to
pass order for removal. Clarify whether X's contention is right as per the provisions of the Competition Act, 2002.
CA (Final) - Nov 2010 (4 Marks), Nov 2014 (4 Marks)
Ans.: As per Section 11, the Central Government may by order remove from the office if the Chairperson or any
other Member has acquired financial or other interest likely to affect prejudicially his functions as a Member.
However, Member shall be removed from his office for the above reason only if following procedure is adopted:
♦ The Central Government makes a reference to the Supreme Court.
♦ The enquiry is held in accordance with the procedure prescribed by the Supreme Court
♦ The Supreme Court makes an order that the member ought to be removed.
Thus, the Central Government can remove a member of Competition Commission from his office by following the
above procedure. So, contention of X is incorrect with respect to his removal by the Central Government.
Question 63] What restriction have been imposed on the employment of Chairperson or any other Member of
Competition Commission under the Competition Act, 2002?
Ans.: Restriction on employment of Chairperson & Members [Section 12]: The Chairperson and other Members
shall not accept any employment in any enterprise which has been a party to a proceeding before the Commission
under the Act for a period of 2 years from the date on which they cease to hold office.
However, above restriction of employment shall not apply to the following:
♦ Central Government or
♦ State Government or
♦ Local authority
♦ Statutory authority or
♦ Corporation established under Central, State or Provincial Act
♦ Government company
181
Question 64] Mr. Raj Behari retired as a Member of Competition Commission of India (CCI) on 31.10.2014. He was
offered the post of Chief Executive in LSD Ltd. which was earlier a party in the proceedings before CCI. Can he join
the Company with effect from 1.11.2015?
What will be the position if Mr. Raj Behari joins Oil & Natural Gas Commission Ltd., a Government Company with
effect from 1.4.2015? ONGC was also earlier a party in the proceedings before CCI.
Mr. Chetan retired as a member of the Competition Commission of India on 31st October, 2014. He was offered
the post of Chief Executive Officer in LCD Ltd., which was earlier a party in a proceeding before the CCI. Can Mr.
Chetan join the company with effect from 1st November, 2015?
What will be the position if Mr. Chetan joins MONA Ltd., a Government company with effect from 1st April, 2015,
if MONA Ltd. was also a party in a proceeding before the CCI?
Ans.: As per Section 12, the Chairperson and other Members shall not accept any employment in any enterprise
which has been a party to a proceeding before the Commission under this Act for a period of 2 year from the date
on which they cease to hold office.
In present case, LSD Ltd. is an enterprise which has been party to proceeding before the Commission. Therefore,
Mr. Raj Behari cannot join LSD Ltd. up to 31.10.2016. However, he can accept employment in Oil & Natural Gas
Commission Ltd., a Government Company as restriction as to employment is not applicable for employment in
Government Company.
Question 65] Whether a defect in the constitution of Competition Commission can be taken as ground for
invalidating the proceedings of the Commission?
Ans.: Vacancy, etc., not to invalidate proceedings of Commission [Section 15]: No act or proceeding of the
Commission shall be invalid merely by reason of any-
(a) vacancy in, or any defect in the constitution of, the Commission or
(b) defect in the appointment of a person acting as a Chairperson or as a Member or
(c) irregularity in the procedure of the Commission not affecting the merits of the case.
Question 66] Mr. ZPM was appointed as a Member of the Competition Commission of India by Central
Government. He has a professional experience in international business for a period of 12 years, which is not a
proper qualification for appointment of a person as member. Pointing out this defect in the Constitution of
Commission, Mr. YKJ, against whom the commission gave a decision, wants to invalidate the proceedings of the
commission. Examine with reference to the provisions of the Competition Act, 2002 whether Mr. YKJ will
succeed?
Ans.: As per Section 15, no act or proceeding of the Commission shall be invalid merely by reason of any defect in
the appointment of a person acting as a Member.
Applying the above provisions, the mere facts that one of the member of the Commission was not qualified for
appointment, does not affects the merits of the case. Therefore, the contention of Mr. YKJ that the proceedings of
the Commission are not valid is incorrect.
Question 67] Whether jurisdiction of the Competition Commission of India extends to matters relating to
agreement entered into outside India but having an effect on competition in India?
Ans.: Acts taking place outside India but having an effect on Competition in India [Section 32]: The
jurisdiction of Competition Commission of India extends to inquire and pass orders in into an agreement or
dominant position or combination, which is likely to have, an appreciable adverse effect on competition in relevant
market in India even if -
(a) An agreement referred to in Section 3 has been entered into outside India or
(b) Any party to such agreement is outside India or
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(c) Any enterprise abusing the dominant position is outside India or (,d) A combination has taken place outside
India or
(e) Any party to combination is outside India or
(f) Any other matter or practice or action arising out of such agreement or dominant position or combination is
outside India.
Thus acts taking place outside India but having an effect on competition in India will be subject to the jurisdiction
of Commission. The Competition Commission of India will have jurisdiction even if both the parties to an agreement
are outside India but only if the agreement, dominant position or combination entered into by them has an
appreciable adverse effect on competition in the relevant market of India.
DUTIES, POWERS & FUNCTIONS OF COMMISSION
Question 68] Mention briefly powers of the Competition Commission of India under the Competition Act, 2002.
State the duties, powers and functions of Competition Commission of India under Competition Act, 2002.
Is the Competition Commission empowered to issue interim orders? Explain.
Write a short note on: Power of Competition Commission to award compensation Write a short note on: Power
of Commission to regulate its own procedure
Ans.: Duties of Commission [Section 18]: Duties of the Competition Commission are follows:
♦ To eliminate practices having adverse effect on competition
♦ To promote and sustain competition
♦ To protect interests of consumers
♦ To ensure freedom of trade carried on by other participants, in markets in India.
The Commission may enter into any memorandum or arrangement with the prior approval of the Central
Government with any agency of any foreign country for the purpose of discharging its duties or performing its
functions.
Power to grant interim relief [Section 33]: The Commission may issue interim orders only if:
(a) An inquiry is pending before the Commission
(b) Contravention Section 3, 4 or 6 has been committed and continues to be committed
The Commission may grant a temporary injunction restraining any party from carrying on any act in contravention
of Section 3, 4 or 6 until the conclusion of inquiry or until further orders.
The Commission is empowered to issue interim orders without giving notice to the opposite party.
Power to award compensation [Section 34]: Any person may make an application to the Commission for an order
for the recovery of compensation from any enterprise for any loss or damage suffered.
After an inquiry into the allegations the Commission may pass an order directing the enterprise to make payment
to the applicant for the loss or damage caused to the applicant.
Where any loss or damage is caused to numerous persons, one or more of such persons may make an application
to the Commission on behalf of and for the benefit of interested persons.
Powers of Commission to regulate its own procedure are as follows [Section 36]:
(1) Power of Civil Court: The Commission shall have the same powers as are vested in a Civil Court, while trying
a suit, in respect of the following matters:
♦ Summoning and enforcing the attendance of any person and examining him on oath
♦ Requiring the discovery and production of documents
♦ Receiving evidence on affidavit
♦ Issuing commissions for the examination of witnesses or documents
♦ Requisitioning any public record or document or copy from any office.
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(2) Proceeding before the Commission is judicial proceeding: Every proceeding before the Commission shall be
deemed to be a judicial proceeding within the meaning of the Indian Penal Code and the Commission shall be
deemed to be a Civil Court.
(3) Power to take help of expert: The Commission may call upon experts from the field of economics,
commerce, accountancy, international trade etc. to assist in the conduct of inquiry.
(4) Power to call records: The Commission may direct any person:
- To produce before the Director General or the Secretary or authorized officer books or other documents the
examination of which may be required for the purposes of the Act.
- To furnish information to the Director General or the Secretary or authorized officer as may be required for
the purposes of the Act.
Question 69] Write a short note on: Reference by Statutory Authority to Competition Commission
Ans.: Reference by statutory authority [Section 21]: If in the course of a proceeding before any statutory authority
an issue is raised by any party that any decision of such statutory authority is contrary to any of the provisions of
Competition Act, then such statutory authority may make a reference to the Commission.
Any statutory authority may also make suo motu reference to the Commission.
On receipt of such reference, the Commission shall give its opinion within 60 days of receipt of reference to statutory
authority which shall consider the opinion of the Commission.
Question 70] Write a short note on: Reference by Commission to Statutory Authority
Ans.: Reference by Commission [Section 21 A]: If in the course of a proceeding before the Commission an issue is
raised by any party that any decision of the Commission is contrary to any provision of this Act whose
implementation is entrusted to a statutory authority, then the Commission may make a reference to the Statutory
Authority.
The Commission may make suo motu reference to the statutory authority.
On receipt such reference, the statutory authority shall give its opinion within 60 days of receipt of such reference
to the Commission which shall consider the opinion of the statutory authority.
Question 71] Who can appear before Competition Commission to present a case?
Ans.: Appearance before Commission [Section 35]: A complainant or defendant or the Director General may either
appear in person or authorize one or more Chartered Accountants or Company Secretaries or Cost Accountants or
Legal Practitioners or any of his or its officers to present the case before the Commission.
Question 72] In proceeding before the Competition Commission of India involving two pharmaceutical
companies, the plaintiff requested the presiding officer to call upon the services of experts from the
pharmaceutical sector to determine the truth of the allegations levelled by it against the respondent. The
respondent opposed the request on the ground that such action cannot be taken by the Competition Commission.
You are required to state with reference to the provisions of the Competition Act, 2002, whether the contention
of the respondent is tenable?
CA (Final) - Nov 2005 (5 Marks), May 2008 (3 Marks) CA (Final) - Nov 2010 (4 Marks)
Ans.: As per Section 36, the Commission may call upon experts from the field of economics, commerce,
accountancy, international trade to assist in the conduct of inquiry before it. Thus, the contention of the respondent
that services of experts cannot be taken is not tenable.
Question 73] One mistake was detected after passing of orders by the Commission under Competition Act, 2002.
Whether such mistake can be rectified? If so, by whom and how?
CWA (Inter) - Dec 2008 (2 Marks)
Ans.: Rectification of orders [Section 38]: The Commission may amend any order passed by it with a view to
rectifying any mistake apparent from the record on its own motion. The Commission may make an amendment of
an order for rectifying apparent from record, which has been brought to its notice by any party to the order.
However, while rectifying any mistake apparent from the record, the Commission shall not amend substantive part
of the order passed by it.
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Question 74] State the procedure generally followed in relation to contravention of any provisions of the
Competition Act, 2002. Also state the role of Director General in investigation of any relating to contravention of
the provisions of the Act.
Ans.: Procedure for inquiry on complaints:
♦ If the Commission is of the opinion that there exists a prima facie case, on receipt of information, it shall direct
the Director General to cause an investigation to be made into the matter.
♦ The Director General shall investigate into the matter and submit a report of its findings within the period as
may be specified by the Commission. It is, however, not binding on the Commission to accept the report of the
Director General.
♦ Where upon receipt of a reference or information, the Commission is of the opinion that there is no prima
facie case, it shall pass an order dismissing the reference/information, as it deems fit and necessary.
♦ Upon receipt of a report from the Director General, the Commission shall forward a copy thereof to -
(a) the parties concerned or
(b) Central or State Government or
(c) Statutory authority.
♦ If the Director General recommends that there is no contravention of any of the provisions of the Act, the
Commission shall give an opportunity of hearing to the informant and after hearing, if the Commission agrees with
the recommendation of the Director General, it shall dismiss the information.
♦ If after hearing information provided, the Commission is of the opinion that further inquiry is called for, it
shall direct the enquiry to proceed further.
♦ Where the report of the Director General relates to matter referred to Commission by the Central or State
Government or a statutory authority and the report contains recommendation that there is no contravention of the
provisions of the Act, the Commission shall invite the comments of the Central or State Government or statutory
authority on such report. On receipt of the comments, if there is no prima facie case, in the opinion of the
Commission, the Commission shall return the reference. However, if the Commission feels that there is a prima
facie case it shall proceed with a reference.
♦ The Commission on receipt of recommendation of Director General that there is contravention of any of the
provisions of the Act, and a further inquiry is called for, shall inquire into such contravention in accordance with the
provisions of the Act.
♦ A copy of the report of the Director General is required to be sent to the information provider or to the
Central or State Government or a statutory authority, for their comments and an opportunity of hearing is required
to be given to the parties as this is warranted by the principles of natural justice.
♦ Where the Director General recommends that there is contravention of any of the provisions of the Act, and
that the Commission is of opinion that further inquiry is called for, it shall institute an inquiry into the matter and
pass a reasoned order.
DIRECTOR GENERAL
Question 75] Discuss the provisions relating to appointment of Director General under the Completion Act, 2002.
Ans.: Appointment of Director-General [Section 16]:
(1) The Central Government by notification appoints a Director General and Additional, Joint, Deputy or
Assistant Directors General or other advisers, consultants or officers for the purposes of assisting the Commission
in conducting inquiry and for performing other functions provided by or under this Act.
(2) Every Additional, Joint, Deputy and Assistant Directors General or such other advisers, consultants and
officers shall exercise his powers and discharge his functions subject to the general control, supervision and
direction of the Director General.
(3) The salary, allowances and other terms and conditions of service shall be such as may be prescribed.
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(4) The Director General etc. shall be appointed from amongst persons of integrity and outstanding ability and
who have experience in investigation, and knowledge of accountancy, management, business, public
administration, international trade, law or economics and such other qualifications as may be prescribed.
Question 76] Describe the duties and powers of Director General under Competition Act, 2002.
CS (Inter) - Dec 2004 (5 Marks) CS (Executive) - Dec 2013 (3 Marks), Dec 2017 (3 Marks)
Ans.: Duties of Director General [Section 41]: The Director General shall assist the Commission in investigating into
any contravention of the provisions, rules or regulations made under the Act.
The Director General shall have all the powers of available to the Commission u/s 36(2).
The provisions of the Companies Act shall apply to an investigation made by the Director General as they apply to
an inspector appointed under that Act.
Power of Civil Court [Section 36(2)]: The Commission shall have the same powers as are vested in a Civil Court,
while trying a suit, in respect of the following matters:
♦ Summoning and enforcing the attendance of any person and examining him on oath
♦ Requiring the discovery and production of documents
♦ Receiving evidence on affidavit
♦ Issuing commissions for the examination of witnesses or documents
♦ Requisitioning any public record or document or copy from any office.
COMPETITION ADVOCACY
Question 77] Write a short note on: Competition Advocacy CS (Inter) - Dec 2006 (3 Marks)
Ans.: Competition Advocacy is one of the main pillars of modern competition law which aims at creating, expanding
and strengthening awareness of competition in the market. Section 49 of the Competition Act, 2002 mandates the
CCI to undertake advocacy for promoting competition.
Competition Advocacy [Section 49]: This Section makes the following provisions relating to Competition Advocacy-
♦ The Central may seek the opinion of the CCI on the possible effects of the policy on competition or any other
matter.
♦ On receipt of such a reference, the Commission shall, give its opinion within 60 days of making such a
reference.
♦ The role of the Commission is advisory and the opinion given by the Commission shall not be binding upon
the Central or State Government in formulating such a policy.
♦ The Commission shall take suitable measures for the promotion of competition advocacy, creating
awareness and imparting training about competition issues.
♦ Creating awareness about benefits of competition and imparting training in competition issues is expected
to generate conducive environment to promote and foster competition, which is sine-qua non for accelerating
economic growth.
Question 78] Write a short note on: Competition Policy CS (Inter) - Dec 2007 (3 Marks)
Ans.: The basic purpose of Competition Policy and law is to preserve and promote competition as a means of
ensuring efficient allocation of resources in an economy.
Competition policy typically has two elements:
(1) A set of policies that enhance competition in local and national markets.
(2) Legislation designed to prevent anti-competitive business practices i.e., a competition law.
Competition law by itself cannot produce or ensure competition in the market unless this is facilitated by
appropriate Government policies. On the other hand, Government policies without a law to enforce such policies
and prevent competition malpractices would also be incomplete.
186
Question 79] How can the orders of Competition Commission imposing monetary penalty be executed under the
Competition Act, 2002? CS (Executive) - Dec 2014 (7 Marks)
Ans.: Execution of orders of Commission imposing monetary penalty [Section 39]:
(1) If any person fails to pay any monetary penalty imposed under the Act then the Commission shall proceed
to recover such penalty in specified manner as per the Regulations made under the Act.
(2) If the Commission is of the opinion that it can recover the penalty as per the provisions of the Income-tax
Act, 1961 then it may make a reference the concerned income-tax authority for recovery of the penalty.
(3) In such cases the person upon whom the penalty has been imposed shall be deemed to be assessee in default
under the Income-tax Act, 1961 and the provisions of the said Act shall apply for recovery of penalty.
PENALTIES
Question 80] What are the penalties attracted for Contravention of orders of Competition Commission under the
Competition Act, 2002?
Ans.: Contravention of orders of Commission [Section 42]: If any person fails to comply with the orders or
directions of the Commission the Act, he shall be punishable with fine which may extend to ` 1 Lakh for each day
during which such non-compliance subject to a maximum of ` 10 Crore.
If any person does not comply with the orders or directions or fails to pay the fine imposed then he shall be
punishable with imprisonment for a term which may extend to 3 years or with fine up to ` 25 Crore or with both as
the Chief Metropolitan Magistrate may deem fit.
However, the Chief Metropolitan Magistrate can take cognizance of any offence only on a complaint filed by the
Commission or any of its officers.
Question 81] Mr. Honest suffers huge loss due non-observance and violating the directions issued by the
Commission against the Super Power Ltd. Referring to the provisions of the Competition Act, 2002 state whether
any remedy is available to Mr. Honest?
Ans.: Compensation in case of contravention of orders of Commission [Section 42A]: Any person may make an
application to the Appellate Tribunal for an order for the recovery of compensation from any enterprise for any loss
or damage shown to have been suffered, by such person as a result of the said enterprise violating directions issued
by the Commission or contravening, without any reasonable ground, any decision or order of the Commission issued
under sections 27, 28, 31, 32 & 33 or any condition or restriction subject to which any approval, sanction, direction
or exemption in relation to any matter has been accorded, given, made or granted under this Act or delaying in
carrying out such orders or directions of the Commission.
Question 82] What are the penalties attracted for Contravention of orders of Director General under the
Ans.: Penalty for failure to comply with directions of Commission & Director General [Section 43]: If
any person fails to comply with a direction given by the Commission or the Director General then such person shall
be punishable with fine which may extend to ` 1 lakh for each day during which such failure continues subject to a
maximum of ` 1 Crore.
Question 83] How much penalty can be imposed for failure to furnish information of Combination under the
Ans.: Power to impose penalty for non-furnishing of information on combinations [Section 43A]:
If any person or enterprise who fails to give notice to the Commission under Section 6(2) then the Commission shall
impose a penalty which may extend to 1% of total turnover or assets whichever is higher of such a combination.
Question 84] State the penalty for making false statement by any party to the combination.
Ans.: Penalty for making false statement or omission to furnish material information [Section 44]: Any
person who being a party to a combination and committing following acts shall be liable to a penalty which shall
not be less than ` 50 lakhs but which may extend to ` 1 Crore for the following -
(a) A person who makes a statement which is false in any material particular, or knowing it to be false.
(b) A person who omits to state any material particular knowing it to be material.
187
Question 85] What is the penalty for furnishing false information or document to the Commission under the
Ans.: Penalty for offences in relation to furnishing of information [Section 45]: A person shall be punishable with
fine which may extend to ` 1 Crore in following cases -
(a) A person who makes any statement or furnishes any document which he knows or has reason to believe to
be false in any material particular.
(b) A person who omits to state any material fact knowing it to be material.
(c) A person who wilfully alters, suppresses or destroys any document which is required to be furnished as
aforesaid, such person shall be punishable with fine which may extend to ` 1 Crore as may be determined by the
Commission.
The Commission may also pass such other order as it deems fit.
Question 86] State the provisions under which the Commission can impose lesser penalty on any person who is
alleged to have violated provisions of Section 3 of the Competition Act, 2002 relating to cartel.
Ans.: Power to impose lesser penalty [Section 46]: The Commission may, if it is satisfied that any producer, seller,
distributor, trader or service provider included in any cartel, which is alleged to have violated Section 3, has made
a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such producer,
seller, distributor, trader or service provider a lesser penalty than leviable under the Act.
However, such lesser penalty shall not be imposed by the Commission in cases where the report of investigation
directed u/s 26 has been received before making of such disclosure.
Lesser penalty shall be imposed by the Commission only in respect of a producer, seller, distributor, trader or service
provider included in the cartel, who has made the full, true and vital disclosures.
Lesser penalty can be imposed by the Commission if the person making the disclosure continues to cooperate with
the Commission till the completion of the proceedings.
If the Commission is satisfied that such producer, seller, distributor, trader or service provider included in the cartel
had in the course of proceedings had not complied with prescribed conditions or gives false evidence or does not
make vital disclosure then regular penalty can be imposed on him.
Question 87] Discuss briefly whether Managing Director can be held liable for contravention of any provisions of
the Competition Act, 2002.
Ans.: Contravention by Companies [Section 48]: Where a person committing contravention of any of the
provisions of this Act or of any rule, regulation, order made or direction issued thereunder is a company, every
person who, at the time the contravention was committed, was in charge of, and was responsible to the company
for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the
contravention and shall be liable to be proceeded against and punished accordingly.
However, nothing shall render any such person liable to any punishment if he proves that the contravention was
committed without his knowledge or that he had exercised all due diligence to prevent the commission of such
contravention.
Where a contravention of any of the provisions of the Act or of any rule, regulation, order made or direction issued
thereunder has been committed by a company and it is proved that the contravention has taken place with the
consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other
officer of the company then all such persons shall also be deemed to be guilty of that contravention and shall be
(a) Company means a body corporate and includes a firm or other association of individuals.
(b) Director, in relation to a firm, means a partner in the firm.
COMPETITION APPELLATE TRIBUNAL
Question 88] Write a short note on: Competition Appellate Tribunal
188
State the composition of the Competition Appellate Tribunal, comprising of qualification term, provisions relating
to resignation and restriction on employment after the resignation of chairperson and/or member; and who can
present the appellant before the Tribunal?
CS (Executive) - June 2018 (7 Marks) * 1 2
Ans.: Establishment of Appellate Tribunal [Section 53A]: The Central Government has established Competition
Appellate Tribunal:
(a) To hear and dispose of appeals against any direction issued or decision made or order passed by the
Competition Commission
(b) To adjudicate on claim for compensation that may arise from
(c) To pass orders for the recovery of compensation
The Headquarter of the Appellate Tribunal is situated at New Delhi.
Composition of Appellate Tribunal [Section 53C]: The Appellate Tribunal shall consist of a Chairperson and not
more than two other members to be appointed by the Central Government.
Qualifications for appointment of Chairperson and Members of Appellate Tribunal [Section 53D]:
(1) The Chairperson of the Appellate Tribunal shall be a person, who is, or has been a Judge of the Supreme
Court or the Chief Justice of a High Court.
(2) A member of the Appellate Tribunal shall be a person of ability, integrity and standing having special
knowledge of, and professional experience of not less than 25 years in, competition matters including competition
law and policy, international trade, economics, business, commerce, law, finance, accountancy, management,
industry, public affairs, administration or in any other matter which in the opinion of the Central Government, may
be useful to the Appellate Tribunal.
Resignation of Chairperson and Members of Appellate Tribunal [Section 53-1]: The Chairperson or a member of
the Appellate Tribunal may, by notice in writing under his hand addressed to the Central Government, resign his
office:
However, the Chairperson or a member of the Appellate Tribunal shall, unless he is permitted by the Central
Government to relinquish his office sooner, continue to hold office until the expiry of 3 months from the date of
receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of
his term of office, whichever is the earliest.
Member of Appellate Tribunal to act as its Chairperson in certain cases [Section 53J]:
(1) In the event of the occurrence of any vacancy in the office of the Chairperson of the Appellate Tribunal by
reason of his death or resignation, the senior-most Member of the Appellate Tribunal shall act as the Chairperson
of the Appellate Tribunal until the date on which a new Chairperson appointed in accordance with the provisions of
this Act to fill such vacancy enters upon his office.
(2) When the Chairperson of the Appellate Tribunal is unable to discharge his functions owing to absence, illness
or any other cause, the senior-most member or, as the case may be, such one of the Members of the Appellate
Tribunal, as the Central Government may, by notification, authorize in this behalf, shall discharge the functions of
the Chairperson until the date on which the Chairperson resumes his duties.
Restriction on employment of Chairperson and other Members of Appellate Tribunal in certain cases [Section
53L]: The Chairperson and other members of the Appellate Tribunal shall not, for a period of two years from the
date on which they cease to hold office, accept any employment in, or connected with the management or
administration of, any enterprise which has been a party to a proceeding before the Appellate Tribunal under the
Act.
However, nothing contained in this section shall apply to any employment under the Central Government or a State
Government or local authority or in any statutory authority or any corporation established by or under any Central,
State or Provincial Act or a Government Company as defined in the Companies Act, 2013.
Right to legal representation [Section 53S]:
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(1) A person preferring an appeal to the Appellate Tribunal may either appear in person or authorize one or
more Chartered Accountants or Company Secretaries or Cost Accountants or legal practitioners or any of its officers
to present his or its case before the Appellate Tribunal.
(2) The Central or State Government or a local authority or any enterprise preferring an appeal to the Appellate
Tribunal may authorize one or more Chartered Accountants or Company Secretaries or Cost Accountants or legal
practitioners or any of its officers to act as presenting officers and every person so authorized may present the case
with respect to any appeal before the Appellate Tribunal.
(3) The Commission may authorize one or more Chartered Accountants or Company Secretaries or Cost
Accountants or legal practitioners or any of its officers to act as presenting officers and every person so authorized
may present the case with respect to any appeal before the Appellate Tribunal.
Question 89] Write a short note on: Appeal to Competition Appellate Tribunal * 1
Ans.: Appeal to Appellate Tribunal [Section 53B]:
(1) The Central or State Government or a local authority or enterprise or any person aggrieved by direction, decision
or order made by Commission may prefer an appeal to the Competition Appellate Tribunal.
(2) Every such appeal shall be filed within a period of 60 days from the date receipt of copy of the direction,
decision or order made by the Commission.
(3) Such appeal has to be made in prescribed form along with prescribed fees.
(4) The Appellate Tribunal may entertain an appeal after 60 days if it is satisfied that there was sufficient cause
for not filing the same.
(5) On receipt of an appeal, the Appellate Tribunal may pass appropriate order as it thinks fit, confirming,
modifying or setting aside the direction, decision or order appealed against.
(6) The Appellate Tribunal shall send a copy of every order made by it to the Commission and the parties to the
appeal.
(7) The Appellate Tribunal shall endeavour to dispose of the appeal within 6 months from the date of receipt of
the appeal.
Question 90] Write a short note on: Appeal to Supreme Court under the Competition Act, 2002
Ans.: Appeal to Supreme Court [Section 53T]: The Central/State Government or the Commission or any statutory
authority or any local authority or any enterprise or any person aggrieved by any decision or order of the Appellate
Tribunal may file an appeal to the Supreme Court within 60 days from the date of communication of the decision
or order of the Appellate Tribunal to them.
However, the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing
the appeal within the said period, allow it to be filed after the expiry of the said period of 60 days.
MISCELLANEOUS
Question 91] Examine whether the Government has any power to take action against the Competition
Commission of India.
Ans.: Power of Central Government to supersede Commission [Section 56(1)]: In following cases the Central
Government shall have power to supersede the Commission for a period up to 6 months by issuing notification -
(a) That on account of circumstances beyond the control of the Commission, it is unable to discharge the
functions or perform the duties imposed on it by or under the provisions of the Act.
(b) That the Commission has persistently made default in complying with any direction given by the Central
Government or in the discharge of the functions or performance of the duties imposed on it and as a result of such
default the financial position of the Commission or the administration of the Commission has suffered.
(c) That circumstances exist which render it necessary in the public interest so to do, the Central Government
may, by notification and for reasons to be specified therein.
However, before issuing any such notification, the Central Government shall give a reasonable opportunity to the
Commission to make representations against the proposed supersession and shall consider representations, if any,
of the Commission.
190
Effects of order [Section 56(2)]: Upon the publication of a notification to supersede the Commission -
(a) The Chairperson and other Members shall as from the date of supersession, vacate their offices as such.
(b) All the powers, functions and duties which may be exercised or discharged by or on behalf of the Commission
shall, until the Commission is reconstituted, be exercised and discharged by the Central Government or authority
specified by the Central Government.
(c) All properties owned or controlled by the Commission shall vest in the Central Government until the
Commission is reconstituted.
Reconstitution of Commission [Section 56(3)]: On or before the expiration of the period of supersession specified
in the notification, the Central Government shall reconstitute the Commission by a fresh appointment of its
Chairperson and other Members and in such case any person who had vacated his office shall not be deemed to be
disqualified for re-appointment.
Lying of notification in Parliament [Section 56(4)]: The notification issued and full report of any action taken and
the circumstances leading to such action shall be laid before each House of Parliament at the earliest.
Question 92] One of the party in proceeding before the Competition Commission submits that provisions of the
Competition Act, 2002 are inconsistent with the provisions of some other law and hence case should be
dismissed. Will party succeed?
Ans.: Act to have overriding effect [Section 60]: The provisions of the Competition Act, 2002 shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Question 93] Can a Civil Court entertains any suit in respect of any matter which the Commission is empowered
to determine under the Competition Act, 2002?
Ans.: Exclusion of jurisdiction of civil courts [Section 61]: No civil court shall have jurisdiction to entertain any suit
or proceeding in respect of any matter which the Commission or the Appellate Tribunal is empowered by or under
the Act to determine.
No injunction shall be granted by any Court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under the Act.
Question 94] One of the party made a complaint before the Competition Commission. The respondent pleaded
that the Competition Commission has no authority to decide the matter in view of the arbitration clause. Will the
complainant succeed?
Ans.: Application of other laws not barred [Section 62]: The provisions of the Competition Act, 2002 shall be in
addition to, and not in derogation of the provisions of any other law for the time being in force.
If an agreement contains arbitration clause then such matter must be referred to arbitration, as per Section 8 of
the Arbitration & Conciliation Act, 1996. However, if there is arbitration agreement, Competition Commission can
still entertain such matter if it falls within its jurisdiction, as remedy provided under the Competition Act, 2002 is in
addition to provision of any law for the time being in force.
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12
CHAPTER
CONSUMER PROTECTION ACT, 1986
INTRODUCTION: An analysis of marketing management has made it dear that consumer is a kingpin in the market.
The producer should produce goods keeping in mind the requirements of consumers and satisfy the consumer but
it is observed that this obligation is neglected by some businessmen and they are involved in the unfair practices
such as supply of sub-standard quality, adulteration etc. So there is need for consumer protection. Hence consumer
protection means protecting the interest of consumer.
Consumer protection is very wide. It includes rights, responsibilities and various remedies available to consumers.
It is not only beneficial for consumer but it is equally important for businessmen also.
Consumer protection provides information to the ignorant customers regarding rights and remedies available to
them. It spreads awareness so that consumer can know about the various redressal agencies where they can
approach to protect their interests.
In developing countries like India, consumers are not organized. There are very few consumer organizations which
are working to protect the interests of consumers. Consumer protection provides power and rights to these
organizations as these organizations can file case on behalf of customers.
Although nowadays consumer is the king pin of market but then also there is lot of exploitation of consumers as
businessmen use various unfair trade practices to cheat and exploit consumers. Consumer protection provides
safeguard to consumers from such exploitation.
Businessmen cannot survive for a long time by ignoring the interest of consumer. They have to give due importance
to consumer if they want to prosper in competitive market. Thus, Consumer Protection Act, 1986 can be described
as common man's Civil Court. The Act is designated to make available cheap and quick remedy to a small consumer.
In today's competitive world buyer could be easily misled and duped. He needs support andprotectionfrom
unscrupulous sellers, thus Act has been incorporated to give quick, cheap and speedy justice of the complaints of
buyers.
The Act extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and services
unless otherwise notified by the Central Government. It came into force on 15th April, 1987.
APPLICABILITY & OBJECT
Question 1] Write a short note on: Basic rights of consumers as provided under the Consumer Protection Act,
1986 CS (Inter) - June 1994 (5 Marks), Dec 1995 (5 Marks)
Ans.: Although businessman is aware of his social responsibilities even then we come across many cases of
consumer exploitation. That is why government of India provided following rights to all the consumers under the
Consumer Protection Act:
(1) Right to safety: The consumers have the right to be protected against the marketing of goods and services
which are hazardous to life and property, this right is important for safe and secure life. Sometimes the
manufacturing defects in pressure cookers, gas cylinders and other electrical appliances may cause loss to life,
health and property of customers. This right to safety protects the consumer from sale of such hazardous goods or
services.
(2) Right to information: The consumer has the right to get information about the quality, quantity, purity,
standard and price of goods or service so as to protect himself against the abusive and unfair practices. The producer
must supply all the relevant information at a suitable place.
(3) Right to choice: Every consumer has the right to choose the goods or services of his or her likings. The right
to choose means an assurance of availability, ability and access to a variety of products and services at competitive
price. The producer or supplier or retailer should not force the customer to buy a particular brand only. Consumer
should be free to choose the most suitable product from his point of view.
192
(4) Right to be heard or right to representation: The consumer has the right to represent him or to be heard or
right to advocate his interest. In case a consumer has been exploited or has any complaint against the product or
service then he has the right to be heard and be assured that his interest would receive due consideration.
(5) Right to seek redressal: This right assures justice to consumer against exploitation. The right to redressal
includes compensation in the form of money or replacement of goods or repair of defect in the goods to the
satisfaction of consumer.
(6) Right to consumer education: Consumer education refers to educating the consumer constantly with regard
to their rights. In other words, consumers must be aware of the rights they enjoy against the loss they suffer on
account of goods and services purchased by them. Government has taken several measures to educate the
consumers. For instance, Ministry of Civil Supplies publishes a quarterly magazine under the title "Upbhokta Jagran".
Doordarshan telecasts a programme like the "Sanrakshan Upbhokta Ka" and apart from this, Consumer Day is
observed on March 15 every year.
CONSUMER
Question 2] Who is a 'Consumer' under the Consumer Protection Act, 1986?
Ans.: Consumer [Section 2(d)]: Consumer means any person who:
(i) Buys goods for a consideration and includes user of goods but does not include a person who obtains such goods
for resale or for any commercial purpose or
(ii) Hires or avails of services for a consideration and includes beneficiary of services.
Explanation: Commercial purpose does not include use by a consumer of goods bought and used by him and
services availed by him exclusively for the purpose of earning his livelihood, by means of self- employment.
Question 3] Write a short note on: Commercial Purpose
CS (Executive) -Dec 2009 (3 Marks), Dec 2012 (3 Marks)
Ans.: As per the definition of 'Consumer' as defined under the Consumer protection Act, 1986, if person purchases
the goods for 'commercial purpose' then he is not 'Consumer' and no benefit under the Act will be available to him.
Commercial purpose does not include use by a consumer of goods bought and used by him and services availed by
him exclusively for the purpose of earning his livelihood, by means of self-employment.
The Supreme Court in Laxmi Engineering Works v. P.S.G. Industrial Institute held that the purpose for which a person
has bought goods is a 'commercial purpose' is always a question of facts and to be decided in the facts and
circumstances of each case. If the commercial use is by the purchaser himself for the purpose of earning his
livelihood by means of self employment such purchaser of goods would yet be a consumer. The Supreme Court
further observed that if a person purchased a machine to operate it himself for earning his livelihood, he would be
a consumer. If such person took the assistance of one or two persons to assist him in operating the machine, he
would still be a consumer. But if a person purchases a machine and appoint or engage another person exclusively
to operate the machine, then such person would not be a consumer.
Question 4] Whether passenger travelling by trains holding valid tickets and the subscribers of telephones are
consumers? Explain with reasons. CS (Inter) - Dec 1995 (5 Marks)
Ans.: It has been held that railway passengers travelling on payment of stipulated fare charged for tickets are
'Consumers' and facility of transportation provided by railway administration is a 'service' rendered for
consideration as defined in Consumer Protection Act, 1986. [GM South Eastern Railway v. Anand Sinha, (1991) (1)
CPJ10]
Subscribers to telephones are also 'consumers'. It has been held that Telephone Departments fell within the
provisions of the Consumer Protection Act, 1986 and subscribers, as consumer of telephone service, would entitled
to seek relief whenever necessary. [District Manager, Telephones, Patna v. Lalit Kumar Bajilal, (1992) 1 CPJ 189
(NCDRC)]
193
Question 5] X a small scale entrepreneur engaging 25 workers in his workshop, purchased a turning machine from
Y which was found defective. X wants to lodge a complaint against Y with a consumer forum for compensation.
Advise X. CS (Inter) - June 1996 (5 Marks)
Ans.: As per the definition of 'Consumer' as defined under the Consumer Protection Act, 1986, if person purchases
Since, X had engaged 25 workers in his workshop to operate the machine purchased, his action will not be construed
an activity for earning his livelihood but will be considered as commercial activity and thus he will not succeed in
getting any compensation under the Consumer Protection Act, 1986.
Question 6] Discuss whether the legal heir of a deceased patient admitted in a government hospital rendering
free services is a 'consumer' under the Consumer Protection Act, 1986.
Ans.: As term 'Consumer' as defined in Consumer Protection Act, 1986 includes the person who hires or avails of
any services for a consideration and includes any beneficiary of such services. It has been held by the Supreme Court
that government hospital renders services free of charge and hence legal heir of a deceased patient admitted in a
government hospital availing free services is not a 'Consumer'. [Indian Medical Association v. Shantha & Others
(1995) 19 CLA 258 SC]
Hence, the heir of deceased patient admitted in a government hospital cannot avail any benefit under the Consumer
Protection Act, 1986.
Question 7] X brought from Beta Engineering works a machine called 'Brickman' which was used for clay
preparation, brick moulding etc., The machine was found to be defective. Examine whether X can claim relief
under the Consumer Protection Act, 1986. CS (Inter) - June 1998 (5 Marks)
If X proves that machine purchased by him is for the purpose of earning his livelihood and was used for self
employment then he will be 'Consumer' under the Act and will succeed in getting relief for the defect in the machine.
Question 8] Satarang Singh admitted his only infant son in a private nursing home. As result of strong dose of
medicine administered by the nursing attendant, the child has become mentally retarded. Satarang Singh wants
to make a complaint under the Consumer Protection Act, 1986. Will he succeed? CS (Inter) - Dec 1998 (5 Marks)
Ans.: It was held that even a member of a family gets the status of 'Consumer'. In an action by a member of the
family for any deficiency in service, a hospital cannot take a stand that there is no priority of contract. In this case a
minor was wrongly diagnosed and the Commission awarded compensation to both minor and parents separately.
Thus, Satarang Singh and his infant son both are consumers and they will succeed in their claim under the Consumer
Protection Act, 1986.
Question 9] Mr. X booked for a motor car vehicle through one of the dealers. He was informed that the procedure
for purchasing the car has been changed and he was called upon to make some further payment before delivery.
On being aggrieved, Mr. X filed a complaint with the State Commission under the Consumer Protection Act, 1986.
Will he succeed?
Ans.: The facts of the case are similar to M.N. Narasimha Reddy v. Managing Director, Maruti Udyog Ltd., where the
appellant informed that the procedure for purchasing the car has been changed and he was called upon to make
some further payment whereupon he filed complaint with State Commission.
194
The State Commission dismissed the complaint on the ground that the appellant was not a consumer as complaint
does not relates to 'defect' in goods. On an appeal, the National Commission also dismissed the appeal and held
that the complainant was not a consumer and the complaint was not maintainable in law.
Therefore, Mr. X will not succeed in his complaint against the company.
Question 10] A car dealer issued an advertisement that a person could enter a contest by booking a particular
branded car. On the specified dates, draws would be held and the persons who are successful in the draws would
be entitled to two free tickets from Mumbai to New York and back. Hari who purchased the car and entered the
contest was declared a winner of the draw. But the tickets were not delivered to him and therefore he filed a
complaint under the Consumer Protection Act, 1986. Will he succeed? CS (Inter) - Dec 1999 (5 Marks)
Ans.: Hari will not succeed as he is not 'Consumer' because he had paid for the car which he had duly received and
there was no complaint that it had any defect. Therefore, the opposite party was not liable so far as the contract
was concerned and stated.
In Byford v. S.S. Srivastava (1993) 1 CPJ/55 (NCDRC), the National Commission held that -
Receiving two air tickets to New York was an additional attraction that was attached to the sale but, which depends
upon lottery draw. It was not an intrinsic part of the contract deal for which the payment was made. Thus, so far
the lottery winning is concerned it cannot be said that the complainant was 'Consumer' who had hired any service
and hence he has no right to get the redressal under the Consumer Protection Act, 1986.
Question 11] Ajay purchased a tractor from Mahi Ltd. for tilling the land but he used it in idle time for
transportation of agricultural produce on hire. Some defects were developed in the engine of the tractor. He
complained to Mahi Ltd., but all in vain. Then he filed a suit in Consumer Disputes Redressal Forum for damages
caused by the defects. Mahi Ltd. pleaded that Ajay is not a 'consumer' within the definition of section 2(1) (d) of
the Consumer Protection Act, 1986, as he is using the tractor for commercial purposes. Whether Ajay will succeed
in his case? Refer to relevant provisions of law in support of your answer with reference to case law, if any.
In Bhupendra ]ang Bahadu r Guna v. Regional Manager & Others, it was held that a tractor purchased primarily to
till the land of the purchaser and let out on hire during the idle time to till the lands of others would not amount to
commercial use. Thus, Ajay is 'Consumer' under the Consumer Protection Act, 1986 and he can file the claim if there
is any defect in the tractor.
Question 12] Mahesh purchased a machine from Astute Ltd. to operate it himself for earning his livelihood. He
took the assistance of a person to assistance of a person in operating machine. He filed a claim in the cons umer
forum against the company for deficiency in service. Astute Ltd. alleged that Mahesh did not operate the machine
himself but had appointed a person exclusively to operate the machine. Will Mahesh Succeed?
The facts of the given case are based on the leading case Laxmi Engineering Works v. PSG Industrial Institute, (1995)
II LPR 11 SC, where the Supreme Court held that if a person purchased a machine to operate himself for earning his
livelihood, he would be consumer. But if a person purchases machine and appoint or engage another person
exclusively to operate the machine, then such person would not be consumer. Thus, Mahesh is 'Consumer' within
the meaning of the Consumer Protection Act, 1986 and he will succeed in his claim.
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Moreover, the complainant will succeed even if he engage somebody to operate the machine exclusively on the
ground that the defect took place during the warranty period as that will be deficiency of service.
Question 13] A company named A Ltd. maintained a guest house for use of its CMD and other senior executives.
It entered into a contract with X Ltd. for installation of central air-conditioner system. A complaint was lodged
with X Ltd. that air-conditioning system did not function properly. But no action was taken by X Ltd. to repair the
air-conditioning system. Then, the complainant company appointed a consultant to submit a report on the
working of the air-conditioning system. The consultant pointed out number of defect such as defective
fabrication, improper construction of the cooling tower and so on. A Ltd. now wants to make a complaint before
the consumer forum. Will it succeed? CS (Inter) - Dec 2001 (5 Marks)
Ans.: In J.K. Puri Engineers v. Mohan Breweries & Distilleries Ltd., (NCDCRC), 1996, it was held that even where the
goods are purchased for commercial purpose, if there is a warranty, as in this case, for its maintenance, the
purchaser becomes a consumer in respect of the services rendered or to be rendered
by the manufacturer or supplier during the warranty period. The complainant is, therefore, a consumer. Further the
complainant had drawn the attention of X Ltd. there was no reply from them for quite some time, there was thus
gross deficiency in service. Thus, A Ltd. can file a complaint before the consumer forum and it will succeed.
Question 14] A person running a printing press purchased an offset printing machine from a supplier. When put to
use, the offset printing machine was found defective due to which he suffered serious loss in his business. The defect
could not be rectified by supplier/manufacturer. The supplier also refused to provide a defect free replacement. He
made a complaint to the consumer court claiming compensation. CS (Inter) - June 2002 (5 Marks)
In Abbay Chemical Pvt. Ltd. v. Kanti Bahi D Patel, the National Commission held that no compensation could be
awarded in respect of defects of a machine worth ` 10 lakhs, purchased for use in large scale manufacturing activity,
because the purchase would be for a commercial purpose and the buyer in such case would not be a consumer
under the Consumer Protection Act, 1986.
Thus, a person running printing press is not 'Consumer' and hence he will not succeed in his claim.
Question 15] An income taxpayer went to a Government Hospital for treatment where treatment is rendered free
of charges. Being not satisfied with the treatment, he lodged a complaint with the Consumer Forum alleging
deficiency in service and claiming compensation contending that the income tax paid by him has been appropriated
in providing the 'so-called free service' by the hospital. Will he succeed? CS (Inter) - Dec 2003 (5 Marks)
Ans.: As per the definition of 'Consumer' as given in Consumer Protection Act, 1986, consumer means any person
who hires or avails of any services for a consideration.
The tax paid by the person availing the service at a Government hospital cannot be treated as a consideration or
charge for the service rendered at the hospital. Hence, he cannot be treated as 'consumer' and hence he will not
succeed.
Question 16] A tenant entered into a lease agreement of a flat for use as residential house. After occupying the flat,
the tenant demanded of the landlord to effect some repairs and re-paint the building. The owner refused on the
ground that there was no such clause in the lease agreement. The tenant filed a complaint in the Consumer Forum
for 'deficiency in service'. Will he succeed?
Ans.: It was held by the Supreme Court in Laxmiben Laxmichand Shah v. Sakerben Kanji Chandan that the tenant
entering into lease agreement with the landlord cannot be considered as consumer. Where there was no provision
in the lease agreement in respect of cleaning, repairing and maintaining the building, the rent paid by tenant is not
the consideration for availing these services and therefore, no question of deficiency in service.
Thus, tenant cannot be said to be consumer and he will not succeed.
Question 17] Under the 'salary saving scheme' of LIC of India, employees of a company have taken insurance policies
and the premium due on each policy is collected by the company from the salaries of the employees and sent to LIC
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of India. LIC of India neither issued any separate receipts nor used to issue any premium notices to the employees.
When the widow of a deceased employee made a claim to the LIC of India on the death of her husband, LIC of India
repudiated the claim on the ground that four instalments of the premium have not been paid. The widow
approached the Consumer Forum for redressal. Will she succeed? CS (Inter) - Dec 2007 (5 Marks)
Ans.: Facts of the given case are similar to Delhi Electric Supply Undertaking v. Basanti Devi. The LIC formulated a
scheme called 'salary saving scheme' under which employees of an organization could buy an insurance policy.
Premium due on each policy was collected by the employer from the salary of the employee and sent to LIC. The
Corporation did not issue any separate receipt to employees nor did it issue any premium notice. When the widow
of a deceased employee made a claim to LIC on the death of her husband, the LIC repudiated the claim on the
ground that four instalments of the premium have not been paid.
Allowing the widows claim, the Supreme Court held that since the burden of collecting the premium and remitting
it to the corporation was on the employer it was not for the employee to intimate the corporation about non-
remittance of the premium. The Supreme Court further held that the employer had implied authority to collect
premium on behalf of the corporation. There was no gain saying the fact that if the employer had, after deducting
the stipulated amount from the employee's salary, failed to remit the premium to the corporation, it was the fault
of the agent of the corporation. In the circumstances, the LIC is liable to make payment under the policy.
GOODS & SERVICES
Question 18] Explain the term 'Goods' as per Consumer Protection Act, 1986
Whether shares of a company constitutes 'goods' under the Consumer Protection Act, 1986? Discuss in the light
of case law? CS (Inter) - Dec 1995 (5 Marks)
Ans.: Goods [Section 2(i)]: Goods means goods as defined in the Sale of Goods Act, 1930.
As per Section 2 (7) of the Sale of Goods Act, 1930, Goods means every kind of movable property other than
actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming
part of the land, which are agreed to be severed before sale or under the contract of sale.
In Morgan Stanley Mutual Fund v. Kartik Das (1994) 3 CLJ 27, the Supreme Court held that an application for
allotment of shares cannot constitute goods. It is after allotment, rights may arise as per the articles of association
of the company. At the stage of application there is no purchase of goods for consideration and again the purchaser
cannot be called the hirer of services for consideration.
Question 19] Explain the concept of 'service' as defined under Consumer Protection Act, 1986.
Ans.: Service [Section 2(1) (o)]: Service mean service of any description which is made available to potential users
and includes, but not limited to the provision of facilities in connection with banking, financing, insurance, transport,
processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment,
amusement or the purveying of news or other information, but does not include the rendering of any service free
of charge or under a contract of personal service.
Question 20] X, a small scale industry having a turnover of only about ` 10 lakhs, seek nursing facilities from a
bank by means of grant of adequate margin money. On failing to obtain this, it proceeds under the Consumer
Protection Act, 1986. Will it succeed? CS (Inter) - Dec 1994 (4 Marks)
Ans.: In Special Machines v. Punjab National Bank (1991) CPJ 78, the National Commission held that failure to
provide nursing and financing facilities to a small scale industry which consequently became sick cannot be said to
constitute 'deficiency in service' as grant or withholding of further advances and insisting on margin money, banks
may exercise their discretion and act in accordance with their best judgment. The proper forum to agitate such
grievances is a Civil Court not a Consumer Forum. Based on the facts, it can be said that X will not succeed in his
complaint against the bank before the Consumer Forum.
Question 21] A contract was entered between the landlord and the tenant for hiring of a flat on a monthly tenancy
basis. Contrary to the contract, the landlord neglected and refused to provide the agreed amenities to the tenant
and as consequences, the tenant and his family members suffered mental agony ill health etc. on being aggrieved,
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the tenant wants to file a complaint before the redressal agency under the Consumer Protection Act, 1986. Can
landlord be held liable under the Act?
Ans.: The arrangement between the tenant and the landlord was only one of the lease immovable property, which
does not fall with the definition of 'Service' and hence not covered by the Consumer Protection Act, 1986. Further,
tenant is not 'Consumer' within the meaning of Section 2(1) (d).
The facts of the given case are similar to Smt. Laxmi Singhania v. Smt. Debi Lohia, 1992 (1) CPJ 293, in which National
Commission gave similar view and held that dispute between landlord and tenant does not come within purview of
the Consumer Protection Act, 1986.
Thus, landlord cannot be held liable under Consumer Protection Act, 1986.
Question 22] Whether a medical practitioner could be regarded as rendering service within the meaning of
Section 2(1) (o) of the Consumer Protection Act, 1986? CS (Inter) - Dec 2001 (5 Marks)
Ans.: Service rendered by a medical practitioner is 'Service' and such service would fall within the ambit of 'Service'
as defined in Section 2(1) (o) of the Consumer Protection Act, 1986.
Thus, medical practitioner may be held liable for deficiency in service under the Consumer Protection Act, 1986.
Question 23] X, who was working as a truck driver had taken a general insurance policy to cover the risk of injuries
for a period of from 1.11.2018 to 30.10.2019. He renewed the policy for a further period of one year on
10.11.2019. On the same day, he met with an accident and suffered multiple injuries including fractures. X
submitted the claim along with documents to the insurance company. The insurance company repudiated the
claim on the ground that the premium for the renewed policy was received in the office at 2.30 pm on 10.11.2019,
while the accident had taken place at 10 am on that day and hence there was no policy at the time of accident.
Will X succeed if he files a complaint against the insurance company for his claim?CS (Inter) - June 2000 (5
Marks)
Ans.: Service of insurance company is included as per the definition of 'Service'. In New India Assurance Company
Ltd. v. Ram Dyal & Others, the Supreme Court has held that when insurance policy is taken on particular day it is
effective from the commencement of the day if in policy time of commencement is not stated.
Thus, when premium was paid on 10.11.2019 and on the policy only the date of the commencement of policy was
mentioned and not the time, therefore, the policy gets renewed on the commencement of the day i.e. from the
midnight of 9.11.2019. Hence, X will succeed if he files complaint against insurance company for his claim under the
Consumer Protection Act, 1986.
DEFECT IN GOODS & DEFICIENCY IN SERVICE
Question 24] What amounts to 'defect in goods' under the Consumer Protection Act, 1986?
Ans.: Defect [Section 2(1) (f)]: Defect means any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained by or under any law for the time being in force or under any
contract express or implied, or as is claimed by the trader in any manner whatsoever in relation to any goods.
It is clear from the above definition that non-fulfilment of any of the standards or requirements laid down under
any law for the time being in force or as claimed by the trader in relation to any goods fall under
the ambit of defect. Therefore, contravention of any of the provisions of following enactments will be treated as a
defect under the Act:
- The Drugs & Cosmetics Act, 1950
- The Prevention of Food Adulteration Act, 1955
- The Indian Standards Institution (Certification Marks) Act, 1952
Contravention of the conditions or implied warranties under the Sale of Goods Act, 1930 in relation to any goods
has also been treated as a defect under the Act.
Fault, imperfection or shortcoming in quality, quantity, potency, purity or standard in relation to goods is to be
determined with reference to the warranties or guarantees expressly given by a trader.
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Question 25] Explain the concept of 'deficiency' as defined under Consumer Protection Act, 1986.
Write a short note on: Deficiency in service
Ans.: Deficiency [Section 2(1)(g)]: Deficiency means any fault, imperfection, shortcoming or inadequacy in the
quality, nature and manner of performance which is required to be maintained by or under any law for the time
being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in
relation to any service.
Question 26] Sohan sent all the relevant documents in an envelope regarding consignment of goods to a buyer in
the USA through Fast Service Couriers. The documents did not reach the buyer as a consequences of which buyer
could not take the delivery of the goods. By the time the duplicate copies of the documents had been received
by the buyer, the seasons of the goods over. He claimed that he had suffered loss of US$ 50,000 as a result of the
negligence of the courier. The State Commission ordered the payment to be made by the Fast Service Couriers,
but National Commission in appeal reversed the order and ordered payment of US$ 100 only as per the receipt
issued by the Fast Service Couriers to the consignor. Advise Sohan.
CS (Inter) - Dec 1994 (4 Marks), Dec 2000 (5 Marks) CS (Inter) - June 2003 (5 Marks)
Ans.: A delay in delivery of article or non deliver is deficiency in service by the organization engaged in courier
service. However, courier can limit the damage payable by having terms of contract.
In Air Pack Courier (India) Pvt. Ltd. v. S Suresh, (1993) 1 CTJ 304, the National Commission held that if the document
in courier were of great value then consignee should have insured the documents. Hence, National Commission did
not grant any relief to the complainant.
Upholding the order of the National Commission, the Supreme Court held in view of the terms and conditions of
contract between the parties, Courier Company was right in limiting the liability undertaken in the contract and in
awarding compensation to the extent stated in the contract. Thus, if courier has limited its liability up to specific
amount say ` 100 then courier is liable for damages up to ` 100 only and not for any other amount for loss of
documents.
Question 27] Can postal department be held liable for non delivery of registered letter or late receipt by the
addresses? CS (Inter) - June 2001 (5 Marks)
Ans.: As per Section 6 of the Post Office Act, 1896, Government does not incur any liability by reason of loss, mis-
delivery or delay of, or damage to, any postal article in the course of transmission by post except to the extent
liability expressly undertaken. Postal authority is liable only on account of fraudulent or wilful act of postal authority.
Question 28] Smartee posted a duly stamped cover, with complete address of the addressee and the address of
sender. On the top of the cover the words "Application for admission to M.A/M. Sc/M.C.A." were printed in bold
letters. The letters was mis-delivered back to the sender. Smartee seeks relief under the Consumer Protection
Act, 1986 on account of deficiency in service by postal department. Will he succeed?
Ans.: In Kober Rajendra Prasad v. Superintendent of Post Offices Neliore, 1991 (1) CRP 299, the State Commission
held that mis-delivery back of packet to sender by the postal authority is a deficiency in service as there is gross
negligence by postal department especially when complete address of sender as well as addressee was given on
the packet and therefore post department is held liable.
Smartee can seek relief under the Consumer Protection Act, 1986 on account of deficiency in service by postal
department.
Question 29] Jolly, who got admission in a collage, paid ` 20,000 towards tuition fee, hostel fee and other charges.
Subsequently, he got admission in a Government Engineering College and therefore, demanded the refund of
fees from the college. The college partly refunded the hostel fee and tuition fee and retained a major portion of
the tuition fee. Jolly wants to file a complaint against the college for total refund fee. Will he succeed?CS (Inter)
- June 2000 (5 Marks)
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Ans.: In Ramdeobaba Engineering College v. Sushant Yubraj Rode & Another, the National Commission held that
non refund of admission fee is not deficiency in service. Admission fee is a consideration for admission and the
service which the college was to render to the student in the matter of his pursuing studies in the college after
admission. Hence, jolly will not succeed in complaint against college under the Consumer Protection Act, 1986 as
college has still to render the service and without any service there is no question of 'deficiency in service'.
Question 30] Avtar made a complaint to the Consumer Disputes Redressal Forum that the Regional Provident
Fund Commissioner had not settled his provident fund dues within the period stipulated in the Employees'
Provident Funds and Miscellaneous Provisions Act, 1952 and for the 'deficiency in service'. He also claimed
damages for non-settlement of the dues within the stipulated period. The Regional Provident Fund Commissioner
in his reply contended that there was no hiring of service for consideration since he was performing a statutory
function. Will Avtar succeed?
CS (Inter) - Dec 2000 (5 Marks), June 2007 (5 Marks)
Ans.: In Regional PF Commissioner, Faridabad v. Shiv Kumar Joshi, RP No. 238,1994, it was held that it was not
correct that the Commissioner was exercising statutory power and was discharging statutory functions under the
Provident Fund Act, he could not come within the ambit of the expression service. Administration charges were
levied and recovered by the Commissioner for payment of services rendered by him and his staff. A duty is also cast
for investment of moneys belonging to the employee's provident fund just as any banker or financial institution
under the control of the Central Government. The Commissioner is required to credit interest to each account. This
was rendering of service for consideration as defined in the Act.
Considering above, if Provident Fund Commissioner fails to settle his dues within the time prescribed it is
deficiency in service and Provident Fund Commissioner will be liable.
Question 31] Bindu while travelling in a train down through the hole in the inter-connection passage way between
two compartments and died. Bindu's dependant wants to lodge a complaint against the railway under the
Consumer Protection Act, 1986. Advice.
Ans.: It was held that a railway passenger travelling in a train on payment of consideration was a consumer within
the meaning of the Consumer Protection Act, 1986.
©
In Union of India v. Nathmal Hansaria, the National Commission held that the death of the passenger could not be
described as resulting from railway accident but an accidental death caused by the absence of safety devices in the
vestibule passage way. Thus, there is deficiency in service and Railway is liable in given case.
Question 32] Rekha made a deposit of ` 20,000 with XYZ Ltd. for a period of 3 years. However, the company did
not pay principal as well as interest on maturity. She filed a complaint before district forum. Will she succeed?
Ans.: When a company invites deposits from the public, it is an offer by the company to interested persons for
investment of their income with an assurance of refund with interest. Thus, in transaction of public deposit there is
an inherent element of service for a consideration and therefore depositor is 'Consumer' under Consumer
Protection Act, 1986. If company did not pay principal as well as interest on maturity it will be deficiency in service.
Hence, Rekha will succeed if she files the complaint against XYZ Ltd.
Question 33] Mohan suffered in his nervous system because of administration of certain non-allopathic medicine
by a doctor, a medical practitioner in allopathy system. Mohan filed a complaint demanding compens ation for
the consequences of the doctor's negligence. Will he succeed?
Ans.: In Poonam Verma v. Ashwin Patel, 1996 (4) SCALE 364, the Supreme Court observed that disputes regarding
applicability of the Act to persons engaged in medical profession either as private practitioners or as Government
doctors working in hospitals or Government dispensaries comes within the purview of the Consumer Protection
Act, 1986. Allowing the appeal the Supreme Court held that the respondent who had practiced in allopathy without
being qualified in that system was guilty of negligence per se.
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Thus, Mohan will succeed in claiming compensation from a doctor for negligence in medical service of doctor.
Question 34] Raman booked a ticket from Delhi to New York by Lufthansa Airlines. The airport authorities in New
Delhi did not find any fault in his visa and other documents. However, at Frankfurt airport authorities instituted
proceedings of verification because of which Raman missed his flight to New York. After necessary verification,
Raman was able to reach New York by the next flight. The airline authorities tendered apology to Raman for the
inconvenience caused to him and also paid as goodwill gesture a sum of ` 5,000. Raman intends to institute
proceedings under the Consumer Protection Act, 1986 against the Lufthansa Airline for deficiency in service. Will
he succeed?
Ans.: In Ravneet Singh Bagga v. KLM Royal Dutch Fin times, the Supreme Court held that the respondent could not
be held to be guilty of deficiency in service. The staff of the airline acts keeping in mind security and safety of
passengers and the Aircraft. In the circumstances, the staff took some time to ascertain the truth and helped the
appellant to reach New York the same day. Thus, if there is delay to airline passenger due to checking and
verification it cannot be called as deficiency in service. Hence, Raman will not succeed in his claim against Lufthansa
Airline for deficiency in service under the Consumer Protection Act, 1986.
Question 35] Raman purchased a car by taking a loan from a bank and gave post-dated cheques to the bank not
only in respect of repayment of loan instalments but also towards premium of insurance policy for succeeding 3
years. On the expiry of the policy in the first year, the bank failed to get the policy renewed for the second year.
In the meantime, the car met with an accident. Raman brought an action against the bank for 'deficiency in
service' under the Consumer Protection Act, 1986. Will he succeed? CS (Inter) - June 2003 (5 Marks)
Ans.: In Pradeep Kumar Jain v. Citi Bank the Supreme Court held that there is no deficiency in service because the
obligation to renew the policy was on the appellant alone. But merely passing on two cheques to the
bank for being paid to the insurance company the appellant would not absolve himself of his liability to renew the
policy. The appellant also have certain duties to discharge in the matter of obtaining the policy and can not merely
pass the blame to someone else.
Question 36] Anju boarded an Express Train at a station in Tamil Nadu to go Delhi on some professional work.
She was carrying with her suitcase in which there were some research material and cash of ` 10,000. She
complained to the travel ticket examiner that stranger without reservation had entered into the compartment
and despite protest from her and other co-passengers, the stranger occupied the berth and travel ticket examiner
did not do anything to de-train stranger. When Anju work up to 2.00 pm the next day, to her surprise, she found
that the suitcase was ransacked and important documents and cash were missing. She alleged that both travel
ticket examiner and the guard were unwilling to receive her complaint and therefore she had registered and FIR
with the police at Delhi. Whether the Railway is liable to pay damages to Anju?
Ans.: Passengers travelling by trains on payment of the stipulated fare charged for the ticket are 'consumers' and
the facility of transportation by rail provided by the railway administration is a 'service' rendered for consideration
as defined in the Act.
Failure of the Railways to check unauthorized persons from entering and occupying first class compartments is
'deficiency in service'.
The facts of the case are similar to General Manager, Southern Railway v. Mrs. A. Shameem (2002). In this case the
National Commission held that if the reserved compartment was not protected from intruders, it was clearly a case
of deficiency of service on the part of Railways. The TTE, who was present in the compartment when the train
started and a complaint was made to him about presence of unauthorized passengers in the reserved compartment,
ignored the pleas of passengers and did not offer any help to passengers in distress. This is nothing but the deficiency
in service and negligence.
Thus, the Railway is liable to pay damages to Anju because the stranger occupied the berth and travel ticket
examiner did not do anything which is deficiency in service on the part of railway.
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Question 37] Rosy made a deposit of ` 5 lakh with a co-operative housing society for the purchase of a flat to be
built by it at a given site on the commitment to deliver completed flat in 2 years time. On expiry of this period,
the society offered her the option of money back without interest or booking of a flat of the same size on another
plot situated at a distance of 2 km. The reason given for the fresh offer was some litigation on the title of the land
which had hampered the progress of construction. She demanded money back with interest @ 12%. The society
refused and Rosy approached the appropriate consumer forum for relief. Will she succeed?
Ans.: In S.P. Dhavaskar v. Housing Commissioner, Karnataka Housing Board, wherein it was held by the National
Commission that a person who had deposited huge sums could not be asked to take back refund after 2 years
without interest or to opt for alternative house at increased price which might be beyond his financial capacity.
Before taking up construction job they should have taken adequate care as to title of land.
The Housing Board had been grossly negligent in rendering service. Therefore, Rosy will succeed in her claim.
Question 38] Babul entered into a contract with a share broker for the sale of shares. The share broker, after
having sold the shares, issued him a cheque but the cheque was dishonoured. Despite repeated reminders, the
share broker did not pay him the money. He took up the matter with the Consumers Forum for redressal. Will he
be regarded as a 'Consumer' and will he succeed?
Ans.: Babul is 'Consumer' and share broker service is covered under the Consumer Protection Act, 1986. As per the
facts of the case, the complainant had been cheated. Since, the broker had committed deficiency
in service. He was responsible for damages. Therefore Babul will succeed in his complaint against broker as held in
Indiravandan Chokey v. Hitesh Dineshchandara Mali, (1994) CPJ 304.
Question 39] Prudent Investments Ltd. was celebrating silver jubilee of its operations and in this connection sent
invitations by post to 250 top businessmen for a special dinner at a 5-Star Hotel. Due to delay in delivery and/or
non-delivery of invitation cards by the postal authorities, only 100 invitees attended the dinner. Advise the
company whether it can make a complaint for compensation to the Consumer Disputes Redressal Forum against
the postal authorities for deficiency in service.
Ans.: As per Section 6 of Post Office Act, 1896, Government does not incur any liability by reason of loss, mis-
delivery or delay of, or damage to, any postal article in the course of transmission by post except to the extent
liability expressly undertaken. Postal authority is liable only on account of fraudulent or wilful act of postal authority.
In Presidency Post Master & Another v. Dr. V. Shankar Rao, it was held by the National Commission that if the Act
provides additional means of obtaining remedy by a consumer but if the remedy is barred under any other Act, then
the various forums constituted under the Act cannot grant the remedy prayed for. Further, services rendered by
the Post Office are merely statutory and there is no contractual liability in running the postal service. The Central
Government merely performs a governmental function which does not amount to a commercial transaction and
therefore, the liability for misleading or late delivery can be fastened on the Postal Department only on the basis of
express provisions of the Post Office Act, 1896.
Question 40] Kajol purchased 2,000 units from a leading mutual fund in 1999 on monthly income scheme. On
maturity, the mutual fund sent account payee cheque dated 1st September, 2005 in favour of Kajol at her address
lodged with the mutual fund through registered post. The registered post letter was not returned undelivered
and the mutual fund believed that the letter containing the cheque was duly delivered to Kajol. On 19th
November, 2005, Kajol asked for payment of the maturity amount and was informed that the cheque was
delivered and en-cashed through a co-operative bank. Kajol files a complaint against the mutual fund for
deficiency in service and seeks relief. Will she succeed? CS (Inter) - June 2006 (5 Marks)
Ans.: Non-refunding the amount due on maturity by mutual fund is clearly deficiency in service as per the Consumer
Protection Act, 1986. Kajol, who files a complaint against the mutual fund will be able to succeed & will be awarded
compensation. There is a deficiency in service on the part of the mutual fund to make the payment due to Kajol.
Thus, Kajol will be able to get compensation under the Consumer Protection Act, 1986.
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Question 41] Chhote Lai, a customer of a bank, while waiting to deposit cash of ` 45,000 at the bank counter was
robbed of his bag containing cash by a person who confronted him with a revolver. The bank security guard did
not catch the person even when he was alerted by Chhote Lai. Chhote Lai filed a complaint with the District Forum
against the bank for deficiency in service and sought relief. Will he succeed?
Ans.: Facts of the given problem are similar to D. S. Sachar v. Punjab and Sind Bank, 2005 CTJ NCDRC, it was held by
the National Commission that ensuring safety of the money to be deposited or withdrawn inside the bank premises
is impliedly part of service which the bank renders to its customers.
Bank was deficient in service in view of the facts that bank's gunman or any other employee made no attempt
whatsoever to approach the snatcher of the money. Hence, bank was directed to pay the amount of ` 45,000 to the
petitioner with interest and cost.
In view of above case law, Chhote Lai will succeed in claiming compensation against bank for deficiency in service
under the Consumer Protection Act, 1986.
Question 42] A newly wedded couple Anand and his wife Anjali had gone to Kathmandu for their honeymoon.
They could not return in time to attend the reception as the airline authorities failed to inform them about
cancellation of their return flight. They lodged a complaint with the Consumer Forum for grant of compensation.
However, the airlines authorities pleaded that the mistake was on the part of their agent whom the airlines
authorities had informed about the cancellation of the flight. Will they succeed in getting compensation? Give
reasons in support of your answer.
Ans.: It was held by the National Commission in Indian Airline, Delhi v. S. N. Seth, Appeal No. 495 (1997) that the
travel agents are the agents of airlines and airline is liable for the negligent acts of its agents as per the Indian
Contract Act, 1872.
The Contract Act, 1872 applies to all litigants before the commission under the Consumer Protection Act, 1986. By
issuing air ticket on behalf of the Indian Airline a contract has been entered into between customer and Indian
Airline. In such circumstances principle is certainly bound by the terms of the contract.
Thus, complainants can succeed in their claim for compensation under the Consumer Protection Act, 1986 against
Airline Authorities for deficiency in service. As the agent acted negligently, Airline Authorities are liable as principal
for the loss to third party.
Question 43] Girish, while taking a loan from a bank, gave FDR of his family friend Neena as a guarantee against
the loan received. The bank adjusted the said FDR amount when Girish defaulted the loan repayment. Neena
claimed return of money from the bank contending that she is a third party and it was 'deficiency in service' on
the bank's part. Will Neena succeed?
Ans.: The facts given in problem are similar to Mrs. Anumati v. Punjab National Bank, in which National Commission
held that there shall be no deficiency in service where bank takes conscious decision to adjust the fixed deposit of
the joint holders against the loan taken by third party when FDR has been mortgaged as guarantee for loan.
The FDR of Neena was guaranteed against the loan taken by the Girish from the bank. Thus Neena will not succeed
if she claimed return of money from the bank contending that she is a third party.
Question 44] Rajesh made a complaint before the Consumer Disputes Redressal Forum for seeking compensation
against the State Electricity Board contending that due to fluctuations and fall in electricity voltage in his small
scale industrial unit, he suffered production loss. Will he succeed?
Ans.: The National Commission in Kerela State Electricity Board v. Raveendran considered a complaint regarding fall
in electricity voltage damaging the machine in a plastic factory and affecting production and held that it is 'deficiency
in service'. The National Commission awarded compensation to the complainant.
Thus, Rajesh will succeed if he makes complaint against SEB before the Consumer Disputes Redressal Forum for
seeking compensation under the Consumer Protection Act, 1986.
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Question 45] After the date of booking for purchase of a car, Rakshit was asked to pay differential amount of
increase in the Central Excise Duty at the time of delivery of the car. Rakshit refused to pay the amount and
moved the Consumer Disputes Redressal Forum. Will he succeed?
Ans.: In the above case, Rakshit was asked to pay differential amount of increase in the Central Excise Duty at the
time of delivery of the car after the date of booking for purchase of car manufacturer's decision to increase the price
due to increase in central excise duty is not justified. Thus, Rakshit will succeed in the above case.
Question 46] Sangeetha filed a complaint against a bank where her ornaments kept in the bank's locker were found
missing and sought compensation through the Consumers Disputes Redressal Forum against the deficiency in
service by the bank. The bank submitted a certificate recorded by the custodian of the bank on the day Sangeetha
had operated the locker which stated that all lockers operated during the day had been checked and found properly
locked. Will Sangeetha succeed in her claim? CS (Executive) - Dec 2008 (5 Marks)
Ans.: In Punjab National Bank v. K.B. Shetty, First Appeal No. 7 (1991), ornaments kept in the banks locker were
found lost though the certificate recorded by the custodian of the bank on the day the customer operated the locker
stated that all lockers operated during the day have been checked and found properly locked. The National
Commission upholding the decision of the State Commission, held the bank guilty of negligence which amounts to
deficiency in service and therefore, liable to make good the loss.
Thus, Sangeetha will succeed in her claim against the bank for deficiency in service for the lost ornaments form the
locker of the bank under the Consumer Protection Act, 1986.
Question 47] A school owned a swimming pool and offered swimming facilities to the public on payment of fees.
The school conducted summer swimming training camps to train children in swimming and for this purpose had
engaged a trainer/coach.
Mohan had enrolled his son for learning how to swim. One day while swimming, the child died due to drowning.
The school authorities maintained that the trainer/coach was fully qualified for the job and challenged the
complainant's claim for compensation in the consumer disputes redressal forum. Should the school authorities be
held liable to pay compensation for 'deficiency in service'? Who is entitled to receive compensation? Give reasons.
Ans.: In the case of Sashikant Krishnaji Dole v. Shitshan Prasarak Mandali [F.A. No. 134 of 1993 (NCDRC)], the school
owned a swimming pool and offered swimming facilities to the public on payment of a fee. The complainants had
enrolled their son for learning swimming under the guidance of the coach. The State Commission held the school
and the coach deficient in rendering service to the deceased, that the coach was not fully trained, did not exercise
even the basic commonsense needed to counter an accident in swimming. Dismissing the appeal the National
Commission observed that the State Commission had given cogent reasons for holding the school and the coach
responsible for death of the deceased. Thus, Mohan will succeed in claiming compensation from the school and the
coach under the Consumer Protection Act, 1986.
Question 48] Prakash, aged 37 years, was travelling from Mumbai to Delhi by air. When he occupied his seat in the
aircraft, an announcement was made that his luggage was lying on the ground unidentified and that he should
disembark to identify his luggage. When Prakash was stepping down from the aircraft, the ladder was suddenly
removed as a result of which he fell down sustaining bodily injuries causing 10% disablement. As against the claim
of ` 10 lakh filed by Prakash towards compensation, the airlines was willing to pay ` 40,000 which according to it was
the maximum statutory liability of the airlines under the Carriage by Air Act, 1972. However, the State Commission
awarded ` 4 lakh towards compensation and an additional ` 1 lakh for mental agony and distress plus costs. Is the
order passed by the State Commission justified? If so, give reasons and refer to the decided case law. CS
Ans.: In Station Manager, Indian Airlines v. Dr. Jiteswar Ahir [First Appeal No. 270 of 1994 decided on 28.2.1996
(NCDRC)] when the complainant-passenger occupied his seat in the aircraft, an announcement was made that his
luggage was lying on the ground unidentified and that he should disembark to identify his luggage. According to the
complainant he moved towards the rear door, and finding that the step ladder was attached to the aircraft door,
he stepped out on to the staircase but before he could actually put his entire body weight on the staircase the ladder
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was suddenly removed as a result of which he fell down on the ground and sustained bodily injuries which was
reported to be about 10%. As against the
complainant's claim of ` 10 lakhs the airline was willing to pay ` 40,000 as compensation which according to them
was the maximum statutory liability of the Corporation under the Carriage by Air Act, 1972. The State Commission,
after examining witnesses and the medical boards report held that there was dangerous deficiency in service and
having regard to the expert opinion and other medical reports, it ordered payment of compensation of ` 4 lakhs and
` 1 lakh for mental agony and distress plus costs. In appeal by the Corporation, the National Commission, upholding
the State Commissions order, held that in terms of regulations relied upon by the appellant Corporation, if it was
proved that the accident caused to the complainant had resulted in a permanent disablement, incapacitating him
from engaging in or being occupied with his usual duties or his business or occupation.
Question 49] Ramesh, an industrial employee contributing to ESI Fund was treated in an ESI hospital. Due to
negligent diagnosis at the hospital, his condition deteriorated and he had to be shifted to a private hospital. He filed
a complaint before the Consumer Disputes Redressal Forum seeking compensation from the ESI hospital. His
complaint was dismissed on the ground that medical service rendered by the ESI hospital was gratuitous in nature.
The State Commission and the National Commission upheld the decision of the District Forum. Ramesh intends to
prefer an appeal before the Supreme Court. Will he succeed? Give reasons. CS (Executive) - June 2013 (5 Marks)
Ans.: The Supreme Court in Kishore Lai v. Chairman, Employees State Indurance Corporation held that appellant is
a consumer within the ambit of Section 2(1) (d) of the Consumer Protection Act, 1986 and the medical service
rendered in the ESI hospital/dispensary by the respondent Corporation falls within the ambit of Section 2(1) (o) of
the Consumer Protection Act and, therefore, the consumer forum has jurisdiction to adjudicate upon the case of
the appellant. The jurisdiction of the consumer forum is not ousted by virtue of Section 75 of the Employees' State
Insurance Act, 1948.
Thus, Ramesh will succeed in his appeal.
Question 50] Mohan was suffering from a serious ailment. He was admitted to a well-known private hospital in
Gurgaon. He was subjected to various tests. Even after diagnosis and subsequent treatment, his condition
deteriorated. The doctor advised surgery during which Mohan collapsed and died. Sushma, his wife, preferred a
claim for compensation of ` 50 lakh under the Consumer Protection Act, 1986 for 'deficiency in service'. The hospital
authorities contended that medical profession was being unnecessarily hounded. Is the contention tenable? Refer
to relevant case law laying down the guidelines for medical profession.
S (Executive) - June 2014 (5 Marks)
Ans.: In Kusum Sharma & Others v. Batra Hospital & Medical Research Centre & Others 2010 CTJ 242 SC, the
Supreme Court held that hospital could be charged as guilty if it is shown that hospital was negligence in its duties.
However, the medical professionals are entitled to get protection so long as they perform their duties with
reasonable skill and competence and in the interest of the patients. The interest and welfare of the patients have
to be paramount for the medical professionals.
In given case, Mohan was given reasonable and standard treatment by the hospital. Even, after this he was expired,
then hospital and doctors cannot be held liable as there is no deficiency in service.
Question 51] Ms. Neelam, daughter of Ashok, was travelling by train. She fell down from the running train while she
was passing through the inter-connecting passage between two compartments and died as a result of crush injuries
on her head.
Ashok claimed compensation from the Railways for deficiency in service. The Railways contended that the redressal
agencies under the Consumer Protection Act, 1986 had no jurisdiction to consider a complaint of this nature. They
also contended that all the coaches of the train had been thoroughly checked at the starting point of the train and
no defect was reported.
Will Ashok succeed in getting compensation? Give reasons and refer to decided case law, if any.
Ans.: It was held that a railway passenger travelling in a train on payment of consideration was a consumer within
the meaning of the Consumer Protection Act, 1986.
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In Union of India v. Nathmal Hansaria, the National Commission held that the death of the passenger could not be
described as resulting from railway accident but an accidental death caused by the absence of safety devices in the
vestibule passage way. Thus, there is deficiency in service and Railway is liable in given case.
Question 52] Pawan booked an air ticket for New York with Skyhigh airlines. At New Delhi airport, authorities
found visa in order; but at Amsterdam, when his visa was checked it was found that the visa bears the photocopy
of photograph. Thus, Pawan missed his flight to New York. However, the airlines helped him to reach New York
on the same day. After reaching New York, Skyhigh airlines tendered an apology to Pawan for the inconvenience
caused to him and paid as a goodwill gesture, a sum of ` 2,500. Pawan filed a complaint with National Commission
under the Consumer Protection Act, 1986. Will Pawan succeed? Give reasons with reference to case law, if any.
Ans.: In Ravneet Singh Bagga v. KLM Royal Dutch Fintimes, the Supreme Court held that the respondent could not
verification it cannot be called as deficiency in service. Hence, Raman will not succeed in his claim against Skyhigh
Airlines for deficiency in service under the Consumer Protection Act, 1986.
Question 53] Sohan has a truck which was driven by a driver, Shyam, but Shyam did not have valid licence for
driving the truck. The truck was insured with an insurance company. On the way, all of a sudden the truck started
burning. Sohan filed a claim with the insurance company. The insurance company repudiated the claim on the
ground that driver of the said truck did not have valid driving licence. The truck owner pleaded that the claim is
not related to 'driving' of the truck but the insurance company did not change its earlier decision. Sohan filed a
complaint with the District Consumers' Disputes Redressal Forum. Will Sohan succeed? Discuss with reference to
decided case, if any.
Ans.: In the case of jitendra Kumar v. Oriental Insurance Company Ltd. and another, the Supreme Court has held
that where the fire has occurred due to mechanical failure and not due to any act or omission of the driver, the
insurance company cannot repudiate the claim because of lack of valid driving license.
Thus, Sohan will succeed in his claim.
Question 54] Samir, on a holiday with his family, hired a taxi service. The taxi was in a poor condition and the
driver had not adequate rest and drove rashly. Eventually, it went burst in the middle of the way. As a result,
Samir and his family could not reach the airport in time to catch their flight. Decide, whether, Samir may be
treated as a consumer under Consumer Protection Act, 1986?
Ans.: As per facts given in case, Samir hired taxi service and hence Samir is consumer within the meaning of
definition of 'consumer' as given in Section 2(d) as he take service for consideration. Thus, there is contract between
Samir and provider of taxi service.
The service provider has a duty as per contract to reach the destination as indicated by the consumer safely and in
time. It is also duty of provider of taxi service to see that taxi is in good and running condition in ordinary
circumstance. If taxi is in poor condition and also diver drive the car rashly causing inconvenience to consumer then
it is definitely deficiency in service.
Question 55] Pankaj booked a flat in Sagar Housing Board colony. Housing Board registered it and agreed to give
possession within two years. After receiving the price of the flat Housing Board failed to give possession to Pankaj
within the agreed period. Is it a deficiency in service under Consumer Protection Act, 1986?
Ans.: In Failure of a Housing Board to give possession of the flat after receiving the price and after registering it in
favour of the allottee was held to be 'deficiency in service'. [Lucknow Development Authority v. Roop Kishore
Tandon F.N. No. 54/1990 decided on 10.10.1990]
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As per facts given in case, Pankaj booked a flat in Sagar Housing Board colony and after receiving price of the flat,
Housing Board has failed to given possession to Pankaj within agreed period which is clearly deficiency in service.
OTHER DEFINITIONS
Question 56] Define the term: Complainant CS (Inter) - Dec 1997 (5 Marks)
Ans.: Complainant [Section 2(l)(b)]: Complainant means -
(i) A consumer
(ii) Any voluntary consumer association registered under the Companies Act, 2013 (iii) The Central or State
Government which makes a complaint
(iv) One or more consumers, where there are numerous consumers having the same interest. Question 57]
Explain the term 'Complaint' as per the Consumer Protection Act, 1986.
Ans.: Complaint [Section 2(l)(c)]: Complaint means any allegation in writing to obtain relief by a complainant that:
(i) An UTP or RTP has been adopted by trader or service provider
(ii) The goods suffer from one or more defects
(iii) The services suffer from deficiency
(iv) Charging excess price than
- Fixed under any law
- Displayed on the goods or package
- Displayed on the price list
- Agreed between the parties.
(v) Hazardous goods are being offered for sale to the public
- in contravention of safety standards
- which will affect life and safety of the public
(vi) Hazardous Services are being offered to the public.
Question 58] Explain the term 'Consumer Dispute' as per the Consumer Protection Act, 1986.
Ans.: Consumer Dispute [Section 2(l)(e)]: Consumer dispute means a dispute where the person against whom a
complaint has been made, denies or disputes the allegations contained in the complaint.
Question 59] What do you understand by 'restrictive trade practice'?
Ans.: Restrictive Trade Practice [Section 2(1) (nn)]: Restrictive trade practice means a trade practice which
manipulate price or conditions of delivery or flow of supplies relating to goods or services in a manner to impose
unjustified costs or restrictions on the consumers and shall include:
(a) A trade practice to raise price by making delay in supply of goods or rendering of service
(b) Any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other
goods or services, (i.e. tie in sale)
CONSUMER PROTECTION COUNCIL
Question 60] Write a note on: Redressal Agencies under the Consumer Protection Act, 1986 and their Jurisdiction
Ans.: Three tier consumer grievances machinery under the Consumer Protection Act, 1986 are as follows:
(1) District Forum: District forum consists of a president and two other members. The president can be a retired
or working judge of District Court. They are appointed by state government. The complaints for goods or services
worth ` 20 lakhs or less can be filed in this agency. The agency sends the goods for testing in laboratory if required
and gives decisions on the basis of facts and laboratory report. If the aggrieved party is not satisfied by the decision
of the district forum, they can file an appeal to State Commission within 30 days by depositing ` 25,000 or 50% of
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penalty amount whichever is less. On sufficient cause, the State Commission may entertain an appeal after the
expiry of 30 days.
(2) State Commission: It consists of a president and two other members. The president must be a retired or
working judge of High Court. They all are appointed by state government. The complaints for the goods worth more
than ` 20 lakhs and less than ` 1 Crore can be filed in State Commission. On receiving complaint the State commission
contacts the party against whom the complaint is filed and sends the goods for testing in laboratory if required. In
case the aggrieved party is not satisfied with the judgment then they can file an appeal in National Commission
within 30 days by depositing ` 35,000 or 50% of penalty amount whichever is less. On sufficient cause, the National
Commission may entertain an appeal after the expiry of 30 days.
(3) National Commission: The National Commission consists of a president and four members one of whom
shall be a woman. They are appointed by Central Government. The complaint can be filed in National Commission
if the value of goods exceeds ` 1 Crore. On receiving the complaint the National Commission informs the party
against whom complaint is filed and sends the goods for testing if required and gives judgment. If aggrieved party
is not satisfied with the judgment then they can file a complaint in Supreme Court within 30 days. On sufficient
cause, the Supreme Court may entertain an appeal after the expiry of 30 days.
Transfer of cases [Section 17A]: The State Commission on the application of the complainant or of its own motion
to transfer, at any stage of the proceeding any complaint pending before the District Forum to another District
Forum within the State if the interest of justice so requires.
Question 61] Write a short note on: Pecuniary and territorial jurisdiction of the District Forum
Ans.: Jurisdiction of the District Forum [Section 11]: The District Forum shall have jurisdiction to entertain
complaints where the value of the goods or services and the compensation claimed does not exceed ` 20 lakhs.
A complaint shall be instituted in a District Forum within the local limits of whose jurisdiction:
(a) The opposite party actually and voluntarily resides or carries on business or has a branch office or personally
works for gain.
(b) If there are more than one opposite party then suit shall be instituted in jurisdiction of that District Forum
where any of the opposite party actually and voluntarily resides, or carries on business, or personally works for gain.
However, in such case the leave of the District Forum has to be taken or the opposite party who do not reside, or
carry on business, or personally work for gain, acquiesce in such institution.
(c) The cause of action arises.
In the case of Dynavox Electronic Pvt. Ltd. v. B.J.S. Ratnpuria Jain College, Bikaner, it was held that where in a
contract, the machinery was supplied and installed at a particular place, a part of cause of action would be deemed
to have arisen at that place, therefore, the complaint could be instituted in the District Forum within whose
jurisdiction that place falls.
Question 62] State the powers of District Forum under the Consumer Protection Act, 1986. * (i)
Ans.: The District Forum, State Commission and the National Commission have been vested with the powers of Civil
Court under the Code of Civil Procedure, 1908 while trying a suit in respect of the following matters:
(a) The summoning and enforcing attendance of any defendant or witness and examining the witness on oath.
(b) The discovery and production of any document or other material object producible as evidence.
(c) The reception of evidence on affidavits.
(d) The requisitioning of the report of the concerned analysis or test from the appropriate laboratory or from any
other relevant source.
(e) Issuing of any commission for the examination of any witness.
(f) Any other prescribed matter.
Under the Consumer Protection Rules, 1987, the District Forum, the State Commission and the National
Commission have the power to require any person:
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(i) To produce before and allow to be examined by an officer of any of these agencies, such books of accounts,
documents or commodities as may be required and to keep such book, documents etc. under his custody for the
purposes of the Act.
(ii) To furnish such information which may be required for the purposes of the Act to specified officer.
These redressal agencies have also been empowered to pass written orders authorizing any officer to exercise the
power of entry and search of any premises where the books, papers, commodities or documents are kept if there
is any ground to believe that these may be destroyed, mutilated, altered, falsified or secreted. Such authorized
officer may also seize books, papers, documents or commodities if they are required for the purposes of the Act,
provided the seizure is communicated to the District Forum/State Commission/ National Commission within 72
hours. On examination of such documents or commodities, the agency concerned may order the retention thereof
or may return it to the party concerned.
The District forum, the State Commission and the National Commission have the power to issue remedial orders to
the opposite party directing him to do any one or more of the things referred to in Section 14(1)
(a)(i). The redressal agencies have also been empowered to dismiss frivolous and vexatious complaints u/s 26 of the
Act and to order the complainant to make payment of costs, not exceeding ` 10,000 to the opposite party.
Question 63] Avinash booked his goods with Superfast Freight Carriers at Delhi for being Carried to Firozabad.
The goods receipt note mention that all disputes would be subject to jurisdiction of the Mumbai Court. Avinash
lodged a complaint for certain deficiency in service against the transporter in the District Forum at Delhi.
Superfast Freight Carriers contested that District Forum at Delhi had no jurisdiction to entertain complaint as the
head office of the transporter was at Mumbai and the jurisdiction has been clearly stated in the goods receipt
note. Is the contention of the transporter tenable? CS (Inter) - June 2000 (5 Marks)
Ans.: The facts of the given case are similar to the decision given in Paras Mai v. Roshan Freight Carriers, wherein it
was held by the National Commission that the parties cannot confer jurisdiction on a District Forum/ Court which
has no jurisdiction to try the suit and consequently, the agreement between the parties conferring exclusive
jurisdiction on such District Forum/ Court is of no use. The National Commission held that in present case goods are
booked from Delhi to Firozabad and thus the District Forum at Mumbai where the Head Office situated had no
jurisdiction to try suit. Consequently, the condition in the goods receipt note that all disputes were subject to
jurisdiction of the Mumbai Court or District Forum is of no use.
MISCELLANEOUS PROVISIONS
Question 64] Who can file a complaint under the Consumer Protection Act, 1986?
Ans.: Manner in which complaint shall be made [Section 12]: A complaint in relation to any goods or service may
be filed with a District Forum by -
(a) Consumer himself
(b) Recognized consumer association
(c) One or more consumers, where there are numerous consumers
(d) Central or State Government.
Question 65] Explain the nature and scope of remedies available under the Consumer Protection Act, 1986.
Ans.: Finding of the District Forum [Section 14]: Where the goods suffer any defect or there is deficiency in service,
the District Forum, State or National Commission may pass the following orders:
(a) To remove the defects
(b) To replace the goods
(c) To return the price or the charges paid by the complainant
(d) To pay compensation amount to the consumer for any loss or injury
(e) To remove the defects in goods or deficiencies in the services
(f) To discontinue the unfair trade practice or the restrictive trade practice
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(g) Not to offer the hazardous goods for sale
(h) To withdraw the hazardous goods from being offered for sale
(i) To cease manufacture of hazardous goods and to desist from offering services which are hazardous in nature
(j) To pay such sum as may be determined by it if it is of the opinion that loss or injury has been suffered by a large
number of consumers who are not identifiable conveniently. It is to be noted that the minimum amount of sum so
payable shall not be less than 5% of the value of such defective goods sold or service provided to such consumers.
Further, the amount so obtained shall be credited in favour of prescribed person and utilized in prescribed manner.
(k) To issue corrective advertisement to neutralize the effect of misleading advertisement at the cost of the
opposite party
(l) To provide for adequate costs to parties.
Question 66] What is the limitation period for filing of a complaint before the District Forum, State Commission
and National Commission? CS (Inter) - Dec 1997 (5 Marks)
Ans.: Limitation Period [Section 24A]: A Complaint has to be filed with the District Forum, State or National
Commission within 2 years from the date of cause of action. If sufficient cause is shown the complaint may be
admitted after 2 years. A delayed complaint is entertained only when District Forum, State or National Commission
records its reasons for condoning such delay.
Question 67] Discuss the process of filing an appeal by an aggrieved person under the Consumer Protection Act,
1986. CS (Executive) - Dec 2017 (5 Marks)
Ans.: If the aggrieved party is not satisfied by the decision of the district forum, they can file an appeal to State
Commission within 30 days by depositing ` 25,000 or 50% of penalty amount whichever is less. On sufficient cause,
the State Commission may entertain an appeal after the expiry of 30 days.
In case the aggrieved party is not satisfied with the order of State Commission then they can file an appeal in
National Commission within 30 days by depositing ` 35,000 or 50% of penalty amount whichever is less. On
sufficient cause, the National Commission may entertain an appeal after the expiry of 30 days.
If aggrieved party is not satisfied with the order of National Commission they can file an appeal in Supreme Court
within 30 days. On sufficient cause, the Supreme Court may entertain an appeal after the expiry of 30 days.
Thus, an Appeal from the order of the District Forum lies to the State Commission, against the order of the State
Commission to the National Commission and against the order of the National Commission to the Supreme Court.
All appeals are to be filed within 30 days of the order appealed against and are to be accompanied by a certified
copy of the order and prescribed amount as deposit.
MISCELLANEOUS CASES
Question 68] One of the parties to a contract which contained an arbitration clause, made a complaint before the
Consumer Forum. The respondent pleaded that the Forum has no authority to decide the dispute in view of the
arbitration clause, will the complainant succeed?
CS (Inter) - Dec 2001 (5 Marks) CS (Executive) - Dec 2011 (5 Marks)
Ans.: Act not in derogation of any other Law [Section 3]: The provisions of Consumer Protection Act, 1986 shall be
in addition to and not in derogation of the provisions of any other law for the time being in force.
If an agreement contains arbitration clause, the dispute must be referred to arbitration, as per Section 8 of the
Arbitration & Conciliation Act, 1996. However in Skypack Courier Ltd. v. Tata Chemical Ltd., it has been held that if
there is arbitration agreement, a consumer forum can entertain consumer complaint, as remedy provided under
the Consumer Protection Act, 1986 is in addition to provision of any law for the time being in force.
Question 69] Raja took a life insurance policy with accident benefits and premium was payable half- yearly. When
the fourth premium fell due, Balwinder, the agent of LIC, met with him and collected a bearer cheque towards
premium payable in respect of the policy. The cheque was encashed immediately, but was not deposited with LIC
for three months. Meanwhile, Raja met with an accident and died. Will the wife of the deceased succeed in her
claim against the LIC?
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CS (Inter) - June 2002 (5 Marks), June 2008 (5 Marks) CS (Executive) - June 2009 (5 Marks), Dec 2010 (5 Marks) CS
(Executive) - June 2012 (5 Marks)
Ans.: In Harshad ]. Shah v. Life Insurance Corporation of India, 1997 (3) SCALE 423 SC, the Supreme Court held that
the agent had no express authority to receive the premium on behalf of the Corporation. Nor could it be said that
he had an implied authority to collect the premium, as regulations expressly prohibited the agents from collecting
premiums. Therefore, no case had been set up by the complainant before the State Commission that the
Corporation by its conduct had induced the policyholders, including the insured, to believe that the agents were
authorized to receive premiums on behalf of the Corporation nor was there any material on record that lent support
to this contention. In the facts of this case there was no room to invoke the doctrine of apparent authority
underlying Section 237 of the Indian Contract Act, 1872. Hence, wife of Raja will not succeed in her claim against
the LIC.
Question 70] In February, 1999, Dhirendra opened an account under the national savings scheme in the General
Post Office in Nagpur. In March, 2000, he opened a similar account in another Post Office in Pune. On his retirement
from service, he got both the accounts transferred to a branch of the Post Office in Bhopal, When he sought to close
the accounts by withdrawing the amount together with interest, the Post Office pointed out that under the National
Savings Scheme Rules, he could have opened only one account and thus would not be entitled to receive any interest
on the second account opened in Pune. Dhirendra wants to file a complaint with the Consumer Disputes Redressal
Forum. Will he succeed? Decide giving reasons and citing case law, if any.
Ans.: In Department of Posts & Telegraphs v. Dr. R.C. Saxena, the State Commission had taken the view that neither
the application form which was required to be filled in by the depositor while opening the account or even the
passbook issued to the depositor after opening the account under the National Savings Scheme contain any
information that the depositor could not open more than one account under the scheme and that the rule was
made more for administrative convenience of the department and did not have any connection with the substantive
provisions of the scheme. Therefore, the opening of the second account was only irregularity and not a
contravention of the Post Office Savings Bank General Rules, 1981. The State Commission accordingly directed the
department to pay interest on the amount of deposit due at the time of closure of the account.
Dismissing the Departments appeal the National Commission held that the opening of the second account by the
respondent was an irregularity not amounting to contravention of the rules. The respondent was entitled to interest
on the deposit.
Question 71] An insurance company did not settle the insurance claim amounting to ` 2 lakh on the plea that
Shambhu, the assured, had not disclosed material facts about his illnesses, i.e., high blood pressure and history of
diabetes, at the time of submitting the proposal. Shambhu denies the allegations and pleads that he had not
concealed anything. The insurer contended that the onus of proof lies on the assured to prove beyond doubt that
he had not misrepresented about the material facts. Will the contention of the insurance company be given
credence by the Consumer Disputes Redressal Forum? Give reasons in support of your answer and refer to relevant
case law, if any.
Ans.: In L/C of India v. Smt. Sheela Pandey, the National Commission has held that the repudiation of the claim was
wrong and unjustified as the insurance company has failed to prove that assured had suppressed material facts,
which he was duty bound to disclose. Section 45 of the Insurance Act, 1938 places the burden of proof on the
insurer to establish the above circumstances and unless the insurer is able to do so, there is no question of the
policy being avoided simply on the ground of misstatement of facts.
The onus probandi, in all such cases, rest heavily on the party alleging the fraud. The insurer cannot avoid
consequences of the insurance contract by simply showing inaccuracy or falsity of the statement made in proposal
for insurance or in report of medical officer. Thus, the insurance company had to settle the claim of the assured.
Question 72] A CT scan machine is installed in Daya Ram Charitable Trust and Diagnostic Centre. 80% of the
patients are required to pay charges for the services rendered by the trust whereas 20% patients are provided
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free services. On a complaint against the trust for deficiency in service, it contended that the trust did not engage
in profit-making activity on a large scale. Will it succeed?
Ans.: In Kalpavriksha Charitable Trust v. Toshnival Brothers (P) Ltd. (1999) (6) Scale 534, it was held that in a
diagnostic Centre where 80% of the patients are required to pay for the services availed and only 20% of the patients
were given free services, the CT scan machine was used for commercial purpose. Hence, complaint can lie against
Daya Ram Charitable Trust and Diagnostic Centre for deficiency in service.
Question 73] Distinguish between: Contract of service and contract for service
Ans.: Following are the main points of distinction between contract of service and contract for service:
Points Contract of service Contract for service
Meaning A contract of service is an agreement whereby A contract for service is an agreement whereby
a person agrees to employ another as an a person is engaged as an independent
employee and the employee agrees to serve contractor for carrying out an assignment or
his employer as an employee. project.
Relationship There exists master and servant relationship in In contract for service there is no master and
contract of service. servant relationship.
Example X Ltd. employs Mr. Ram, a Company Secretary. X Ltd. appoints Mr. Ram as a Secretarial
This is contract of service. Auditor. This is contract for service.
Nature of work In contract of service the employee is bound to In contract for service, a person executes his
work under the supervision and directions work as per his own skill and experience.
given by the employer.
The Supreme Court in the case of Indian Merchants Association v.VP Shantha, (CA No. 688 of 1993) observed that
a contract for service implies a contract whereby one party undertakes to render services e.g. professional or
technical services to or for another in the performance of which he is not subject to detailed direction and control
but exercises professional or technical skill and uses his own knowledge and discretion. A contract of service on the
other hand implies relationship of master and servant and involves an obligation to obey orders in the work to be
performed and as to its mode and manner of performance. Thus, an employer could not be regarded as a consumer
in respect of the services rendered by his employee in pursuance of contract of employment.
The expression contract of personal service in the exclusionary part of Section 2(l)(o) must be construed as excluding
the services rendered by an employee to his employer under the contract of personal service free from the ambit
of the expression service.
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13
CHAPTER
ESSENTIAL COMMODITIES ACT, 1955
INTRODUCTION: The Essential Commodities Act, 1955 was enacted to ensure the delivery of certain commodities or
products, the supply of which if obstructed owing to hoarding or black marketing would affect the normal life of the
people. This includes foodstuff, drugs, fuel, petroleum products etc. The Act provides for regulation and control of
production, distribution and pricing of commodities, which are declared as essential for maintaining or increasing
supplies or for securing their equitable distribution and their availability at fair prices.
The Act is being implemented by the State Governments availing of the delegated powers under the Act. The State
Governments have issued various Control Orders for regulation, production and distribution of essential
commodities. The Central Government regularly monitors the action taken by State Governments to implement the
provisions of Act.
The items declared as essential commodities are reviewed from time to time in the light of liberalized economic
policies in consultation with the Departments administering the essential commodities and particularly with regard
to their production, demand, and supply. The Act came into force on and it extends to the whole of India.
Applicability & Definitions
Question 1] Write a short note on: Object & Scope of the Essential Commodities Act, 1955
Ans.: The Essential Commodities Act, 1955 was enacted to ensure the delivery of certain commodities, the supply
of which if obstructed owing to hoarding or black marketing would affect the normal life of the people. This includes
foodstuff, drugs, fuel, petroleum products etc. The Act provides for regulation and control of production,
distribution and pricing of commodities, which are declared as essential for maintaining or increasing supplies or
for securing their equitable distribution and availability at fair prices.
The dominant object and intendment of the Act is to secure equitable distribution and availability at fair prices of
essential commodities in the interest of the general public.
The items declared as essential commodities are reviewed from time to time in the light of liberalized economic
policies in consultation with the Departments administering the essential commodities and particularly with regard
to their production, demand, and supply.
Question 2] Explain the term 'essential commodities' as per the provisions of the Essential Commodities Act,
1955. CS (Inter) - Dec 1995 (5 Marks), Dec 1998 (5 Marks)
Ans.: Essential Commodity [Section 2(a)]: Essential commodity means any of the following classes of commodities:
(i) Cattle fodder, including oilcakes and other concentrates
(ii) Coal, including coke and other derivatives
(iii) Component parts and accessories of automobiles
(iii) Cotton and woolen textiles
(v) Drugs
(vi) Foodstuffs, including edible oilseeds and oils
(vii) Iron and steel, including manufactured products of iron and steel
(viii) Paper, including newsprint, paperboard and straw board
(ix) Petroleum and petroleum products;
(x) Raw cotton, whether ginned or unginned, and cotton seed (xz) Raw jute
(xii) Any other class of commodity declared by notified order by the Central Government to be an essential
commodity as per 7th Schedule to the Constitution
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Question 3] Whether 'tea' is food stuff under the Essential Commodities Act, 1955? Does it have any nutritional
value? Discuss in reference with leading case law, if any.
Ans.: Supreme Court has held that T ea is not foodstuff. Tea leaves are not eaten. Tea is a beverage produced by
steeping tea leaves or buds of the tea plants in the boiled water. Such tea is consumed hot or cold for its flavour,
taste and its quality as a stimulant. It does not have any nutritional value. Tea or its beverage does not go into the
preparation of any foodstuff. In common parlance, anyone who has taken tea would not say that he has taken or
eaten food. Thus, tea is not a food. [S. Samuel, AID. Harrisons Malayava v. Union of India, AIR 2004 SC 218]
Question 4] Discuss the provisions of Section 3 of the Essential Commodities Act, 1955 under which Central
Government may issue Orders for regulating or prohibiting the production, supply and distribution of essential
commodities. CS (Inter) - June 1999 (7 Marks)
How is the order issued by the Central Government under the Essential Commodities Act, 1955 served? What is
the effect of such order? CS (Inter) - Dec 2001 (8 Marks)
Evaluate the efficacy of the Essential Commodities Act, 1955 in controlling the production, supply and distribution
of essential commodities in the country. CS (Executive) - June 2010 (5 Marks)
Ans.: Powers to control production, supply, distribution, etc. of essential commodities [Section 3(1)]:
The Central Government can regulate or prohibit the production, supply and distribution of any essential
commodity by order for securing equitable distribution and to ensure that such essential commodities are available
at fair prices.
Content of Order [Section 3(2)]: Such order may provide -
(a) Issuing licenses or permits for production or manufacture of essential commodity
(b) Bringing under cultivation any land for maintaining or increasing the cultivation of food crops
(c) Controlling price of essential commodity
(d) Regulating the storage, transport, distribution, disposal, acquisition, use or consumption of any essential
commodity by licenses or permits
(e) Prohibiting the withholding of sale of any essential commodity
(f) Requiring any person holding stock any essential commodity to sell it to public or to the Central or State
Government or to a Corporation owned or controlled by Government
(g) Regulating or prohibiting commercial or financial transactions relating to foodstuffs or cotton textiles which are
unregulated or are likely to be detrimental to the public interest
(h) Collecting information or statistic to regulating or prohibiting any of the aforesaid matters
(i) Requiring persons engaged in the production, supply or distribution of any essential commodity to maintain and
produce for inspection books, accounts and records.
(j) Any incidental and supplementary matters such as - the entry, search or examination of premises, aircraft,
vessels, vehicles and animals, and the seizure by a authorized person.
Issuance & service of Order [Section 3(5)]: An order made under this section shall be issued and served in the
following manner -
(a) In the case of an order of a general nature or affecting a class of persons, be notified in the Official Gazette
and
(b) If an order is directed to a specified individual be served on such individual -
♦ by delivering or tendering it to that individual or
♦ by affixing it on the outer door or some other conspicuous part of the premises in which that individual lives,
and a written report shall be prepared and witnessed by two persons living in the neighbourhood.
Laying the order before Parliament [Section 3(6)]: Every order made u/s 3 by the Central Government or by any
officer or authority of Central Government shall be laid before both Houses of Parliament as soon as may be, after
it is made.
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Delegation of powers [Section 5]: The Central Government may, by notified order direct that the power to make
orders or issue notifications u/s 3 shall also be exercisable by -
(a) Such officer or authority subordinate to Central Government
(b) Such State Government or such officer or authority subordinate to a State Government.
Effect of the Order [Section 6]: The order made u/s 3 shall have effect notwithstanding anything inconsistent
therewith contained in any enactment or any instrument having effect by virtue of any enactment.
The ultimate effect of Section 6 is that an order u/s 3 will override existing laws. [Ramananda Agrawala v. State AIR
1951 Calcutta 120]
Question 5] Write short note on: Fixing the price of essential commodities being sold to Government
Ans.: Fixing the price of essential commodities being sold to Government [Section 3(3)]: If any person sells
essential commodity in compliance with an order u/s 3(1) then he shall be paid price as mentioned below:
(a) Agreed Price, when the price can be agreed upon consistently with the controlled price
(b) Controlled Price, when no such agreement can be reached or
(c) Market Rate Price as per the prevailing market rate in the locality at the date of sale where clause (a) or (b)
does not apply.
Question 6] State the powers of Central Government under the Essential Commodities Act, 1955 regarding
fixation of the price of the essential commodities during an emergency.
Ans.: Fixing the price of essential commodities during emergency [Section 3(3 A)]: The Central Government by
notification in the Official Gazette can issue an order to control the rise in prices or prevent the hoarding of any
foodstuff in any locality and can direct that foodstuff shall be sold at the price in that locality in compliance
provisions of this section. Such notification issued shall remain in force for 3 months.
After the issue of a notification if any person sells foodstuffs in the locality then he shall be paid price as mentioned
below:
(a) Agreed Price, when the price can be agreed upon consistently with the controlled price
(b) Controlled Price, when no such agreement can be reached or
(c) Average Price of last 3 months before the date of the notification where clause (a) or (b) does not apply.
For the purposes clause (c), the average price shall be determined by an authorized officer of the Central
Government and the average price so determined shall be final and cannot be questioned in any Court.
Question 7] What provisions are incorporated under the Essential Commodities Act, 1955 relating to "Sugar"?
Ans.: Sugar [Section 2(e)]: Sugar means:
(i) Any form of sugar containing more than 90% of sucrose, including sugar candy;
(ii) Khandsari sugar or bura sugar or crushed sugar, or any sugar in crystalline or powdered form; or
(iii) Sugar in process in vacuum pan sugar factory, or raw sugar.
Fixing price for sugar to be paid to producer [Section 3(3C)]: Where any producer is required by an Order to sell
sugar to Central or State Government then he shall be paid such price of sugar as the Central Government may
determine by Order. While fixing price of sugar the Central Government may consider -
(a) Minimum price fixed for sugarcane
(b) Manufacturing cost of sugar
(c) Duty or tax paid or payable on sugar
(d) Reasonable return on the capital employed in manufacturing of sugar
The Central Government may determine different prices for different areas or for different factories or for different
kinds of sugar.
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Restriction on selling & disposal of sugar [Section 3(3D)]: The Central Government is empowered to direct any
producer, importer or exporter not to sell or dispose of or deliver sugar or remove sugar from the bonded godowns
of the factory in which it is produced except under and in accordance with its direction.
However, this provision does not affect the pledging of such sugar by any producer or importer in favour of any
scheduled bank.
Issuance of Directions [Section 3(3E)]: The Central Government has been empowered to direct by general or special
order to any producer or importer or exporter or recognized dealer to take action regarding production,
maintenance of stocks, storage, sale, grading, packing, marking, weighment, disposal, delivery and distribution of
sugar in the manner specified in the direction.
Question 8] Who is empowered to appoint Authorized Controller? State the functions of such Authorized
Controller under the Essential Commodities Act, 1955.
Ans.: Power to Appoint Authorized Controller [Section 3(4)]: If the Central Government is of opinion that it is
necessary to maintain or increase the production and supply of an essential commodity then it may by Order
authorize any person (called authorized controller) to exercise prescribed functions.
Functions of authorized controller: The authorized controller shall exercise his functions as per the instructions
given by the Central Government. However, he shall not have any power to give any direction inconsistent with the
provisions of any law.
If authorized controller gives directions to any undertaking then it is the responsibility of such undertaking to comply
with the directions given by the authorized controller.
SEIZURE & CONFISCATION
Question 9] Distinction between: Seizure & Confiscation under the Essential Commodities Act, 1955
Ans.: Following are the main points of distinction between seizure & confiscation:
Points Seizure Confiscation
Meaning 'Seizure' means to take possession contrary Confiscation means to take possession &
to the wishes of the owner the property. ownership contrary to the wishes of the owner the
property.
Property in Property in goods remains with owner. Property in goods does not remain with owner.
goods
Disposal of Seized goods cannot be disposed of by the Confiscated goods can be disposed by the
goods Government. Government.
Section Commodity can be seized as per Section 3. Confiscation is as per circumstances mentioned in
Section 6A.
Distinction as per Essential Commodities Act, 1955: In the context of Essential Commodities Act, 1955, it could be
seen that an essential commodity which has been seized could be confiscated. Therefore, confiscation is an action
posterior to the seizer of the essential commodity. A commodity that cannot be seized cannot be confiscated.
Question 10] Mention the provisions of the Essential Commodities Act, 1955 regarding confiscation of essential
commodities seized in contravention of section 3 of the Act.
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Ans.: Confiscation of Essential Commodity [Section 6A(1)]: Where any essential Commodity is seized as per an
Order made u/s 3 then a report of such seizure shall be made to the Collector of the district in which such essential
commodity is seized. The Collector may direct the essential commodity so seized to be produced for inspection
before him, and if he is satisfied that there has been a contravention of the Order then he may order confiscation
of, -
(a) Essential commodity so seized
(b) Package, covering or receptacle in which such essential commodity is found and
(c) Animal, vehicle, vessel or other conveyance used in carrying such essential commodity.
However, no food grains or edible oilseeds seized from a producer shall be confiscated if the same is produced for
inspection.
In the case of any animal, vehicle, vessel or other conveyance the owner of such animal vehicle etc., shall be given
an option to pay in lieu of its confiscation, a fine not exceeding the market price.
Question 11] State the provisions relating to 'Seizure & Confiscation' of essential commodities under the Essential
Commodities Act, 1955? CS (Inter) - June 1994 (8 Marks)
Ans.: The Essential Commodities Act envisages two independent proceedings against a person charged with
contravention of the provisions of the Act. Under Section 6A, the Collector can confiscate the seized commodity
and u/ s 7. Confiscation of essential commodities is a sharp weapon which the Act has provided to the Central
Government u/s 6A of the Act.
Section 6A provides that where any essential commodity is seized u/s 3, a report of such seizure shall be made to
the Collector. The Collector at his discretion, may direct for the production of the seized commodity before him and
if he is satisfied that there has been contravention of the order he may pass order for confiscation of the essential
commodity so seized.
The Act uses the expressions 'confiscation' and 'seizure' in Section 6A and under this section a commodity which
has been seized in pursuance of an order u/ s 3 can be confiscated under the circumstances mentioned in Section
6A.
In the context of the Essential Commodities Act, it could be seen that an essential commodity which has been seized,
could be confiscated. Therefore, confiscation is an action posterior to the seizure of the essential commodity. A
commodity that has not been seized cannot be confiscated. Seizure itself does not imply confiscation.
Question 12] State the powers of collector under the Essential Commodities Act, 1955 to prevent speedy and
natural decay of confiscated commodity. How are the sale proceeds of the confiscated commodity death with by
collector? CS (Inter) - Dec 1999 (8 Marks)
What is the procedure for disposal of confiscated commodities? How can the sale proceeds of such commodities
be utilized? CS (Inter) - Dec 2001 (8 Marks)
Ans.: Sale of the Confiscated Commodity [Section 6A(2)]: On receiving seizure or inspection report of any essential
commodity if the Collector is of the opinion that the essential commodity is subject to speedy and natural decay he
may order the same to be sold -
(i) At the controlled price or
(ii) By public auction.
However, if the retail sale price of any such essential commodity has been fixed by the Central or State Government
then the Collector may order to sell it at fair price through any shops for equitable distribution and availability at
fair prices of such essential commodity.
Disposal of sale proceeds of confiscated goods [Section 6A(3)]: Where any essential commodity is sold as aforesaid
then the sale proceeds after deduction of the selling expenses shall be paid to the owner or person from whom it is
seized in the following circumstances:
(a) Where no order of confiscation is ultimately passed by the Collector or
(b) Where appeal is decided in favour of such person or
(c) Where concerned person is acquitted in a prosecution.
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Question 13] Discuss whether issue of show cause notice is necessary before ordering confiscation of an essential
commodity under the Essential Commodities Act, 1955?
CS (Inter) - June 1998 (7 Marks), Dec 1998 (5 Marks) CS (Inter) - Dec 2002 (5 Marks)
Ans.: Issue of show-cause notice before confiscation [Section 6B]: Before passing an order for confiscation, the
owner of the essential commodity, package, covering, receptacle, animal, vehicle, vessel or the person from whom
it is seized is required to be given a notice in writing informing him of the grounds on which it is proposed to
confiscate the above goods.
Such person should also be given an opportunity of making a representation in writing within a reasonable time.
Judicial View:
It is not sufficient for the owner to prove that the vehicle carried the essential commodity without his knowledge
or concurrence. He must also prove that the vehicle was used without the knowledge, or concurrence of the
person in charge of the vehicle. In addition, he must prove that not only he but also the person in-charge of the
vehicle had taken all reasonable and necessary precautions against such use. [Shai Rahhim v. State of Andhra
(1976) LT 357]
Question 14] A lorry carrying unauthorized stock of wheat bags was seized by the collector. The owner of the
vehicle was under charge of the driver and that he had no knowledge of the transaction. Decide giving reasons
with reference to provisions of the Essential Commodities Act, 1955?
Ans.: Animal, vehicle or conveyance which was carrying the goods cannot be confiscated if the owner of such
conveyance proves that the vehicle was used for carrying essential commodities without knowledge or without
connivance or his agent or the person in charge of the vehicle and he had taken precaution against misuse of the
conveyance.
Thus, if the owner of lorry proves that the lorry was carrying unauthorized stock of wheat bags without his
knowledge or connivance then seizure of such lorry will not be valid under the Essential Commodities Act, 1955.
As per Section 6A, in the case of any animal, vehicle, vessel or other conveyance the owner of such animal vehicle
etc., shall be given an option to pay in lieu of its confiscation, a fine not exceeding the market price.
Question 15] State the provisions relating to Appeal against Confiscation Order under the Essential Commodities
Act, 1955?
Ans.: Appeal [Section 6C]: Any person aggrieved by an order of confiscation may file an appeal to the State
Government within 1 month from the date of the communication order. The State Government shall after giving
an opportunity to the appellant to be heard, pass such order as it may think fit confirming, modifying or annulling
the order appealed against.
If in appeal Order passed u/s 6A is modified or annulled or the person concerned is acquitted from a prosecution
instituted and in either case it is not possible to return the essential commodity seized then such person shall be
paid the price as if the essential commodity had been sold to the Government with reasonable interest.
Question 16] What is the penalty for making false statement under the Essential Commodities Act, 1955?
Ans.: Penalty for false statement [Section 9]: A person shall be punishable with imprisonment for a term which
may extend to 5 years or with fine or with both for the following offences:
(i) When required by any order made u/ s 3 to make any statement or furnish any information, makes any
statement or furnishes any information which is false in any material particular which he knows or has reasonable
cause to believe to be false or does not believe to be true;
(ii) Makes any such statement as aforesaid in any book, account, record, declaration, return or other document
which he is required by any such order to maintain or furnish.
Question 17] Write a short note on: Offences by Companies under the Essential Commodities Act, 1955
Ans.: Offences by Companies [Section 10]: Every person who, at the time of the contravention, was in charge of,
and was responsible to, the company for the conduct of the business of the company, shall be deemed to be guilty
of the contravention, and shall be liable to be punished accordingly. In such cases, the company itself is also liable
218
to be proceeded against. Any such person, can, however, escape liability if he proves that the contravention took
place without his knowledge or that he exercised all due diligence to prevent it.
It may be noted that the term 'company' as used above, refers to any body corporate, and even includes a firm or
other association or individuals. In the case of a firm, the term 'Director' would mean a partner in the firm.
Question 18] Every offence punishable under the Essential Commodities Act, 1955 is cognizable and non-bailable.
Comment. CS (Inter) - Dec 1996 (7 Marks)
Ans.: Offences to be cognizable & bailable [Section 10A]: Notwithstanding anything contained in the Code of
Criminal Procedure, 1973 every offence punishable under the Act shall be cognizable and non- bailable.
A cognizable offence is one, where, under the Criminal Procedure Code or any other law in force, a police officer
may arrest a person without a warrant.
Cognizance of offences [Section 11]: Court shall take cognizance of any offence under the Act only on a report in
writing of the facts constituting such offence made by
- A person who is a public servant or
- Any person aggrieved or
- Any recognized consumer association.
Question 19] Briefly discuss the provisions relating to publication of names of convicted companies by the Court
under the Essential Commodities Act, 1955.
Ans.: Publication of names of convicted companies by the Court [Section 10B]: The Court may cause to be
published in newspapers or in other manner at the expense of the company the name, place of business and the
offence/contravention committed by it when a company has been convicted.
However, no publication shall be made until the period for preferring an appeal against the order of the Court has
expired, without any appeal having been preferred or where such appeal having been preferred, was disposed of.
The expenses of any publication shall be recoverable from the company as if it were a fine imposed by Court.
Question 20] Can Civil Court grant an injunction or provide any other relief against the order made by Central
Government or any public officer under the Essential Commodities Act, 1955? If yes, what conditions are required
to be fulfilled in this regard?
Ans.: Grant of injunction by Civil Courts [Section 12B]: No Civil Court shall grant an injunction or make any order
for any other relief against the Central Government or a public officer in respect of any act done or purporting to
be done by such Government, or such officer in his official capacity, under this Act or any order made thereunder,
until after notice of the application for sue, injunction or other relief has been given to such Government or officer.
Question 21] "Mens rea is an essential ingredient of an offence punishable". Examine with reference to the
provision of the Essential Commodities Act, 1955.
Comment on the presumption of culpable mental state. Who can avoid such presumption of culpable metal state
under the Essential Commodities Act, 1955? CS (Executive) - June 2017 (5 Marks)
Ans.: It was held by the Supreme Court that mens rea or guilty mind is an ingredient of the offence punishable under
the Essential Commodities Act, 1955 i.e., an intentional contravention of an order made u/s 3, is an essential
ingredient of an offence u/s 7. [Nathulal v. State of Madhya Pradesh AIR 1966 S.C. 43]
In other words, if the dealer did believe bona fide that he could store the foodgrains, without infringing any order
u/ s 3, there could be no contravention u/s 7.
Mens rea by necessary implication may be excluded from a statute only where it is absolutely clear that the
implementation of the object of the Statute would otherwise be defeated. The nature of mens rea that would be
implied in a Statute creating an offence depends on the object of the Act and the provisions thereof.
In Hariprasad Rao v. State (AIR 1951 SC 264), it was observed that unless a Statute either clearly or by necessary
implication rules out mens rea as a constituent part of a crime, an accused cannot be found guilty of an offence
219
against the criminal law unless he has got a guilty mind. Therefore, mens rea is an essential ingredient of an offence
u/s 7 of the Act.
Section IOC provides for a presumption of culpable mental state, which includes intention, motive, knowledge of a
fact and the belief in a fact. It is now provided that in any prosecution for an offence under the Act which requires
a culpable mental state on the part of the accused, the Court shall presume the existence of mental state. Of course,
it is open to the accused to prove that he had no such mental state with respect of the act committed by him.
Question 22] State the offences enumerated under the Essential Commodities Act, 1955 and penalties
enumerated for such offences. CS (Inter) - Dec 1998 (5 Marks), Dec 2000 (5 Marks)
Ans.: Following penalties are provided under the Essential Commodities Act, 1955.
Offence Punishment
Contravention of an order passed by the Central Imprisonment for a term which may extend to 1 year
Government u/s 3(2) with reference to clause (h) or (i) and with fine
For the contravention of an order with reference to Imprisonment for a term ranging from 3 months to 7
other clauses of Section 3(2) years and fine.
If any person to whom a direction is given u/s 3(4) (b) Imprisonment not less than 3 months but which may
fails to comply with it. extend to 7 years and fine.
If any person convicted of an offence u/s 7(1)(a)(ii) or Imprisonment for a term which shall not be less than
7(2) is again convicted of an offence under the same 6 months but which may extend to 7 years besides
provision he shall be punishable with imprisonment fine.
for the second and for every subsequent offence
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14
Chapter
LEGAL METROLOGY ACT, 2009
INTR ODU CT lONlMetrology is the science of measurement. Metrology includes all theoretical andpractical aspects
of measurement. The branch of knowledge concerning weights and measure is technically known as Legal
Metrology. Legal metrology "concerns activities which result from statutory requirements and concern
measurement, units of measurement, measuring instruments and methods of measurement and which are
performed by competent bodies." Such statutory requirements might arise from, amongst others, the needs for
protection of health, public safety, the environment, enabling taxation, protection of consumers and fair trade.
It is right of every buyer to have information regarding net weight or quantity, price and other information of
commodity he buys. Before introduction of this Act there were lots of non-standard practices followed in the
country. There are no rules regarding quantity or weight to be contained in package. Consumers were being cheated
by sellers by putting less quantity or weight and by give false information on package. To curb all such malpractices
the Act has been introduced. The Act extends to the whole of India and had come into force on 1st April, 2011.
INTERNATIONAL ORGANIZATION OF LEGAL METROLOGY
Question 1] What do you understand by International Organization of Legal Metrology (OIML) Certificate System?
Ans.: The International Organization of Legal Metrology (OIML) is an intergovernmental organization, created in
1955 and based in Paris. OIML is created to promote the global harmonization of the legal metrology procedures
that underpin and facilitate international trade. Such harmonization ensures that certification of measuring devices
in one country is compatible with certification in another, thereby facilitating trade in the measuring devices and in
products that rely on the measuring devices. Such products include weighting devices, taxi meters, speedometers,
agricultural measuring devices such as cereal moisture meters, health related devices such as exhaust
measurements and alcohol content of drinks.
Since its establishment, it has developed a number of guidelines to assist members, particularly developing nations,
to draw up appropriate legislation concerning metrology.
The OIML organization has no legal authority to impose solutions on its members, but its recommendations are
often used by member states as part of their own domestic law.
The OIML develops model regulations, International Recommendations, which provide Members with an
internationally agreed-upon basis for the establishment of national legislation on various categories of measuring
instruments.
The International Organization of Legal Metrology in French called Organization Internationale de Metrologie
Legale. Thus short form is OIML.
Ans.: The OIML certificate system for measuring instruments was introduced in 1991 to facilitate administrative
procedures and lower the costs associated with the international trade of measuring instruments subject to legal
requirements.
Once a member state had set up certificate issuing authorities (laboratories competent to validate that a particular
product complied with the regulations), that issuing authority could issue OIML Basic certificates.
The System provides the possibility for a manufacturer to obtain an OIML Certificate and a Test Report indicating
that a given instrument complies with the relevant requirements of OIML. Certificates are delivered by OIML
Member States that have established one or several Issuing Authorities responsible for processing applications by
manufacturers wishing to have their instrument certified.
Question 2A] Write a short note on: Salient features of the Legal Metrology Act, 2009
Ans.: It is right of every buyer to have information regarding net weight or quantity, price and other information of
commodity he buys. Before introduction of the Legal Metrology Act, 2009 there were lots of non-standard practices
followed in the country. There are no rules regarding quantity or weight to be contained in package. Consumers
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were being cheated by sellers by putting less quantity or weight and by giving false information on package. To curb
all such malpractices the Legal Metrology Act, 2009 has been introduced. Salient features of the Legal Metrology
Act, 2009 are as follows:
(1) Legal metrology Act, 2009 intends to establish and enforce standards of weights and measures, regulate
trade and commerce in weights, measures and other goods which are sold or distributed by weight, measure or
number and for matters connected therewith or incidental thereto.
(2) Legal Metrology Act, 2009 provides for penalty for use of non-standard Weight or measure.
(3) Legal Metrology Act, 2009 empowers the Central Government and State Governments to make rules for
carrying out the provisions of the Act.
DEFINITIONS
Question 3] Define the term "Dealer" with reference to the Legal Metrology Act, 2009.
Ans.: Dealer [Section 2(b)]: Dealer in relation to any weight or measure means a person who carries on business of
buying, selling, supplying or distributing any weight or measure.
It may be for cash or deferred payment or commission, remuneration or other valuable consideration.
Dealer also includes a commission agent, an importer, a manufacturer, who sells, supplies, distributes or otherwise
delivers any weight or measure manufactured by him to any person other than a dealer;
Question 4] Explain the term 'legal metrology' under the Legal Metrology Act, 2009.
CS (Inter) - Dec 1997 (7 Marks) CS (Executive) - Dec 2008 (3 Marks),
Dec 2011 (3 Marks) CS (Executive) - Dec 2014 (3 Marks)
Ans.: Metrology is the science of measurement. The branch of knowledge concerning weights and measure is
technically known as Legal Metrology.
Legal Metrology [Section 2(g)]: Legal Metrology means that part of metrology which treats units of weighment and
measurement, methods of weighment and measurement and weighing and measuring instruments, in relation to
the mandatory technical and legal requirements which have the object of ensuring public guarantee from the point
of view of security and accuracy of the weighments and measurement.
Ans.: Manufacturer [Section 2(i)]: Manufacturer in relation to any weight or measure, means a person who -
(i) Manufactures weight or measure,
(ii) Manufactures parts, and acquires parts of weight or measure and after assembling parts claims the end
product to be a weight or measure manufactured by himself,
(i») Does not manufacture any part of weight or measure but assembles parts manufactured by others and claims
the end product to be a weight or measure manufactured by himself,
(iv) Puts his own mark on any complete weight or measure made or manufactured by any other person and
claims such product to be a weight or measure made or manufactured by himself.
Question 6] Define the term "Protection" with reference to the Legal Metrology Act, 2009.
Ans.: Protection [Section 2 (k)]: Protection as to mean the utilization of reading obtained from any weight or
measure. Such reading may be obtained for the purpose of determining any step which is required to be taken-
- To safeguard the well-being of any human being or animal or
- To protect any commodity, vegetation or thing.
Question 7] Explain the term 'Pre-packaged Commodity' under the Legal Metrology Act, 2009.
Ans.: Pre-packaged Commodity [Section 2(1)]: Pre-packaged commodity means a commodity which is placed in a
package without the purchaser being present, whether sealed or not and such package has a pre-determined
quantity of any product.
Question 8] Explain the term 'Person' under the Legal Metrology Act, 2009.
Ans.: Person [Section 2(m)]: Person includes-
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(i) Hindu undivided family
(ii) Every department or office,
(iii) Every organization established or constituted by Government
(iv) Every local authority
(v) A company, firm and association of individuals,
(vi) Trust
(vii) Every co-operative society
(viii) Every society registered under the Societies Registration Act, 1860
Question 9] Explain the term 'Sale' under the Legal Metrology Act, 2009.
Ans.: Sale [Section 2(r)]: Sale with its grammatical variations and cognate expressions, means transfer of property
in weight, measure or goods by one person to another for cash or for deferred payment or for any other valuable
consideration.
Sale also includes a transfer of weight, measure or goods on the hire-purchase or instalment system, but does not
include a mortgage or hypothecation or charge or pledge of such weight, measure or other goods.
Question 10] Explain the term 'Seal' under the Legal Metrology Act, 2009.
Ans.: Seal [Section 2(s)]: Seal means a device or process by which a stamp is made, and includes any wire or other
accessory which is used for ensuring the integrity of any stamp.
Ans.: Stamp [Section 2(t)]: Stamp as to mean a mark, made by impressing, casting, engraving, etching, branding,
affixing pre-stressed paper seal or any other process in relation to, any weight or measure with a view to-
(i) certifying that such weight or measure conforms to the specified standard or
(ii) indicating that any mark which was previously made thereon certifying that such weight or measure
conforms to the specified standards has been obliterated.
Question 12] Explain the term 'Verification' under the Legal Metrology Act, 2009.
Ans.: Verification [Section 2(v)]: Verification includes, in relation to any weight or measure, the process of
comparing, checking, testing or adjusting weight or measure with a view to ensuring that weight or measure
conforms to the established standards and also includes re-verification and calibration.
Question 13] Explain the term Weight or Measure' under the Legal Metrology Act, 2009.
Ans.: Weight or Measure [Section 2(w)]: Weight or measure means a weight or measure specified by or under this
Act and includes a weighing or measuring instrument.
STANDARD WEIGHTS & MEASURES
Question 14] State the provisions relating to "Standard of Weight & Measure" under the Legal Metrology Act,
2009.
Ans.: Units of weights & measures to be based on metric system [Section 4]: Every unit of weight or measure shall
be in accordance with the metric system based on the international system of units.
Base unit of weights & measures [Section 5]: The base unit should be as follows:
Weights & Measures Base Unit
Length Metre
Mass Kilogram
Time Second
Electric current Luminous intensity Amount of substance Ampere
Candela
Mole
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Base unit of numeration [Section 6]: The base unit of numeration shall be the unit of the international form of
Indian numerals. Every numeration shall be made in accordance with the decimal system. The decimal multiples &
sub-multiples shall be written in prescribed manner.
Standard units of weights & measures [Section 7]: The base units of weights and measures specified in Section 5
shall be the standard units of weights and measures.
The base unit of numeration specified in section 6 shall be the standard unit of numeration.
For the purpose of deriving the value of base units mentioned in section 5, the Central Government shall prepare
objects or equipments in prescribed manner.
The physical characteristics, configuration, constructional details, materials, equipments, performance, tolerances,
period of re-verification, methods or procedures of tests shall be such as may be prescribed.
Standard weight, measure or numeral [Section 8]: Any weight or measure which conforms to the standard unit of
weight or measure should also conform to the provisions of section 7.
Any numeral which conforms to the provisions of section 6 shall be the standard numeral.
No weight, measure or numeral, other than the standard weight, measure or numeral, shall be used as a standard
weight, measure or numeral.
No weight or measure shall be manufactured or imported unless it conforms to the standards of weight or measure.
However, the aforesaid provisions shall not apply for manufacture done exclusively for export or for the purpose of
any scientific investigation or research.
Reference, secondary & working standard [Section 9]: The reference, secondary and working standards of weights
and measures shall be such as may be prescribed.
Every reference, secondary and working standard shall be verified and stamped in prescribed manner and after
payment of prescribed fee.
Every reference, secondary and working standard which is not verified and stamped shall not be deemed to be a
valid standard.
Use of weight or measure for particular purposes [Section 10]: Any transaction, dealing or contract in respect of
any goods, class of goods or undertakings shall be made in prescribed weight, measure or number.
Prohibition of quotation which are not standard units of weight, measure or numeration [Section 11]:
No person shall, in relation to any goods, things or service,-
- Quote or announce any price or
- Issue or exhibit any price list, invoice, cash memo or other document, or
- Prepare or publish advertisement, poster or other document or
- Indicate the net quantity of a pre-packaged commodity or
- Express quantity or dimension which is not in accordance with the standard unit of weight, measure or
numeration.
This provision shall not be applicable for export of any goods, things or service.
Any custom, usage contrary to standard weight, measure or numeration to be void [Section 12]:
Any custom, usage, practice which permits a person to demand, receive any quantity of article, thing or service
which is contrary to standard weight, measure or numeration to be void.
Question 15] State the power of director to inspect and seize under the Legal Metrology Act, 2009.
Discuss the powers of Legal Metrology Officer regarding inspection and seizure under Legal Metrology Act, 2009.
Ans.: Power of inspection & seizure [Section 15]: The Director, Controller or legal metrology officer may exercise
the following powers if there is reason to believe that any offence committed or is likely to be committed in relation
to any weight or measure or other goods:
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(a) Enter into any such premises at any reasonable time for search and inspection of any weight, measure, other
goods, record, register or other document
(b) Seize any weight, measure, other goods, record, register or other document or article which may furnish
evidence.
The Director, Controller or any legal metrology officer may also require the production of every document or other
record relating to the weight or measure.
Where any goods seized are subject to speedy or natural decay it may be disposed in such prescribed manner.
Every search or seizure shall be carried out in accordance with the provisions of the Code of Criminal Procedure,
1973.
Manufacturers to maintain records & registers [Section 17]: Every manufacturer, repairer or dealer of weight or
measure shall maintain prescribed records and registers. The records and registers shall be produced authorized
persons at the time of inspection.
Question 16] "Every non-standard weight and measure used in the course of trade is liable to be forfeited".
Comment. CS (Executive) - Dec 2017 (3 Marks)
Ans.: Forfeiture [Section 16]: Every non-standard or unverified weight or measure and every package on which
required declaration are not made and which is seized as per Section 15, shall be liable to be forfeited to the State
Government.
However, if the person from whom weight or measure was seized gets the same verified and stamped within
prescribed time then no forfeiter can be made.
Question 17] Health Foods gave an advertisement in daily newspaper for its pre-packed snacks mentioning retail
sale price of the package. However, in the advertisement, neither the net quantity not the number of snacks
contained in the package was given. What are the legal provisions in this regard and whether the advertisement
given by Health Foods is appropriate and sufficient as per relevant law? CS (Executive) - June 2013 (5 Marks)
What are the declarations required to be made by the manufacturer on pre-packaged commodities? Also refer
to penalties provided under the Legal Metrology Act, 2009 for such contravention.
CS (Executive) - June 2014 (5 Marks), June 2015 (3 Marks) CS (Executive) - June 2018 (5 Marks)
Ans.: Declarations on pre-packaged commodities [Section 18]: No person shall manufacture, pack, sell, import,
distribute, deliver, offer for sale any pre-packaged commodity unless such package is in standard quantities or
number and bears prescribed declarations and particulars.
Any advertisement mentioning the retail sale price of a pre-packaged commodity shall contain a declaration as to
the net quantity or number of the commodity contained in the package in prescribed form and in prescribed
manner.
Penalty for selling non-standard packages [Section 36]: Whoever manufactures, packs, imports, sells, distributes,
delivers or otherwise transfers, offers, exposes or possesses for sale, or causes to be sold, distributed, delivered or
otherwise transferred, offered, exposed for sale any pre-packaged commodity which does not conform to the
declarations on the package, shall be punishable as follows:
♦ For the first offence with fine which may extend to ` 25,000,
♦ For the second offence, with fine which may extend to ` 50,000 and
♦ For the subsequent offence, with fine which shall not be less than ` 50,000 but which may extend to `
1,00,000 or with imprisonment up to 1 year or with both.
Whoever manufactures or packs or imports or causes to be manufactured or packed or imported, any pre-packaged
commodity, with error in net quantity as may be prescribed shall be punishable as follows:
♦ For the first offence with fine which shall not be less than ` 10,000 but which may extend to ` 50,000 and
♦ For the second and subsequent offence, with fine which may extend to ` 1,00,000 or with imprisonment up
to 1 year or with both.
Question 18] Write a short note on: Import of weight or measure
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Ans.: Registration for importer of weight or measure [Section 19]: No person shall import any weight or measure
unless he is registered with the Director in such manner and on payment of such fees, as may be prescribed.
Non-standard weights and measures not to be imported [Section 20]: No weight or measure shall be imported
unless it conforms to the standards of weight or measure established under the Act.
Question 19] Write a short note on: Approval of Model
Ans.: Approval of Model [Section 22]: Every person manufacturing or importing any weight or measure shall seek
the approval of model of weight or measure in prescribed manner, on payment of prescribed fee and from
prescribed authority.
However, approval of model may not be required in respect of any cast iron, brass, bullion, or carat weight or any
beam scale, length measures which are ordinarily used in retail trade for measuring textiles or timber, capacity
measures, not exceeding 20 litre in capacity, which are ordinarily used in retail trade for measuring kerosene, milk
or potable liquors.
Prescribed authority may approve model without any test if satisfied that any model of weight or measure has been
approved outside India and which conforms to the standards established under the Act.
Question 20] Write a short note on: Prohibition on manufacture, repair or sale of weight or measure without
licence
Ans.: Prohibition on manufacture, repair or sale of weight or measure without licence [Section 23]:
No person shall manufacture, repair or sell any weight or measure unless he holds a licence issued by the Controller.
However, no licence to repair shall be required by a manufacturer for repair of his own weight or measure in a State
other than the State of manufacture of the same.
The Controller shall issue a licence in prescribed form on fulfilment of prescribed conditions, for prescribed period
and on payment of prescribed fee.
Question 21] Write a short note on: Verification and stamping of weight or measure
Ans.: Verification and stamping of weight or measure [Section 24]: Every person having possession, custody or
control of any weight or measure shall get it verified as specified by Controller on payment of prescribed fees.
The Central Government may prescribe the kinds of weights and measures for which the verification is to be done
through the Government approved Test Centre.
The Government approved Test Centre shall be notified by the Central or State Government.
The Government approved Test Centre shall appoint or engage persons having prescribed qualifications and
experience and collect prescribed fee for the verification of weights and measures.
OFFENCES & PENALTIES
Question 22] State the penalty for 'use of non-standard weight or measure' under the Legal Metrology Act, 2009.
Ans.: Penalty for use of non-standard weight or measure [Section 25]: Whoever uses or keeps for use any weight
or measure or makes use of any numeration otherwise than in accordance with the standards of weight or measure
or the standard of numeration, shall be punished with fine which may extend to ` 25,000.
Second or subsequent offence shall be punished with imprisonment for a term which may extend to 6 months and
also with fine.
Ans.: Penalty for alteration of weight and measure [Section 26]: Whoever tampers with, or alters in any way, any
reference standard, secondary standard or working standard or increases or decreases or alters any weight or
measure with a view to deceiving any person or knowing or having reason to believe that any person is likely to be
deceived thereby, except where such alteration is made for the correction of any error noticed therein on
verification, shall be punished with fine which may extend to ` 50,000.
Second and subsequent offence shall be punished with imprisonment for a term which shall not be less than 6
months but which may extend to 1 year or with fine or with both.
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Question 24] What is the penalty for manufacture or sale of non-standard weight or measure under the Legal
Metrology Act, 2009?
Ans.: Penalty for manufacture or sale of non-standard weight or measure [Section 27]: Every person who
manufactures or causes to be manufactured or sells or offers, exposes or possesses for sale, any weight or measure
which does not conform to the standards of weight or measure; or which bears thereon any inscription of weight,
measure or number which does not conform to the standards of weight, measure or numeration, except where he
is permitted to do so, shall be punished with a fine which may extend to `5,000 and for the second or subsequent
offence with imprisonment for a term which may extend to 3 years or with fine or with both.
Question 25] Write a short note on: Penalty for transactions in contravention of standard weight or measure
under the Legal Metrology Act, 2009?
Ans.: Penalty for transactions in contravention of standard weight or measure [Section 30]: Whoever -
(a) in selling any article or thing by weight, measure or number, delivers or causes to be delivered to the
purchaser any quantity or number of that article or thing less than the quantity or number contracted for or paid
for; or
(b) In rendering any service by weight, measure or number, renders that service less than the service contracted
for or paid for; or
(c) In buying any article or thing by weight, measure or number, fraudulently receives, or causes to be received
any quantity or number of that article or thing in excess of the quantity or number contracted for or paid for; or
(d) In obtaining any service by weight, measure or number, obtains that service in excess of the service
contracted for or paid for,
shall be punished with fine which may extend to ` 10,000, and; for the second or subsequent offence, with
imprisonment for a term which may extend to 1 year, or with fine, or with both.
Question 26] State the penalty for 'non-production of documents' under the Legal Metrology Act, 2009.
Ans.: Penalty for non-production of documents [Section 31]: Whoever, being required to submit returns, maintain
any record or register, or being required by the Director or the Controller or any legal metrology officer to produce
before him for inspection any weight or measure or any document, register or other record relating thereto, omits
or fails without any reasonable excuse, so to do, shall be punished with fine which may extend to ` 5,000 and for
the second or subsequent offence, with imprisonment for a term which may extend to 1 year and also with fine.
Question 27] Write a short note on: Penalty for use of unverified weight or measure
Ans.: Penalty for use of unverified weight or measure [Section 34]: Whoever, sells, distributes, delivers or
otherwise transfers or uses any unverified weight or measure shall be punished with fine which shall
not be less than ` 2,000 but which may extend to ` 10,000 and, for the second or subsequent offence, with
imprisonment for a term which may extend to 1 year and also with fine.
Question 28] What is the penalty for sale or delivery of commodities by non-standard weight or measure as
provided under the Legal Metrology Act, 2009?
Ans.: Penalty for sale or delivery of commodities by non-standard weight or measure [Section 34]:
Whoever sells, or causes to be sold, delivers, or causes to be delivered, any commodity, article or thing by any means
other than the standard weight or measure or number, shall be punished with fine which shall not be less than `
2,000 but which may extend to ` 5,000 and, for the second or subsequent offence, with imprisonment for a term
which shall not be less than 3 months but which may extend to 1 year, or with fine, or with both.
Question 29] Write a short note on: Penalty for rendering services by non-standard weight, measure or number
Ans.: Penalty for rendering services by non-standard weight, measure or number [Section 35]: Whoever renders
or causes to be rendered, any service through means other than the weight or measure or numeration or in terms
of any weight, measure or number other than the standard weight or measure, shall be punished with fine which
shall not be less than ` 2,000 but which may extend to ` 5,000 and for the second or subsequent offence, with
imprisonment for a term which shall not be less than 3 months but which may extend to 1 year, or with fine, or
with both.
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Question 30] What is the penalty for Vexatious search' under the Legal Metrology Act, 2009?
Ans.: Vexatious search [Section 42]: The Director, the Controller or any legal metrology officer, exercising powers
under the Act or any rule made thereunder, who knows that there are no reasonable grounds for so doing, and yet
-
(a) Searches, or causes to be searched, any house, conveyance or place or (ib) Searches any person or
(c) seizes any weight; measure or other movable property;
shall for every such offence, be punished with imprisonment for a term which may extend to 1 year, or with fine
which may extend to ` 10,000 or with both.
Question 31] Write a short note on: Penalty for counterfeiting of seals under the Legal Metrology Act, 2009
Ans.: Penalty for counterfeiting of seals [Section 44]: Whoever -
(i) Counterfeits any seal specified by or under the Act or the rules made thereunder, or (ii) Sells or otherwise disposes
of any counterfeit seal, or (ii) Possesses any counterfeit seal, or
(iv) Counterfeits or removes or tampers with any stamp, specified by or under this Act or rules made thereunder,
or
(v) Affixes the stamp so removed on, or inserts the same into, any other weight or measure,
shall be punished with imprisonment for a term which shall not be less than 6 months but which may extend to 1
year and for the second or subsequent offence, with imprisonment for a term which shall not be less than 6 months
but which may extend to 5 years.
Explanation: Counterfeit shall have the meaning assigned to it in section 28 of the Indian Penal Code.
A person is said to "counterfeit" who causes one thing to resemble another thing, intending by means of that
resemblance to practice deception, or knowing it to be likely that deception will thereby be practiced. [Section
28 of the Indian Penal Code, 1860]
Question 32] As a Company Secretary advise the board of directors of your company, how offence by companies
are treated under the provisions of the Legal Metrology Act, 2009.
Ans.: Who is liable for the offence by the Companies [Section 49(1)]: Where an offence under the Act has been
committed by a company -
(a) the person nominated u/s 49(2) who is in charge of, and responsible to, the company for the conduct of the
business of the company; or where no person has been nominated, every person who at the time the offence was
committed was in charge of, and was responsible to, the company for the conduct of the business of the company;
and
(b) the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and
punished accordingly.
However, nothing shall render any such person liable to any punishment if he proves that the offence was
committed without his knowledge and that he exercised all due diligence to prevent the commission of such
offence.
Nomination of person for offence [Section 49(2)]: Any company may in writing, authorize any of its directors to
exercise all such powers and take all such steps as may be necessary or expedient to prevent the commission of any
offence.
The company may give notice to the Director or Controller or any authorized legal metrology officer in prescribed
form and manner that it has nominated a director as the person responsible for the offence under the Act. Written
consent of director is required to be attached to such nomination.
Explanation: Where a company has different establishments or branches or different, units in any establishment or
branch, different persons may be nominated in relation to different establishments or branches or units and the
person nominated in relation to any establishment, branch or unit shall be deemed to be responsible person in
respect of such establishment branch or unit.
Liability of nominated person [Section 49(3)]: The person nominated shall, until -
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(i) Further notice cancelling such nomination is received from the company by the Director or the concerned
Controller or the authorized officer; or
(ii) He ceases to be a director of the company; or
(iii) He makes a request in writing to the Director or the concerned Controller or the legal metrology officer under
intimation to the company, to cancel the nomination, which request shall be complied with by the Director or the
concerned Controller or the legal metrology officer,
whichever is the earliest; continue to be the person responsible.
However, where such person ceases to be a director of the company, he shall intimate the fact of such cessation to
the Director or the concerned Controller or the authorized officer.
Where such person makes a request the Director or the concerned Controller or the authorized officer shall not
cancel such nomination with effect from a date earlier than the date on which the request is made.
Director, manager, secretary or other officer are also liable for the offence [Section 49(4)]: Where an offence has
been committed by a company and it is proved that the offence has been committed with the consent or connivance
of, or is attributable to the neglect on the part of, any director, manager, secretary or other officer, they all also be
deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Publication of name of convicted companies [Section 49(5), (6) & (7)]: Where any company is convicted under the
Act for contravention of any of the provisions thereof, it shall be competent for the Court convicting the company
to cause the name and place of business of the company, nature of the contravention, the fact that the company
has been so convicted and such other particulars as the Court may consider to be appropriate in the circumstances
of the case, to be published at the expense of the company in such newspaper or in such cfther manner as the court
may direct.
No publication shall be made until the period for preferring an appeal against the orders of the Court has expired
without any appeal having been preferred, or such an appeal, having been preferred, has been disposed of.
The expenses of any publication of name of convicted companies shall be recoverable from the company as if it
were a fine imposed by the Court.
Explanation: For the purposes of this section,-
(a) Company means any body corporate and includes a 'firm or other association of individuals.
(i>) Director, in relation to a firm, means a partner in the firm but excludes nominated directors, honorary directors,
Government nominated directors.
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15
Chapter
TRANSFER OF PROPERTY ACT, 1002
INT R ODU CT ION! 'Transfer of Property'means an act by which a livingperson conveys property, in present or fu
ture, to one or more living persons, or to himself and one or more other living persons. The property may be
movable or immovable, present or future and the transfer can be made orally, unless transfer in writing is
specifically required under any law. Any person competent to contract and entitled to transferable property, or
authorized to dispose of transferable property on his own, can transfer such property whether in part or whole,
absolutely or conditionally.
The Act outlines transfers of property by act of parties like sales of immovable property, mortgages and charges,
leases of immovable property, exchanges, gifts and actionable claims.
The Transfer of Property Act, 1882 mainly deals with transfer of immovable property. It applies only to voluntary
transfers. It does not apply to transfers by the operation of law. It came into force on the 1st July, 1882.
Before you start reading this chapter go through the following basic concepts.
ABSOLUTE INTEREST
When person owns property, he has an "absolute interest" in the property. Ownership consists of a bundle of rights,
the right to possession, right to enjoyment and right to do anything such as selling, mortgaging or making gift of the
property.
Example: If Ram is the owner of land, he has an absolute interest in the land. If Ram sells his land to Balram, then
Balram becomes the owner and he acquires an absolute interest in the land which he has purchased from Ram.
Likewise if Ram makes a gift of his property to Shyam, there again Shyam gets an absolute interest in the property
which is gifted to him.
Reversion & Remainder
Reversion means any future interest kept by a person who transfers property to another.
A reversion occurs when owner of a property makes an effective transfer of property to another but retains some
future right to the property. For example, if Ram transfers a piece of property to Shyam for life, Shyam has the use
of the property for the rest of his life. Upon his death, the property reverts, or goes back, to Ram, or if Ram has died,
it goes to his heirs. Shyam's interest in the property is a life estate. Ram's ownership interest during Shyam's life,
and his right or the right of his heirs to take back the property upon Shyam's death, are called reversionary interests.
A reversion differs from a remainder because a reversion arises through the operation of law rather than by act of
the parties. A remainder is a future interest that is created in some person other than the grantor or transferor,
whereas a reversion creates a future interest in the grantor or his heirs. If Ram's transfer had been "to Shyam for
life, then to Rahim," Rahim's interest would be a remainder.
Vested & Contingent Interest
Vested in possession: It is a right to present possession of property.
Vested in interest: It is a present right to future possession.
Example: If land is given to Kalyani for life with a remainder to Piyusha, Kalyani's right is vested in possession,
Piyusha's right is vested in interest.
In the above example, the interest of Piyusha is not subject to any uncertain condition. It will come into her
possession after Kalyani's life comes to an end. Therefore, an interest is said to be vested when it is not subject to
any condition precedent, i.e., when it is to take effect on the happening of an event which is certain.
Contingent interest: A contingent interest is dependent upon the fulfilment of some conditions which may or may
not happen.
Example: A gift to Aakash on the marriage of Mahesh creates a contingent interest, for Mahesh may never marry
at all but that contingent interest becomes vested if and when Mahesh marries.
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A vested interest is transferable and heritable. If property is given to Anil for life and afterwards to Bobby, Bobby
gets a vested interest and if Bobby transfers this interest to Chirag, Chirag will take when the life estate of Anil
comes to an end. Bobby's interest, since it is vested, is also heritable. Therefore, if Bobby dies during the lifetime of
Anil, Chirag will get the property after the death of Anil.
The contingent interest is not heritable although it is transferable. In a vested interest the transfer is complete, but
when the interest is contingent the transfer depends upon a condition precedent.
Example: Property is given to A for life and then to B if he marries C. B should marry C before A dies. If he does so,
his interest is converted into vested interest. Before B marries C his interest is contingent.
Question 1] A property is given to Anil for life and afterwards to Bimal. Bimal transfers this interest to Chandan.
Bimal dies during the life-time of Anil. Chandan claims the property. Decide.
Ans.: A property is given to Anil for life. Here, Anil's interest is vested in possession. After Anil's death property will
go to Bimal, hence Bimal's interest is vested interest. A vested interest is transferable and heritable. Thus, if Bimal
dies during the life time of Anil, Bimal's vested interest will go his legal heir. Bimal can also transfer his vested
interest to some other person. As per facts given in case, Bimal has transferred his vested interest to Chandan. As
Bimal was to get the property after the lifetime of Anil, and so, Chandan gets the same rights. Hence, Chandan's
claim is correct.
Question 2] Distinguish between: Vested & Contingent Interest
CS (Executive) - June 2009 (4 Marks), Dec 2009 (4 Marks) CS (Executive) - June 2017 (4 Marks)
Ans.: The following are main points of distinction between vested and contingent interest:
Points Vested Interest Contingent Interest
Meaning It is a present right to future possession. A contingent interest depends upon the
fulfilment of some conditions which may or
may not happen.
Takes A vested interest takes effect from the date of A contingent interest in order to become
effect transfer. vested is conditioned by a contingency which
may not occur.
Death of A vested interest cannot be defeated by the A contingent interest may fail in case of death
transferee death of the transferee before he obtains of transferee before the fulfilment of condition.
possession.
Example If a land is given to Kalyani for life with a A gift to Aakash on the marriage of Mahesh
remainder to Piyusha, Kalyani's right is vested creates a contingent interest, for Mahesh may
in possession, Piyusha's right is vested in never marry at all.
interest.
MOVABLE & IMMOVABLE PROPERTY

Question 3] What do you understand by movable and immovable property?
Ans.: Movable Property: The Transfer of Property Act does not define the term "movable property". Therefore, it
is to be defined with the help of other statutes.
General Clauses Property of every description except immovable property.

Act, 1897
Registration Act, Property of every description excluding immovable property but including standing timber,
1908 growing crops and grass.
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Immovable Property [Section 3]: The immovable property does not include standing timber, growing crops, or
grass.
The term "immovable property" is also not defined under the Transfer of Property Act. It just says what cannot be
treated as immovable property.
Lest have look on how other statute defines the term "immovable property".
General Clauses Immovable property shall include land, benefits to arise out of land and things attached to
Act, 1897 the earth, or permanently fastened to anything attached to the earth.
Registration Act, Immovable property includes the benefits to arise out of land, hereditary allowances, rights
1908 of way, lights, ferries and fisheries.
Question 4] Distinguish between: Movable & Immovable Property

CS (Inter) - June 1989 (7.5 Marks)
Ans.: Following are the main points of difference between movable & immovable property:
Points Movable Property Immovable Property
Definition in "Movable Property" shall mean "Immovable Property" shall include land, benefits
General Clauses property of every description, except to arise out of land, and things attached to the
earth,
Act, 1897 immovable property. [Section 3(36)] or permanently fastened to anything attached to
the earth. [Section 3(26)]
Definition in TP The expression 'movable property' is Section 3 of the Transfer of Property Act, 1882
defines
Act, 1882 not defined by the Transfer of the term 'immovable property' negatively; it says
Property
Act, 1882. that immovable property does not include

standing timber, growing crops or grass.
Example The following have been held to be The following have been held to be immovable
movable property. property.
♦ Right to worship ♦ Right to collect rents of immovable property
♦ Government promissory notes ♦ Right to way
♦ Royalty ♦ Right to collect dues from fair on a piece of land
♦ Right to recover maintenance al- ♦ Hereditary offices
lowance ♦ Equity of redemption
♦ Copyright ♦ Interest of mortgagee
♦ Decree for sale on a mortgage- ♦ Right to collect lac from trees

deed
232
♦ Decree for arrears of rent ♦ Right of ferry
♦ Right of fishery
♦ Machinery which is not ♦ Right to receive future rents and profits of land
permanently attached to earth
♦ Standing timber, growing crop and ♦ Reversion in property leased a factory

grass
Question 5] A orally grants to B for ` 7,00,000 the rights to catch and carry away fish from his lake. Is the grant
valid?
Ans.: The Supreme Court in Ananda Behra v. State of Orissa, AIR 1956 SC 17, held that rights to catch and carry away
fish from his lake is a benefit arising out of immovable property. So, under the General Clauses Act, 1897 it is
immovable property. The sale requires a registered instrument for its validity. Therefore, the oral grant is invalid
and cannot pass away any title in favour of Y.
Question 6] Which of the following are movable or immovable properties under the Transfer of Property Act,
1882:
(1) a right to way
(2) a factory
(3) a right to collect lac from trees
(4) hereditary offices
(5) growing crops
(6) standing timber CS (Inter) - Dec 2006 (6 Marks)
Ans.:
(1) a right to way Immovable
(2) a factory Immovable
(3) a right to collect lac from trees Immovable
(4) hereditary offices Immovable
(5) growing crops Movable
(6) standing timber Movable
RULES RELATING TO TRANSFER OF PROPERTY

Question 7] What are the exceptions to the general rule that property of any kind may be transferred? Refer to
relevant provisions of Transfer of Property Act, 1882. CS (Inter) - June 2003 (8 Marks)
The concept of spes succession under the Transfer of Property Act, 1882.
Mention the properties which cannot be transferred under the Transfer of Property Act, 1882.
Ans.: What may be transferred [Section 6]: Property of any kind may be transferred, except as otherwise provided
by the Act or by any other law for the time being in force.
Exceptions: Some exceptions to the general rule that property of any kind may be transferred. Thus, following
properties cannot be transferred:
233
(1) Spes Successions: The chance of an heir apparent succeeding to an estate, the chance of a relation obtaining
a legacy on the death of a kinsman (a man who is one of a person's blood relations) or any other mere possibility of
a like nature cannot be transferred.
Example: Suppose A is the owner of the property and B is his son. B is the heir of A. During the life time of his father
A, B has only a hope expectancy that he will inherit the property of his father. This type of property which B hopes
to get after the death of the father cannot be transferred, during the life time of A.
(2) Right of re-entry: A mere right of re-entry for breach of a condition subsequent cannot be transferred to
anyone except the owner of the property affected thereby.
Example: A grants his land by way of lease to B, a limited liability company on condition that the land should revert
to A from B if the company goes into liquidation. This is a mere right in favour of A and this right of A cannot transfer
to anyone as this is a personal right which can be exercised by A only. But if A transfers the whole of his interest in
the land including the right of re-entry to C, there the right to re-entry is a legal incident of property and can be
validly transferred along with the property.
(3) Transfer of easement: An easement cannot be transferred apart from the dominant heritage. (An easement
means a right to cross or otherwise use someone else's land for a specified purpose.)
Example 1: The right of certain villagers to bath in another's tank cannot be transferred.
Example 2: If A, the owner of a house X, has a right of way over an adjoining plot of land belonging to B, he cannot
transfer this right of way to C. But if he transfers the house itself to C, the easement is also transferred to C.
(4) Restricted interest or personal interest: An interest is property restricted in its enjoyment to the owner
personally cannot be transferred by him. Examples of such restricted interest or property are the following:
- The right of pre-emption given under the Mohammedan Law.
- The office of a Shebait of a Temple or mohunt of a mutt or mutuwalli of a wakf.
- Emoluments attached to a priestly office.
- Service tenures.
(5) Right to future maintenance: A right to future maintenance in whatsoever manner arising, secured or
determined, cannot be transferred.
(6) Mere right to sue: A mere right to sue cannot be transferred.
Example: A commits an assault on B, B can file a suit to obtain damages; but B cannot assign the right to C and allow
him to obtain damages. In contract also, the rule is the same. If A breaks a contract which he has entered into with
B, B can bring action for damages, but B cannot transfer this right to C to recover damages.
(7) Transfer of public office & salaries, stipends, etc.: A public office cannot be transferred nor can the salary
of a public officer, whether before or after it has become payable.
(8) Stipends allowed to military, naval, air force and civil pensioners of the Government and political pensions
cannot be transferred. Since these allowances, pensions and stipends are given on personal basis, the law does not
allow these types of property to be transferred.
Question 8] Amrish sells a property to Chaman for ` 25,000. In fact the property belonged to his father but he is
named as the sole beneficiary in his father's will. What is the legal effect?
Ans.: In the given problem, it is not clear whether Amrish sells the property during the life time of his father. If it is
so, the transfer is not valid in view of the provisions Section 6(a).
"The property belonged to his father but he is named as the sole beneficiary in his father's will"-it may also be
inferred that the sale takes place after the death of Amrish's father and that case sale will be valid.
Question 9] A transfers to B for valuable consideration his reversionary interest in a house. When A succeeds to the
house, B sues him for possession of the same. Advise B. CS (Inter) - Dec 1993 (7 Marks)
Ajit transfer to Baljit for valuable consideration his reversionary interest in a property. When Ajit succeeds to the
property, Baljit sues for possession of the same. Whether Baljit's suit for possession will succeed? Give reasons.
234
Ans.: Reversion means any future interest kept by a person who transfers property to another.
A reversion occurs when a property owner makes an effective transfer of property to another but retains some
future right to the property.
As per Section 6, the reversionary interest is spes succession and is not transferable. Therefore, the transfer of
reversionary interest of A to B is void, and hence, the suit of B for possession would fail.
Question 10] Discuss the validity of the following transfers:
(1) X, a Hindu widow, transfers her right to future maintenance.
(2) X, a Hindu widow, transfers her arrears of past maintenance.
(3) Transfer of right of easement apart from the dominant heritage.
CS (Inter) - June 2004 (3 * 2 Marks = 6 Marks)
Ans.: Validity of various transfer can be discussed as follows:
(1) Right to future maintenance: A right to future maintenance in whatsoever manner arising, secured or
determined, cannot be transferred. Thus, transfer by X right to future maintenance is not valid.
(2) Right to past maintenance: Arrears of past maintenance can be transferred since they are already accrued
and due. Thus, transfer by X right to past maintenance is valid.
(3) Transfer of easement: An easement cannot be transferred apart from the dominant heritage. Hence, transfer
is invalid.
Question 11] Rohit, a Hindu who has his self-earned property, dies leaving his widow Priya and brother Bidur. Bidur's
succession to the property is dependent upon two factors, viz.,
(1) his surviving the widow Priya and
(2) Priya leaving the property intact.
Bidur transfers his right of succession. Is it a valid transfer? Explain.
Ans.: As per Section 6, the chance of an heir apparent succeeding to an estate, the chance of a relation obtaining a
legacy on the death of a kinsman (a man who is one of a person's blood relations) or any other mere possibility of a
like nature cannot be transferred.
As per facts given in case, Bidur has mere possibility of getting the property. This is spes successions and Bidur
cannot transfer his right of succession. Thus, transfer by Bidur of his right of succession is not a valid transfer.
Question 12] A makes a gift of a house to B with whom he had illicit relation in the past. Is this transfer valid? Will
it make any difference if A's consideration for this transfer is adulterous relations of B with A? Give reason. CS
Ans.: Section 6 of the Transfer of Property Act, 1882 deals with "what may be transferred". Section 6 provides that,
property of any kind may be transferred, except as otherwise provided by the Act or by any other law for the time
being in force. Clauses (a) to (i) of Section 6 provides that which property cannot be transferred.
As per Section 6(h), no transfer can be made for an unlawful object or consideration within the meaning of Section
23 of the Indian Contract Act, 1872.
Section 23 of the Indian Contract Act, 1872 declares that - the consideration or object of an agreement is if Court
regards it as immoral or opposed to public policy.
In Nagaratnambu v. Ramayya AIR 1968 SC 523, the Supreme Court held that past cohabitation was only motive and
not a consideration for the gift and such transfer is not hit by Section 6(h) and gift of immovable property for past
illicit cohabitation is valid.
However, adulterous relations are offence and hence it is immoral and opposed to public policy. It is unlawful
consideration as per Section 23 of the Indian Contract Act, 1872 and hence transfer of immovable property is not
valid as per Section 6(h) of the Transfer of Property Act, 1882.
Question 13] Discuss the various formalities to be completed to effect valid transfer?
235
Attestation is an important formality in connection with the execution of the transfer as per the Transfer of
Property Act, 1882. Comment. CS (Inter) - June 2008 (4 Marks)
Ans.: Following are various formalities to be completed to effect valid transfer:
(1) Attestation: Attestation, in relation to a document, signifies the fact of authentication of the signature of
the executants of that document by the attestator by putting down his own signature on the document in testimony
of the fact of its execution.
Attestation is valid and complete when two witnesses sign the instrument.
(2) Registration: The advantage of registering a document is that any person who deals with the property would
be bound by the rights that are created in earlier registered document. If a document of transfer relating to
immovable property is required by the law to be and has been effected by registered instrument, the persons who
deal with the property subsequently are deemed in the eye of law as having knowledge of the registered instrument
from the date of its registration.
(3) Notice: Notice, may be actual or constructive. If a person knows about a fact, he has an actual notice. If a
person knows about a fact, he has an actual notice. But, in certain circumstances law treats a man who ought to
have known a fact even though he did not in fact know it. This is called constructive notice.
Question 14] Who can transfer the immovable property?
Ans.: Persons competent to transfer [Section 7]: Every person who is competent to contract and entitled to
transferable property, or authorised to dispose of property is competent to transfer such property.
Hence, every person competent to contract and having ownership can transfer property. According to the Contract
Act, 1872 a person is competent to contract when he is a major and of sound mind and is not disqualified from
contracting by any law to which he is subject. But a minor can be a transferee. Thus, a mortgage can be validly
executed in favour of a minor who has paid the consideration. [Hari Mohan v. Mohini, 22 C.W.C. 130, Raghava v.
Srinivasa, (1917) 60 Mad. 308]
Although a minor is not competent to be a transferor yet a transfer to a minor is valid.
RESTRAINT ON TRANSFERS/RULES AGAINST INALIENABILITY
Question 15] What law against inalienability of property is given in the Transfer of Property Act, 1882?
CS (Inter)-June 1994 (7 Marks)
Exceptions to the rule that absolute restraint on transfer of property is void. Comment.
Ans.: Condition restraining alienation [Section 10]: Where property is transferred subject to a condition absolutely
restraining the transferee from parting with or disposing the property, the transfer is valid but condition is void.
Thus, one may give property to another subject to a condition, but the condition should not be one which absolutely
prevents the transferee from alienating the property.
Examples of absolute restraint
(1) Ram gives property to Shyam (his heirs) adding a condition that if the property is alienated it should revert
to Ram. The transfer is valid and takes effect but the condition not to alienate the property is void. The transferee
can ignore such condition.
(2) Suresh gives to Nagesh property worth only ` 2,000 and adds a condition that Nagesh should sell property
for ` 50,000 and not below that amount, this condition is invalid because no one will buy the property which is only
worth ` 2,000 for ` 50,000. Thus, transfer of property of ` 2,000 by Suresh to Nagesh is valid but condition to sell it
for ` 50,000 is void. Nagesh can sell the property at any amount as he able to sell by ignoring the condition.
(3) Suresh gives to Nagesh property worth ` 50,000 and stipulates that if Nagesh wants to sell the property he
should sell it to Parag only for ` 1,000. This will operate as an absolute restraint.
(4) The testator gave his estate to his son and added a condition that if his son wanted to sell the property he
should first give an option to the testator's wife who should be able to buy for 3,000 was void. [Roslier v. Kosher
(1884) 26, Ch. D. 801]
236
(5) There was a partition between a Hindu father and his five sons. The deed of partition provided that if any
one of the sons wanted to sell his share, he should not sell it to a stranger but to one of his brothers who should
have the option to buy for a sum not exceeding ` 1,000. It was held by the Court that the condition
absolutely prevented the son from selling the property to any one for good value. In this case the market value of
the property of the son was far greater than `,000. Hence, the condition was declared invalid. [Trichitipoly Varthaga
Sangurti v. Shunmoga Sunderam (1939) Madras 954]
Partial restraint valid: Though absolute restraints are bad in law, partial restraints are valid. If there are conditions
which restrain the transferee no to alienate the property outside the family, it has been held by the Courts that they
are partial restraints. For example, whenever there are conditions in a family settlement whereby the members are
not allowed to sell their shares to a stranger, such conditions are valid.
Restraint on enjoyment [Section 11]: Restraint on the enjoyment of the property is invalid. Where land is
transferred by one to another, the transferor should not impose conditions as to how and in what manner the
transferee should enjoy the property.
Example: Aalia sells her house to Babita and adds a condition that only Babita should reside in that house. Here
again transfer is valid but the condition is invalid. Aalia cannot put such condition on Babita regarding enjoyment of
property. Babita can ignore such condition.
Restraint on enjoyment - when valid: If a person transfers a plot of land keeping another plot for himself, he can
impose certain conditions which may interfere with the right of enjoyment of the transferee.
Example: Raman has properties X & Y. He sells property Y to Mayank and puts a condition that Mayank should not
construct on property Y more than one storey so that Raman's property X which he retains should have good light
and free air. The condition which is imposed by Raman is for the benefit of another property which he retains. Such
a condition is valid.
Condition making interest determinable on insolvency or attempted alienation [Section 12]: If a property is
transferred to any person adding a condition that if such person becomes insolvent he ceases to hold that property.
Such a condition is void.
However, if a landlord leases his property he can impose a condition on the lessee that if the lessee becomes
insolvent the lease should come to an end.
Question 16] Sunil gives property worth ` 2,000 only to Anil and adds a condition that Anil should sell the property
for ` 50,000 and not below this amount. Is this condition valid? Give reasons.
Ans.: As per Section 10 of the Transfer of Property Act, 1882, where property is transferred subject to a condition
absolutely restraining the transferee from parting with or disposing the property, the transfer is valid but condition
is void.
As per facts given in case condition imposed by Sunil is void because no one will buy the property which is only
worth ` 2,000 for ` 50,000. Thus, transfer of property of ` 2,000 by Sunil to Anil is valid but condition to sell it for `
50,000 is void. Anil can sell the property at any amount as he able to sell by ignoring the condition.
Question 17] There was a partition between a Hindu father and his five sons. The deed provided that if any one
of the sons wanted to sell his share, he shall sell it to one of his brothers only and not to any stranger. The
consideration for that share shall be ` 1,000 only. Are these conditions valid? Give reasons.
Ans.: As per Section 10 of the Transfer of Property Act, 1882, where property is transferred subject to a condition
absolutely restraining the transferee from parting with or disposing the property, the transfer is valid but condition
is void.
237
In given case the deed provided that if any one of the sons wanted to sell his share, he shall sell it to one of his
brothers only and not to any stranger. The consideration for that share shall be ` 1,000 only. This condition is invalid
and the transferee can ignore such condition. The transfer takes effect and is valid, and the condition not to alienate
the property is void.
Question 18] Anil has two properties, Property-X and Property-Y. He sells his Property-Y to Jolly and puts a
condition that Jolly should not construct more than one storey on Property-Y so that Property- X, which he
retains, shall have good light and free air. Whether the condition imposed by Anil is 'valid' under the Transfer of
Property Act, 1882? Give reasons.
Ans.: As per Section 11 of the Transfer of Property Act, 1882, if a person transfers a plot of land keeping another
plot for himself, he can impose certain conditions which may interfere with the right of enjoyment of the transferee.
Thus, it is clear that the condition which is imposed by Anil is for the benefit of another property which he retains.
Such a condition is valid.
Question 19] Distinguish between: Conditions restraining alienation and condition restraining enjoyment
Ans.: Following are the main points of difference between conditions restraining alienation and condition
restraining enjoyment:
Points Conditions restraining alienation Condition restraining enjoyment
Meaning Conditions restraining alienation means Condition restraining enj oyment means
transferor restrains transferee form parting transferor restrains transferee form enjoyment
with or disposing the property. of property.
Points Conditions restraining alienation Condition restraining enjoyment
Validity of Where property is transferred subject to a Restraint on the enjoyment of the property is
transfer condition absolutely restraining the transferee invalid. Where land is transferred by one to
from parting with or disposing the property, another, the transferor should not impose
the transfer is valid but condition is void. conditions as to how and in what manner the
Though absolute restraints are bad in law, transferee should enjoy the property.
partial restraints are valid if conditions
imposed are reasonable.
Section This dealt by Section 10 of the Transfer of This dealt by Section 11 of the Transfer of
Property Act, 1882. Property Act, 1882.
Example Ram gives property to Shyam (his heirs) adding Aalia sells her house to Babita and adds a
a condition that if the property is alienated it condition that only Babita should reside in that
should revert to Ram. The transfer is valid and house. Here again transfer is valid but the
takes effect but the condition not to alienate condition is invalid. Aalia cannot put such
the property is void. The transferee can ignore condition on Babita regarding enjoyment of
such condition. property. Babita can ignore such condition.
TRANSFER FOR THE BENEFIT OF UNBORN PERSON

Question 20] Write a short note on: Transfer for the benefit of unborn person
Describe the essential conditions required for transfer for benefit of unborn person.
CS (Executive) - June 2010 (4 Marks), Dec 2016 (5 Marks) * 1 2
238
Ans.: Transfer for benefit of unborn person [Section 13]: If there is transfer of property for the benefit of unborn
person, subject to a prior interest created by the same transfer, interest created for the benefit of unborn person
shall not take effect unless it extends to the whole of the remaining interest of the transferor in the property.
Thus, if a property is given to an unborn person, two conditions should be satisfied:
(1) It should be preceded by a life estate in favour of a living person, and
(2) It should comprise the whole of the remaining interest of the transferor so that there can be no further
interest in favour of others.
Example: Ram transfers property of which he is the owner to Shyam in trust for Ram and his intended wife
successively for their lives, and after the death of the survivor, for the eldest son of the intended marriage for life,
and after his death for Ram's second son. The interest so created to the benefit of the eldest son does not take
effect, because it does not extend to the whole of Ram's remaining interest in the property, (i.e. to say eldest son is
getting only a life interest and not an absolute interest)
Effect of a transfer on failure of prior interest [Section 16]: Further, where by reason of any rules contained in
Section 13 interest created for the benefit of a person fails in regard to such person, any interest created in the
same transaction and intended to take effect or upon failure of such prior interests also fail.
Question 21] On the occasion of birthday of Rajat, his father Govind gives a plot of land to him for life and after
his death to his wife Sujata for life. He stipulates that after the death of both Rajat and Sujata, their eldest unborn
son will get the property for life. After the death of eldest son, the land will be enjoyed by their younger son
absolutely. Decide the validity of the transfer.
CS (Inter) - June 1995 (6 Marks) CS (Inter) - Dec 2002 (5 Marks), Dec 2005 (5 Marks)
Ans.: As per Section 13 of the Transfer of Property Act, 1882, if there is transfer of property for the benefit of unborn
shall not take effect unless it extends to the whole of the remaining interest.
In the given problem, the interest created for the benefit of the eldest (unborn) son does not take effect, because
the transfer does not extend to the whole of remaining interest in the property, since he is getting only a life interest
and not an absolute interest. The alienation in favour of younger (unborn) son also fails as provided in Section 16.
On failure of a prior interest, any interest intended to come into exercise after or upon failure of prior interest, also
fails.
Question 22] Arjun transfers his property to Bhanu for life and after Bhanu's death to that of his unborn sons as
shall first attain the age of 25 years and if no son of Bhanu shall attain that age, to Chandan who is living at the
time of the transfer. Decide the validity of this transfer.
Ans.: As per Section 13 of the Transfer of Property Act, 1882, if there is transfer of property for the benefit of unborn
shall not take effect unless it extends to the whole of the remaining interest.
239
In the given problem, the interest created for the benefit of the Bhanu's unborn son does not take effect, because
the transfer does not extend to the whole of remaining interest in the property, since he is getting only a life interest
and not an absolute interest. The transfer to in favour of Chandan also fails as provided in Section 16. On failure of
a prior interest, any interest intended to come into exercise after or upon failure of prior interest, also fails.
RULE AGAINST PERPETUITY
Question 23] Write a short note on: Rule against perpetuity
Ans.: Rule against perpetuity [Section 14]: No transfer of property can operate to create an interest which is to
take effect after the life-time of one or more persons living at the date of such transfer, and the minority of some
person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the interest
created is to belong
Example: Transfer may be made to A for life and then to B for life and then to C for life and so on, provided that A,
B & C are all living persons at the date of the transfer. But if the ultimate beneficiary is someone who is not in
existence at the date of the transfer, the whole residue of the estate should be transferred to him. If he is born
before the termination of the last prior estate, he takes a vested interest at birth and takes possession on the
termination of the last prior estate but if he is not born till the termination of the last prior estate, the transfer to
him fails.
Further, the rule is not that vested interest is created at the birth of the beneficiary but that vested interest cannot
be delayed in any case beyond his minority. Therefore, the rule against perpetuity is that the minority of the ultimate
beneficiary is the latest period at which an estate can be made to vest.
In India minority terminates at the end of 18 years.
Thus, the rule against perpetuity contains two propositions, i.e
(1) No transfer is valid after the life-time of one or more persons living at the date of such transfer. Transfer can
remain in effect only during the life time of an existing person.
(2) Transfer can be extended to a person who is not in existence but if he is in existence at the time of
termination of the period of last transfer. The moment the person is born he shall have contingent interest and
after minority i.e. after the age of 18 years, he shall have vested interest. Barring these two conditions, a restriction
on alienation of a property is void.
CONDITIONAL TRANSFER
Question 24] Write a short note on: Conditional Transfer
Ans.: Conditional Transfer [Section 25]: An interest created on a transfer of property and dependent upon a
condition fails if the fulfilment of the condition:
- is impossible,
- is forbidden by law,
- is of such a nature that, if permitted, it would defeat the provisions of any law,
- is fraudulent,
- involves or implies injury to the person or property of another, or
- Court regards it as immoral or opposed to public policy.
Illustration (as given in Transfer of Property Act, 1882)
(a) A lets a farm to B on condition that he shall walk a hundred miles in an hour. The lease is void.
(b) A gives ` 500 to B on condition that he shall marry A's daughter C. At the date of the transfer C was dead.
The transfer is void.
(c) A transfers ` 500 to B on condition that she shall murder C. The transfer is void.
(d) A transfers ` 500 to his niece C, if she will desert her husband. The transfer is void
Fulfilment of Condition Precedent [Section 26]: Where the terms of a transfer of property impose a condition to
be fulfilled before a person can take an interest in the property, the condition shall be deemed to have been fulfilled
if it has been substantially complied with.
240
Illustration (as given in Transfer of Property Act, 1882)
(a) A transfers ` 5,000 to B on condition that he shall marry with the consent of C, D & E. E dies. B marries with
the consent of C & D. B is deemed to have fulfilled the condition.
(b) A transfers ` 5,000 to B on condition that he shall marry with the consent of C, D & E. B marries without
the consent of C, D & E, but obtains their consent after the marriage. B has not fulfilled the condition
Condition Subsequent: A transfer may also be made subject to a contingency which may or may not occur. Thus,
an interest may be created with the condition superadded that it shall cease to exist in case a specified uncertain
event shall happen, or in case a specified uncertain event shall not happen. This is known as condition subsequent.
Condition subsequent is one which destroys or divests the rights upon the happening or non-happening of an event.
Example: A transfers a Farm to B for his life with a proviso that in case B cuts down a certain wood, the transfer shall
cease to have any effect, B cuts down the wood. He loses his life interest in the farm.
Example: Similarly, if A transfers a farm to B provided that B shall not go to England within 3 years after the date of
transfer, the interest in the farm shall cease. B does not go to England within the term prescribed. His interest in
the farm ceases.
Question 25] Anurag transfer ` 10,000 to his sister in law provided she deserts her husband. Is the transfer valid?
Ans.: As per Section 25, the condition should not be such as to cause injury to the person or property of another or
should not be immoral of opposed to public policy. Condition imposed by Anurag to his sister is invalid and hence
there is no valid transfer.
Question 26] Raman makes transfer of his house in favour of Sohan with the condition that Sohan will get the
house only if he marries Shyama with the permission of her three brothers. Before the marriage is solemnized,
one of the brothers dies. Sohan marriages Shyama with the permission of the remaining two brothers. Can he
claim the house.
CS (Inter) - June 1995 (5 Marks), June 1996 (6 Marks) CS (Inter) - Dec 2000 (5 Marks)
Ans.: As per Section 26 of the Transfer of Property Act, 1882, a condition precedent shall be deemed to have been
fulfilled if it has been substantially complied with.
In the given case, Sohan marries Shyama with the consent of two brothers i.e. the condition precedent is
substantially fulfilled, more particularly when one brother has already died before the marriage is solemnized. Thus,
Sohan will get the house.
DOCTRINE OF ELECTION
Question 27] The foundation of doctrine of election is that one may not approbate and reprobate at the same
time. Comment. CS (Inter) - June 2001 (8 Marks)
A person cannot approbate and reprobate CS (Inter) - Dec 2007 (4 Marks)
Write a short note on: Doctrine of election CS (Executive) - Dec 2008 (4 Marks) * (i)
Ans.: 'Doctrine of Election' and the common law doctrine of prohibiting 'approbation' and 'reprobation' as enshrined
in the Latin Maxim qui approbat non reprobat (one who approbates cannot reprobate) is discussed as follows:
Election when necessary [Section 35]: Where a person—
(i) Professes to transfer property which he has no right to transfer, and (ii) As part of the same transaction,
confers any benefit on the owner of the property, such owner must elect either to confirm the transfer or to dissent
from it.
If he dissents from it, —
(a) He must relinquish the benefit so conferred and
(ib) The benefit so relinquished reverts to the transferor or his representative as if it had not been disposed of.
However, when such benefit reverts back to the transferor, it is subject to the charge of making good to the
disappointed transferee the amount or value of the property attempted to be transferred in two cases, namely —
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(i) Where the transfer is gratuitous, and the transferor has, before election, died or otherwise become incapable
of making a fresh transfer and
(ii) Where the transfer is for consideration.
Example: Let us suppose that one farm of Sultanpur is the property of C of ` 80,000. A professes to transfer that
farm of Sultanpur to B and by same instrument ` 1,00,000 to C. C, the owner of the farm of Sultanpur, is to elect
either to confirm the transfer or to dissent from it. If C elects to transfer his Farm of Sultanpur of ` 80,000 to B then
only he can receive ` 1,00,000 from A.
However, if C elects to retain the farm then he will not receive the gift of ` 1,00,000.
In the same case, if A dies before the election is made by C. The representatives of A must, out of the ` 1,00,000 pay
` 80,000 to B to make good to the disappointed transferee the amount or value of the property attempted to be
transferred.
Exception to the doctrine of election: Where a particular benefit is expressed to be conferred on the owner of the
property which the transferor professes to transfer, and such benefit is expressed to be in lieu of that property, if
such owner claims the property, he must relinquish the particular benefit, but he is not bound to relinquish any
other benefit conferred upon him by the same transaction.
Example: Let us suppose that X transfers to Y the property PI, in lieu of Y's property P2 which is given to Z. X also
gives to Y the property P3. If Y elects to retain his own property he must relinquish claim over PI but not P3.
Question 28] Kamal transfers his property worth ` 10,000 to Shyam and by the same instrument asked Shy am to
transfer his property worth ` 5,000 to Manoj. Kamal dies before Shyam made his election. Can Manoj get
compensation? If so, from whom and how much?
CS (Inter) - June 2006 (6 Marks), Dec 2006 (6 Marks) CS (Executive) - June 2010 (4 Marks)
Ans.: As per Section 35, doctrine of election is applicable to given case.
In this case Kamal transfers his property worth ` 10,000 to Shyam and by the same document asks Shyam to transfer
his property worth ` 5,000 to Manoj. Before Shyam can accept the property, Kamal dies. The representatives of
Kamal must, out of the ` 10,000 pay ` 5,000 to Manoj to make good the amount or value of the property attempted
to be transferred.
TRANSFER BY OSTENSIBLE OWNER/DOCTRINE OF HOLDING OUT
Question 29] Write a short note on: Doctrine of holding out
Ans.: General rule regarding the transfer of property is that no one can transfer a better title than what he himself
possesses. However, Section 41 of the Transfer of Property Act, 1882 makes an exception to this rule. Thus, transfer
made by the ostensible owner of the property is valid subject to condition specified in Section 41. This Section is a
statutory application of the law of estoppels. An ostensible owner is one who has all the indicia of ownership without
being the real owner.
Transfer by ostensible owner [Section 41]: Where, with the consent, express or implied, of the persons interested
in immovable property, a person is the ostensible owner of such property and transfers the same for consideration,
the transfer shall not be voidable on the ground that the transferor was not authorized to make it, provided that
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the transferee, after taking reasonable care to ascertain that the transferor had power to make the transfer, has
acted in good faith.
In simple words, if sale is made by ostensible owner for a consideration, then such sale is valid if transferee has
taken reasonable care to see that transferor has power to make such sale.
Essential Conditions:
(1) Transferor is the ostensible owner.
(2) He is so by the consent, express or implied, of the real owner.
(3) Transfer is for consideration, and
(4) Transferee has acted in good faith taking reasonable care to ascertain that the transferor had power to
transfer.
Examples:
(a) A made a gift of property to B but continued in possession of the gifted property. He purported to exercise
a power of revocation and then transferred the property to the defendant. The gift, however, was not revocable as
it was an unconditional gift. B seeks to recover possession from the defendant. The defendant invoked protection
under Section 41. In the given example, the donor is not an "ostensible owner" holding the property with the
consent of the real owner. The defendant cannot, therefore, invoke the protection of Section 41.
(b) The manager of a joint Hindu family consisting of some minor members alienated the ancestral house to P
without any necessity and the alienee transferred it to the defendants. The minors challenged the alienation. The
defendants sought protection u/s 41.
Question 30] An illegitimate son of a deceased owner of a property gets possession of the property to which he
is not legally entitled but his name is entered in the papers as owner. He mortgages the property. On the date of
mortgage, the rightful owner's suit against him for recovery and possession was pending and it was decreed
subsequently. When the rightful owner sought to avoid the mortgage, the mortgagee resisted the claim by
pleading that mortgagor was the ostensible owner of the property when he mortgaged it. Decide.CS (Inter) - Dec
2003 (6 Marks)
Ans.: General rule regarding the transfer of property is that no one can transfer a better title than what he himself
possesses. However, Section 41 of the Transfer of Property Act, 1882 makes an exception to this rule. Thus, transfer
made by the ostensible owner of the property is valid subject to condition specified in Section 41.
As per facts mentioned in case, illegitimate son of a deceased owner of a property is not ostensible owner of the
property and hence he cannot transfer or mortgage the property to another. Hence, rightful owner of the property
will succeed in avoiding the mortgage.
DOCTRINE OF FEEDING THE GRANT BY ESTOPPLE
Question 31] Discuss the law embodied in the doctrine of feeding the grant by estoppels under Transfer of
Property Act, 1882. CS (Inter) - Dec 2005 (6 Marks)
Write a short note on: Doctrine of feeding the grant by estoppels
Ans.: Transfer by unauthorized person who subsequently acquires [Section 43]: Where, a person fraudulently or
erroneously represents that he is authorized to transfer certain immovable property and professes to transfer such
property for consideration, such transfer shall, at the option of the transferee, operate on any interest which the
transferor may acquire in such property at any time during which the contract of transfer subsists.
In simple words, if a transferor transfer the property of other which he is not entitled, then subsequently when he
acquires the property, he will have to transfer the property to the transferee.
Example: A, a Hindu who has separated from his father B, sells to C three fields, X, Y & Z, representing that A is
authorized to transfer the same. Of these fields Z does not belong to A, it having been retained
by B on the partition; but on B's dying A as heir obtains Z. C, not having rescinded the contract of sale, may require
A to deliver Z to him.
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Question 32] Ajay, a Hindu, who was separated from his father, sells to Chander three fields A, B & C representing
that he is authorized to transfer the same. Of these fields, Field-C does not belong to Ajay, as it was retained by
his father at the time of partition, but after his father's death Ajay being the heir obtained Field-C. Chander did
not rescind the contract of sale and asked Ajay to deliver Field-C to him. Whether Chander will succeed? Decide.
CS (Executive) - June 2009 (6 Marks), Dec 2009 (5 Marks)
Ans.: According to Section 43 of the Transfer of Property Act, 1882, if a transferor transfer the property of other
which he is not entitled, then subsequently when he acquires the property, he will have to transfer the property to
the transferee. As per the facts given in case, Ajay has no authority to sale Field-C and Chander has yet not rescinded
the contract, hence by applying provisions of Section 43 Chander can require Ajay to deliver Field-C acquired by him
on the death of his father.
DOCTRINE OF FRAUDULENT TRANSFER
Question 33] Discuss the doctrine of fraudulent transfer.
"Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall
be voidable at the option of any creditor so defeated or delayed, for which he may move to the Court." Comment.
Ans.: Where a person transfers his property so that his creditors shall not have anything out of the property, the
transfer is called a fraudulent transfer. A debtor in order to defeat or delay the rights of a creditor, may transfer his
property to some person, who may be his relative or a friend. The law does not allow this. Section 53 embodies the
principle.
Fraudulent Transfer [Section 53]: Every transfer of immovable property made with intent to defeat or delay the
creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed.
Thus, where an owner of the property contracts a debt and then transfers his property to someone so that the
creditor cannot proceed against the property to realize his debt, such a transfer is voidable at the option of the
creditor. The transfer is valid so long as the creditor does not challenge it in a Court of law and gets a declaration
that the transfer is invalid.
A suit instituted by a creditor to avoid a transfer on the ground that it has been made with intent to defeat or delay
the creditors of the transfer or shall be instituted on behalf of, or for the benefit of all the creditors. Once the
creditor sues the debtor and says that the debtor has the intention to deceive him, the transfer can be declared
invalid by the Court. The creditor has to satisfy the Court that there was an intention on the part of the debtor to
defeat his rights.
Example: Suppose a man takes a loan from the creditor. Fie does not pay the loan. The creditor sues him in a Court
to get back his debt. On seeing this, the debtor transfers Fiis property to his friend or some other person who simply
holds the property on behalf of the transferor. Again, the debtor may make a gift of his property to his wife or sell
it to a friend who will afterwards retransfer the same to the transferor. Under these circumstances, we can easily
say that the debtor's intention was to prevent the creditor from taking the property by a suit in the Court and to
realize Fiis debt.
But suppose the debtor has several creditors and he transfers his property to one of his creditors in satisfaction of
his whole debt to him. This is not a fraudulent transfer. A mere preference of one creditor over the others is not
fraudulent, even if the whole property is so transferred and nothing is left for the other creditors. But the other
creditors may file a petition in the Court within three months of the transfer praying that the debtor be declared
insolvent. If the debtor is adjudicated an insolvent, their interest will
be protected and the transfer will be declared as fraudulent preference. The transfer will be set aside and the
property will be distributed among all the creditors.
However, the rights of a transferee in good-faith and for consideration are protected. It says nothing shall affect or
impair the rights of a transferee in good-faith and for consideration.
DOCTRINE OF PART PERFORMANCE
Question 34] Discuss the doctrine of part performance. CS (Inter) - Dec 2007 (4 Marks)
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Discuss briefly 'doctrine of part performance', which is embodied in Section 53A of the Transfer of Property Act,
1882. CS (Executive) - June 2018 (5 Marks)
Ans.: Doctrine of part-performance is embodied in Section 53A of the Transfer of Property Act.
A Contract for the sale of land has been entered into between A and B. The transferee has paid the price entering
into possession and is willing to carry out his contractual obligation. As registration has not been effected A, the
transferor, seeks to evict B from the land. Can he do so?
No, B will not be allowed to suffer simply because the formality of registration has not been through. The legislature
grants some relief to such a transferee under Section 53A, which embodies the doctrine of part-performance.
(1) There must be a contract to transfer immovable property.
(2) It must be for consideration.
(3) The contract should be in writing and signed by the transferor.
(4) The terms must be ascertainable with reasonable certainty.
(5) The transferee should have taken the possession of the property. In case he is already in possession, he must
have continued in possession.
(6) The transferee must have fulfilled or ready to fulfil his part of the obligation.
If all the abovementioned conditions are satisfied, then, the transferor and the persons claiming under him are
debarred form exercising any right in relation to the property other than the right expressly provided by the terms
of the contract notwithstanding the fact that the instrument of transfer has not been registered or complete in the
manner prescribed therefore by the law for time being in force.
Question 35] Ajoy transfers his house under a written contract of sale to Bijoy for ` 10,00,000. Bijoy pays ` 3,00,000
to Ajoy and takes possession of one of the four rooms of the house. No registration of documents of the contract
of sale is made. After six months of the said contract, Ajoy sells the same house to Chander for ` 20,00,000.
Chander has no knowledge of the previous transaction between Ajoy and Bijoy. When Chander claims the house,
Bijoy takes protection of part-performance of the contract. Will Bijoy succeed? CS (Inter) - Dec 2001 (6 Marks)
Ans.: The doctrine of part-performance will not affect the right of a subsequent transferee for consideration without
notice of the earlier contract and of its being partly performed.
Hence, Chandan as bona fide purchaser has full right of possession of property.
ACCUMULATION OF INCOME
Question 36] Write a short note on: Accumulation of income
Ans.: Direction for accumulation [Section 17]: Accumulation of income from the land for an unlimited period
without the income-being enjoyed by owner of the property is not allowed. The law allows accumulation of income
for a certain period only. The period for which such accumulation is valid is:
♦ Life of the transferor, or
♦ 18 years from the date of transfer.
Any direction to accumulate the income beyond the period mentioned above is void.
Exceptions: In following cases any direction for accumulation of income beyond the period prescribed above is
allowed:
(1) For the payment of the debts of the transferor or any other person taking any interest under the transferor.
(2) For provision of portions for children or any other person taking any interest in the property under the
transfer, and
(3) For the preservation and maintenance of the property transferred.
DOCTRINE OF LIS PENDENS
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Question 37] Explain the rule of lis pendens as provided in the Transfer of Property Act, 1882.
CS (Executive) - June 2009 (4 Marks), June 2010 (4 Marks) CS (Executive) - Dec 2017 (7 Marks)
Noting new should be introduced in a pending litigation, is a well known concept of property law. Critically
evaluate this concept. CS (Executive) - June 2018 (3 Marks)
Ans.: Lis means dispute, "pendens" means pending, Lis pendens means a pending suit, action, petition or the like.
Transfer of property pending suit relating thereto [Section 52]: During the pendency of a suit in a court of law,
property which is subject to litigation cannot be transferred i.e. property may be transferred but this transfer is
subject to the rights that are created by a court's decree.
The provision is based on maxim-"ws lite pendente nihil innovetur"- During litigation nothing new should be
introduced'
A suit in foreign Court cannot operate as lis pendens. The doctrine of lis pendens does not apply to movables. It is
the essence of the rule that a right to immovable property is directly and specifically in question in the suit. The
doctrine is not applicable in favour of a third-party.
Question 38] While a suit relating to Property-X is pending between Raj an and Sajan, Mohan transferred this
property in favour of Rameshwar. Court passes a decree in favour of Raj an and against Saj an. Raj an starts
proceedings for enforcement of the decree against Rameshwar. Advise Rameshwar.
CS (Inter) - June 1994 (5 Marks) CS (Inter) - June 1997 (5 Marks), Dec 1998 (6 Marks)
While a suit relating to a bungalow is pending between Ram and Shyam, Gita transferred the bungalow in favour
of Sita. The court passes a decree in favour of Ram. Ram starts proceedings for execution of the decree against
Sita. Will Ram succeed? CS (Inter) - Dec 2004 (5 Marks)
Ans.: According to Section 52 of the Transfer of Property Act, 1882, during the pendency of a suit in a court of law,
property which is subject to litigation cannot be transferred i.e. property may be transferred
but this transfer is subject to the rights that are created by a court's decree. The doctrine is not applicable in favour
of a third-party.
In the given case, during the pendency of the suit, the disputed property is transferred by Mohan, who is not party
to the suit. The decree passed in the suit is not binding on transferee Rameshwar.
The doctrine of lis pendens, as incorporated in Section 52 can be invoked, inter alia, when the property in dispute
is transferred or otherwise dealt with by any of the parties to the suit.
SALE, EXCHANGE, GIFT, LEASE
Question 39] Write a short note on: Sale of immovable property
Ans.: Sale [Section 54]: "Sale" has been defined as a transfer of ownership in exchange for a price paid or promised
or partly paid and partly promised.
Essentials:
(a) The seller must be a person competent to transfer. The buyer must be any person who is not disqualified to
be the transferee.
(b) The subject matter is transferable property.
(c) There is a transfer of ownership.
(id) It must be an exchange for a price paid or promised or partly paid and partly promised.
(e) There must be present a money consideration. If the consideration is not money but some other valuable
consideration it may be an exchange or barter but not a sale.
Mode of transfer by sale: Sale of an immovable property can be effected.
(a) Where such property is tangible
♦ by a registered instrument if it is of the value of ` 100 and upwards, and
♦ by a registered instrument or by delivery of property when it is less than ` 100 in value, and
(b) Where the property is tangible or a reversion, only by a registered instrument.
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Question 40] Write a short note on: Exchanges
Ans.: When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing
nor both things being money only, the transaction is called an "exchange".
Essentials:
(1) The person making the exchange must be competent to contract.
(2) There must be mutual consent.
(3) There is a mutual transfer of ownership though things and interests may not be identical.
(4) Neither party must have paid money only.
This Section applies to both movable and immovable property.
Mode of exchange: A transfer of property in completion of an exchange can be made only in the matter provided
for the transfer of such property by sale.
Question 41] Distinguish between: Sale and Exchange CS (Executive) - Dec 2011 (4 Marks)
Ans.: Following are the main points of difference between movable & immovable property:
Points Sale Exchange
Meaning "Sale" has been defined as a transfer of When two persons mutually transfer the
ownership in exchange for a price paid or ownership of one thing for the ownership of
promised or partly paid and partly promised. another, neither thing nor both things being
money only, the transaction is called an
"exchange".
Money In sale whole or part consideration should be Money consideration is not involved in
consideration money. exchange.
Section Section 54 of the Transfer of Property Act, Sections 118 to 121 of the Transfer of Property
1882 deals with the 'sale'. Act, 1882 deals with the 'exchange'.
Question 42] Distinguish between: Sale and Contract for sale

Ans.: "Sale" means a transfer of ownership in exchange for a price paid or promised or part paid and part-promised.
"Contract for sale" includes both a present sale and a contract to sell at a future time.
A contract for the sale of immoveable property differs from a contract for the sale of goods in that the Court will
grant specific performance of it unless special reasons to the contrary are shown.
Question 43] Write a short note on: Gift * 1 2 3 4 5
Ans.: "Gift" is the transfer of certain existing movable or immovable property made voluntarily and without
consideration by one person called the donor, to another called the donee and accepted by or on behalf of the
donee.
Such acceptance must be made during the life time of the donor and while he is still capable of giving. If the donee
dies before acceptance, the gift is void.
Essentials:
(1) There must be a transfer of ownership.
(2) The subject matter of gift must be a certain existing movable or immovable property.
(3) The transfer must me made voluntarily.
(4) It must be done without consideration.
(5) There must be acceptance by or on behalf of the donee, and such acceptance must be made during the
lifetime of the donor and while he is capable of giving.
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The essence of a gift is that it is a gratuitous transfer.
According to Section 123, a gift of immovable property must be made by a registered instrument signed by or on
behalf of the donor and attested by at least two witnesses. A gift of movable property may be made by a registered
instrument or by delivery of property.
Revocation of gift: A revocable gift is one which may be revoked by the donor at any time. It is to be noted that, a
gift cannot be revoked at the will and pleasure of the grantor. If the revocation of gift depends upon the mere will
or pleasure of the donor, then such a gift is void. But on the other hand, if the condition is one which does not
depend on the will or pleasure of the donor, the gift can be revoked on the happening of such condition.
Illustrations:
(a) A gives a field to B, reserving to himself, with B's assent, the rights to take back the field in case B and his
descendents die before A, B dies without descendents during A's lifetime. A may take back the field.
(b) A gives ` 1,00,000 to B, reserving to himself with B's assent the right to take back at leisure ` 10,000 out of `
1,00,000. The gift holds goods as to ` 90,000 but is void as to ` 10,000 which continue to belong to A.
It was held by the Privy Council, that while registration is a necessary solemnity for the enforcement of a gift of
immovable property, it does not suspend the gift until registration actually takes place, when the instrument of
gift has been handed over by the donor to the donee and accepted by him, the former has done everything in his
power to complete the donation and to make it effective and if it is presented by a person having necessary
interest within the prescribed period the Registrar must register it. Neither death nor the express revocation by
the donor, is a ground for refusing registration, provided other conditions are complied with. [Kalyan Sundaram
Pillai v. Karuppa Mopanar, AIR 1927 PC 42]
Delay in registration of a gift does not postpone its operation. Section 123, Transfer of Property Act, 1882 merely
requires that donor should have signed the deed of gift. Hence a gift deed can be registered even if the donor
does not agree to its registration. [Kalyati Sundaram Pillai v. Karuppa Mopanar, AIR 1927 PC 42]; [Venkata Rama
Reddy v. Pillai Rama Reddy, AIR 1923 Mad. 282] '
Question 44] Ajoy voluntarily makes a gift of his immovable property to Bijoy. Bijoy accepts the gift. The
possession of the property was given to Bijoy but the gift deed which required registration under section 123 of
the Transfer of Property Act, 1882 was not registered. Whether Ajoy, the donor can revoke the gift? Decide.
If the gift of an immovable property is accepted but not registered, does it amount to a valid gift? Give reasons.
Ans.: It was held by privy council in Kalyati Sundaram Pillai v. Karuppa Mopanar, AIR 1927 PC 42 that, when the
instrument of gift has been handed over by the donor to the donee and accepted by him, the former has done
everything in his power to complete the donation and to make it effective and if it is presented by a person having
necessary interest within the prescribed period the Registrar must register it. Neither death nor the express
revocation by the donor, is a ground for refusing registration, provided other conditions are complied with.
Thus, as per the facts given in case gift is complete as it was accepted by the donee. However, to be a valid gift, it
must be registered as provided in the Transfer of Property Act, 1882.
Question 45] Write a short note on: Onerous Gift CS (Executive) - June 2016 (5 Marks)
Ans.: Onerous gifts [Section 127]: Sometimes several things are transferred as a gift by single transaction. In such
case some of them are really beneficial while the other conveys burdensome obligations. Such gift is known as
onerous gift and the donee takes nothing by the gift unless he accepts it fully.
Where the gift is in the form of two or more independent transfers to the same person of several things, the donee
is at liberty to accept one of them and refuse the other.
Illustrations (as given in Transfer of Property Act, 1882)
(a) A shares in X, prosperous joint stock company, and also shares in Y, a joint stock company in difficulties.
Heavy calls are expected in respect of the shares in Y. A gives B all his shares in joint stock companies. B refuses
to accept the shares in Y. He cannot take the shares in X.
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(b) A, having a lease for a term of years of a house at a rent which he and his representatives are bound to
pay during the term, and which is more than the house can be let for, gives to B the lease, and also, as a separate
and independent transaction, a sum of money. B refuses to accept the lease. He does not by this refusal forfeit
the money.
Question 46] Write a short note on: Lease
Ans.: According to Section 105, a "lease" of immovable property is a transfer of a right to enjoy property. Since it is
a transfer to enjoy and use the property, possession is always given to the transferee. The lease of immovable
property must be made for a certain period.
The transferor is called the lessor, the transferee is called the lessee, the price is called premium and the money,
share service or any other thing of value to be so rendered is called the rent.
The parties to the lease (i.e. lessor and lessee), must be competent to make and to take the lease respectively.
Question 47] Distinguish between: Lease & License CS (Inter) - June 2000 (4 Marks)
Ans.: Following are the main points of difference between lease and license:
Points Lease License
Meaning Lease of immovable property is a transfer of a A licence is a right to do or continue to do in or

right to enjoy property. upon the immovable property of the grantor,
something which would, in the absence of such
a right, be unlawful.
Possession A lease involves a transfer of interest followed In case of license, the legal possession continues
by possession of the property for a specified to be with the owner of the property, but the
period. licensee is permitted to make use of the
premises for a particular purpose.
Enjoyment In the case of a lease, there is a transfer of a right In the case of a license there is something less
of property to enjoy the property. than a right to enjoy the property in the licensee.
Transfer of Lease would amount to transfer of property. A mere license does not create interest in the
property property to which it relates.
Transfer The lease is both transferable and heritable. License is personal to the grantee. It is neither
transferable nor heritable
Termination Lease comes to an end only in accordance with License can be withdrawn at any time at the
the terms and conditions stipulated in the pleasure of the grantor
contract
Question 48] Amrit (lessor) grants his immovable property (premises) on lease for 4 years to Sukant (lessee)
commencing from 1st June, 2001. The lessor gives a notice to the lessee on 1st February, 2008 for vacating the
premises on 1st March, 2008:
(i) Is this notice a valid notice?
(ii) If the lease is continued after 4 years, will the tenancy be on monthly basis or yearly basis?
Decide. CS (Executive) - Dec 2012 (6 Marks)
Ans.: As per Section 106 of the Transfer of Property Act, 1882, in the absence of a contract or local law or usage to
the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a
lease from year to year. Flowever, landlord and tenant can mutually agree and make the lease of immovable
property for agricultural or manufacturing purposes on month to month basis. (If they have not agreed then only a
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lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to
year)
Lease of immovable property for any purpose other than agricultural or manufacturing purposes shall be deemed
to be a lease from month to month.
Notice: In case of a tenancy for a period more than a year the landlord wants to terminate or end the lease, he has
to give a 6 months notice to the lessee to quit. In case of a tenancy from month to month, 15 days notice to quit is
necessary.
The monthly tenancy may be created either by contract or may be presumed from the nature of the tenancy to be
one, from month to month.
Effect of holding over [Section 116]: If a lessee of property remains in possession after the determination of the
lease granted to the lessee, and the lessor or his legal representative accepts rent from the lessee, or otherwise
assents to his continuing in possession, the lease is, in the absence of an agreement to the contrary, renewed from
year to year, or from month to month, according to the purpose for which the property is leased, as specified in
Section 106.
As per facts given in case Amrit has granted his immovable property on lease for 4 years to Sukant. The problem
does not specifically specify that the lease of immovable property is for agricultural or manufacturing purposes;
hence it is deemed to be lease for month to month basis. The lease is granted for 4 years on 1st June 2001 which
end on 31st May 2005. Sukant remains in possession after the determination of the lease; hence applying effect of
holding out it will be lease of month to month after 31st May 2005.
Since it is lease of month to month notice of 15 days will be necessary. Amrit has given notice Sukant on 1st February,
2008 for vacating the premises on 1st March 2008. Notice period is of 1 month which is more than statutory period
of 15 days. Thus, notice given by Amrit is valid.
ACTIONABLE CLAIMS
Question 49] Write a short note on: Actionable claim
CS (Inter) - June 1995 (4 Marks), Dec 2005 (3 Marks) * 1 2 3
Ans.: As per Section 3 of the Transfer of Property Act, 1882, actionable claim means a claim to any debt, other than
a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any
beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which
the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent,
accruing, conditional or contingent.
Important points relating to actionable claim:
(1) Actionable claim is a claim to an unsecured debt, which the civil court recognizes as affording grounds for
relief of the person who claims it.
(2) It is not in ready possession of a person and that person can claim such a debt by bringing action in a court
of law.
(3) It includes a beneficial interest in the movable property.
Examples of Actionable Claim: The following claims are "actionable claims"-
♦ Claim for arrear rent.
♦ Claim for rent to fall due in future.
♦ An option offered to repurchase the property once sold.
♦ Benefit of a contract giving option to purchase the land.
♦ When a contract for purchase of goods is endorsed by the purchaser, by writing on the back of the contract
under his signature that he has sold all his rights and interest in the goods purchased under the said contract to a
certain person who is named and properly identified in such endorsement.
♦ Provident Fund that is standing to the credit of a member of the Provident Fund.
♦ Money due under the Insurance Policy.
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♦ A partners right to sue for accounts of dissolved partnership is an actionable claim being a beneficial interest
in movable property not in possession
Not Actionable Claims:
- A claim which is decreed.
- Relinquishment of interest of a member retiring from joint Hindu Family business in favour of the members
who continue to be coparceners of the same.
- "Right to Sue", though it is a right but not an actionable claim.
- A claim for main profits.
- Debentures are secured debts and therefore not regarded as actionable claims.
- Copyright though a beneficial interest in immovable property is not an actionable claim since the owner has actual
or constructive possession of the same
Actionable claim does not include:
♦ Benefit of contract for purchase of goods,
♦ Arrears of rent due,
♦ Money due under insurance policy,
♦ Partner's right to sue for accounts of dissolved partnership etc.
♦ Negotiable instruments Illustration:
♦ Aman agrees on 1.2.2016 to deliver 1,000 gunny bags to Balu on 1.3.2016. On 1.2.2016 Balu assigns interest
in the contract to Chirag. Aman fails to deliver the bags on 1.3.2016. Chirag can sue Aman because a beneficial
interest in a subsisting contract which relates to movable property is an actionable claim which can be validly
transferred.
♦ Suppose in the above illustration Balu has assigned the right to Chirag to claim damages after the contract
was broken. That is Balu transfers his right to sue Aman on, say, 1.4.2016, (i.e. one month after the contract was
broken). In this case what B has assigned to Chirag is a mere right to sue Aman and get damages. Balu cannot
transfer this right. After the breach of the contract, Balu has a mere right to sue Aman which he cannot assign or
transfer.
Question 50] Distinguish between: Actionable Claim and mere right to sue
Ans.: Following are the main points of difference between actionable claim and mere right to sue:
Points Actionable Claim Mere right to sue
Meaning Actionable claim is a claim to an unsecured debt, The 'right to sue' is a personal right available to
which the civil court recognizes as affording the party to contract in case of breach of contract
grounds for relief of the person who claims it. by other party.
Transfer Actionable claim which can be validly A mere right to sue cannot be transferred.
transferred.
Example Aman agrees on 1.2.2019 to deliver 1,000 gunny (1) Ram commits assault on Balu, Balu can
bags to Balu on 1.3.2019. On 1.2.2019 Balu file a suit to obtain damages; but Balu cannot
assigns interest in the contract to Chirag. Aman assign the right to Chandan and allow him to
fails to deliver the bags on 1.3.2019. Chirag can obtain damages.
sue Aman because a beneficial interest in a (2) If A breaks a contract which he has
subsisting contract which relates to movable entered into with B, B can bring action for
property is an actionable claim which can be damages, but B cannot transfer this right to C to
validly transferred. recover damages.
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MORTGAGES & CHARGES
Question 51] "Mortgage implies transfer of limited interest in an immovable property." Explain how the limited
interest is transferred under different kinds of mortgages enumerated in Section 58 of the Transfer of Property
Act, 1882. CS (Inter) - June 1991 (8 Marks)
Ans.: According to Section 58, a mortgage is the transfer of an interest in specific immovable property for the
purpose of securing payment of money advanced or to be advanced by way of loan, an existing or future debt or
performance of an engagement which may give rise to pecuniary liability.
In simple words, when some immovable property is offered as security for repayment of loan, the transaction is
called as mortgage. Mortgages are advance against immovable property.
There are three essentials in a mortgage:
(1) There is a transfer of an interest in the specific immovable property
(2) Property should be an immovable one and
(3) Transaction is for the purpose of securing the payment of a loan or of the performance of an
obligation which may give rise to a pecuniary liability.
Question 52] Define 'Mortgage/ Explain briefly the various kinds of mortgages.
Explain the meaning of 'Usufractuary Mortgage' as given in the Transfer of Property Act, 1882.
Ans.: There are six kinds of mortgages namely.
(1) Simple Mortgage: A simple mortgage is a transaction whereby without delivering possession (ownership or
occupancy) of the mortgaged property, the mortgagor binds himself personally to pay the debt. Mortgagor also
agrees that in the event of his failure to pay the mortgage money, the mortgagee shall have the right to sale of
property by a decree (an order of law) of the court.
If the mortgaged property is not sufficient to discharge the debt, the mortgagee can bring a personal action against
the mortgagor for the recovery of money.
(2) Mortgage by conditional sale: In this type of mortgage, the property is mortgaged with a condition super
added that in the event of failure by the debtor to repay the debt at the stipulated time, the transaction should be
regarded as a sale. In case the loan is repaid within the stipulated time, the sale shall be invalid, or on condition that
on such payment being made, the buyer shall transfer the property to the seller.
(3) Usufractuary Mortgage: In this type of mortgage, the mortgagor has to deliver possession of the property
to the mortgagee. The mortgagor expressly, or by implication binds himself to deliver possession of the mortgaged
property to the mortgagee; and authorizes him to retain such position until payment of the mortgage money, and
to receive the rents and profits accruing from the property or any part of those and to appropriate the same in lieu
of interest or partly in payment of mortgage money. This is also known as mortgage with possession.
(4) English Mortgage: Where the mortgagor binds himself to repay the mortgage money on a certain date, and
transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will retransfer it to
the mortgagor upon payment of the money as agreed, the transaction is called an "English Mortgage".
(5) Mortgage by deposit of title deeds: This type of mortgage is called equitable mortgage. In this transaction,
a person delivers the property with an intention to create a security, and obtains a loan. The requisites of such a
mortgage are:
♦ a debt
♦ deposit of title deeds and
♦ an intention that deeds shall be security for the debt.
It should be noted that this type of mortgage can be created only in certain towns and not everywhere in India. The
facility to create a valid mortgage is available in the following towns in India:
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Calcutta, Madras, Bombay, Adoni, Ajmer, Allahabad, Alwar, Bangalore, Bellary, Cochin, Coimbatore, Delhi, Jaipur,
Jodhpur, Kanpur, Rajahmundry, Udaipur, Vellor, Ellora, pali, Bhilwara Bikaner, Kakinada, Narayanganj, Mysore
and Maduri.
(6) Anomalous Mortgage: A mortgage which is not a simple mortgage, a mortgage by conditional sale,
usufructuary mortgage, an English mortgage, or a mortgage by deposit of title deeds, is called an anomalous
mortgage.
Ans.: Following are the main points of difference between English mortgage and mortgage by conditional sale:
Points English Mortgage Mortgage by Conditional Sale
Meaning Where the mortgagor binds himself to repay the In this type of mortgage, the property is
mortgage money on a certain date, and mortgaged with a condition super added that in
transfers the mortgaged property absolutely to the event of failure by the debtor to repay the
the mortgagee, but subject to a proviso that he debt at the stipulated time, the transaction
will retransfer it to the mortgagor upon payment should be regarded as a sale. In case the loan is
of the money as agreed, the transaction is called repaid within the stipulated time, the sale shall
an "English Mortgage". be invalid, or on condition that on such payment
being made, the buyer shall transfer the
property to the seller.
Sale of In English mortgage the property is absolutely In mortgage by conditional sale, the mortgaged
property sold to the mortgagee. property is conditionally sold.
Personal The mortgagor has personal liability to pay the The mortgagor has no personal liability to pay
liability debt. the debt.
Right of The mortgagee has no right of foreclosure. The mortgagee has right of foreclosure.
foreclosure
Mesne The ownership is transferred to mortgagee and If mortgagor commits defaults title of property
profits the mortgagee enjoys the mesne profits. can be transferred to mortgagee.
Possession The mortgagor has right to possession. The mortgagor has no such right.
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has
stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
The term 'mesne profits' relates to the damages or compensation recoverable from a person who has been in
wrongful possession of immovable property. The Mesne profits are nothing but a compensation that a person in
the unlawful possession of others property has to pay for such wrongful occupation to the owner of the property.
Question 54] define the term 'Puisne Mortgage'. CS (Executive) - June 2018 (3 Marks)
Ans.: Puisne Mortgage: Where the mortgagor, having mortgaged his property, mortgages it to another person to
secure another loan, the second mortgage is called a puisne mortgage.
Example: Where A mortgages his house worth ` 1,00,000 to B for ` 40,000 and mortgages the same house to C for
a further sum of ` 30,000, the mortgage to B is first mortgage and that to C the second or puisne mortgage C is the
puisne mortgagee, and can recover the debt subject to the right of B, the first mortgagee, to recover his debt of `
40,000 plus interest.
Question 55] Distinguish between: Sub Mortgage & Puisne Mortgage
Ans.: Following are the main points of distinction between sub-mortgage & puisne mortgage:
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Points Sub mortgage Puisne mortgage
Meaning Where the mortgagee transfers by Where the mortgagor, having mortgaged his property,
mortgage his interest in the mortgaged mortgages it to another person to secure another loan,
property, or creates a mortgage of a the second mortgage is called a puisne mortgage.
mortgage the transaction is known as a
sub-mortgage.
Example Where A mortgages his house to B for ` Where A mortgages his house worth ` 1,00,000 to B for
10,000 and B mortgage his mortgagee `0,000 and mortgages the same house to C for a further
right to C for ` 8,000. B creates a sub- sum of `0,000, the mortgage to B is first mortgage and
mortgage. that to C the second or puisne mortgage C is the puisne
mortgagee, and can recover the debt subject to the right
of B, the first mortgagee, to recover his debt of `0,000
plus interest.
Question 56] Explain: Right against clog on equity of redemption CS (Inter) - Dec 1991 (5 Marks),
Ans.: A mortgager has a right of redemption. Any clause or provision inserted in the mortgage deed to prevent,
evade, or hamper redemption is void. "Once a mortgage always a mortgage" rule is based on the principle of equity.
The court will not allow or permit any condition which will impede the redemption of mortgage or the repayment
of loan for which the security of property was given.
A mortgage deed, providing that if the amount is not paid within a stipulated time, the mortgages would become
the absolute owner of the property, was held to be a clog on equity of redemption. [Murari Lai v. Dev Karani\
However, when conditions are reasonable and do not prevent the mortgagor to redeem the property, they will be
recognized as valid and binding.
Conditions like "no redemption during cultivating season of a land, for a certain period", were held valid and
enforceable. But where "no redemption on a particular day", barred the mortgagor from redeeming for a further
long period, it was held to be a clog on redemption, hence not valid.
Question 57] Write a short note on: Doctrine of Marshalling CS (Inter) - June 1990 (4 Marks),
Ans.: Marshalling [Section 81]: If the owner of two or more properties mortgages them to one person and then
mortgages one or more of those properties to another person, the subsequent mortgagee is-in the absence of a
contract to the contrary - entitled to have the prior mortgage debt satisfied out of the properties not mortgaged to
him, so far as the same will extend, but not so as to prejudice the rights of the prior mortgagee or any person who
has for consider action acquired an interest in any of the properties.
Example: Ram has three properties Fv P2 & P3. He mortgages all the three properties to Shyam. He again mortgages
property P3 & P, to Mohan. Since properties P1 & P, are common to both Shyam and Mohan, Mohan can invoking
doctrine of marshalling can compel Shyam to have the prior mortgage debt satisfied out of the property P 3 which
was not mortgaged to Mohan.
Question 58] A mortgages his fields X, Y and Z to B. Thereafter he mortgaged fields X and Y to C. Can C compel B
to first relies his money from field Z?
Ans.: According to doctrine of marshalling as provided in Section 81, the subsequent mortgagee in the absence of
a contract to the contrary, is entitled to have the prior mortgage debt satisfied out of the properties not mortgaged
to him
In given case, C can invoke the doctrine of marshalling and can compel B to first relies his mortgage money from
field Z.
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Question 59] Distinguish between: Mortgage & Charge
Ans.: Following are main points of distinction between mortgage & charge:
Points Mortgage Charge
Meaning A mortgage is the transfer of an interest in Although in a charge, the property is made a
specific immovable property for the purpose of security for the payment of the loan, yet the
securing payment of money advanced. transaction does not amount to mortgage.
Transfer of In mortgage there is transfer of interest in the In charge there is no transfer of any interest in
interest property. the property.
Created A mortgage can only be created by act of A charge may be created by act of parties or by
parties. operation of law.
Registration A mortgage deed must be registered and A charge need not be made in writing, and if
attested by two witnesses. reduced to writing, it need not be attested or
registered.
Foreclosure In certain types of mortgage the mortgagee can The charge-holder cannot foreclose though he
foreclose the mortgaged property. can get the property sold as in a simple
mortgage.
Personal In a mortgage, there can be security as well as In a charge the remedy of the charge-holder is
liability personal liability. against the property only.
Question 60] What do you understand by 'crystallisation of floating charge' under the Transfer of Property Act,
1882? CS (Executive) - June 2016 (5 Marks)
Ans.: A floating charge attaches to the company's property generally and remains dormant till it crystallizes or
becomes fixed. The company has a right to carry on its business with the help of assets having a floating charge till
the happening of some event which determines this right.
In certain cases like default, liquidation etc. the lender can take physical possession of the assets and realize his
dues by selling the current assets, without the intervention of the Court. This is termed as 'crystallization of charge'.
A floating charge crystallizes and the security becomes fixed in the following cases:
(1) When the company goes into liquidation
(2) When the company ceases to carry on the business
(3) When the creditors or the debenture holders take steps to enforce their security e.g. by appointing receiver
to take possession of the property charged
(4) On the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed or to have crystallized. Until the charge
crystallizes or attaches or becomes fixed the company can deal with the property so charged in any manner it likes.
Effect of crystallization of a floating charge: On crystallization, the floating charge converts itself into a fixed charge
on the property of the company. It has priority over any subsequent equitable charge and other unsecured creditors.
But preferential creditors who have priority for payment over secured creditors in the winding-up get priority over
the claims of the debenture holders having floating charge.
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16
CHAPTER
REAL ESTATE (REGULATION & DEVELOPMENT) ACT, 2016
INTRODUCTION! Tire Real es ta te sector plays a important role in fulfilling the needs and demand for housing and
infrastructure in the country. It is one of the important pillars of the economy. While this sector has grown
significantly in recent years, it has been largely unregulated, with absence of professionalism and standardization
and lack of adequate consumer protection. It has no Sectoral Regulator like there are for other specific sectors like
insurance, telecom, stock markets etc. History is witness to the fact that whenever sectoral regulators like SEBI,
IRDAI, TRAI etc. have been formed; they have helped in deepening the market and made it more robust. In view of
the above, Parliament enacted the Real Estate (Regulation & Development) Act, 2016 which aims at protecting the
rights and interests of consumers and promotion of uniformity and standardization of business practices and
transactions in the real estate sector. It attempts to balance the interests of consumers and promoters by imposing
certain responsibilities on both.
OBJECTS, FEATURES & ADVANTAGES OF THE REAL ESTATE (REGULATION & DEVELOPMENT) ACT, 2016
Question 1] What are the objects of enacting Real Estate (Regulation & Development) Act, 2016?
Ans.: The objects and reasons for which the Real Estate (Regulation & Development) Act, 2016 has been framed are
-
♦ Ensure accountability towards allottees and protect their interest.
♦ Infuse transparency, ensure fair-play and reduce frauds & delays.
♦ Introduce professionalism and pan India standardization.
♦ Establish symmetry of information between the promoter and allottee.
♦ Impose certain responsibilities on both promoter and allottees.
♦ Establish regulatory oversight mechanism to enforce contracts.
♦ Establish Fast-Track Dispute Resolution Mechanism.
♦ Promote good governance in the sector which in turn would create investor confidence.
Question 2] Enumerate salient features of the Real Estate (Regulation & Development) Act, 2016
Ans.: Salient features of the Real Estate (Regulation & Development) Act, 2016 are given below -
(a) Establish the Real Estate Regulatory Authority for regulation and promotion of the real estate sector.
(b) Ensure sale of plot, apartment of building or sale of real estate projects, in an efficient and transparent
manner.
(c) Protect the interest of consumers in the real estate sector.
(d) Establish an adjudicating mechanism for speedy dispute redressal.
(e) Regulates transactions between buyers and promoters of residential real estate projects.
(f) Establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs).
(g) Residential real estate projects, with some exceptions, need to be registered with RERAs.
(h) Promoters cannot book or offer projects for sale without registering them. Real estate agents dealing in
projects also need to register with RERAs.
(i) The promoter must upload details of the project on the website of the RERA.
(j) Amount collected from buyers for a project must be maintained in a separate bank account and must only
be used for construction of that project.
(k) Right to legal representation on behalf of Client by Company Secretaries or Chartered Accountants or Cost
Accountants or Legal Practitioners.
(1) Imposes stringent penalty on promoter & real estate agent.
Question 3] Write a short note on: Advantages of the Real Estate (Regulation & Development) Act, 2016
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Ans.: Advantages of the Real Estate Development & Regulation Act, 2016 are as follows:
♦ Reduction in litigation
♦ More transparency
♦ Proper project planning
♦ Timely completion of the projects
♦ Better customer management
♦ Increased Foreign Direct Investment (FDI)
Question 4] What is role of the Company Secretaries under the Real Estate (Regulation & Development) Act,
2016?
Ans.: The role of Company Secretaries under the Real Estate (Regulation & Development) Act, 2016 is given below:
(1) Advisory Role: Company Secretaries can offer following advisory services in relation to real estate projects:
♦ Financial advisory services
♦ Funding options for real estate project
♦ Taxation aspects for real estate project
♦ Legal advisory services.
(2) Drafting of various documents: Under the Real Estate (Regulation & Development) Act, 2016 various
document are required to be drafted for various purpose like, registration, agreement between promoter and
allottees, agreement between promoter and association of allottees, documents for submission to the Real Estate
Regulatory Authority and Appellate Tribunal etc. Company Secretaries being specialist in drafting can help to their
'real estate developer clients' to draft various documents and deeds required under the Act.
(3) Registration under RERA: Every real estate project in any planning area requires prior approval of the Real
Estate Regulatory Authority (RERA). Company Secretary being specialist in various corporate and business laws can
take the assignment relating to registration under the Real Estate (Regulation & Development) Act, 2016 and other
applicable laws.
(4) Legal Representative: Section 56 of the Act provides that the applicant or appellant may either appear in
person or authorize one or more Company Secretaries to present the case before the Appellate Tribunal/Regulatory
Authority/Adjudicating Officer.
Hence, a Company Secretary holding certificate of practice can represent a person before Real Estate Appellate
Tribunal and other authorities under the Act.
(5) Compounding of offences: Company Secretaries can help their clients in compounding offences under the
Act and can also appear and represent the case before various authorities in relation to compounding of offences.
DEFINITIONS
Question 5] Define the term 'advertisement' as per the Real Estate (Regulation & Development) Act, 2016.
Ans.: Advertisement [Section 2(b)]: Advertisement means any document described or issued as advertisement
through any medium and includes any notice, circular or other documents or publicity in any form, informing
persons about a real estate project, or offering for sale of a plot, building or apartment or inviting persons to
purchase in any manner such plot, building or apartment or to make advances or deposits for such purposes.
Question 6] Does term 'advertisement' as defined in Real Estate (Regulation & Development) Act, 2016 include
solicitation by e-mails and SMS?
Ans.: As per Section 2(b), advertisement can be effected to through any medium; however, it must be adopted in
'soliciting for sale'. Thus, 'advertisement' includes solicitation by e-mails and SMS.
Question 7] Who is 'allottee' as per the Real Estate (Regulation & Development) Act, 2016?
Ans.: Allottee [Section 2(d)]: Allottee in relation to a real estate project means -
(a) the person to whom a plot, apartment or building, has been allotted, sold (whether as freehold or leasehold)
or otherwise transferred by the promoter
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(b) the person who subsequently acquires the allotment through sale, transfer or otherwise but Allottee does
not include a person to whom plot, apartment or building is given on rent.
Question 8] What do you understand by the term 'apartment' as per the Real Estate (Regulation & Development)
Act, 2016?
Ans.: Apartment [Section 2(e)]: 'Apartment' may called as block, chamber, dwelling unit, flat, office, showroom,
shop, godown, premises, suit, tenement, unit or by any other name.
Apartment means any part of any immovable property in a building or on a plot of land which is used or intended
to be used for any residential or commercial use.
Use of apartment can be made for various purposes such as residence, office, shop, showroom or godown or for
carrying on any business, occupation, profession or trade.
Question 9] Who is the "Appropriate Government"? Also state important responsibilities of the Appropriate
Government under the Real Estate (Regulation & Development) Act, 2016?
Ans.: Appropriate Government [Section 2(g)]: Appropriate Government means in respect of matters relating to -
(1) The Union territory without Legislature, the Central Government
(2) The Union territory of Puducherry, the Union territory Government
(3) The Union territory of Delhi, the Central Ministry of Urban Development
(4) The State, the State Government.
Responsibilities of the Appropriate Government: Responsibilities of the Appropriate Government under various
provisions of the Act are given below:
Section Responsibility/duty
Section 20 To establish the Regulatory Authority
Section 43 To establish the Appellate Tribunal and to constitute the Selection Committee
Sections 28 & 51 To appoint officers and other employees of Regulatory Authority and the Appellate Tribunal
Section 41 To constitute a 'Real Estate Regulatory Fund'
Section 84 To notify Rules for implementation of the Act
Question 10] What do you understand by the term "Carpet Area' as per the Real Estate (Regulation &
Development) Act, 2016?
Ans.: Carpet Area [Section 2(k)]: Carpet Area means the net usable floor area of an apartment.
Carpet Area does not include -
♦ Area covered by the external walls,
♦ Areas under services shafts,
♦ Balcony or verandah area
♦ Open terrace area
However, carpet area includes the area covered by the internal partition walls of the apartment.
Explanation: "Balcony or verandah area' means the area of the balcony or verandah, which is appurtenant to the
net usable floor area of an apartment, meant for the exclusive use of the allottee.
'Open terrace area' means the area of open terrace which is appurtenant to the net usable floor area of an
apartment, meant for the exclusive use of the allottee.
Carpet area is the actual area you get for use in a housing unit. Built-up area is the area that comes after adding
carpet area and wall area.
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Question 11] Write a short note on: Common Area
Ans.: Common Areas [Section 2(k)]: Common areas mean -
(a) the entire land for the real estate project or where the project is developed in phases and registration is
sought for a phase, the entire land for that phase;
(b) the stair cases, lifts, staircase and lift lobbies, for escapes, and common entrances and exits of buildings;
(c) the common basements, terraces, parks, play areas, open parking areas and common storage spaces;
(d) the premises for the lodging of persons employed for the management of the property including
accommodation for watch and ward staffs or for the lodging of community service personnel;
(e) installations of central services such as electricity, gas, water and sanitation, air-conditioning and
incinerating, system for water conservation and renewable energy;
(f) the water tanks, sumps, motors, fans, compressors, ducts and all apparatus connected with installations for
common use;
(g) all community and commercial facilities as provided in the real estate project;
(h) all other portion of the project necessary or convenient for its maintenance, safety, etc., and in common use.
Question 12] Can 'open parking area' be sold to allottees?
Ans.: Section 2(n) of the Real Estate (Regulation & Development) Act, 2016 defines 'common areas' to include 'open
parking areas', thus open parking areas cannot be sold to the allottees.
Question 13] Who is 'competent authority' under the Real Estate (Regulation & Development) Act, 2016?
Ans.: Competent Authority [Section 2(p)]: Competent authority means the local authority or any authority created
or established under any law for the time being in force by the appropriate Government which exercises authority
over land under its jurisdiction, and has powers to give permission for development of such immovable property.
In simple words, competent authority means an authority established by the Appropriate Government who
sanctions or gives permission for development of immovable property.
Question 14] The Real Estate (Regulation & Development) Act, 2016 defines 'estimated cost of the real estate
project', what is the significance of the definition?
Ans.: Estimated cost of real estate project [Section 2(v)]: Estimated cost of real estate project means the total cost
involved in developing the real estate project and includes the land cost, taxes, cess, development and other
charges.
The determination of the estimated cost of the real estate project is necessary due to Chapter VIII which deals with
"Offences, Penalties & Adjudication" under the Act. As per the provisions of Chapter VIII penalties would be imposed
on the promoter, for violations prescribed under the Act, based on the estimated cost of the real estate project.
Question 15] What do you understand by the term 'Completion Certificate' & 'Occupancy Certificate' as per the
Real Estate (Regulation & Development) Act, 2016?
Ans.: Completion Certificate [Section 2(q)]: Completion certificate means a certificate issued by the competent
authority certifying that the real estate project has been developed according to the sanctioned plan and
specifications approved by the competent authority.
Occupancy certificate [Section (zf)]: Occupancy certificate means a certificate issued by the competent authority
permitting occupation of any building which has provision for civic infrastructure such as water, sanitation and
electricity.
Question 16] Distinguish between: Completion Certificate & Occupancy Certificate Ans.: Following are the main
points of distinctions between completion certificate & occupancy certificate:
Points Completion Certificate Occupancy Certificate
Meaning Completion certificate means a certificate issued Occupancy certificate means a certificate issued
by the competent authority certifying that the by the competent authority permitting
real estate project has been developed according occupation of any building which has provision for
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to the sanctioned plan and specifications civic infrastructure such as water, sanitation and
approved by the competent authority. electricity.
Points Completion Certificate Occupancy Certificate
What it Completion certificate shows that the building Occupancy certificate shows that building is ready
shows construction is done as per approved plan. occupy as necessary facilities like water, lift,
sanitation and electricity etc. are made available
by the builder.
Depen Completion certificate is issued first, once the After issuance of completion certificate and
dence construction of property is completed. getting confirmation that necessary facilities are
made available for occupancy by people
occupancy certificate is issued.
Section It is defined in Section 2(q) of the Act. It is defined in Section 2(zf) of the Act.
Question 17] Write a short note on: Person under RERDA

Ans.: Person [Section 2(zg)]: Person includes -
(1) An individual
(2) HUF
(3) Company
(4) Firm or LLP
(5) Competent authority
(6) AOP or BOI whether incorporated or not
(7) Co-operative society registered under any law relating to co-operative societies
(8) Any other entity as the Appropriate Government may specify by notification.
Question 18] Define the term 'Planning Area' as per the Real Estate (Regulation & Development) Act, 2016.
Ans.: Planning Area [Section 2(zh)]: Planning area is also known as 'development area', 'local planning area',
'regional development plan area'.
Planning area means an area specified by the Appropriate Government/ Competent Authority and includes any area
for future planned development under the law relating to Town and Country Planning.
Question 19] Who is promoter under the Real Estate (Regulation & Development) Act, 2016? * (i)
Ans.: Promoter [Section (zk)]: promoter means -
(i) A person who constructs or causes to be constructed an independent building or a building consisting of
apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some
of the apartments to other persons and includes his assignees.
(ii) A person who develops land into a project, whether or not the person also constructs structures on any of the
plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without
structures thereon.
(iii) Any development authority or any other public body in respect of allottees of -
(a) buildings or apartments, as the case may be, constructed by such authority or body on lands owned by them
or placed at their disposal by the Government; or
(b) plots owned by such authority or body or placed at their disposal by the Government, for the purpose of
selling all or some of the apartments or plots.
(iv) An apex State level co-operative housing finance society and a primary co-operative housing society which
constructs apartments or buildings for its Members or in respect of the allottees of such apartments or buildings.
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(v) Any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any
other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the
building or apartment is constructed or plot is developed for sale.
(vi) Such other person who constructs any building or apartment for sale to the general public.
Explanation: Where the person who constructs or converts a building into apartments or develops a plot for sale
and the persons who sell apartments or plots are different persons, both of them shall be deemed to be the
promoters and shall be jointly liable as such for the functions and responsibilities specified under the Act.
Question 20] Examining the provisions of the Real Estate (Regulation & Development) Act, 2016, answer the
following:
(i) Does the definition of 'promoter' include public bodies such as Development Authorities and Housing
Boards?
(ii) Does the definition of 'promoter' include all promoters in case of joint development?
Ans.:
(i) The Real Estate (Regulation & Development) Act, 2016 covers all bodies (private & public) which develop real
estate projects for sale to the general public. Section 2(zk) defines the term 'promoter' which includes both private
and public real estate promoters. Thus, both Development Authorities and the Housing Boards, when involved in
sale are covered under the Act.
(ii) As per the Explanation to Section 2(zk), where the person who constructs or converts a building into apartments
or develops a plot for sale and the persons who sells apartments or plots are different persons, both of them shall
be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified,
under the Act or the rules and regulations made thereunder.
Question 21] Define the term 'Prospectus' as per the Real Estate (Regulation & Development) Act, 2016.
Ans.: Prospectus [Section 2(zl)]: Prospectus means any document described or issued as a prospectus or any notice,
circular, or other document offering for sale or any real estate project or inviting any person to make advances or
deposits for such purposes.
The term 'prospectus' is also used in the Companies Act, 2013 and as per said act, the 'prospectus' means any
document by which securities of the company like equity shares, preference shares and debentures are offered to
the public whereas the term 'prospectus' as per the Real Estate (Regulation & Development) Act, 2016 means any
document by which real estate like house, shops and other commercial units are offered for sale to the public.
Question 22] What do you understand by the term 'Real Estate Project' under the Real Estate (Regulation &
Ans.: Real estate project [Section 2(zn)]: Real estate project means -
(a) the development of a building or
(b) development of a building consisting of apartments or
(c) converting an existing building or a part thereof into apartments or
(d) the development of land into plots or apartment.
The purpose of real estate project is to sale all or some of the apartments or plots or building, as the case may be.
The term as defined in the Act also covers in its meaning the common areas, the development works, all
improvements and structures and all easement, rights and appurtenances (i.e. other items associated with it).
Ans.: Sanctioned Plan [Section 2(q)]: Sanctioned plan means the site plan, building plan, service plan, parking and
circulation plan, landscape plan, layout plan, zoning plan and such other plan. It also includes structural designs,
environment permission and other permissions, which are approved by the competent authority prior to start of a
real estate project.
Typically, to build or renovate, a land owner or a developer has to approach the competent authority and get an
approval for the plan. After an approval is granted, building plan becomes a sanctioned plan and the owner has the
right to go ahead with the construction.
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It is mandatory for the land owner or developer to strictly follow the sanctioned plan. In case of any non-
compliance, the authorities have the right to penalize the owner, including by demolishing the building. Thus, any
construction which is not as per sectioned plan is 'unauthorized constructions'.
Unauthorized constructions not only deface land parcels but also hinder revenue generation for government
authorities. For instance, some flat owners extend their balconies or gardens beyond their rightful space. This is
'unauthorized constructions'.
The Appropriate Authority may recommend disconnection of power and water supplies to the owners who did not
follow the sanctioned building plan. Such steps could be instrumental in curbing illegal constructions across the
country.
REGISTRATION OF REAL ESTATE PROJECT & REAL ESTATE AGENTS
Question 24] State the provisions relating to registration of real estate projects under the Real Estate (Regulation
& Development) Act, 2016. What is the penalty for non-registration?
Ans.: Prior registration of real estate project with Real Estate Regulatory Authority [Section 3(1)]: Every real estate
project in any planning area requires prior approval of the Real Estate Regulatory Authority (RERA).
Promoter cannot advertise, market, book, sell or offer for sale, or invite persons to purchase any plot, apartment or
building in any real estate project unless prior approval is obtained from the RERA.
Registration of project started before commencement of the Act: Promoters of all ongoing projects which have
not received completion certificate will need to register their project with the RERA within 3 months of
commencement the Act.
Registration of projects developed beyond the planning area: Real estate project which are developed beyond the
planning area but with the requisite permission of the local authority also needs registration if it is so specified by
the RERA and all the provisions of the Act shall apply to such projects from that stage of registration.
Registration of real estate projects to be developed in phases: Where the real estate project is to be developed in
phases, every such phase shall be considered a standalone real estate project, and the promoter shall obtain
registration under the Act for each phase separately.
Punishment for non-registration [Section 59]: If any promoter contravenes the provisions of Section 3, he shall be
liable to a penalty which may extend up to 10% of the estimated cost of the real estate project
as determined by the Authority.
If any promoter does not comply with the orders, decisions or directions or continues to violate the provisions of
Section 3, he shall be punishable -
♦ with imprisonment for a term which may extend up to 3 years or
♦ with fine which may extend up to a further 10% of the estimated cost of the real estate project or
♦ with both.
Ans.: Exempted Project/Projects which do not require registration [Section 3(2)]: Following real estate projects
are exempted from the ambit of the Act i.e. to say such projects do not require registration.
(a) Any real estate project in which the 'area of land' or the 'number of apartments' proposed to be developed
does not exceed 500 square meters or 8 apartments respectively. However, the Appropriate Government may
reduce the threshold below 500 square meters or 8 apartments.
(b) Real estate project where the promoter has received completion certificate prior to commencement of the
Act.
(c) Real estate project relating to renovation or repair or re-development which does not involve marketing,
advertising selling or new allotment of any apartment, plot or building, under the real estate project.
Question 26] What is the procedure for registration of real estate projects? Also state the documents required to
be submitted along with application of registration.
Ans.: Application for registration of real estate projects [Section 4(1)]: Every promoter shall make an application
to the Authority for registration of the real estate project in prescribed form and in prescribed manner, within
specified time.
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The application for registration should be accompanied by prescribed fee.
The mechanism for registration i.e. the requisite forms to be filled, the fees to be paid etc. are to be determined by
the Rules made by the appropriate Government.
Documents to be enclosed with Application for registration [Section 4(2)]: The promoter shall enclose the
following documents along with the application for registration:
(a) A brief details of the enterprise including its name, registered address, type of enterprise (proprietorship,
societies, partnership, companies, competent authority), and the particulars of registration, and the names and
photographs of the promoter.
(b) A brief detail of the projects launched by him, in the past 5 years, whether already completed or being
developed, including the current status of the said projects, any delay in its completion, details of cases pending,
details of type of land and payments pending.
(c) An authenticated copy of the approvals and commencement certificate from the competent authority.
(d) The sanctioned plan, layout plan and specifications of the proposed project or the phase and the whole
project as sanctioned by the competent authority.
(e) The plan of development works to be executed in the proposed project and the proposed facilities to be
provided like fire fighting facilities, drinking water facilities, emergency evacuation services, use of renewable
energy.
(f) The location details of the project, with clear demarcation of land dedicated for the project along with its
boundaries including the latitude and longitude of the end points of the project.
(g) Proforma of the allotment letter, agreement for sale, and the conveyance deed proposed to be signed with
the allottees.
(h) The number, type and the carpet area of apartments for sale in the project along with the area of the
exclusive balcony or verandah areas and the exclusive open terrace areas apartment with the apartment.
(i) The number and areas of garage for sale in the project.
(j) The names and addresses of his real estate agents of the proposed project.
(k) The names and addresses of the contractors, architect, structural engineer and other persons concerned
with the development of the proposed project.
(l) A declaration supported by an affidavit which shall be signed by the promoter or any person authorized by the
promoter, stating that:
(1) Promoter has a legal title to the land on which the development is proposed along with legally valid
documents with authentication of title, if such land is owned by another person.
(2) The land is free from all encumbrances, or as the case may be details of the encumbrances on such land
including any rights, title, interest or name of any party in or over such land along with details.
(3) The time period within which promoter undertakes to complete the project or phases.
(4) 75% of the amounts realized for the real estate project from the allottees, from time to time, shall be
deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land
cost and shall be used only for that purpose.
(5) Promoter shall take all the pending approvals from the competent authorities on time.
(6) Promoter has furnished other prescribed documents.
Online application [Section 4(3)]: For a period of 1 year the application process can be both manual and online
based, however after 1 year it is mandatory to make the entire process online.
Penalty [Section 60]: If any promoter provides false information or contravenes the provisions of section 4, he shall
be liable to a penalty which may extend up to 5% of estimated cost of real estate project, as determined by the
Authority.
Question 27] Briefly discuss the provisions relating to grating of registration certificate by the Regulatory
Authority.
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Referring to the provisions of the Real Estate (Regulation & Development) Act, 2016, answer the following:
(i) In how many days the Regulatory Authority is required to register the real estate project?
(ii) Is there any provision for deemed registration of a real estate project in case the Regulatory Authority does
not respond to the application?
(iii) What is the period of validity of registration granted to a real estate project by the Regulatory Authority?
Ans.: Grant of registration [Section 5(1)]: On receipt of the application of registration, the Authority shall grant
registration within a period of 30 days if necessary provisions of the Act relating to registration are complied with.
On registration the Authority will provide a registration number, including a Login ID and password to the applicant
for accessing the website of the Authority and to create his web page and to fill therein the details of the proposed
project.
Rejection of application: The Authority may also reject the application for reasons to be recorded in writing if
application does not conform to the provisions of the Act. However, no application shall be rejected unless the
applicant has been given an opportunity of being heard.
Deemed registration on the expiry of 30 days [Section 5(2)]: If the Authority fails to grant the registration or reject
the application, the project shall be deemed to have been registered and the Authority shall within a period of 7
days of the expiry of the 30 days provide a registration number and a Login ID and password to the promoter for
accessing the website of the Authority and to create his web page and to fill therein the details of the proposed
project.
Validity of registration [Section 5(3)]: The registration granted shall be valid for a period declared by the promoter
for completion of the project or phase, as the case may be.
Question 28] Is the promoter required to maintain an 'escrow account' or a 'separate account'? What are the
purposes for which the promoter can withdraw the money from the separate account?
Ans.: As per Section 4(2) of the Real Estate (Regulation & Development) Act, 2016, a declaration supported by an
affidavit signed by the promoter or any person authorized by the promoter is required to be filed while making
application of registration, stating that 75% of the amounts realized for the real estate project from the allottees
shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and
the land cost and shall be used only for that purpose.
However, the promoter can withdraw such amounts from the separate account to cover the cost of the project in
proportion to the percentage of completion of the project.
Promoter should take the certificate from engineer, architect and CA that the withdrawal is in proportion to the
percentage of completion of the project.
The promoter is also required to get his accounts audited within 6 months after the end of every financial year by
CA and shall procfuce a statement of accounts duly certified and signed by such CA and it shall be verified during
the audit that the amounts collected for a particular project have been utilized for the project and the withdrawal
has been in compliance with the proportion to the percentage of completion of the project.
Question 29] Can the period of registration granted to a real estate project by the Regulatory Authority be
extended? What is the definition of force majeure?
Ans.: Extension of registration [Section 6]: In two situations the registration granted to a project can be extended.
Extension of registration can be granted in case of force majeure, in addition, it can also be granted under
reasonable circumstances, without the fault of the promoter, which shall not be more than a maximum period of 1
year.
Explanation to Section 6 has defined force majeure to mean 'a case of war, flood, drought, fire, cyclone, earthquake
or any other calamity caused by nature affecting the regular development of the real estate project'.
Delay in handing over of projects by the developer within the stipulated time frame has been a major complaint of
the buyers and thus was one of the important reasons for introduction of the Act. Thus, it is provided in the Act that
at the time of registration, a developer has to specify a time line within which he will complete and handover the
project to the buyer.
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The timeline is very important because if promoter of the project fails complete the project in stated time then
rigorous provisions in the Act will get attracted whereby his registration would be revoked and his project would be
usurped by the Regulator. To avoid such situation that may arise due delay in completion of project beyond his
control, Section 6 of the Act provides him a remedy (last chance you can say so) to get the extension of the project.
Question 30] Can the registration of a real estate project be revoked?
Ans.: Revocation of registration [Section 7(1)]: The Regulatory Authority on receipt of a complaint or suo motu or
on the recommendation of the competent authority may revoke the registration granted to promoter of real estate.
Circumstance in which registration can be revoked: The Regulatory Authority can revoke registration in following
cases:
(a) If the promoter makes a default in any provisions of Act or the rules or the regulations made thereunder.
(b) If the promoter violates any terms or conditions of the approval given by the competent authority.
(c) If the promoter is involved in unfair practice or irregularities.
Notice to promoter before revocation of registration [Section 7(2) & (3)]: The registration granted to the promoter
shall not be revoked unless the Authority has given 30 days notice in writing, stating the grounds on which it is
proposed to revoke the registration. The Authority should also consider reply given by the promoter within the
notice period of 30 days.
The Authority may, instead of revoking the registration, permit it to remain in force subject to such further terms
and conditions as it thinks fit to impose in the interest of the allottees, and any such terms and conditions so
imposed shall be binding upon the promoter.
Consequences of revocation of registration [Section 7(4)]: Consequences of revocation of the registration are as
follows:
(a) The Authority shall debar the promoter from accessing its website in relation to that project. It shall specify
the name of promoter in the list of defaulters and display his photograph on its website. It shall also inform other
Real Estate Regulatory Authority in other States and Union territories about revocation of registration.
(b) The promoter and developer shall hand over the remaining project work to competent authority or allottees
as provided in Section 8 of the Act.
(c) The Authority shall direct the bank holding the project bank account to freeze it.
(d) The Authority may issue necessary directions in the public interest and to protect the interest of allottees.
Question 31] What do you understand by the term 'unfair practice' under the Real Estate (Regulation &
Ans.: If promoter of the real estate project is involved in any kind of unfair practice or irregularities then registration
granted to him under the Act can be revoked by the Regulatory Authority. Thus, it is necessary to know the meaning
of the term 'unfair practice'.
Unfair Practice [Explanation to Section 7(1)]: The term "unfair practice" means unfair method or deceptive practice
adopted for the purpose of promoting sale or development of real estate project and includes the following
practices:
(A) The practice of making any statement whether in writing or by visible representation which -
(1) falsely represents that the services are of a particular standard or grade;
(2) represents that the promoter has approval or affiliation which such promoter does not have;
(3) makes a false or misleading representation concerning the services;
(B) The promoter permits the publication of any advertisement or prospectus whether in any newspaper or
otherwise of services that are not intended to be offered.
Question 32] What is the obligation of Regulatory Authority if it revoke registration granted to promoter of real
estate?
Ans.: Obligation of Authority consequent upon lapse of or on revocation of registration [Section
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8]: Upon lapse of the registration or on revocation of the registration, the Authority, may consult the Appropriate
Government to take such action as it may deem fit including the carrying out of the remaining development works
by Competent Authority or by the association of allottees or in any other manner, as may be determined by the
Authority.
However, no direction, decision or order of the Authority shall take effect until the expiry of the period of appeal
provided under the provisions of the Act.
In case of revocation of registration of a project, the association of allottees shall have the first right of refusal for
carrying out of the remaining development works.
REAL ESTATE AGENT
Question 33] Who are real estate agents? Discuss the provisions relating to registration of real estate agent under
the Real Estate (Regulation & Development) Act, 2016? What is the penalty for nonregistration?
Write a short note on: Real Estate Agent
Ans.: In simple words real estate agent is middleman who introduces prospective buyer and seller of real estate to
each other and receives commission for his service.
Real Estate Agent [Section 2(zm)]: Real estate agent means any person, who negotiates or acts on behalf of one
person in a transaction of transfer of his plot, apartment or building, in a real estate project, by way of sale, with
another person or transfer of plot, apartment or building, of any other person to him.
Real estate agent may receive remuneration or fees or other charges for his services.
Real estate agent includes a person who introduces prospective buyers and sellers to each other through any
medium for negotiating sale/purchase of plot, apartment or building.
Example: Property dealers, brokers, middlemen are the real estate agents.
Provisions for registration of Real Estate Agents:
Only registered person can act as real estate agent [Section 9(1)]: No real estate agent shall facilitate the sale or
purchase of any plot, apartment or building, in a real estate project being sold by the promoter in any planning area,
without obtaining registration.
Procedure for registration [Section 9(2)]: Every real estate agent shall make an application to the Authority for
registration in prescribed form, in prescribed manner, within prescribed time and along with prescribed fee. [Forms,
time and fees will be prescribed in Rules made by the respective State Governments]
Grant of registration [Section 9(3)]: If the Authority is satisfied that all the necessary provisions in relation
registration has been complied it may grant a single registration to the real estate agent for the entire State or Union
territory.
The Authority can reject the application for reasons to be recorded in writing if the application does not conform to
the provisions of the Act or the rules or regulations made thereunder. However, no application shall be rejected
unless the applicant has been given an opportunity of being heard.
Deemed Registration [Section 9(4)]: Whereon the completion of the period specified, if the applicant does not
receive any communication about the deficiencies in his application or the rejection of his application, he shall be
deemed to have been registered.
Registration Number [Section 9(5)]: Every real estate agent who is registered as per the provisions of this Act or
the rules and regulations made thereunder, shall be granted a registration number by the Authority, which shall be
quoted by the real estate agent in every sale facilitated by him.
Validity of registration [Section 9(6)]: Every registration shall be valid for prescribed period and shall be renewable
for a period in prescribed manner and on payment of prescribed fee.
Revocation of registration [Section 9(7)]: In following cases the Authority may revoke or suspend the registration
of real estate agent for such period as it thinks fit.
(a) If registered real estate agent commits breach of any conditions specified under the Act or any Rules or
Regulations made thereunder.
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(b) If the Authority is satisfied that registration has been secured by the real estate agent through
misrepresentation or fraud.
However, no such revocation or suspension shall be made by the Authority unless an opportunity of being heard
has been given to the real estate agent.
Penalty for non-registration [Section 62]: If any real estate agent fails to comply with or contravenes the provisions
of Section 9 or 10, he shall be liable to a penalty of ` 10,000 for every day during which such
default continues, which may cumulatively extend up to 5% of the cost of plot, apartment or buildings of the real
estate project, for which the sale or purchase has been facilitated, as determined by the Authority.
Question 34] Does the term 'real estate agents' as defined in the Real Estate (Regulation & Development) Act,
2016 include web-portals engaged in selling of apartments or plots?
Ans.: Section 2(zm) of the Real Estate (Regulation & Development) Act, 2016 defines the term 'real estate agents',
which is a very broad and inclusive definition and covers all from of agencies involved in sale and purchase of
projects, registered under the Act.
Consequently, web-portals engaged in selling plots or apartments are also covered and are required to comply with
the duties and responsibilities as provided under the Act and Rules and Regulations made thereunder.
Question 35] Write a short note on: Functions and obligations of real estate agents
Ans.: Functions and obligations of real estate agents [Section 10]: Following are the functions and obligations of
real estate agent under the Act:
(a) He should not offer his agency service in a real estate project being sold by the promoter in any planning
area which is not registered with the Authority.
(b) He should maintain and preserve prescribed books of account, records and documents.
(c) He should not involve himself in any unfair trade practices.
(d) He has to give all the information and documents to the allottee at the time of booking of plot, apartment
or building.
(e) He should discharge other prescribed functions and obligation
Unfair Trade Practices: Following are unfair trade practice in relation to services offered by real estate agent -
(1) If he falsely represents that the services are of a particular standard or grade.
(2) If he represents that promoter or himself has approval or affiliation, whereas in reality he or promoter does
not have such approval.
(3) If he makes false or misleading representations relating to his services.
(4) If he permits the publication of any advertisement whether in any newspaper or otherwise of services that
are not intended to be offered.
FUNCTIONS & DUTIES OF PROMOTER
Question 36] What are the important functions and responsibilities of the promoter after registration of the
project with the Authority under the Real Estate (Regulation & Development) Act, 2016? * 1
Ans.: Functions & Duties of Promoter [Section 11]:
(1) Creation of web page and details to be provided on such web page: Upon receiving Login ID and password,
the promoter shall create his web page on the website of the Authority and enter all details of the proposed project
for public viewing. Details to be entered on such web page are as follows -
(a) Details of the registration granted by the Authority.
(b) Quarterly up-to-date the list of number and types of apartments or plots booked.
(c) Quarterly up-to-date the list of number of garages booked.
(d) Quarterly up-to-date the list of approvals taken and the approvals which are pending subsequent to
commencement certificate.
(e) Quarterly up-to-date status of the project.
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(f) Such other information and documents as may be specified by the regulations made by the Authority.
(2) Details to be given in advertisement or prospectus: The advertisement or prospectus issued or published
by the promoter shall mention prominently the website address of the Authority, wherein all details of the
registered project have been entered and include the registration number obtained from the Authority and other
incidental matters.
(3) Information to be made available to allottee at the time of booking: The promoter at the time of the
booking and issue of allotment letter shall be responsible to make available to the allottee, the following
information:
(a) Sanctioned plans, layout plans, along with specifications, approved by the competent authority, by display
at the site or such other place as may be specified by the regulations made by the Authority.
(b) The stage wise time schedule of completion of the project, including the provisions for civic infrastructure
like water, sanitation and electricity.
(4) Responsibility of promoter towards allottees: The promoter shall be responsible for all obligations,
responsibilities and functions under the provisions of the Act or the Rules and Regulations made thereunder or to
the allottees as per the agreement for sale, or to the association of allottees, till the conveyance of all the
apartments, plots or buildings, to the allottees, or the common areas to the association of allottees or the
competent authority. However, the responsibility of the promoter, with respect to the structural defect or any other
defect shall continue for period of 5 years even after the conveyance deed of all the apartments, plots or buildings,
to the allottees are executed.
(5) Duty to obtain completion certificate: The promoter shall be responsible to obtain the completion certificate
or the occupancy certificate, or both, from the relevant competent authority as per local laws or other laws for the
time being in force and to make it available to the allottees individually or to the association of allottees.
(6) Duty to obtain lease certificate: The promoter shall be responsible to obtain the lease certificate, where the
real estate project is developed on a leasehold land, specifying the period of lease, and certifying that all dues and
charges in regard to the leasehold land has been paid, and to make the lease certificate available to the association
of allottees.
(7) Duty to provide and maintain essential services: The promoter shall be responsible for providing and
maintaining the essential services, on reasonable charges, till the taking over of the maintenance of the project by
the association of the allottees.
(8) Enable the formation of association of allottees: The promoter shall enable the formation of an association
or society or co-operative society of the allottees, or a federation of the same, under the laws applicable. In the
absence of local laws, the association of allottees shall be formed within a period of 3 months of the majority of
allottees having booked their plot or apartment or building in the project.
(9) Execution of registered conveyance deed: The promoter shall execute a registered conveyance deed of the
apartment, plot or building, in favour of the allottee along with the undivided proportionate title in the common
areas to the association of allottees or competent authority.
(10) Payment of outgoings till handing over physical possession of the real estate project: The promoter shall
pay all outgoings until he transfers the physical possession of the real estate project to the allottee or the
associations of allottees, which he has collected from the allottees, for the payment of outgoings (including land
cost, ground rent, municipal or other local taxes, charges for water or electricity, maintenance charges, including
mortgage loan and interest on mortgages or other encumbrances and such other liabilities payable to competent
authorities, banks and financial institutions, which are related to the project).
Where any promoter fails to pay all or any of the outgoings collected by him from the allottees or any liability,
mortgage loan and interest thereon before transferring the real estate project to such allottees, or the association
of the allottees, the promoter shall continue to be liable, even after the transfer of the property, to pay such
outgoings and penal charges, to the authority or person to whom they are payable and be liable for the cost of any
legal proceedings which may be taken by such authority or person.
(11) Not to create charge after execution of agreement for sale: After promoter executes an agreement for sale
for any apartment, plot or building, he shall not mortgage it or create a charge on it. If any such mortgage or charge
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is made or created, it shall not affect the right and interest of the allottee who has taken or agreed to take such
apartment, plot or building.
(12) When promoter can cancel allotment: The promoter may cancel the allotment only in terms of the
agreement for sale. However, the allottee may approach the Authority for relief, if he is aggrieved by such
cancellation and such cancellation is not in accordance with the terms of the agreement for sale, unilateral and
without any sufficient cause.
(13) Prepare and maintain details specified by the Authority: The promoter shall prepare and maintain all such
other details as may be specified, from time to time, by regulations made by the Authority.
Question 37] What are the obligations of the promoter in respect of information contained in advertisement or
prospectus issued by him for any real estate project under the Real Estate (Regulation & Development) Act, 2016?
Ans.: Obligations of promoter regarding veracity of the advertisement or prospectus [Section 12]:
Where any person makes an advance or a deposit on the basis of the information contained in the notice
advertisement or prospectus, or on the basis of any model apartment, plot or building and sustains any loss or
damage by reason of any incorrect, false statement included therein, he shall be compensated by the promoter in
the manner as provided under the Act.
However, if the person affected by such incorrect, false statement contained in the notice, advertisement or
prospectus, or the model apartment, plot or building, intends to withdraw from the proposed project, he shall be
returned his entire investment along with interest at such rate as may be prescribed and the compensation in the
manner provided under the Act.
Question 38] Mr. Gautam Pandey visited the office of DS Kulkarni for purchasing a flat in his on-going project
called 'Swapnalok' at Baner in Pune. Staff of DS Kulkarni provided a copy of advertisement and prospectus and
explained all the details of project including formalities to be completed regarding documents, legal aspect and
details of payment. After a long discussion with the staff and manager of the project Mr. Gautam Pandey decided
to invest on the basis of information supplied to him and information contained in prospectus of the project.
Price quoted by the builder was 5,800 per sq. ft. and total price of the flat for the built-up area of 750 sq. ft. was
` 43,50,000. Builder also offered discount of ` 3,50,000 if the whole price of the flat is paid at the time of
agreement. Accordingly in next week agreement was executed and Mr. Gautam Pandey paid the cheque of `
40,00,000 and availed discount of ` 3,50,000. After a month, the project was completed and on visit to Swapnalok
project Mr. Gautam Pandey found that built up are of his flat is 725 sq. ft. and not 750 sq. ft. as explained to him
and the construction of the flat was not as per information stated in the prospectus.
WTiat remedies are available to Mr. Gautam Pandey under the Real Estate (Regulation & Development) Act,
2016?
Ans.: As per Section 12 of the Real Estate (Regulation & Development) Act, 2016, where any person makes an
advance or a deposit on the basis of the information contained in the notice advertisement or prospectus, or on the
basis of any model apartment, plot or building and sustains any loss or damage by reason of any incorrect, false
statement included therein, he shall be compensated by the promoter in the manner as provided under the Act.
However, if the person affected by such incorrect, false statement contained in the notice, advertisement or
prospectus, or the model apartment, plot or building, intends to withdraw from the proposed project, he shall be
returned his entire investment along with interest at such rate as may be prescribed and the compensation in the
manner provided under the Act.
Keeping in view above provisions, answer to given case is as follows:
(1) Mr. Gautam Pandey is entitled to get compensated by the builder for loss and damage by reason of incorrect
and false statement in the prospectus.
(2) Instead for going for remedy (1), Mr. Gautam Pandey may withdraw from the Swapnalok project and the
builder shall return entire investment to Mr. Gautam along with interest at prescribed rate plus compensation as
provided under the Act.
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Question 39] How much deposit or advance can be accepted by the promoter of real estate project from the
prospective buyer without entering into agreement for sale as per the provisions of the Real Estate (Regulation
& Development) Act, 2016?
Ans.: No deposit or advance to be taken by promoter without first entering into agreement for sale [Section
13(1)]: A promoter shall not accept a sum more than 10% of the cost of the apartment, plot, or building as an
advance payment or an application fee, from a person without first entering into a written agreement for sale with
such person.
The promoter shall get registered the agreement for sale as the law for the time being in force.
Form and details of agreement to sale [Section 13(2)]: The agreement for sale shall be in prescribed form. The
agreement for sale shall specify -
(a) Particulars of development of the project including the construction of building and apartments, along with
specifications and internal development works and external development works.
(b) Dates and the manner by which payments towards the cost of the apartment, plot or building, are to be
made by the allottees.
(c) Date on which the possession of the apartment, plot or building is to be handed over to the allottee.
(id) Rates of interest payable by the promoter to the allottee and the allottee to the promoter in case of default.
(e) Other prescribed particulars as may be specified by the Authority.
Question 40] Fast Construction Ltd. is a company engaged in various real estate projects. One of the projects of
the company commenced at Delhi for which are the necessary formalities like registration, approval from
appropriate authorities are completed. The company started to accept the advances from the prospective buyers
at 15% of the price of the plots located in the projects without entering into agreement for sale. Decide whether
the company has contravened any provisions of the Real Estate (Regulation & Development) Act, 2016?
Ans.: As per Section 13 of the Real Estate (Regulation & Development) Act, 2016, a promoter shall not accept a sum
more than 10% of the cost of the apartment, plot, or building as an advance payment or an application fee, from a
person without first entering into a written agreement for sale with such person.
As per facts given in case, Fast Construction Ltd. is accepting more than 10% of the price of the plots without
entering into agreement for sale with prospective buyer and thus company had contravened the provisions of the
Real Estate (Regulation & Development) Act, 2016 and will be liable to penalty and punishment as provided in the
Act.
Question 41] Can the promoter modify or amend the sanctioned plans or project specifications after having been
approved by the competent authority and disclosed to the allottees?
Ans.: Adherence to sanctioned plans and project specifications by the promoter [Section 14 (1) & (2)]:
The promoter shall develop and complete the project (i.e. apartment, plot or building) as per sanctioned plans,
layout plans and specifications as approved by the competent authorities.
Without obtaining the previous consent of the allottee who had agreed to take any apartment, plot or building the
promoter shall not make any additions and alterations in -
♦ Sanctioned plans
♦ Layout plans
♦ Specifications
♦ Nature of fixtures, fittings and amenities.
However, the promoter may make minor additions or alterations as may be required by the allottee.
He can also make minor changes or alterations which are necessary due to architectural and structural reasons
which are duly recommended by authorized Architect/Engineer. However before carrying such changes intimation
must be given to the allottee.
Explanation: Following structural changes does not amount to "minor additions or alterations" -
(a) An addition to the area or change in height
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(b) Removal of part of a building, or
(c) Any change to the structure e.g. construction or removal or cutting of any wall or a part of a wall, partition,
column, beam, joist, floor including a mezzanine floor or other support, or
(id) Change to means of access ingress or egress or
(e) Change to the fixtures or equipment.
(1) The promoter also cannot make any changes in sanctioned or layout plans etc. in building or its common area
without the previous written consent of at least 2/3rd of the allottees who have agreed to take apartments in
building.
Question 42] What is the liability of promoter of real estate in relation to structural defect under the Real Estate
(Regulation & Development) Act, 2016?
What is the period for which the promoter is liable for any structural defects etc. in the project/ apartment etc.?
Ans.: Liability of promoter for structural defects [Section 14(3)]: In case any structural defect or any other defect
in workmanship, quality or provision of services or any other obligations of the promoter as per the agreement for
sale is brought to the notice of the promoter within a period of 5 years by the allottee from the date of handing
over possession, it shall be the duty of the promoter to rectify such defects without further charge, within 30 days.
In the event of promoter's failure to rectify structural defects within 30 days, the aggrieved allottees shall be entitled
to receive appropriate compensation in a manner provided under the Act.
Question 43] Can a promoter of real estate project transfer his majority rights and liabilities to third party? What
are the obligations of such third party (intending promoter)?
Ans.: Obligations of promoter in case of transfer of a real estate project to a third party [Section 15(1)]:
The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a
third party without obtaining prior written consent from 2/3rd allottees and without the prior written approval of
the Authority.
However, such transfer or assignment shall not affect the allotment or sale of the apartments, plots or buildings in
the real estate project made by the erstwhile promoter.
Obligations of intending promoter [Section 15(2)]: On the transfer or assignment being permitted by the allottees
and the Authority, the intending promoter shall be required to independently comply with -
(a) All pending obligations in respect of the project under the Act and
(b) All pending obligations as per the agreement for sale entered into by the erstwhile promoter with the
allottees.
However, any permitted transfer or assignment shall not result in extension of time to the intending promoter to
complete the real estate project. Further he shall be required to comply with all the pending obligations of the
erstwhile promoter.
In case of default, such intending promoter shall be liable to the consequences of breach or delay as provided under
the Act or the Rules and Regulations made thereunder.
Question 44] What is the obligation of the promoter as regards insurance of real estate project under the Real
Estate (Regulation & Development) Act, 2016?
Ans.: Obligations of promoter regarding insurance of real estate project [Section 16]:
(1) The promoter shall obtain all insurances notified by the Appropriate Government including insurance in
respect of title of the land and building and construction of the real estate project.
(2) The promoter shall be liable to pay the premium and charges in respect of insurance.
Such premium and charges are required to be paid before transferring the insurance to the association of the
allottees.
(3) The insurance shall stand transferred to the benefit of the allottee or the association of allottees, at the time
of promoter entering into an agreement for sale with the allottee.
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(4) All documents relating to the insurance shall be handed over to the association of the allottees once the
association of the allottees is formed.
Question 45] What are the responsibilities of the promoter with respect to execution of conveyance deed and
transfer of documents to allottees or association of allottees under the Real Estate (Regulation & Development)
Act, 2016?
Ans.: Transfer of title [Section 17(1)]: The promoter shall execute a registered conveyance deed in favour of each
allottee. The promoter shall handover the physical possession of the plot, apartment to the allottees.
For the common areas in the building or apartment conveyance deed shall be executed with association of the
allottees or the competent authority. The promoter shall handover the common areas to the association of the
allottees or the competent authority in a real estate project.
The promoter shall also handover other title documents within time specified in sanctioned plans.
All such deeds and documents shall be executed and transferred within 3 months from date of issue of occupancy
certificate.
Responsibility of the promoter to handover all documents and plans after obtaining the occupancy certificate
[Section 17(2)]: After obtaining the occupancy certificate and handing over physical possession to the allottees, it
shall be the responsibility of the promoter to handover the all necessary documents and plans to the association of
the allottees or the competent authority as per the local laws and in the absence of any local law, the promoter
shall handover the necessary documents and plans within 30 days after obtaining the occupancy certificate.
Question 46] Under what circumstances the promoter of real estate project is liable to return the amount to
allottees? What is the liability of promoter for defective title of the land on which the project is being developed?
Ans.: Return of amount and compensation [Section 18(1)]: If the promoter fails to complete or is unable to give
possession of an apartment, plot or building and the allottee wishes to withdraw from the project, the promoter
shall be liable to return the amount received by him with interest at prescribed rate and shall also be liable pay
compensation as provided under in the Act.
Failure to complete the work may be due to discontinuance of business as a developer or due to suspension or
revocation of the registration under the Act or for any other reason but the promoter shall remain liable to return
the amount and pay compensation as stated above.
However, where an allottee does not intend to withdraw from the project then the promoter shall be liable to pay
interest at prescribed rate for every month of delay till the handing over of the possession.
Liability of the promoter to compensate allottees in case of defective title [Section 18(2)]: The promoter shall
compensate the allottee in case of any loss caused to him due to defective title of the land on which the project is
being developed or has been developed.
The claim for compensation due to defective title in the land shall not be barred by limitation provided under any
law for the time being in force.
Liability of the promoter to compensate allottees if he fails to discharge any other obligations imposed under the
Act [Section 18(3)]: If the promoter fails to discharge any other obligations imposed on him under the Act or the
rules or regulations made thereunder or in accordance with the terms and conditions of the agreement for sale, he
shall be liable to pay compensation to the allottees, in the manner as provided under the Act.
RIGHTS & DUTIES OF ALLOTTEES
Question 47] What are the rights and duties of the allottees under the Real Estate (Regulation & Development)
Act, 2016?
Ans.: Rights of allottees [Section 19]:
(1) Right to obtain information relating to sanctioned plans, layout plans etc.: The allottee shall be entitled to
obtain the information relating to sanctioned plans, layout plans along with the specifications, approved by the
competent authority and other information as per the Act or the agreement for sale signed with the promoter.
(2) Right to know stage-wise time schedule of completion of the project: The allottee shall be entitled to know
stage-wise time schedule of completion of the project, including the provisions for water, sanitation, electricity and
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other amenities and services as agreed to between the promoter and the allottee in accordance with the terms and
conditions of the agreement for sale.
(3) Right to claim possession: The allottee shall be entitled to claim the possession of apartment, plot or
building. The association of allottees shall be entitled to claim the possession of the common areas.
(4) Right claim refund, interest and compensation: The allottee shall be entitled to claim refund with interest
and compensation from the promoter if the promoter fails to comply or is unable to give possession of the
apartment, plot or building.
(5) Right have the necessary documents and plans: The allottee shall be entitled to have the necessary
documents and plans, including that of common areas, after handing over the physical possession of the apartment
or plot or building by the promoter.
Duties of allottees [Section 19]:
(1) Duty to make payment: Every allottee shall be responsible to make necessary payments in prescribed
manner and within specified time as per agreement for sale. Every allottee shall also pay in time share of the
registration charges, municipal taxes, water and electricity charges, maintenance charges, ground rent, and other
charges.
(2) Duty to pay interest for delayed payments: The allottee shall be liable to pay interest at prescribed rate for
any delay in payment. The obligations of the allottee and the liability towards interest may be reduced when
mutually agreed to between the promoter and such allottee.
(3) Duty participate in formation of association: Every allottee of the apartment, plot or building, shall
participate towards the formation of an association or society or cooperative society of the allottees, or a federation
of the same.
(4) Duty to take physical possession: Every allottee shall take physical possession of the apartment, plot or
building as the case may be, within a period of two months of the occupancy certificate issued for the said
apartment, plot or building, as the case may be.
(5) Duty to participate towards registration of the conveyance deed: Every allottee shall participate towards
registration of the conveyance deed of the apartment, plot or building.
REAL ESTATE REGULATORY AUTHORITY (RERA)
Question 48] Who has authority to establish Real Estate Regulation Authority?
Ans.: Establishment and incorporation of Real Estate Regulatory Authority [Section 20(1)]:
♦ The Appropriate Government has been given power to establish Real Estate Regulatory Authority (RERA).
Accordingly, every State Government and Union Territory will be required to establish a Real Estate Regulatory
Authority (RERA).
♦ The Real Estate Regulatory Authority will to exercise the powers conferred on it and perform the functions
assigned to it under the Act.
♦ The Appropriate Government of two or more States or Union territories may establish one single Authority.
♦ The Appropriate Government may establish more than one Authority in a State or Union territory.
Authority to be body corporate [Section 20(2)]: The Authority shall be a body corporate having perpetual
succession and a common seal, with the power to acquire, hold and dispose of property, both movable and
immovable, and to contract and shall by the said name, sue or be sued.
The Real Estate (Regulation & Development) Act, 2016 was put in operation just like the Motor Vehicles Act passed
by the Central Government, pursuant to which respective State Governments and Union Territories are required to
notify their own Rules, which would be in the lines of the Central Act and accordingly administer their own State
Rules.
Accordingly, every State Governments and Union Territories are to required to promulgate their own Real Estate
Rules which would be based on the lines of the Central Real Estate (Regulation & Development) Act, 2016 and
establish a Real Estate Regulatory Authority (RERA) pursuant to the Rules, which will administer the respective Real
Estate Rules of the State or UT.
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Composition of Authority [Section 21]: The Authority shall consist of a Chairperson and not less than two whole
time Members to be appointed by the Appropriate Government.
Officers and other employees of Authority [Section 28]: The Appropriate Government in consultation with the
Authority may appoint such officers and employees as it considers necessary for the efficient discharge of their
functions under the Act.
All officers and employees of the Authority shall discharge their functions under the general superintendence of the
Chairperson.
Question 49] Discuss the provisions relating to qualifications and terms of office of Chairperson and members of
Real Estate Regulatory Authority (RERA) under the Real Estate (Regulation & Development) Act, 2016.
Ans.: Qualifications of Chairperson and Members of Authority [Section 22]: The Chairperson and other Members
of the Authority shall be appointed by the Appropriate Government on the recommendations of a Selection
Committee consisting of the Chief Justice of the High Court or his nominee, the Secretary of the Department dealing
with Housing and the Law Secretary.
Persons having adequate knowledge and professional experience of at least 20 years in case of the Chairperson and
15 years in the case of the Members shall be appointed in the office of Authority.
Chairperson and members shall have adequate knowledge and professional experience in urban development,
housing, real estate development, infrastructure, economics, planning, law, commerce, accountancy, industry,
management, social service, public affairs or administration.
A person who has held the post of Additional Secretary to the Central Government or any equivalent post in the
Central or State Government can be appointed Chairperson of Authority.
A person who has held the post of Secretary to the State Government or any equivalent post in the Central or State
Government can be appointed Member of Authority.
Term of office of Chairperson and Members [Section 23]:
(1) The Chairperson and Members shall hold office for a term not exceeding 5 years from the date on which
they enter upon their office, or until they attain the age of 65 years, whichever is earlier and shall not be eligible for
re-appointment.
(2) Before appointing any person as a Chairperson or Member, the appropriate Government shall satisfy itself
that the person does not have any such financial or other interest as is likely to affect prejudicially his functions as
such Member.
Vacancies not to invalidate proceeding of Authority [Section 30]: No act or proceeding of the Authority shall be
invalid merely by reason of -
(a) any vacancy or any defect in the constitution of the Authority or
(b) any defect in the appointment of a person acting as a Member of the Authority or
(c) any irregularity in the procedure of the Authority not affecting the merits of the case.
Question 50] Mr. GPL, who has relevant experience of more than 22 years in real estate sector attained the age
of 62 years on 31.12.2017. The State Government of Maharashtra appointed him as the Chairperson of the Real
Estate Regulatory Authority with effect from 1.1.2018. You are required to state, with reference to the provisions
of the Real Estate (Regulation & Development) Act, 2016, the term for which he may be appointed as Chairperson
of the Authority. Whether he can be reappointed as Chairperson of the Authority?
Ans.: As per Section 23 of the Real Estate (Regulation & Development) Act, 2016, the Chairperson and Members
shall hold office for a term not exceeding 5 years from the date on which they enter upon their office, or until they
attain the age of 65 years, whichever is earlier and shall not be eligible for re-appointment.
Keeping in view above provisions, Mr. GPL can be appointed as chairperson since at the date of appointment he has
attained age of 62 years. However, on attainment of age of 65 years, Mr. GPL shall have to vacate the office of
Chairperson and he shall not be reappointed as chairperson.
Question 51] State the circumstance in which Chairperson and Members of the Real Estate Regulatory Authority
can be removed from their office. What is the procedure of such removal?
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Ans.: Removal of Chairperson and Members from office in certain circumstances [Section 26]: The
Appropriate Government may remove from office the Chairperson or other Members, if the Chairperson or such
other Member, as the case may be -
(a) has been adjudged as an insolvent; or
(b) has been convicted of an offence, involving moral turpitude; or
(c) has become physically or mentally incapable of acting as a Member; or
(d) has acquired such financial or other interest as is likely to affect prejudicially his functions; or
(e) has so abused his position as to render his continuance in office prejudicial to the public interest.
Procedure for removal of Chairperson or Member [Section 26(2)]: Member shall be removed from his office for
the above reason only if following procedure is adopted:
♦ A Judge of the High Court conducts the inquiry
♦ Chairperson or Member are informed of the charges and a reasonable opportunity of being heard is given to
them
♦ A Judge of the High Court recommends to the State Government removal of Chairperson or Member.
♦ State Government passes order to remove the Chairperson or Member.
Question 52] Mr. PK a member of the Real Estate Regulatory Authority was removed by the State Government
of Karnataka on the grounds that he had acquired financial interest likely to affect prejudicially his functions as a
member. Mr. PK challenged his removal by the State Government claiming that the State Government had no
authority to pass order for removal. Clarify whether Mr. PK's contention is right as per the provisions of the Real
Estate (Regulation & Development) Act, 2016.
Ans.: As per Section 26 of the Real Estate (Regulation & Development) Act, 2016, the Appropriate Government may
remove from office the Chairperson or other Members if the Chairperson or such other Member has acquired such
financial or other interest as is likely to affect prejudicially his functions.
However, Member shall be removed from his office for the above reason only if following procedure is adopted:
♦ A Judge of the High Court conducts the inquiry
♦ Chairperson or Members are informed about charges and a reasonable opportunity of being heard is given
to them.
♦ A Judge of the High Court recommends removal of Chairperson or Member to the State Government.
♦ State Government passes an order to remove the Chairperson or Member.
Thus, the State Government can remove a member of Real Estate Regulatory Authority from his office by following
the above procedure. So, contention of Mr. PK is incorrect with respect to his removal by the State Government.
Question 53] What are the restrictions on Chairperson or Members of the Real Estate Regulatory Authority on
acceptance of employment after cessation of office?
Ans.: Restrictions on Chairperson or Members on employment after cessation of office [Section 27(1)]:
(a) Chairperson or Member shall not accept any employment with any person or organization which has been
associated with any work under the Act, from the date on which they ceases to hold office. However, they can
accept employment under the Appropriate Government or local authority or statutory authority or corporation
established by or under any Central, State or provincial Act or Government Company which is not a promoter as per
the provisions of the Act.
(b) Chairperson or Member shall not act on behalf of any person or organization in connection with any specific
proceeding or transaction or negotiation or a case to which the Authority is a party
and with respect to which the Chairperson or such Member had, before cessation of office, acted for or provided
advice to, the Authority.
(c) Chairperson or Member shall not give advice to any person using information which was obtained in his
capacity as the Chairperson or a Member and which are not made available to the public.
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(d) Chairperson or Member shall not enter into a contract of service or accept an appointment to a board of
directors or accept an offer of employment with an entity with which he had direct and significant official dealings
during his term of office.
Duty to keep secrecy [Section 27(2)]: The Chairperson and Members shall not communicate or reveal to any person
any matter which has been brought under his consideration or known to him while acting in official capacity as
Chairperson or Member of the Authority.
Question 54] Mr. Ratan Baheti retired as a Member of Real Estate Regulatory Authority (RERA) formed by State
of Tamilnadu. He was offered the post of director in Big Deal Ltd. with which he had direct and significant official
dealings during his term of office. Can he join the Big Deal Ltd. with effect from 1.1.2019?
What will be the position if Mr. Ratan Baheti joins OMR Ltd., a Government Company, as a Manager with effect
from 1.1.2019?
Ans.: As per Section 27 of the Real Estate Development Act, 2016, Chairperson or a Member shall not enter into a
contract of service or accept an appointment to a board of directors or accept an offer of employment with an entity
with which he had direct and significant official dealings during his term of office.
In present case, Big Deal Ltd. is an entity with which Mr. Ratan Baheti had direct and significant official dealings
during his term of office. Therefore, Mr. Ratan Baheti cannot be appointed in Big Deal Ltd. as a director. However,
he can accept employment in OMR Ltd. a Government Company as restriction as to employment is not applicable
for employment in Government Company.
Question 55] Discuss the provisions relating to meetings of the Real Estate Regulatory Authority?
Ans.: Meetings of Authority [Section 29(1)]: The Authority shall meet at such places and times and follow such rules
of procedure in regard to the transaction of business at its meetings including quorum at such meetings, as may be
specified by the regulations made by the Authority.
Who will preside at the meeting [Section 29(2)]: If the Chairperson for any reason is unable to attend a meeting of
the Authority, any other Member chosen by the Members present amongst themselves at the meeting shall preside
at the meeting.
Decision at the meeting [Section 29(3)]: All questions which come up before any meeting of the Authority shall be
decided by a majority of votes by the Members present and voting. In the event of equality of votes, the Chairperson
or in his absence, the person presiding shall have a second or casting vote.
Expeditious disposal of questions and application [Section 29(4)]: The questions which come up before the
Authority shall be dealt with as expeditiously as possible and the Authority shall dispose of the same within a period
of 60 days from the date of receipt of the application. However, where any application could not be disposed of
within period of 60 days, the Authority shall record its reasons in writing for not disposing of the application within
that period.
Question 56] Shri Sudhir Mahajan was appointed as Chairman of the Goa Regulatory Authority. Shri Sudhir
Mahajan was unable to attend the meeting to be scheduled on 15.1.2019 due health issues. Other 5 members
attended the meeting and selected one of them as presiding person of the meeting and completed the meeting
as per the items on agenda. On resuming the office, Sudhir Mahajan raised objection as to validity of the meeting
and decisions taken at the meeting. Is objection taken by Sudhir Mahajan tenable under the provisions of the
Real Estate (Regulation & Development) Act, 2016?
Ans.: As per Section 29(2) of the Real Estate (Regulation & Development) Act, 2016, if the Chairperson for any
reason is unable to attend a meeting of the Real Estate Regulatory Authority, any other Member chosen by the
Members present amongst themselves at the meeting shall preside at the meeting.
Thus, meeting held in absence of Sudhir Mahajan is valid and objections raised by him are invalid.
Question 57] Aakash Malhotra wants to file a complaint against promoter of real estate project. Advice regarding
the course of action available to him in this regard.
Ans.: Filing of complaints with the Authority or the adjudicating officer [Section 31]: Any aggrieved person may
file a complaint with the Authority or the Adjudicating Officer for any violation or contravention of the provisions
of the Act or the Rules and regulations made thereunder against any promoter, allottee or real estate agent.
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Complaint can also be filed by the association of allottees or any voluntary consumer association registered under
any law for the time being in force.
The complaint has to be filed in prescribed form and manner along with prescribed fees.
Question 58] What are the functions of the Real Estate Authority in relation to growth and promotion of a healthy
real estate sector?
Ans.: Functions of Authority for promotion of real estate sector [Section 32]: The Authority shall in order to
facilitate the growth and promotion of a healthy, transparent, efficient and competitive real estate sector make
recommendations to the Appropriate Government of the competent authority on -
(a) Protection of interest of the allottees, promoter and real estate agent.
(b) Creation of a single window system for ensuring time bound project approvals and clearances for timely
completion of the project.
(c) Creation of a transparent and robust grievance redressal mechanism against acts of omission and
commission of competent authorities and their officials.
(id) Measures to encourage investment in the real estate sector including measures to increase financial assistance
to affordable housing segment.
(e) Measures to encourage construction of environmentally sustainable and affordable housing, promoting
standardization and use of appropriate construction materials, fixtures, fittings and construction techniques.
(f) Measures to encourage grading of projects on various parameters of development including grading of
promoters.
(g) Measures to facilitate amicable conciliation of disputes between the promoters and the allottees through
dispute settlement forums set up by the consumer or promoter associations.
(h) Measures to facilitate digitization of land records and system towards conclusive property titles with title
guarantee.
(i) To render advice to the appropriate Government in matters relating to the development of real estate sector.
(j) Any other issue that the Authority may think necessary for the promotion of the real estate sector.
Question 59] Write a short note on: Real Estate Sector Advocacy
Write a short note on: Real Estate Sector Policy by Appropriate Government * 1
Ans.: Advocacy and awareness measures [Section 33]:
(1) While formulating a policy or law on real estate sector, the Appropriate Government may make a reference
to the Authority for its opinion on possible effect of such policy or law on real estate sector.
The Authority shall give its opinion to the Appropriate Government within a period of 60 days from the date of
receipt of a reference.
The Appropriate Government may take such action as it deems fit on opinion given by the Authority.
(2) The opinion given by the Authority shall not be binding upon the Appropriate Government in formulating
such policy or laws.
(3) The Authority shall take suitable measures for the promotion of advocacy, creating awareness and imparting
training about laws relating to real estate sector and policies.
Question 60] What are the general functions of the real estate authorities constituted by the respective State
Governments?
Ans.: Functions of Authority [Section 34]: The functions of the Authority shall include -
(a) To register and regulate real estate projects and real estate agents registered under the Act.
(b) To publish and maintain a website of records, for public viewing, of all real estate projects for which
registration has been given, with such details as may be prescribed, including information provided in the
application for which registration has been granted.
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(c) To maintain a database, on its website, for public viewing, and enter the names and photographs of
promoters as defaulters including the project details, registration for which has been revoked or have been
penalized, with reasons, for access to the general public.
(id) To maintain a database, on its website, for public viewing, and enter the names and photographs of real estate
agents who have applied and registered under the Act, with such details as may be prescribed, including those
whose registration has been rejected or revoked.
(e) To fix through regulations for each areas under its jurisdiction the standard fees to be levied on the allottees or
the promoter or the real estate agent, as the case may be.
(f) To ensure compliance of the obligations cast upon the promoters, the allottees and the real estate agents under
the Act and the rules and regulations made thereunder.
(g) To ensure compliance of its regulations or orders or directions made in exercise of its powers under the Act.
(h) To perform such other functions as may be entrusted to the Authority by the appropriate Government as
may be necessary to carry out the provisions of the Act.
Question 61] Discuss briefly powers available to the various Real Estate Regulatory authorities constituted by the
Appropriate Governments.
Ans.: Powers of Authority to call for information [Section 35(1)]: Where the Authority considers it expedient to do
so it may on a complaint or suo motu by order in writing and recording reasons call at any time promoter or allottee
or real estate agent to furnish in writing information or explanation relating to its affairs as the Authority may
require. The Authority may appoint one or more persons to make an inquiry in relation to the affairs of any promoter
or allottee or the real estate agent.
Power of Civil Court [Section 35(2)]: The Authority shall have same powers as are vested in a Civil Court under the
Code of Civil Procedure, 1908 while trying a suit, in respect of the following matters:
(i) Discovery and production of books of account and other documents, at such place and at such time as may
be specified by the Authority.
(ii) Summoning and enforcing the attendance of persons and examining them on oath.
(iff) Issuing commissions for the examination of witnesses or documents.
(iv) Any other matter which may be prescribed.
Power to issue interim orders [Section 36]: Where during an inquiry, the Authority is satisfied that an act in
contravention of the Act has been committed and continues to be committed or that such act is about to be
committed, the Authority may issuing order restrain any promoter, allottee or real estate agent from carrying on
such act until the conclusion of inquiry.
Powers of Authority to issue directions [Section 37]: For the purpose of discharging its functions the Authority may
issue directions from time to time, to the promoters or allottees or real estate agents, as it may consider necessary
and such directions shall be binding on all concerned.
Powers impose penalty or interest [Section 38(1)]: The Authority shall have powers to impose penalty or interest
in regard to any contravention of obligations cast upon the promoters, the allottees and the real estate agents.
Power to regulate its own procedure [Section 38(2)]: The Authority shall be guided by the principles of natural
justice and the Authority shall have powers to regulate its own procedure.
Power to make reference to Competition Commission of India [Section 38(3)]: The Authority may suo motu make
reference to the Competition Commission of India (CCI). Such reference to CCI can be made where an issue is raised
relating to agreement, action, omission, practice or procedure that -
(a) has an appreciable prevention, restriction or distortion of competition in connection with the development
of a real estate project; or
(b) has effect of market power of monopoly situation being abused for affecting interest of allottees adversely.
Rectification of orders [Section 39]: The Authority has a power to rectify any mistake apparent from the record in
its order if the same is brought to notice of the Authority by the parties within a period of 2 years from the date of
order.
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However, rectification of order is not possible if appeal is preferred against the order.
While rectifying any mistake the Authority shall not amend substantive part of its order passed under the provisions
of the Act.
CENTRAL ADVISORY COUNCIL
Question 62] Write a short note on: Central Advisory Council
Ans.: Establishment of Central Advisory Council [Section 41(1)]: The Central Government may, by notification,
establish with effect from such date as it may specify in such notification, a Council to be known as the Central
Advisory Council.
Chairman of the Central Advisory Council [Section 41(2)]: The Minister to the Government of India in charge of the
Ministry of the Central Government dealing with Housing shall be the ex officio Chairperson of the Central Advisory
Council.
Composition of Central Advisory Council [Section 41(3) & (4)]: The Central Advisory Council shall consist of
representatives of the Ministry of Finance, Ministry of Industry and Commerce, Ministry of Urban Development,
Ministry of Consumer Affairs, Ministry of Corporate Affairs, Ministry of Law and Justice, Niti Aayog, National Housing
Bank, Housing and Urban Development Corporation, 5 representatives of State Governments to be selected by
rotation, 5 representatives of the Real Estate Regulatory Authorities to be selected by rotation, and any other
Central Government department as notified.
The Central Advisory Council shall also consist of not more than 10 members to represent the interests of real estate
industry, consumers, real estate agents, construction labourers, non-governmental organizations and academic and
research bodies in the real estate sector.
Question 62A] Write a short note on: Functions of Central Advisory Council
Ans.: Functions of Central Advisory Council [Section 42]: The functions of the Central Advisory Council shall be to
advise and recommend the Central Government -
(a) on all matters concerning the implementation of the Act;
(b) on major questions of policy;
(c) towards protection of consumer interest;
(d) to foster the growth and development of the real estate sector;
(e) on any other matter as may be assigned to it by the Central Government.
The Central Government may specify the rules to give effect to the recommendations of the Central Advisory
Council.
REAL ESTATE APPELLATE TRIBUNAL
Question 63] Discuss the provisions relating to establishment Appellate Tribunal and filing an appeal before it.
Also state whether pre-deposit of penalty is necessary if promoter of real estate wants to file an appeal against
the decision or order of Adjudicating Officer.
Ans.: Establishment of Real Estate Appellate Tribunal [Section 43(1) to (4)]:
(1) The Appropriate Government shall establish an Appellate Tribunal to be known as the " (name of the State/Union
territory) Real Estate Appellate Tribunal. Thus, each State Government has to establish its own Appellate Tribunal
in the State.
(2) The Appropriate Government may establish one or more benches of the Appellate Tribunal, for various
jurisdictions, in the State or Union territory.
(3) Every bench of the Appellate Tribunal shall consist of at least one Judicial Member and one Administrative
or Technical Member.
(4) The Appropriate Government of two or more Sates or Union territories may establish one single Appellate
Tribunal.
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Appeal to Appellate Tribunal [Section 43(5)]: Any person aggrieved by any direction or decision or order made by
the Authority or by an Adjudicating Officer may prefer an appeal before the Appellate Tribunal having jurisdiction
over the matter.
Class Action: Appeal can also be filed by the association of allottees or any voluntary consumer association
registered under any law for the time being in force.
Appeal by promoter cannot be entertained unless he deposit 30% penalty: Where a promoter files an appeal, it
shall not be entertained unless promoter first deposits at least 30% of the penalty or such higher percentage as may
be determined by the Appellate Tribunal, or the total amount to be paid to the allottee including interest and
compensation imposed on him or with both.
Question 64] Referring to the provisions of the Real Estate (Regulation & Development) Act, 2016, answer the
following:
(i) Who can file an appeal against the decision of the Real Estate Regulatory Authority or the Adjudicating
Officer?
(ii) What is the time limit for filing such appeal?
(iii) Whether Appellate Tribunal has a power to pass interim orders?
(iv) What is time limit for disposal of the appeal by the Appellate Tribunal?
Ans.: Application for settlement of disputes and appeals to Appellate Tribunal [Section 44]:
Who can file appeal [Section 44(1)]: Following can file the appeal against any direction or order or decision of the
Authority or the Adjudicating Officer:
(a) Appropriate Government or
(b) Competent Authority or
(c) A person aggrieved by any direction or order or decision of the Authority or the Adjudicating Officer.
Time limit for filing appeal [Section 44(2)]: Every appeal shall be preferred within a period of 60 days from the date
on which a copy of the direction or order or decision made by the Authority or the Adjudicating Officer is received.
Appeal has to be made in prescribed form along with prescribed fee. However, the Appellate Tribunal may entertain
any appeal after the expiry of 60 days if it is satisfied that there was sufficient cause for not filling it within that
period.
Orders by Appellate Tribunal [Section 44(3)]: On receipt of an appeal, the Appellate Tribunal may after giving the
parties an opportunity of being heard, pass such orders, including interim orders, as it thinks fit.
Copies of order [Section 44(4)]: The Appellate Tribunal shall send a copy of every order made by it to the parties
and to the Authority or the adjudicating officer.
Disposal of appeal [Section 44(5)]: The appeal shall be dealt with as expeditiously as possible and endeavour shall
be made by it to dispose of the appeal within a period of 60 days from the date of receipt of appeal.
However, where appeal could not be disposed of within the said period of 60 days, the Appellate Tribunal shall
record its reasons in writing for not disposing of the appeal within that period.
Power to call record [Section 44(6)]: The Appellate Tribunal may call relevant records to examine the legality or
propriety or correctness of any order or decision of the Authority or the Adjudicating Officer and may pass such
orders as it thinks fit for this purpose.
Question 65] Write a short note on: Composition of Appellate Tribunal
Ans.: Composition of Appellate Tribunal [Section 45]: The Appellate Tribunal shall consist of a Chairperson and not
less than two whole time Members of which one shall be a Judicial Member and other shall be a Technical or
Administrative Member, to be appointed by the appropriate Government.
Question 66] Discuss the provisions relating to qualifications and terms of office of Chairperson and members of
the Appellate Tribunal under the Real Estate (Regulation & Development) Act, 2016.
Ans.: Qualifications for Chairperson and Members [Section 46(1)]: A person shall not be qualified for appointment
as Chairperson or Member of the Appellate Tribunal unless he -
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(a) In the case of Chairperson, is or has been a Judge of a High Court.
(b) In the case of a Judicial Member -
(i) he has held a judicial office in the territory of India for at least 15 years or
(ii) he has been a member of the Indian Legal Service and has held the post of Additional Secretary of that service
or any equivalent post, or
(iii) he has been an advocate for at least 20 years with experience in dealing with real estate matters.
(c) In the case of a Technical or Administrative Member -
(i) he is a person who is well-versed in the field of urban development, housing, real estate development,
infrastructure, economics, planning, law, commerce, accountancy, industry, management, public affairs or
administration and possesses experience of at least 20 years in the field or
(ii) he has held post in the Central or State Government equivalent to the post of Additional Secretary.
Appointment of Chairperson and Members [Section 46(2)]: The Chairperson of the Appellate Tribunal shall be
appointed by the Appropriate Government in consultation with the Chief Justice of High Court or his nominee.
Recommendations of a Selection Committee [Section 46(3)]: The Judicial Members and Technical or Administrative
Members shall be appointed by the Appropriate Government on the recommendations of Selection Committee
consisting of the Chief Justice of the High Court or his nominee, the Secretary of the Department handling Housing
and the Law Secretary and in prescribed manner.
Term of office of Chairperson and Members [Section 47]: The Chairperson or Member of the Appellate Tribunal
shall hold office for a term not exceeding 5 years from the date on which he enters upon his office and shall not be
eligible for re-appointment. A person who has been appointed as Chairperson of the Tribunal shall not hold office
after he has attained the age of 67 years.
No Judicial/Technical/Administrative Member shall hold office after he has attained the age of 65 years.
Before appointing any person as Chairperson or Member, the Appropriate Government shall satisfy itself that the
person does not have any financial or other interest likely to affect prejudicially his functions as member.
Question 67] Hon'ble Justice Mr. HCJ, a retired High Court Judge, attained the age of 62 years on 31.12.2018.
Appropriate Government appointed him as the Chairperson of the Appellate Tribunal with effect from 1.1.2019.
You are required to state, with reference to the provisions of the Real Estate (Regulation & Development) Act,
2016, the term for which he may be appointed as Chairperson of the Appellate Tribunal. Whether he can be
reappointed as Chairperson of Appellate Tribunal?
Ans.: As per Section 47 of the Real Estate (Regulation & Development) Act, 2016, the Chairperson or Member of
the Appellate Tribunal shall hold office for a term not exceeding 5 years from the date on which he enters upon his
office and shall not be eligible for re-appointment. A person who has been appointed as Chairperson of the Tribunal
shall not hold office after he has attained the age of 67 years.
Keeping in view above provisions, Mr. HCJ can be appointed as chairperson since at the date of appointment he has
attained age of 62 years. However, on attainment of age of 67 years, Mr. HCJ shall have to vacate the office of
Chairperson and he shall not be reappointed as Chairperson.
Question 68] What are the restrictions on Chairperson or Members of the Appellate Tribunal on acceptance of
employment after cessation of office?
Ans.: Restrictions on Chairperson or Judicial/Technical/Administrative Member on employment after cessation
of office [Section 50(1)]: The Chairperson or Judicial/Technical/ Administrative Member on ceasing to hold office
are liable to certain restrictions which are discussed below.
(a) They cannot accept any employment with any person or organization which has been associated with any
work under the Act from the date on which they ceases to hold office.
However, they can accept employment under the Appropriate Government or local authority or statutory authority
or corporation established Central/State Act or Government Company, which is not a promoter as per the provisions
of the Act.
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(b) They cannot act, for or on behalf of any person or organization in connection with any specific proceeding
or transaction or negotiation or a case to which the Authority is a party and with respect to which the Chairperson
or Judicial Member or Technical or Administrative Member had, before cessation of office, acted for or provided
advice to, the Authority.
(c) They cannot give advice to any person using information which was obtained in his capacity as the
Chairperson or Member and which is not made available to the public.
(id) They shall not enter into a contract of service or accept an appointment to a board of directors or accept an
offer of employment with an entity with which they had direct and significant official dealings during the term of
office.
Duty to keep secrecy [Section 50(2)]: The Chairperson and Members shall not communicate or reveal to any person
any matter which has been brought under his consideration or known to him while acting in official capacity as
Chairperson or Member of the Appellate Tribunal.
Question 69] Mrs. Bharkha Verma retired as a Member of Appellate Tribunal. She was offered the post of director
in DLF Ltd. with which she had direct and significant official dealings during her term of office in Appellate
Tribunal. Can she join the DLF Ltd. with effect from 1.1.2019?
Ans.: As per Section 50 of the Real Estate Development Act, 2016, Chairperson or a Member of the Appellate
Tribunal shall not enter into a contract of service or accept an appointment to a board of directors or accept an
offer of employment with an entity with which he had direct and significant official dealings during his term of office.
In present case, Big Deal Ltd. is an entity with which Mrs. Bharkha Verma had direct and significant official dealings
during her term of office. Therefore, Mrs. Bharkha Verma cannot be appointed in DLF Ltd. as a director.
Question 70] What are the powers of the Appellate Tribunal as per the Real Estate (Regulation & Development)
Act, 2016? Also state whether Tribunal is bound by the rules of evidence as contained in the Indian Evidence Act,
1872.
Ans.: Powers of the Appellate Tribunal [Section 53]:
(1) The Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908
but shall be guided by the principles of natural justice.
(2) The Appellate Tribunal shall have power to regulate its own procedure.
(3) The Appellate Tribunal shall also not be bound by the rules of evidence contained in the Indian Evidence Act,
1872.
(4) The Appellate Tribunal shall have same powers as are vested in Civil Court under the Code of Civil Procedure,
1908 while discharging its functions under the Act including -
(a) Summoning and enforcing the attendance of any person and examining him on oath.
(b) Requiring the discovery and production of documents.
(c) Receiving evidence on affidavits.
(d) Issuing commissions for the examinations of witnesses or documents.
(e) Reviewing its decisions.
(f) Dismissing an application for default or directing it ex parte.
(g) Any other matter which may be prescribed.
(5) All proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings.
Question 71] Can a Practicing Company Secretary be appointed to present the case of public company before the
Real Estate Regulatory Authority? Would your answer change if he is appointed to present the case before
Appellate Tribunal?
Ans.: Right to legal representation [Section 56]: The applicant or appellant may either appear in person or authorize
one or more Company Secretaries or Chartered Accountants or Cost Accountants or legal practitioners or any of its
officers to present his or its case before the Appellate Tribunal or the Regulatory Authority or the Adjudicating
Officer, as the case may be.
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Thus, public company can appoint Practising Company Secretary to present its case before Real Estate Regulatory
Authority and Appellate Tribunal.
Question 72] How orders passed by the Appellate Tribunal under the Real Estate (Regulation & Development)
Act, 2016 are executed?
Ans.: Orders passed by Appellate Tribunal to be executable as a decree [Section 57]:
(1) Every order made by the Appellate Tribunal shall be executable as a decree of Civil Court. The Appellate
Tribunal shall have all the powers of Civil Court in relation to execution of orders passed by it.
(2) The Appellate Tribunal may transmit any order made by it to a Civil Court having local jurisdiction and such
Civil Court shall execute the order as if it were a decree made by the Court.
Question 73] When a person can file an appeal in High Court as per the provisions of the Real Estate (Regulation
& Development) Act, 2016? What is the time limit for filing such appeal? Whether it is possible to file appeal for
a case which involves substantial question of fact?
Ans.: Appeal to High Court [Section 58]: Any person aggrieved by any decision or order of the Appellate Tribunal,
may file an appeal to the High Court within a period of 60 days from the date of communication of the decision or
order of the Appellate Tribunal to him.
However, High Court may entertain the appeal after the expiry of the said period of 60 days, if it is satisfied that the
appellant was prevented by sufficient cause from preferring the appeal in time.
Such appeal can be filed if the case involves a substantial question of law.
No appeal shall lie against any decision or order made by the Appellate Tribunal with the consent of the parties.
OFFENCES, PENALTIES & ADJUDICATION
Question 74] DLF Ltd. a promoter of real estate project has contravened some provisions of the Real Estate
(Regulation & Development) Act, 2016. How much penalty can be levied on DLF Ltd.?
Ans.: Penalty for contravention of other provisions of the Act [Section 61]: If any promoter contravenes any
provisions of the Act (other than section 3 or 4) or the Rules/Regulations, he shall be liable to a penalty which may
extend up to 5% of the estimated cost of the real estate project.
Question 75] How much penalty can be levied on promoter of real estate if he fails to comply with the orders of
Real Estate Regulatory Authority or Appellate Tribunal?
Ans.: Penalty for failure to comply with orders of Authority by promoter [Section 63]: If any promoter fails to
comply with or contravenes any of the orders or directions of the Authority, he shall be liable to a penalty for every
day during which such default continues, which may cumulatively extend up to 5% of the estimated cost of the real
estate project.
Penalty for failure to comply with orders of Appellate Tribunal by promoter [Section 64]: If any promoter, who
fails to comply with, or contravenes any of the orders, decisions or directions of the Appellate Tribunal, he shall be
punishable -
♦ With imprisonment for a term which may extend up to 3 years or
♦ With fine for every day during which such default continues, which may cumulatively extend up to 10% of
the estimated cost of the real estate project or
♦ With both.
Question 76] How much penalty can be levied on real estate agents if he fails to comply with the orders of Real
Estate Regulatory Authority or Appellate Tribunal?
Ans.: Penalty for failure to comply with orders of Authority by real estate agent [Section 65]: If any real
estate agent, who fails to comply with, or contravenes any of the orders or directions of the Authority, he shall be
liable to a penalty for every day during which such default continues, which may cumulatively extend up to 5% of
the estimated cost of plot, apartment or building of the real estate project, for which the sale or purchase has
been facilitated.
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Penalty for failure to comply with orders of Appellate Tribunal by real estate agent [Section 66]: If any real estate
agent, who fails to comply with, or contravenes any of the orders, decisions or directions of the Appellate Tribunal,
he shall be punishable -
♦ With imprisonment for a term which may extend up to 1 year or
the estimated cost of plot, apartment or building of the real estate project, for which the sale or purchase has
been facilitated or
♦ With both.
Question 77] How much penalty can be levied on Allottee if he fails to comply with the orders of Real Estate
Regulatory Authority or Appellate Tribunal?
Ans.: Penalty for failure to comply with orders of Authority by Allottee [Section 67]: If any allottee of registered
real estate project fails to comply with or contravenes any of the orders, decisions or directions of the Authority, he
shall be liable to a penalty for the period during which such default continues, which may cumulatively extend up
to 5% of the plot, apartment or building cost.
Penalty for failure to comply with orders of Appellate Tribunal by Allottee [Section 68]: If any allottee of registered
real estate project fails to comply with or contravenes any of the orders or directions of the Appellate Tribunal, he
shall be punishable -
♦ With imprisonment for a term which may extend up to 1 year or
the plot, apartment or building cost or
♦ With both.
Question 78] Discuss the liability of company and its officers in respect offences under the Real Estate (Regulation
& Development) Act, 2016.
Ans.: Offences by companies [Section 69]: Where an Offence has been committed by a company, every person
who, at the time, the offence was committed was in charge of, or was responsible to the company for the conduct
of, the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be
However, any such person shall not be liable to any punishment under the Act if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to prevent the commission of such
offence.
Where an offence has been committed by a company, and it is proved that the offence has been committed with
the consent or connivance of, or is attributable to, any neglect on the part of any director, manager, secretary or
other officer of the company then all such persons also be deemed to be guilty of that offence and shall be liable to
be proceeded against and punished accordingly.
Explanation: For the purpose of this section -
(a) Company means any body corporate and includes a firm, or other association of individuals.
(b) Director in relation to a firm, means a partner in the firm.
Question 79] All offences under the Real Estate (Regulation & Development) Act, 2016 are compoundable.
Comment.
Ans.: Compounding of offences [Section 70]: If any person is punished with imprisonment under the Act, the
punishment may, either before or after the institution of the prosecution, be compounded by the Court on such
terms and conditions and on payment of such sums as may be prescribed. However, the sum prescribed shall not,
in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded.
What is compounding?
Instead ofgoing to Court/Tribunal, the offender may agree to pay composition amount and in return
administrator of enactment agrees not to prosecute the person who has committed an offence. This is called as
compounding. Generally, offences which are of private nature and relatively not serious are made
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compoundable. After payment of composition amount, prosecution will not be launched or if already launched,
it will be withdrawn.
Following offences are compoundable:
S Offences punishable with fine only.
S Offences punishable with fine or imprisonment, v" Offences punishable with fine or imprisonment or both.
Following offences are not compoundable:
Offences punishable with imprisonment only. x Offences punishable with fine and imprisonment.
MISCELLANEOUS TOPICS
Question 80] Whether Civil Court entertain a suit for violation of any provisions of the Real Estate (Regulation &
Ans.: Bar of jurisdiction [Section 79]: No Civil Court shall have jurisdiction to entertain any suit or proceeding in
respect of any matter which the Authority/Adjudicating Officer/Appellate Tribunal is empowered by or under the
Act to determine.
No injunction shall be granted by any Court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under the Act.
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17
CHAPTER
BENAIYII TRANSACTION (PROHIBITION) ACT, 1900
INTRODUCTION: Theword “Benami” means anonymous or nameless and the term "Benami Transaction" is used to
describe a transaction where one person pays for property but the property is transferred to or held by somebody
else. The person who pays for the property is the real beneficiary but he is not recorded as the legal owner of the
property. Tins enables the payer to achieve undesirable purposes such as utilizing black money, evading the
payment of tax and avoiding payments to creditors.
The Benami Transactions (Prohibition) Act was enacted in the year 1988 to prohibit all benami transactions.
However, the Act was not comprehensive enough and lacked to make a big impact. The Rules were not framed and
benami transactions continued in India. The Act had several loopholes, including the absence of an appellate
mechanism and lack of provisions for vesting of the confiscated property with the Central government. The Benami
Transactions (Prohibition) Amendment Act, 2016 seeks to amend the Primary Act and is aimed at catching those
with black money in the domestic economy hidden through benami properties.
OBJECT, FEATURES & DEFINITIONS
Question 1] For what purpose the Benami Transaction (Prohibition) Act, 1988 was enacted?
Ans.: The Benami Transactions (Prohibition) Act, 1988 was enacted to prohibit benami transactions and to recover
such benami property.
The Act provides that -
(a) All the properties held benami shall be subject to acquisition by prescribed authority in prescribed manner
and after following prescribed procedure.
(b) No amount shall be payable for the acquisition of any benami property.
(c) The purchase of property by any person in the name of his wife or unmarried daughter for their benefit
would not be benami transaction.
(d) The securities held as per provisions of the Depositories Act, 1996 would not be benami transactions.
During the administration of the Benami Transactions (Prohibition) Act, 1988, it was found that the provisions of
the aforesaid Act are inadequate to deal with benami transactions due following reasons:
(1) The Act does not have any specific provision for vesting of confiscated property with Central Government.
(2) The Act does not have any provision for an appellate mechanism against an action taken by the authorities.
(3) The powers of the Civil Court have not been conferred on the authorities for its implementation.
With a view to providing effective regime for prohibition of benami transactions, the Act was amended through the
Benami Transactions (Prohibition) Amendment Act, 2016.
The amended law empowers the specified authorities to provisionally attach benami properties which can
eventually be confiscated. Besides, if a person is found guilty of offence of benami transaction by the competent
court, he shall be punishable with penalties specified under the Act.
The legislation is also intended to effectively prohibit benami transactions and consequently prevent circumvention
of law through unfair practices. It empowers the Government to confiscate benami property by following due
procedure. It therefore promotes equity across all citizens. However, those who declare their benami properties
under income declaration scheme will get immunity under the Act.
Question 2] State the salient features of the Benami Transaction (Prohibition) Act, 1988.
Ans.: Salient features of the Benami Transaction (Prohibition) Act, 1988 are given below:
♦ It defines 'Benami Transaction' and 'Benami Property'.
♦ It provides for exclusions and transactions which shall not be construed benami.
♦ It provides the consequences of entering into a prohibited benami transactions.
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♦ It lays down the procedure for determination and related penal consequences for prohibited benami
transactions.
♦ It also provides that the powers of Civil Court to the authorities under the Act.
♦ Provisions have been made for service of notice, protection of action taken in good faith, etc.
♦ Central Government empowers to make rules for the implementation of the provisions of the Bill.
♦ It enables the Central Government in consultation with the Chief Justice of the High Court to designate
Special Courts.
♦ It provides penalty for entering into benami transactions and for furnishing any false documents.
♦ It provides for transfer of suit or proceeding in respect of a benami transaction pending in any Court/Tribunal
(other than High Court) to the Appellate Tribunal.
Question 3] Define the following terms as per the Benami Transaction (Prohibition) Act, 1988:
(1) Benami Property
(2) Benamidar
(3) Beneficial Owner
(4) Fair Market Value
(5) Person
(6) Property
(7) Transfer
(8) Initiating Officer
(9) Approving Authority
Ans.: Benami Property [Section 2(8)]: Benami property means any property which is the subject matter of a benami
transaction and also includes the proceeds from such property.
Benamidar [Section 2(10)]: Benamidar means a person or a fictitious person in whose name the benami property
is transferred or held and includes a person who lends his name.
Beneficial Owner [Section 2(12)]: Beneficial Owner means a person, whether his identity is known or not, for whose
benefit the benami property is held by a benamidar.
Fair Market Value [Section 2(16)]: Fair market value in relation to a property means -
(a) The price that the property would ordinarily fetch on sale in the open market on the date of the transaction;
and
(ib) Where the price is not ascertainable, such price as may be determined in prescribed manner.
Person [Section 2(23)]: Person shall include -
(a) An individual
(b) A Hindu undivided family
(c) A company
(d) A firm
(e) An association of persons or a body of individuals, whether incorporated or not
(f) Every artificial juridical person not falling in clauses (a) to (e).
Property [Section 2(26)]: Property means assets of any kind, whether movable or immovable, tangible or intangible,
corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or
interest in the property and where the property is capable of conversion into some other form, then the property
in the converted form and also includes the proceeds from the property.
Transfer [Section 2(29)]: Transfer includes sale, purchase or any other form of transfer of right, title, possession or
lien.
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Initiating Officer [Section 2(19)]: Initiating Officer means an Assistant or Deputy Commissioner as defined in Section
2(9A) and 2(19A) of the Income-tax Act, 1961.
Approving Authority [Section 2(20)]: Approving Authority means an Additional or Joint Commissioner as defined in
Section 2(1C) and (28C) of the Income-tax Act, 1961.
Question 4] Define the term 'Benami Transactions' under the Benami Transaction (Prohibition) Act, 1988. * 1
Ans.: Benami transactions is a transaction or arrangement whereby the identity of real owner (beneficial owner) of
the property is concealed by showing someone else (benamidar) as owner on records. The beneficial owner provides
or pays consideration for the purchase of property.
Benami Transaction [Section 2(9)]:
(1) Benami transactions is a transaction or an arrangement where a property is transferred to, or is held by, a person,
and the consideration for such property has been provided, or paid by, another person. Similarly, a transaction or
arrangement where the property is held by some other person for the immediate or future benefit, direct or
indirect, of the person who has provided the consideration is also benami transaction.
However, following transactions or arrangements does not amount to benami transaction:
(a) An HUF purchasing a property in the name of a Karta or any other member from known sources.
(b) A person holding the property in a fiduciary capacity, (e.g. trustee, executor, partner of a partnership firm,
director of a company, a depository participant etc.)
(c) An individual purchasing a property in the name of his spouse or any child provided the consideration is paid
out of the known sources.
(d) Any person purchasing property in the name of his brother or sister or lineal ascendant or descendant, where
he is one of the joint-owners, provided the consideration is paid out of the known sources.
(2) A transaction carried out in a fictitious name is a benami transaction.
(3) A transaction where the owner of the property is not aware of or denies knowledge of such ownership is a
benami transaction.
(4) A transaction where the person providing the consideration is not traceable or is fictitious, is a benami
transaction.
Possession of property in part performance of contract - not benami transaction: Benami transaction shall not
include any transaction involving the allowing of possession of any property to be taken or retained in part
performance of a contract referred to in Section 53A of the Transfer of Property Act, 1882, if under any law for the
time being in force -
(a) consideration for such property has been provided by the person to whom possession of property has been
allowed but the person who has granted possession thereof continues to hold ownership of such property;
(b) stamp duty on such transaction or arrangement has been paid; and
(c) the contract has been registered.
The Supreme Court in Bhim Singh v. Kan Singh AIR 1980 SC 727, explained Benami Transaction as “Where a person
buys a property with his own money but in the name of another person without any intention to benefit such other
person, the transaction is called benami. In that case the transferee holds the property for the benefit of the person
who has contributed the purchase money, and he is the real owner."
Question 5] Ramesh invested ` 1,00,000 in equity shares of some private companies in name of his wife Reshma
out of the savings made by him in last five years. However, such savings are not disclosed anywhere in his
accounts or income tax returns. Whether this transaction/arrangement amounts to benami property under the
Benami Transaction (Prohibition) Act, 1988?
or pays consideration for the purchase of property. However, if an individual purchases a property in the name of
his spouse or any child and the consideration is paid out of the known sources then it will not be a benami
transaction.
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As per facts given case, Ramesh invested ` 1,00,000 in equity shares of some private companies in name of his wife
Reshma out of the savings made by him in last 5 years which was not disclosed in his accounts or income tax returns
and hence investment is made from unknown source. It amounts to benami transaction.
Question 6] Mr. Satya, a non-resident Indian and resident of USA, gifts ` 50 lakhs to his brother who is resident in
India, who invest in mutual funds, equity shares of Indian listed companies in his own name as a single owner in
India, with intention to return the gift amount to his brother in USA in future. Whether this
transaction/arrangement amounts to benami property under the Benami Transaction (Prohibition) Act, 1988?
What will be your answer if mutual funds and equity shares are held in the joint name of NRI and his resident
brother?
Thus, if NRI transfers money to his resident brother who purchases shares or mutual funds in his name and had
intention to return the money in future then it amounts to benami transaction within the meaning of Section 2(9)
of the Benami Transaction (Prohibition) Act, 1988.
However if any person purchases property in the name of his brother or sister or lineal ascendant or descendant,
where he is one of the joint-owners then it is not a benami transaction provided the consideration is paid out of the
known sources. Thus, in second case, if the shares or mutual funds are held in the joint name of NRI and his resident
brother then it will not amount to benami transaction as the case will fall in exception provided by the Section 2(9).
Question 7] Ratnakar, a Karta of HUF, purchased gold for ` 2,00,000 in the name of her minor daughter on her
sixth birthday. This gold was purchased out of funds held in Axis Bank and details of this bank account are filed
with income tax authorities. Whether this transaction/arrangement amounts to benami property under the
Benami Transaction (Prohibition) Act, 1988?
or pays consideration for the purchase of property. However, an HUF purchases a property in the name of a Karta,
or any other member from known sources, it does not amount to benami transaction.
As per facts given in case, Ratnakar had purchased gold for his minor daughter out of the funds held in Axis Bank
details of which are available with income tax authorities and thus it is a investment out of known sources and the
transaction does not amount benami transaction.
Question 8] Raghav Pardeshi is in possession of some property which on paper is in the name of Neeraj Rathod.
On investigation it was found that Neeraj Rathod does not exist in reality. Further there are evidences which
show that amounts are transferred regularly from Rabhav Pardeshi's account to fake account of Neeraj Rathod.
Whether this transaction/arrangement amounts to benami property under the Benami Transaction (Prohibition)
Act, 1988?
Ans.: As per Section 2(9) of the Benami Transaction (Prohibition) Act, 1988, a transaction carried out in a fictitious
name is a benami transaction. As per facts given in case Neeraj Rathod is fictitious person and thus property in
possession of Raghav Pardeshi in the fictitious name of Neeraj Rathod is a benami transaction.
Question 9] Mr. X purchases a property in his own name for ` 25,50,000. Consideration of ` 5,50,000 paid by him
from the amount declared in his Income Tax Returns and ` 20,00,000 is paid in black not declared in his accounts
or ITR. Whether property held by Mr. X is benami property under the Benami Transaction (Prohibition) Act, 1988?
As per the facts given in case, property is registered in the name of Mr. X and he had paid consideration for acquiring
the property. Question of funding is from known source is irrelevant as property is not held in the name of some
other person and thus it not a benami property. However, appropriate action under the Income-tax Act, 1961 can
be taken against Mr. X as he has not declared his true income and for failure to disclose the sources of income from
which he purchased the property.
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Question 10] Mr. Nitinkumar Gupta is director of Hi-Fi Ltd. The company purchased some property in the name
Mr. Nitinkumar and paid the consideration for the property. State with reason whether this
transaction/arrangement amounts to benami transaction under the Benami Transaction (Prohibition) Act, 1988?
Ans.: As per exception provided by the Section 2(9) of the Benami Transaction (Prohibition) Act, 1988, when a
property is held by a person in a fiduciary capacity for the benefit of another person towards whom he stands in
such capacity, the transaction or arrangement will not be benami transaction. Thus, property held by trustee,
executor, partner of a partnership firm, director of a company, a depository participant, for the benefit of another
is not benami property as they are holding property in a fiduciary capacity.
Keeping in view above discussion, property purchased by the company in the name its director Mr. Nitinkumar
Gupta is not benami transaction as he holds the property in fiduciary capacity for the benefit the company.
PROHIBITION OF BENAMI TRANSACTION
Question 11] How benami transactions are prohibited under the Benami Transaction (Prohibition) Act, 1988?
What is the penalty for benami transactions under the Act?
Ans.: Prohibition of benami transactions [Section 3]: No person shall enter into any benami transaction. Whoever
enters into any benami transaction shall be punishable -
- with imprisonment up to 3 years or
- with fine or
- with both.
Where any person enters into any benami transaction on and after the date of commencement of the Benami
Transactions (Prohibition) Amendment Act, 2016, shall be punishable.
Property held benami liable to confiscation [Section 5]: Any property, which is subject matter of benami
transaction, shall be liable to be confiscated by the Central Government.
Penalty for benami transaction [Section 53]: Where any person enters into a benami transaction in order to defeat
the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial
owner, benamidar and any other person who abets or induces any person to enter into the benami transaction,
shall be guilty of the offence of benami transaction.
Whoever is found guilty of the offence of benami transaction shall be punishable -
- with rigorous imprisonment for a term which shall not be less than 1 year, but which may extend to 7 years
and
- with fine which may extend to 25% of the fair market value of the property.
Question 12] Can benami property held in the name of other person be recovered by the real owner?
Ans.: Prohibition of the right to recover property held benami [Section 4]: Person claiming to be real owner of the
benami property cannot file a suit or claim or take any action against the person in whose name such benami
property is held or against any other person.
No defense based on any right in respect of any property held benami shall be allowed in any suit, claim or action
by or on behalf of a person claiming to be the real owner of such property against the person in whose name the
property is held or against any other person.
Question 13] Write a short note on: Prohibition on re-transfer of property by benamidar
Ans.: Prohibition on re-transfer of property by benamidar [Section 6]: No person, being a benamidar shall re-
transfer the benami property held by him to the beneficial owner or any other person acting on his behalf.
Where any property is re-transferred in contravention of the above the transaction of such property shall be
deemed to be null and void.
Above provisions shall not apply to a transfer made in accordance with the provisions of section 190 of the Finance
Act, 2016.
ATTACHMENT, ADJUDICATION & CONFISCATION
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Question 14] Discuss the provisions relating to issue of notice and attachment of benami property under the
Benami Transaction (Prohibition) Act, 1988.
Ans.: Provisions relating to issue of notice and attachment of benami property are as follows:
Issue of notice to benamidar [Section 24(1)]: Where on the basis of material in possession the Initiating Officer has
reason to believe that any person is a benamidar in respect of a property, he may issue a notice to the person to
show cause why the property should not be treated as benami property.
Copy of notice to beneficial owner [Section 24(2)]: If notice specifies any property as being held by a benamidar
then copy of the notice shall also be issued to the beneficial owner if his identity is known.
Provisional attachment of property if benamidar tries to alienate property [Section 24(3)]: Where the Initiating
Officer is of the opinion that the person in possession of the benami property may alienate the property during the
period specified in the notice, he may by order in writing may attach the property provisionally for a period not
exceeding 90 days from the date of issue of notice. Initiating Officer can provisionally attach the property only with
the previous approval of the Approving Authority.
Procedure on provisional attachment [Section 24(4)]: The Initiating Officer, after making such inquires and calling
for such reports or evidence as he deems fit and taking into account all relevant materials, shall within a period of
90 days from the date of issue of notice -
(a) Where the provisional attachment has been made -
(i) pass an order continuing the provisional attachment with the prior approval of the Approving Authority, till
the passing of the order by the Adjudicating Authority; or
(ii) revoke the provisional attachment of the property with the prior approval of the Approving Authority;
(b) Where provisional attachment has not been made -
(i) pass an order provisionally attaching the property with the prior approval of the Approving Authority, till the
passing of the order by the Adjudicating Authority; or
(ii) decide not to attach the property as specified in the notice, with the prior approval of the Approving
Authority.
Reference of case to Adjudicating Authority [Section 24(5)]: Where the Initiating Officer passes an order continuing
the provisional attachment of the property, he shall, within 15 days from the date of the attachment, draw up a
statement of the case and refer it to the Adjudicating Authority.
Question 15] Discuss the provisions relating to serving notice under the Benami Transaction (Prohibition) Act,
1988.
Ans.: Manner of service of notice [Section 25]: A notice u/s 24(1) may be served on the person named therein
either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908. Any notice
referred to above may be addressed as stated below:
Type of person Notice may be addressed -
In case of an individual To such individual
In the case of a firm To the managing partner or the manager of the firm
In the case of HUF To Karta or any member of family
In the case of a company To the principal officer of the company
In the case of AOP or BOI To the principal officer or any member of such AOP or BOI
In the case of any other person To the person who manages or controls his affairs
Ans.: Provisions relating to adjudication of benami property are given below:
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Notice by Adjudicating Authority to furnish documents, evidence etc. [Section 26(1)]: On receipt of a reference
u/s 24(5), the Adjudicating Authority shall issue notice, to furnish such documents, particulars or evidence as is
considered necessary on a date to be specified therein. Such notice has to be served on following persons:
(a) Benamidar,
(b) Beneficial owner,
(c) Any interested party, including a banking company,
(d) Any person who has made a claim in respect of the property.
The Adjudicating Authority shall issue notice within a period of 30 days from the date on which a reference has
been received.
Serving of notice where benami property is held jointly [Section 26(2)]: The notice should specify that person to
whom the notice is served is required to give necessary information within 30 days from the date of notice.
Where the property is held jointly by more than one person, the Adjudicating Authority shall make all endeavours
to serve notice to all persons holding the property.
Such notice can be send to any one of the joint holder and it is not required to send the notice to all joint holders.
Orders by Adjudicating Authority [Section 26(3)]:
(1) Adjudicating Authority may by passing an order hold the property not to be a benami property and revoke
the attachment order.
(2) Adjudicating Authority may by passing an order hold the property to be a benami property and confirm the
attachment order.
Before passing any of the above order the Adjudicating Authority is required to adopt the following procedure -
(a) He should consider the reply of notice issued u/s 25(1);
(b) He may conduct inquiries and may call such reports or evidence as he deems fit.
(c) He should take in to account all relevant materials relating to the case.
(d) He should provide an opportunity of being heard to benamidar, the Initiating Officer, and any other person who
claims to be the owner of the property.
Procedure to be adopted by Adjudicating Authority when only some part of the property is benami property
[Section 26(4)]: Where the Adjudicating Authority is satisfied that some part of the properties in respect of which
reference has been made to him is benami property, but is not able to specifically identify such part, he shall record
a finding to the best of his judgment as to which part of the properties is held benami.
Power of Adjudicating Authority to attach other property even though no reference has been made by Initiating
Officer [Section 26(5)]: If during the course of proceedings, the Adjudicating Authority finds that some other
property is also benami property but for such other property no reference has been made by the Initiating Officer
then he can provisionally attach such other benami property even though no reference has been made by the
Initiating Officer.
Power of Adjudicating Authority to remove a name or add the name of any person in relation case before him
[Section 26(6)]: The Adjudicating Authority may, at any stage of the proceedings, either on
the application of any party, or suo motu, strike out the name of any party improperly joined or add the name of
any person whose presence before the Adjudicating Authority may be necessary to enable him to adjudicate upon
and settle all the questions involved in the reference.
Time limit for passing order [Section 26(7)]: No order shall be passed after the expiry of 1 year from the end of the
month in which the reference was received by the Adjudicating Authority.
Appearance before Adjudicating Authority [Section 26(8)]: The benamidar or any other person who claims to be
the owner of the property may either appear in person or take the assistance of an authorized representative of his
choice to present his case.
Explanation: Following persons may appear as Authorized representative —
(1) A person related to the benamidar.
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(2) A person regularly employed by the benamidar.
(3) Officer of a scheduled bank with which the benamidar maintains an account.
(4) Legal practitioner.
(5) A person who has passed any accountancy examination recognized by the CBDT.
(6) A person who has acquired prescribed educational qualifications as may be specified by the CBDT.
Question 17] What are the provisions of the Benami Transaction (Prohibition) Act, 1988 regarding confiscation of
benami property?
Ans.: Confiscation and vesting of benami property [Section 27]:
(1) Where an order is passed in respect of any property holding it as a benami property, the Adjudicating
Authority shall make an order confiscating such benami property. However, opportunity of being heard to must be
given before passing the order of confiscation.
(2) If an appeal has been filed against the order of the Adjudicating Authority, the confiscation of property shall
be made subject to the order passed by the Appellate Tribunal.
(3) Nothing contained in this section shall apply to a property held or acquired by a person from the benamidar
for adequate consideration, prior to the issue of notice u/s 24(1) without his having knowledge of the benami
transaction. (Thus if some third person acquires the property from benamidar before issue of notice by adjudication
officer and such innocent third person acquires the property in good faith then such property cannot be confiscated)
(4) Where an order of confiscation has been made, all the rights and title in such property shall vest absolutely
in the Central Government free of all encumbrances. Further no compensation shall be payable in respect of such
confiscation.
(5) Any right of any third person created in such property with a view to defeat the purposes of the Act shall be
null and void.
(6) Where no order of confiscation is made upon the proceedings under the Act attaining finality, no claim shall
lie against the Government.
Question 18] Write a short note on: Management & Possession of confiscated benami properties * 1 2
Ans.: Management of properties confiscated [Section 28]:
(1) The Administrator shall have the power to receive and manage the property, in relation to which an order
of confiscation has been made. Administrator can manage the confiscated property in prescribed manner.
(2) The Central Government may notify as many of its officers as it thinks fit to perform the functions of
Administrators by issuing order in the Official Gazette.
(3) The Administrator shall also take such measures to dispose of the property which is vested in the Central
Government, in such manner and subject to such conditions as may be prescribed.
Possession of the property [Section 29]:
(1) Where an order of confiscation in respect of benami property has been made, the Administrator shall
proceed to take the possession of the property.
(2) The Administrator shall by notice in writing, order within 7 days of the date of the service of notice to any
person, who may be in possession of the benami property, to surrender or deliver possession to the Administrator
or to other person duly authorized by him.
If the administrator is of the opinion that the person to whom the notice has been sent will not comply with his
order, he may take the possession of the property forcefully and for this purpose he can take the help for police
officer.
APPELLATE TRIBUNAL, SPECIAL COURTS & OFFENCES
Question 19] Write a short note on: Appellate Tribunal under the Benami Transaction (Prohibition) Act, 1988
Ans.: Establishment of Appellate Tribunal [Section 30]: The Central Government has been given power to establish
an Appellate Tribunal to hear appeals against the orders of the Adjudicating Authority under the Act.
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Procedure before Appellate Tribunal [Section 40(1)]: The Appellate Tribunal shall not be bound by the procedure
laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject
to the other provisions of the Act, the Appellate Tribunal shall have powers to regulate its own procedure.
Power of Civil Court [Section 40(2)]: The Appellate Tribunal shall have the same powers as are vested in Civil Court
under the Code of Civil Procedure, 1908 while trying a suit for the purposes of discharging its functions under the
Act which includes -
(a) Summoning and enforcing the attendance of any person and examining him on oath.
(b) Requiring the discovery and production of documents.
(c) Receiving evidence on affidavits.
(d) Requisitioning any public record or document or copy of such record or document from any office.
(e) Issuing commissions for the examination of witnesses or documents.
(f) Reviewing its decisions.
(g) Dismissing a representation for default or deciding it ex parte.
(h) Setting aside any order of dismissal of any representation for default or any order passed by it ex parte.
Execution of order of Appellate Tribunal [Section 40(3) & (4)]: An order made by the Appellate Tribunal shall be
executable by it as a decree of Civil Court and for this purpose, the Appellate Tribunal shall have all the powers of
Civil Court.
The Appellate Tribunal may transmit any order made by it to Civil Court having jurisdiction and the Civil Court shall
execute the order as if it were a decree made by that Court.
Proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings [Section 40(5)]:
All proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of
Sections 193 & 228 of the Indian Penal Code, 1860 and the Appellate Tribunal shall be deemed to be Civil Court for
the purposes of Sections 345 & 346 of the Code of Criminal Procedure, 1973.
Ans.: Appeals to Appellate Tribunal [Section 46]:
(1) Any person, including the Initiating Officer, aggrieved by an order of the Adjudicating Authority may prefer
an appeal to the Appellate Tribunal within a period of 45 days from the date of the order.
(2) The Appellate Tribunal may entertain any appeal after 45 days if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal in time.
(3) On receipt of an appeal, the Appellate Tribunal may pass such orders thereon as it thinks fit after giving the
parties to the appeal an opportunity of being heard.
(4) The Appellate Tribunal, as far as possible, may hear and finally decide the appeal within a period of 1 year
from the last date of the month in which the appeal is filed.
Question 21] An order of attachment of benami property was passed against the Amrish by the Adjudicating
Authority. Aggrieved by the order of Adjudicating Authority, Amrish wants to file an appeal. Advise Amrish about
the course of action against the order of the Adjudicating Authority under the Benami Transaction (Prohibition)
Act, 1988.
Ans.: As per Section 45 of the Benami Transaction (Prohibition) Act, 1988, any person aggrieved by an order of the
Adjudicating Authority may prefer an appeal to the Appellate Tribunal within a period of 45 days from the date of
the order. The Appellate Tribunal may entertain any appeal after 45 days if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal in time.
Such appeal shall be made in prescribed form along with prescribed fee.
Thus, Amrish is advised to file an appeal to Appellate Tribunal within a period of 45 days from the date of order of
the Adjudicating Authority.
Question 22] State the provisions relating to filing of appeal in High Court under the Benami Transaction
(Prohibition) Act, 1988.
Ans.: Appeal to High Court [Section 49]:
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(1) Any party aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court
within a period of 60 days from the date of communication of the decision or order of the Appellate Tribunal to him
on any question of law arising out of such order.
(2) The High Court may entertain any appeal after the period of 60 days if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within the specified period.
(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate
that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of
the appeal, be allowed to argue that the case does not involve such question.
(5) The High Court shall decide the question of law so formulated and deliver the judgment thereon containing
the grounds on which any decision is founded and may award any cost as it deems fit.
Question 23] Write a short note on: Special Courts under the Benami Transaction (Prohibition) Act, 1988 * 1
Ans.: Special Courts [Section 50]:
(1) The Central Government in consultation with the Chief Justice of the High Court has been given power to
establish Special Courts for trial of an offence punishable under the Act. Such Special
Court can be established by issuing notification. Different Special Courts can be established for different area.
(2) The Special Court shall have power to try an offence with which the accused may be charged under the Code
of Criminal Procedure, 1973 along with offence under the Act.
(3) The Special Court shall not take cognizance of any offence punishable under the Act except upon a complaint
in writing made by -
(a) Various authorities under the Act (i.e. Initiating Officer, Approving Authority, Administrator and Adjudicating
Authority) or
(b) Any officer of the Central or State Government authorized in writing by a general or special order by that
Government.
(4) Every trial shall be conducted as expeditiously as possible and every endeavour shall be made by the Special
Court to conclude the trial within 6 months from the date of filing of the complaint.
Question 24] Discuss briefly penalty for various offences under the Benami Transaction (Prohibition) Act, 1988.
Ans.: Penalty for benami transaction [Section 53]: Where any person enters into a benami transaction in order to
defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the
beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami
transaction, shall be guilty of the offence of benami transaction.
Whoever is found guilty of the offence of benami transaction shall be punishable -
- with rigorous imprisonment for a term which shall not be less than 1 year, but which may extend to 7 years
and
- with fine which may extend to 25% of the Fair Market Value of the property.
Penalty for false information [Section 54]: Any person who is required to furnish information under the Act
knowingly gives false information to any authority or furnishes any false document in any proceeding under the Act,
shall be punishable -
- With rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 5
years and
- With fine which may extend to 10% of the Fair Market Value of the property.
Previous sanction [Section 55]: No prosecution shall be instituted against any person in respect of any offence
under section 3, 53 or 54 without the previous sanction of the CBDT.
Question 25] Discuss briefly provisions relating to offence by companies under the Benami Transaction
(Prohibition) Act, 1988.
Ans.: Offences by companies [Section 62]: Where a person committing contravention of any of the
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provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the
time the contravention was committed, was in charge of, and was responsible to, the company, for the conduct of
the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be
A person shall not be liable to punishment if he proves that the contravention took place without his knowledge.
Where a contravention of any of the provisions of the Act or of any rule, direction or order made thereunder has
been committed by a company and it is proved that the contravention has taken place with the consent or
connivance of, or is attributable to any neglect on the part of any director, manager, secretary or other officer of
the company, the director, manager, secretary or other officer shall also be deemed to be guilty of the contravention
and shall be liable to be proceeded against and punished accordingly.
(a) Company means a body corporate, and includes a firm and an association of persons or a body of individuals
whether incorporated or not.
(b) Director in relation to -
(i) Firm, means a partner in the Firm.
(ii) Any association of persons or a body of individuals, means any member controlling the affairs thereof.
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18
CHAPTER
PREUENTION OF MONEY LAUNDERING ACT, 2002
INTRODUCTION! Money created by crimes when converted in to white money it is known as money laundering.
The main objectives of the Prevention of Money Laundering Act, 2002 is to prevent money laundering as well as to
provide for confiscation of property either derived from or involved in, money-laundering.
INTRODUCTION
Question 1] What is money laundering? CS (Inter) - Dec 2004 (3 Marks), June 2006 (3 Marks)
Ans.: Money and crime are related to each other. Crimes are done because lot of money involved in it. Money
created by crimes when converted into white money it is known as money laundering. In simple words, money
laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds.
Those who commit the underlying criminal activity may attempt to launder the money themselves, but increasingly
a new class of criminals provides laundering services to Organized Crime.
Criminals want their illegal funds laundered because they can then move their money through society freely,
without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from
being confiscated by the police.
A classic example of money laundering is the case of M/ s Chinubhai Patel & Co. Information received by the
Directorate of Revenue Intelligence (DRI) indicated that the South Indian Bank Ltd., Nariman Point Branch, Mumbai
was involved in a massive money laundering operation.
One of the accounts was in the name of M/s Chinubhai Patel & Co. said to be existing at 27, Vaishali Shopping
Center, JVPD, Bombay - 49, with the South Indian Bank Ltd., Nariman Point Branch, Bombay. Enquiries conducted
revealed that the account was opened in February 1994 and the party was introduced by the Bank Manager Mr.
Kasturi Rangan.
The Bank Manager did not follow the instructions of the Reserve Bank of India (RBI), and the account was opened
without obtaining the photograph of the account holder. Verification of the address revealed that the firm M/s
Chinubhai Patel & Co., did not exist at that address. This account was utilized for remittance of $12 million to Hong
Kong in favour of M/s R. P. Imports and Exports, Hong Kong. The remittances were made on the basis of fraudulent
documents.
It was further discovered that four more fictitious accounts were created with tire same bank. Through these
accounts a total amount of US $ 80 million, was transferred from India to Hong Kong.
Investigations conducted so far by the Directorate of Revenue Intelligence have revealed that certain persons,
including Rajesh Mehta and Prakash, had opened bank accounts solely for the purpose of depositing cash and then
transferring the said funds in foreign exchange to countries like Hong Kong, Singapore and Dubai.
Question 2] Discuss in brief the objectives and scope of the Money Laundering Act, 2002.
Ans.: The Money Laundering Act, 2002 seeks to combat money laundering in India. Various objectives of the Act are
as follows:
♦ To prevent and control money laundering
♦ To confiscate and seize the property derived from, or involved in, money-laundering.
♦ To provide punishment for offence of money-laundering.
♦ To appoint the Adjudicating Authority and Appellate Tribunal to deal the matter connected with money
laundering.
♦ To put obligations on banking companies, financial institutions and intermediaries to maintain records.
♦ To deal with any other issue connected with money laundering in India.
Scope: The Money Laundering Act, 2002 extends to the whole of India.
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Question 3] Write a short note on: Process of money laundering
CS (Executive) - Dec 2013 (3 Marks), Dec 2016 (3 Marks) * 1
Ans.: Money laundering is commonly defined as happening in three steps: the first step involves introducing cash
into the financial system by some means (placement); the second involves carrying out complex financial
transactions to camouflage the illegal source (layering); and the final step entails acquiring wealth generated from
the transactions of the illicit funds (integration).
(1) The Placement Stage: The placement stage represents the initial entry of the "dirty" cash or proceeds of
crime into the financial system. Generally, this stage serves two purposes: (a) it relieves the criminal of holding and
guarding large amounts of bulky of cash; and (b) it places the money into the legitimate financial system. It is during
the placement stage that money launderers are the most vulnerable to being caught. This is due to the fact that
placing large amounts of money into the legitimate financial system may raise suspicions of officials.
(2) The Layering Stage: The layering stage is the most complex and often entails the international movement of
the funds. The primary purpose of this stage is to separate the illicit money from its source. This is done by the
sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.
During this stage, for example, the money launderers may begin by moving funds electronically from one country
to another, then divide them into investments placed in advanced financial options or overseas markets; constantly
moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage
of delays in judicial or police cooperation.
(3) The Integration Stage: In final stage, the money is returned to the criminal from what seem to be legitimate
sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal
proceeds are now fully integrated into the financial system and can be used for any purpose.
There are many different ways in which the laundered money can be integrated back with the criminal; however,
the major objective at this stage is to reunite the money in a manner that does not draw attention
and appears to result from a legitimate source. For example, the purchases of property, art work, jewellery, or high-
end automobiles are common ways for the launderer to enjoy their illegal profits.
Question 4] "The problem of money laundering is no longer restricted to the geo-political boundaries of any
country. It is a menace that cannot be contained by any nation alone." Discuss this statement in the context of
impact of money laundering on development, various global initiatives on the prevention of money laundering
and the enactment of the Prevention of Money Laundering Act, 2002.
Define the term 'money laundering'. How does it impact the development of a growing economy?
Ans.: Impact of money laundering on development is given below:
(1) Increased Crime & Corruption: Successful money laundering helps to make criminal activities profitable. If
money laundering is prevalent in a country, it generates more crime and corruption. It also enhances the use of
bribery.
(2) Damaged reputation and international consequences: A reputation as a money laundering or terrorist
financing haven could cause significant adverse consequences for development in a country. Foreign financial
institutions (FII) may decide to limit their transactions with institutions from money laundering havens. Even
legitimate businesses and enterprises from money laundering havens may suffer from reduced access to world
markets or access at a higher cost due to extra scrutiny of their ownership, organization and control systems.
(3) Weakened Financial Institutions: Money laundering and terrorist financing can harm the soundness of a
country's financial sector, as well as the stability of individual financial institutions in multiple ways.
(4) Compromised economy and private sector: Money launderers are known to use "front companies,"
i.e., business enterprises that appear legitimate and engage in legitimate business but are, in fact, controlled by
criminals.
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These front companies co-mingle the illicit funds with legitimate funds in order to hide the ill-gotten proceeds. Front
companies access to illicit funds, allows them to subsidize the front company's products and services, even at below-
market prices. As a consequence, legitimate enterprises find it difficult to compete with such front companies, the
sole purpose of which is to preserve and protect the illicit funds, not to produce a profit.
This increases the potential for monetary and economic instability due to the misallocation of resources from
artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxation, thus depriving the
country of revenue.
(5) Damaged privatization efforts: Money launderers threaten the efforts of many countries to reform their
economies through privatization. These criminal organizations are capable of outbidding legitimate purchasers of
former state-owned enterprises. When illicit proceeds are invested in this manner, criminals increase their potential
for more criminal activities and corruption, as well as deprive the country of what should be a legitimate, market-
based, taxpaying enterprise.
Question 5] Write a note on: Global initiatives in the prevention of money laundering
Ans.: Since money laundering is an international phenomenon, transnational co-operation is of critical importance
in the fight against this menace. A number of initiatives have been taken to deal with the problem at international
level which are given below:
♦ The UN or the Bank for International Settlements, took some initiatives in 1980's to address the problem of
money laundering.
♦ With the creation of the Financial Action Task Force (FATF) in 1989, regional groupings, such as the European
Union, Council of Europe, and organization of American States also established anti-money laundering standards
for their member countries.
♦ The major international agreements addressing money laundering include the UN Convention against Illicit
Trafficking in Drugs and Psychotropic Substances (the Vienna Convention) and Council of Europe Convention on
Laundering, Search, Seizure and Confiscation of the Proceeds of Crime.
♦ The role of financial institutions in preventing and detecting money laundering has also been the subject of
pronouncements by the Basle Committee on Banking Regulation Supervisory Practices, the European Union and the
International Organization of Securities Commissions.
UN global programme against money laundering: Office of the Drug Control and Crime Prevention implement this
programme against Money Laundering with a view to increase the effectiveness of international action against
money laundering through comprehensive technical cooperation services offered to Governments. The programme
encompasses following three areas of activities, providing various means to states and institutions in their efforts
to effectively combat money laundering:
- Technical co-operation is the main task of the programme. It encompasses activities of creating awareness,
institution building and training.
- The research and analysis aims at offering States Key Information to better understand the phenomenon of
money laundering and to enable the international community to devise more efficient and effective
countermeasure strategies.
- The commitment to support the establishment of financial investigation services for raising the overall
effectiveness of law enforcement measures.
The implementation of the global programme against money laundering is carried out in the spirit of co-operation
with other international, regional and national organizations and institutions.
Question 6] Write a short note on: Financial Action Task Force (FATF)
Discuss the objectives and functions of the Financial Action Task Force (FATF).
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Ans.: The Financial Action Task Force is an intergovernmental organization founded in 1989 on the initiative of the
G7 countries to develop policies to combat money laundering.
In 2001 the purpose expanded to act on terrorism financing. It monitors countries' progress in implementing the
FATF Recommendations by 'peer reviews' of member countries. The FATF Secretariat is housed at the headquarters
of the OECD in Paris.
The main tasks of the FATF are:
♦ Monitoring members' progress in applying measures to counter money laundering.
♦ Reviewing money laundering techniques and countermeasures.
♦ Promoting the adoption and implementation of appropriate measures by non-member countries.
The FATF's primary policies issued are the 40 recommendations on money laundering from 1990 and the 9 Special
Recommendations on Terrorism Financing.
It also set the international standard for anti-money laundering measures and combating the financing of terrorism
and terrorist acts. They set out the principles for action and allow countries a measure of flexibility in implementing
these principles according to their particular circumstances and constitutional frameworks. Both sets of FATF
Recommendations are intended to be implemented at the national level through legislation and other legally
binding measures.
Question 7] Write a short note on: Prevention of money laundering - Indian initiatives
Ans.: In view of an urgent need for the enactment of a comprehensive legislation for preventing moneylaundering
and connected activities, confiscation of proceeds of crime, setting up of agencies and mechanisms for coordinating
measures for combating money laundering etc.
The Prevention of Money Laundering Bill was introduced in the Parliament in year 1998. The Bill was referred to the
Standing Committee on Finance, which presented its report in year 1999 to Lok Sabha.
After incorporating the recommendations of the Standing Committee, the Government introduced the Prevention
of Money Laundering Bill, 1999 in the Parliament. The Bill received the assent of the President and became
Prevention of Money Laundering Act, 2002. The Act has come in force with effect from July 1, 2005.
OFFENCE OF MONEY LAUNDERING
Question 8] What do you understand by "offence of money laundering" under the Prevention of Money
Laundering Act, 2002? Also state the punishment for money laundering offence.
Ans.: Offence of money laundering [Section 3]: Whosoever directly or indirectly attempts to indulge or knowingly
assists or knowingly is a party or is actually involved in any process or activity connected proceeds of crime including
its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of
offence of money-laundering.
Punishment for money laundering [Section 4]: Whoever commits the offence of money laundering shall be
punishable with rigorous imprisonment for 3 years which may extend to 7 years and shall also be liable to fine.
Where the proceeds of crime involved in money-laundering relates to offence specified under Paragraph 2 of Part
A of the Schedule, then imprisonment may extend to 10 years instead of 7 years.
ATTACHMENT, ADJUDICATION & CONFISCATION
Question 9] How the property involved in money laundering is dealt with under the Prevention of Money
Laundering Act, 2002? CS (Executive) - Dec 2010 (5 Marks)
How the attachment of property is executed under the Prevention of Money Laundering Act, 2002?
Ans.: Attachment of property involved in money-laundering [Section 5]: Director, Joint Director or Deputy Director
can provisionally attach property up to 180 days, if he has reasons to believe that such person is in possession of
proceeds of crime, he is charged with that crime and proceeds of money are likely to be concealed or transferred.
Such attachment is executed in the manner provided in the Second Schedule of the Income-tax Act, 1961.
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The reasons to believe should be recorded in writing. The reason should be sent in sealed cover to adjudicating
authority along with copy of attachment order.
After attachment, a complaint will be filed with adjudicating authority within 30 days.
Question 10] Write a short note on: Adjudicating Authorities under the Prevention of Money Laundering Act,
2002
Ans.: Adjudicating Authorities [Section 6]: The Central Governmenthas a power to appoint an Adjudicating
Authority to exercise jurisdiction, powers and authority under the Act.
An Adjudicating Authority shall consist of a Chairperson and two other members. Out of the two members, one
member shall be a person having experience in the field of law, administration, finance or accountancy.
The Adjudicating Authority shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but
shall be guided by the principles of natural justice. The Adjudicating Authority shall have powers to regulate its own
procedure.
Question 11] Write a short note on: 'Adjudication' under the Prevention of Money Laundering Act, 2002
Ans.: Adjudication [Section 8]: On receipt of a complaint under Section 5(5), or applications made under section
17(4) or Section 18(10), if the Adjudicating Authority has reason to believe that any person has committed an
offence u/s 3 or is in possession of proceeds of crime, a notice of not less than 30 days will be served calling him to
indicate the sources of his income, earning or assets and to show cause why the property should not be confiscated.
After hearing the Adjudicating Authority will record it findings whether all or any of the properties are involved in
money-laundering or not.
Where the Adjudicating Authority decides that any property is involved in money laundering, he shall, by an order
in writing, confirm the attachment of the property or if already attached it will continue till order of trial court
becomes final.
If the person is found guilty finally by the Court, the attached property will vest absolutely with Central Government.
Question 12] Mention the provision of the Prevention of Money Laundering Act, 2002 relating to 'Vesting of
property in Central Government'.
Ans.: Vesting of property in Central Government [Section 9]: Where an order of confiscation has been made in
respect of any property, all the rights and title in such property shall vest absolutely in the Central Government free
from all encumbrances.
If the Special Court or the Adjudicating Authority finds that any encumbrance on the property or lease-hold interest
has been created with a view to defeat the provisions of the Act, it may declare such encumbrances or lease-hold
interest to be void. On declaration of void, all property shall vest in the Central Government free from such
encumbrances or lease-hold interest.
OBLIGATION OF BANKING COMPANIES, FINANCIAL INSTITUTIONS & INTERMEDIARIES
Question 13] Mention the provisions of the Prevention of Money Laundering Act, 2002 regarding the obligations
of banking companies, financial institutions and intermediaries.
CS (Inter) - Dec 2007 (5 Marks) CS (Executive) - Dec 2011 (5 Marks), June 2016 (5 Marks)
What information is required to be preserved by the banks under the Prevention of Money Laundering Act, 2002?
Discuss also the process of maintenance and preservation of records by banks?
Ans.: Reporting entity to maintain records [Section 12]: The bank, financial institutions and intermediary has
obligations-
- To maintain records of all transactions and value as prescribed, whether such transactions comprise of a
single transactions or a series of transactions internally connected to each other when such series take place within
a month.
- To inform the director within prescribed time.
- To verify the identity of its clients in prescribed manner.
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- To maintain record of documents evidencing identity of its clients and beneficial owners as well as account
files and business correspondence relating to its clients.
Every information maintained, furnished or verified as above shall be kept confidential.
The records mentioned above shall be maintained for 5 years from the date of transaction.
The Central Government has a power to exempt any reporting entity from the provisions of this section.
Powers of Director to impose fine [Section 13]: Director can call the records from the bank, financial institutions
and intermediary. If the Director finds that the bank, financial institutions and intermediary has not complied with
the provisions of Section 12, he can impose fine of ` 10,000 to ` 1,00,000.
If the bank, financial institutions and intermediary supplies the information, no civil proceedings can be taken
against them for furnishing information to Authority. [Section 14]
Procedure and manner of furnishing information by reporting entities [Section 15]: The Central Government in
consultation with the RBI may prescribe the procedure and the manner of maintaining and furnishing information
by a reporting entity for the purpose of implementing the provisions of the Act.
SUMMONS, SEARCHES & SEIZURES
Question 14] State the provisions relating to summon, searches and seizures under the Prevention of Money
Laundering Act, 2002?
Ans.: Power of survey [Section 16]: An authority has power to enter any place on having reason to believe that an
offence u/s 3 has been committed. Such authority can place marks of identification on the records inspected by him
and make or cause to be made extracts or copies, make an inventory of any property checked or verified by him
and record the statement of any person present in the place which may be useful for any proceedings under the
Act.
Search & Seizure [Section 17]: Director, Joint Director or Deputy Director may authorize any officer subordinate to
them:
(a) To enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such
records or proceeds of crime are kept.
(b) To break and open the lock of any door, box, locker, safe, almirah where the keys are not available.
(c) To seize any record or property found as a result of such search.
(d) To place marks of identification on record or property or make extracts or copies.
(e) To make a note or an inventory of record or property.
(f) To examine on oath any person, who is found to be in possession or control of any record or property, in
respect of all matters relevant to investigation.
In case of scheduled offence search shall be conducted only when a report has been forwarded to a Magistrate or
a complaint has been filed by a person authorized to investigate scheduled offence before a Magistrate.
Where it is not practicable to seize record or property, the authorized officer under may make an order to freeze
such property.
Immediately after search and seizure or upon issuance of a freezing order, the authority shall forward a copy of the
reasons so recorded along with material in his possession to the Adjudicating Authority in a sealed envelope in the
prescribed manner.
Search of persons [Section 18]: Authorized authority may search person and seize record or property which may
be useful for or relevant to any proceedings under this Act.
Power to arrest [Section 19]: The Director, Deputy Director, Assistant Director, or any authorized officer may arrest
such person and inform him of the grounds for such arrest.
Immediately after arrest of person, information will be provided to the Adjudicating Authority, in a sealed envelope.
Every person arrested shall be taken before the Magistrate within 24 hours.
Question 15] State the provisions relating to 'retention of property' under the Prevention of Money Laundering
Act, 2002?
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Ans.: Retention of property [Section 20]: Where any property has been seized during the search be retained or if
frozen, may continue to remain frozen, for a period not exceeding 180 days from date of seizure or frozen as the
case may be.
Immediately after passing an order for retention or continuation of freezing of the property, the officer authorized
by the Director shall forward a copy of the order along with the material in his possession to the Adjudicating
Authority in a sealed envelope in the prescribed manner.
On the expiry of period of 180 days, the property shall be returned to the person from whom such property was
seized or whose property was ordered to be frozen.
The Adjudicating Authority may retain or allow to continue to freeze property beyond 180 days if he is satisfied that
property is prima facie involved in money-laundering.
After passing the order of confiscation, the Court or the Adjudicating Authority shall direct the release of.all property
other than the property involved in money-laundering.
Question 16] State the provisions relating to 'retention of records' under the Prevention of Money Laundering
Act, 2002?
Ans.: Retention of records [Section 21]: Where any records have been seized or frozen, the investigating officer
may continue to seize or may allow continue to remain frozen records for period of 180 days if he has reason to
believe that any of such records are required to be retained for any inquiry under the Act. However, copies of
records can be obtained on request.
On the expiry of 180 days, the records shall be returned to the person from whom such records were seized or
whose records were ordered to be frozen.
After passing of an order of confiscation, the Adjudicating Authority shall direct the release of the records to the
person from whom such records were seized.
Where an order releasing the records has been made, the Director or authorized officer may withhold the release
of records for a period of 90 days from the date of order, if he is of the opinion that such record is relevant for
making appeal.
Question 17] State whether offence punishable under the Prevention of Money Laundering Act, 2002 are bailable
or non-bailable? What is role of Public Prosecutor? When Special Court can take cognizance of any offence
punishable under the Act?
Is the offence committed under the Prevention of Money Laundering Act, 2002 cognizable and bailable? State
the law and procedure relating to it. CS (Executive) - Dec 2017 (5 Marks)
Ans.: Offences to be cognizable and non-bailable [Section 45]: Every offence punishable under the Act to be
cognizable.
A person accused of an offence punishable for a term of imprisonment of more than 3 years shall not be released
on bail or on bond unless the Public Prosecutor has been given an opportunity to oppose the application for such
release.
If the Public Prosecutor opposes the application then bail can be granted only when Court is satisfied that there are
reasonable grounds for believing that he is not guilty of offence and that he is not likely to commit any offence while
in bail.
The Special Court shall not take cognizance of any offence punishable u/s 4, except upon a complaint in writing
made by the Director or any officer of the Central or State Government authorized by a general or special order.
No police officer shall investigate into an offence under the Act, unless specifically authorized, by the Central
Government by a general or special order.
KNOW YOUR CUSTOMER
Question 18] Write a short on: Know Your Customer Guidelines
What is the objective of 'know your customer' (KYC) guidelines? When do the KYC guidelines apply?
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Ans.: In terms of the guidelines issued by the RBI on 29th November, 2004 on Know Your Customer (KYC) Standards/
Anti Money Laundering Measures, all banks are required to put in place a comprehensive policy framework covering
KYC Standards and AML Measures. RBI introduced KYC guidelines for all banks.
KYC enables banks to know/understand their customers and their financial dealings to be able to serve them better
and manage its risks prudently.
Objective of KYC Guidelines: The objective of KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to
know/understand their customers and their financial dealings better which in turn help them manage their risks
prudently. Banks should frame their KYC policies incorporating the following four key elements:
- Customer Acceptance Policy
- Customer Identification Procedures
- Monitoring of Transactions and
- Risk management
Meaning of Customer: For the purpose of KYC policy, a 'Customer' may be defined as:
- A person or entity that maintains an account with the bank
- The beneficial owner
- Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, CA, Solicitors
etc. and
- Any person or entity connected with a financial transaction which can pose significant reputational or other
risks to the bank.
Need for KYC: KYC is done to establish the identity of the client. This means identifying the customer and verifying
his/her identity by using reliable, independent source documents, data or information. For individuals, banks are
required to obtain identification data to verify the identity of the customer, his address/location and also his recent
photograph. This is to be done for the joint holders and mandate holders as well.
For non-individuals, banks need to obtain identification data to:
- Verify the legal status of the legal person/entity
- Verify identity of the authorized signatories and
- Verify identity of the Beneficial owners/controllers of the account
Thus KYC is done to ensure that sufficient information is obtained on the nature of employment/ business that the
customer does/expects to undertake and the purpose of opening the account with bank.
When does KYC apply?: KYC is carried out at the following stages:
- Opening a new account
- Opening a subsequent account where documents as per current KYC standards not been submitted while
opening the initial account.
- Opening a Locker Facility where these documents are not available with the bank for availing the Locker
facility holders.
- When the bank feels it necessary to obtain additional information from existing customers based on conduct
of the account.
- When there are changes to signatories, mandate holders, beneficial owners etc.
KYC is also carried out in respect of non-account holders approaching the bank for high value one-off transactions.
Question 19] State the obligation of banks on KYC policy as per the guideline issued by the Reserve Bank of India.
Ans.: In The objective of Know Your Customer (KYC) Norms/ Anti-Money Laundering (AML) Measures/ Combating
of Financing of Terrorism (CFT) guidelines is to prevent banks from being used, intentionally or unintentionally, by
criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to
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know/understand their customers and their financial dealings better which in turn help them manage their risks
prudently.
Obligation of Banks:
♦ Banks should keep in mind that the information collected from the customer for the purpose of opening of
account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like
purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the perceived
risk, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information from the
customer should be sought separately with his/her consent and after opening the account.
♦ Banks should ensure that any remittance of funds by way of demand draft, mail/ telegraphic transfer or any
other mode and issue of travellers cheques for value of ` 50,000 and above is effected by debit to the customer's
account or against cheques and not against cash payment.
♦ Banks should ensure that the provisions of Foreign Contribution (Regulation) Act, 1976 as amended from
time to time, wherever applicable are strictly adhered to.
Question 20] What are the provisions for freezing of assets under Section 51A of the Unlawful Activities
(Prevention) Act, 1967? Briefly discuss. CS (Executive) - June 2018 (5 Marks)
Ans.: Certain powers of the Central Government [Section 51A of the Unlawful Activities (Prevention) Act, 1967]:
For the prevention of, and for coping with terrorist activities, the Central Government shall have power to -
(a) Freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the
direction of the individuals or entities listed in the Schedule to the Order, or any other person engaged in or
suspected to be engaged in terrorism.
(b) Prohibit any individual or entity from making any funds, financial assets or economic resources or related
services available for the benefit of the individuals or entities listed in the Schedule to the Order or any other person
engaged in or suspected to be engaged in terrorism.
(c) Prevent the entry into or the transit through India of individuals listed in the Schedule to the Order or any
other person engaged in or suspected to be engaged in terrorism.
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19
Chapter
CONTRACT ACT. 1872
INTRODUCTION! The Law of Contract constitutes the most important branch ofMercantile or Commercial Law. It
affects everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of the
civilized world. Therefore, it is essential for the students to be familiar with the law relating to Contract. The Contract
Act came into force on 1st September, 1872. It extends to whole of India excluding state of Jammu & Kashmir. The
Act does not affect the usage or custom of trade. A Contract is an agreement made between two or more parties,
which the law will enforce.
CONTRACT - MEANING
Question 1] What is contract?
Ans.: Contract [Section 2(h)]: A Contract is an agreement which is enforceable by law.
Agreement [Section 2(e)]: Every promise and every set of promises forming the consideration for each other is an
agreement.
Promise [Section 2(b)]: When the person to whom the proposal is made signifies his assent, the proposal is said to
be accepted. Proposal when accepted becomes a promise.
An agreement comes into existence by the process of offer by one party and its unqualified acceptance by the other
party.
Question 2] Write a short note on: Consensus ad idem
Ans.: The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the
same time, i.e. there must be consensus ad idem.
Example: X owns two horses, one is white & other is black. X wants to sale white horse to Y. Y thinks that he is
purchasing black horse. There is no contract as there no consensus ad idem.
Question 3] Arun has two cars - one of white colour and another of red colour. He offers to sell one of the cars to
Basu thinking that he is selling the car which has white colour. Basu agrees to buy the car thinking that Arun is
selling the car which has red colour. Will this agreement become a valid contract? Give reasons.
CS (Foundation) - June 2005 (5 Marks)
Ans.: The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the
same time, i.e. there must be consensus ad idem. In the given problem, the agreement between Arun and Basu will
not become a valid contract because there is no consensus ad idem.
Question 4] Law of contract creates jus in personam as distinguished from jtis in rem.
Ans.:
(1) Jus in personam means right against specific person.
Example: Baban owes ` 5,000 to Sameer. Sameer has right to recover ` 5,000 from Baban. In this case right of Sameer
is against specific person i.e. Baban. Hence this right is called as jus in personam.
(2) Jus in rem means a right against whole world.
Example: Arun is the owner of a plot of land. He has right to have quit possession and enjoyment of that land against
every member of public. This right of Arun is jus in rem.
Question 5] A social agreement is different than legal agreement. Discuss.
Ans.: An agreement may be a social agreement or a legal agreement. A social agreement is that which does not give
rise to legal consequences. In case of its breach the parties cannot go to the Law Court to enforce a right.
Example: A invites his friend B to take dinner. When B came, A refuses to perform his obligation. B has no remedy
as obligation of A is social obligation & not a legal or contractual.
A legal agreement is that which gives rise to legal consequences and remedies in the Law Court in case of its breach.
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Question 6] X promised to pay ` 10,000 per month to his wife Mrs. X who was living in Mumbai. On receiving
information that she was unfaithful to him, he stopped paying ` 10,000 to Mrs. X. Mrs. X approaches you to file a
case against Mr. X. Advise her with reference to the Indian Contract Act, 1872.
Ans.: An agreement may be a social agreement. A social agreement is that which does not give rise to legal
consequences. In case of its breach the parties cannot go to the Law Court to enforce a right.
Agreement between husband and wife is social agreement and do not create any binding legal relations. Hence,
Mrs. X cannot file suit against her husband for non-payment of ` 10,000 to her every month.
Question 7] A invites B to stay with him during the winter vacation at his residence. B accept the invitation and
informs A accordingly. When B reaches A's house, he finds it locked and he has to stay in a hotel. Can B claim
damages from A? CS (Executive) - June 2017 (3 Marks)
Ans.: Section 2(b) of the Contract Act, 1872 says that when the person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted and a proposal when accepted becomes a promise. In broad
sense, therefore, a contract is an exchange of promises by two or more persons, resulting in an obligation to do or
abstain from doing a particular act, where such obligation is recognized and enforced by law.
Agreements in which the idea of bargain is absent and there is no intention to create legal relations are not
contracts.
An agreement between two persons to go together to the cinema, or for a walk, does not create a legal obligation
on their part to abide by it. Similarly, if I promise to buy you a dinner and break that promise, I do not expect to be
liable to legal penalties. There cannot be any offer and acceptance to hospitality.
Keeping in view of above discussion, it can be concluded that there is no contract if Mr. A invites to Mr. B to stay
with him during winter vacation at his residence as it is a social contract and offer and acceptance to hospitality
does not crate contract.
Question 8] Write a short note on: E-Contract CS (Executive) - June 2014 (3 Marks)
Ans.: Electronic contracts are not paper based but rather in electronic form are born out of the need for speed,
convenience and efficiency. In the electronic age, the whole transaction can be completed in seconds, with both
parties simply affixing their digital signatures to an electronic copy of the contract. The conventional law relating to
contracts is not sufficient to address all the issues that arise in electronic contracts. The Information Technology
Act, 2000 solves some of the peculiar issues that arise in the formation and authentication of electronic contracts.
As in every other contract, an electronic contract also requires to fulfil the essential element of contract laid down
in Section 10 of the Indian Contract, 1872.
ESSENTIAL ELEMENTS OF VALID CONTRACT
Question 9] What are the essential elements of valid contract? CS (Executive) - Dec 2013 (5 Marks)
Ans.: What agreements are contracts [Section 10]: 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 expressly
declared to be void.
Essential elements of a valid contract are as follows:
(1) There must be an agreement. This involves two parties, one party making the offer and the other party
accepting it.
(2) The parties must intend to create legal relationship.
(3) The parties must be capable of entering into an agreement as regards age and understanding. Thus, person
making contract should not be minor, idiot or lunatic.
(4) The agreement must be supported by consideration on both sides.
(5) The consent of the parties must be free and genuine.
(6) The object of the agreement must be lawful.
(7) The terms of the agreement must be certain and capable of performance.
(8) The agreement must not have been expressly declared as void.
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CLASSIFICATION OF CONTRACTS
Question 10] Write a short note on: Classification of contracts/agreements
Write a short note on: Executed & Executory Contract CS (Foundation) - Dec 1998 (5 Marks)
Ans.:
(a) Void Agreement [Section 2(g)]: An agreement not enforceable by law.
Example: A agrees to give B ` 10,000 if he beats C. B accept it. This is void agreement.
(b) Void Contract [Section 2(j)]: A contract which, ceases to be enforceable by law. Thus, A contract which is
valid initially however, ceases to enforceable subsequently become void when it ceases be enforceable.
Example: A enters into contract with P of Pakistan to sale 10,000 kg of wheat. P accepts it. But subsequently
Government of India declares war with Pakistan. Now the contract will become void contract.
(c) Voidable Contract [Section 2 (i)]: A Contract, which is enforceable by law at the option of one party thereto,
but not at the option of the other.
Example: Sachin at point of pistol ask Arun to sign the documents for transfer of house. This is voidable contract at
the option of Arun because Arun can go in to Court of law but not Sachin.
(d) Unlawful Agreement: An unlawful agreement is agreement, which is not enforceable by law. It is void ab
initio. It affects immediate parties only and has no further consequences.
(e) Illegal Agreement: An agreement, which involves the transgression of, some rule of basic public policy and
is criminal in nature or immoral. It is not only void as between the immediate parties but it also taints the collateral
transactions with illegality.
(f) Express Contract: A contract is which the terms are stated in words (written or spoken) by the parties.
(g) Implied Contract: A contract which is inferred from the circumstances of the case or from the conduct of the
parties is known as implied contract.
(h) Tacit Contract: Where a contract has to be inferred from the conduct of parties.
Example: Drawing cash from ATM, Sale by fall of hammer at auction sale etc.
(i) Quasi Contract: An obligation created by law, regardless of agreement.
(f) Executed Contract: A contract which is wholly performed by both the parties.
(k) Executory Contract [Bilateral Contract]: A contract in which the promises of both the parties have yet to be
performed.
(i) Partly executory, partly executed [unilateral contract]: A contract in which one party has performed his
obligation, but the other party has yet to perform his obligation.
Question 11] Distinguish between: Agreement & Contract
Ans.: Following are the main points of difference between Agreement & Contract:
Points Agreement Contract
Meaning Every promise and every set of promises forming A contract is an agreement which is enforceable
the consideration for each other. by law.
Enforce An agreement may or may not be enforceable at A contact is enforceable at law.

ability law.
For example, social agreements are generally not
enforceable while business agreements are
enforceable at law.
Effect An agreement is not always a binding on the A contract is always concluded and binding on the
concerned parties. concerned parties.
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Scope All agreements are not contracts. All contracts are agreements.
Question 12] Distinguish between: Void Agreement & Void Contract Ans.: Following are the main points of
distinction between void Agreement & Void Contract:
Points Void Agreement Void Contract
Meaning An agreement not enforceable by law is known as When a contract ceases to be enforceable at law,
void agreement. it becomes a void contract.
What is It is an agreement. It is a contract.
Status It never takes form of a contract. It is a nullity When it is formed it is perfectly valid.
since from the very beginning. Subsequently it becomes a nullity.
OFFER & ACCEPTANCE

Question 13] Define: Offer/Proposal
Ans.: Proposal [Section 2(a)]: A person is said to have made a proposal, when he signifies to another his willingness
to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence.
The person making the offer is known as the offeror, proposer or promisor.
The person to whom the offer is made is called as offeree, proposee or promisee.
Question 14] Write a short note on: Kinds of offer Ans.:
(1) Express Offer: When offer is made by express words, spoken or written it is known as express offer.
(2) Implied Offer: An offer may be inferred from the circumstance of the case or conduct of the parties. This is
known as implied offer.
(3) Specific Offer: When offer is made to definite person or definite group of persons it is known as specific
offer. Specific offer is also known as special offer.
(4) General Offer: When an offer is made to public or world at large it is called as general offer.
Question 15] Gamaxo Ltd. offered a reward of ` 10,000 by advertisement to anyone who infected influenza after
using their smoke ball in the specified manner. Mr. Upma uses smoke ball in the specified manner, but still
infected by influenza. She claims the reward. Decide the case with the help of leading case laws and related
sections of the Contract Act, 1872.
Ans.: The communication of the offer may be general or specific. Where an offer is made to a specific person it is
called specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body
of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public
by fulfilling the condition laid down in the offer. The leading case on the subject is Carlill v. Carbolic Smoke Ball Co.
The company offered by advertisement, a reward of £100 to anyone who contacted influenza after using their
smoke ball in the specified manner. Mrs. Carlill did use smoke ball in the specified manner, but was attacked by
influenza. She claimed the reward and it was held that she could recover the reward as general offer can be accepted
by anybody. Since this offer is of a continuing nature, more than one person can accept it and can even claim the
reward. But if the offer of reward is for seeking some information or seeking the restoration of missing thing, then
the offer can be accepted by one individual who does it first of all. The condition is that the claimant must have
prior knowledge of the reward before doing that act or providing that information.
Question 16] Explain the rules relating to an offer, as provided in the Contract Act, 1872.
Ans.: Following are various rules relating to valid offer:
(1) Offer must be capable of creating legal relationship: Social invitation cannot be called as offer in legal terms
because they create social obligation which are not enforceable by law.
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(2) Offer must be in clear words: That is to say offer must be certain, definite & unambiguous. If the terms of
an offer are vague or indefinite, its acceptance cannot create any contractual relationship.
(3) An offer may be distinguished from
- A declaration of intention or an announcement.
- An invitation to make an offer or to do business.
(4) Offer must be communicated: There can be no acceptance unless the offer is communicated to the offeree
by the offeror.
(5) Offer must be made with a view of obtaining the assent.
(6) Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.
Question 16A] Distinguish between: Offer & An invitation to offer
CS (Foundation) - Dec 2011 (5 Marks)
Ans.: Following are the main points of distinction between offer & an invitation to offer:
Points Offer An invitation to offer
Meaning A person is said to have made a proposal, when Something by which a person is invited to make
he signifies to another his willingness to do or to an offer is known as invitation to make an offer.
abstain from doing anything, with a view to
obtaining the assent of that other to such act or
abstinence.
Defined 'Offer' is defined in Section 2(a) of the Contract 'An invitation to offer' is not defined in the
Act, 1872. Contract Act, 1872.
Effect Offer when accepted become agreement. An invitation to offer when responded results into
offer.
Example Kir an say to Gopal, "Will you purchase my motor Display of goods by a shopkeeper in his window,
bike for ` 15,000". In this case Kiran is making offer with prices marked on them, is not offer but
to Gopal as Kiran signifies his willingness to Gopal merely an invitation to the public to make an
to sell his motor bike for ` 15,000. offer.
Question 17] An auctioneer advertised in the newspaper that a sale of office furniture will be held at Bangalore.
Mr. Smart, a broker of Mumbai, reached Bangalore on the appointed date and time. But the auctioneer withdrew
all the office furniture from the auction sale. The broker sued for his loss of time and expenses. Will he succeed?
Ans.: No. Such an auction is not an offer; it is only an invitation to offer. In a decided case of Harris v. Nickerison an
advertisement for an auction sale does not even bind the auctioneer to hold the auction and the prospective bidders
have no legal right to complaint for loss of time and money in coming to the advertised place of the sale.
In the given problem also, Mr. Smart will not succeed in getting compensation from the auctioneer.
Question 18] Shambhu Dayal started? "self service" system in his shop. Smt. Prakash entered the shop, took a
basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses
to accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide
CA (PE-II) - May 2004 (4 Marks)
Ans.: An offer may be distinguished from - An invitation to make an offer or to do business. Display of goods by a
shopkeeper in his window, with prices marked on them, is not offer but merely an invitation to the public to make
an offer. When Smt. Prakash articles of her choice into the basket reached the cashier for payments it amount to
offer and when cashier accepts money it will become contract. As cashier refuses to accept the price there is not
contract and hence Shambhu Dayal cannot be compelled to sell the said articles to Smt. Prakash.
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Question 19] Write a short note on: Cross Offer
Ans.: When two parties make identical offers to each other, in ignorance of each others offer, the offers are cross
offers. Making cross offers does result into valid contract, as there is only offer by each party but there absence of
acceptance to offer.
Question 20] Write a short note on: Counter Offer
Ans.: Offer to an original offer is known as counter offer. When counter offer is made original offers come to an
end.
Example: Pavan says to Chetan will you purchase my car for ` 50,000.
Chetan replies - "will you sale it for ` 45,000?" Reply of Chetan is counter offer and original offer of Pavan comes to
an end.
Question 21] 'B' offered to sell his car to 'A' for ` 75,000. 'A' accepts to purchase at ` 74,950. 'B' refuses.
Subsequently 'A' agrees to purchase at ` 75,000 but 'B' refused. 'A' sued 'B' for specific performance of the
contract. State legal position.
Ans.: Offer to an original offer is known as counter offer. When counter offer is made original offers come to an
end.
In given case when B makes offer to A, to which A makes counter offer and hence original offer of B comes to end.
Again when A makes offer, there is only offer and no acceptance as offer previously made by B already come to end
by the counter offer of A and hence there is no contract at all between parties. B is not liable to sell the car to A.
Question 22] Write a short note on: Special terms in contract Ans.:
(1) Where any special terms are to be included in a contract, these must be duly brought to the notice of the
offeree at the time when the proposal is made. If it is not done and if the contracts subsequently entered into, the
offeree will not be bound by them. Also these terms should be presented in such a manner that a reasonable man
can become aware of them before he enters into a contract.
Example: A hotel put a notice in bed room, exempting the proprietor from liability for the loss of client's goods.
Held, the notice was not effective as it came to the knowledge of the client only when the contract to take a room
had already been entered into. [Olley v. Marlborough Court Ltd.]
(2) Certain conditions are attached to transactions like purchase of a ticket for a journey or deposit of luggage
in a clock room. Wherever on the face of a ticket the words "For conditions see back" are printed, the person
concerned is as a matter of law held to be bound by the conditions subject to which the ticket is issued whether he
takes care to read them or not. The fact that he did not or could not read does not alter the legal position.
Example: P deposited a bag in the cloak room of railway company station. On the face of the ticket, issued to him,
was written, "see back". One of the printed conditions limited the liability of the company for loss of a package to
£10. The bag was lost and P claimed £24.50 as its value. P was bound by the conditions on the back of the ticket
even if he had not read them.
Question 23] Aman hired a room in a hotel and paid a week's rent in advance. After registering, he went up to
occupy the room. Aman found a notice on the wall that "The proprietor will not be responsible for articles lost or
stolen, unless handed over to the manager of the hotel for safe custody." Owing to the negligence of the hotel
staff, a thief gained access to the room and stole some goods of Aman. State whether the proprietor of the hotel
is liable for the loss caused to Aman? State also which type of contract it is?
Ans.: Where any special terms are to be included in a contract, these must be duly brought to the notice of the
offeree at the time when the proposal is made. If it is not done and if the contracts subsequently entered into, the
offeree will not be bound by them. Also these terms should be presented in such a manner that a reasonable man
can become aware of them before he enters into a contract. [Olley v. Marlborough Court Ltd.]
As per facts given in case, hotel has failed to brought to the notice of Aman special term that hotel will not be
responsible for article lost or stolen in hotel at the time of entering into contract and hence hotel cannot escape its
liability as special terms in contract should be presented in such a manner that a reasonable man can become aware
of them before he enters into a contract.
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Question 24] Define: Acceptance
"Acceptance is to offer what a lighted match is to a trail of gunpowder".
Ans.: Acceptance [Section 2(b)]: A proposal or offer is said to have been accepted when the person to whom the
proposal is made signifies his assent to the proposal to do or not to do something.
Offer is a train of gunpowder while acceptance is lighted match: After offer is accepted then only it becomes
contract. So an offer may laps for want of acceptance or be revoked before acceptance.
Question 25] Describe the general rule regarding 'acceptance of an offer'
Ans.: Following are rules for valid acceptance.
(1) Acceptance must be absolute and unqualified.
(2) Acceptance must be communicated to the offeror. Mere mental acceptance is not acceptance.
(3) Acceptance must be according to the mode prescribed/usual and reasonable mode.
(4) Acceptance must be given within a prescribed time. Acceptance cannot precede an offer.
(5) Acceptance must show an intention on the part of the acceptor to fulfil terms of the promise.
(6) Acceptance must be given by the party to whom the offer is made.
(7) Acceptance must be given before the offer lapses or offer comes to an end.
(8) Acceptance cannot be implied from silence.
Question 26] A offers to sell 80 quintals of sugar to 8 at a certain price. B accept to buy 50 quintals only. Is it valid
contract?
Ans.: Acceptance must be absolute and unqualified. Acceptance by B is not valid and there is no concluded contract
between A and B.
Question 27] Amar offers by advertisement a reward of ` 1,000 to anyone who returns his lost bag. Bahadur finds
the bag and brings it to Amar, without having knowledge of the offer of reward. Is Bahadur entitled to the
reward? Give reasons. CS (Foundation) - June 2009 (5 Marks)
Ans.: An offer can be accepted only by a person who knows about it. In case of general offer, it could be accepted
by anyone, provided the person was aware about the offer. Bahadur restored the bag but knew nothing about the
offer of reward. He, therefore, could not have been accepted it and hence he cannot claim the reward.
Question 28] A young boy ran away from his father's home. His father issued a pamphlet offering a reward of ` 5
lakh to anybody who would bring the boy home. Arun saw the boy at a railway station and sent an e-mail to the
boy's father.
(i) Is Arun entitled for reward?
(ii) In the light of the above case, explain the rules governing offer.
Ans.: The communication of the offer may be general or specific. Where an offer is made to a specific person it is
by fulfilling the condition laid down in the offer.
A young boy ran away from his father's home. The father issued a pamphlet offering a reward of ` 500 to anybody
who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy's father.
It was held that the handbill was an offer open to the world at large and was capable to acceptance by any person
who fulfilled the conditions contained in the offer. [Harbhajan Lai v. Harcharan Lai (AIR 1925 All. 539)]
The plaintiff substantially performed the conditions and was entitled to the reward offered. Same rule will also apply
for reply through e-mail and thus Arun is entitled to reward.
Question 29] When communication 'offer' & 'acceptance' is complete?
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Ans.: Communication when complete [Section 4]: The communication of a proposal is complete when it becomes
to the knowledge of the person to whom it is made.
Example 1: Anish proposes by a letter to Gauri, to sell a house at ` 50,000. The letter is posted on 10th July 2019. It
reaches to Gauri on 12th July 2019. The communication of the offer is complete when Gauri receives the letter i.e.
on 12th July 2019.
The communication of an acceptance is complete-
♦ As against the proposer: When it is put in a course of transmission to him so at to be out of the power of the
acceptor.
♦ As against the acceptor: When it comes to the knowledge of the proposer.
Example 2: Suppose in above example Gauri sends a letter on 14th July 2019 accepting the offer of Anish, which
reach in the hands of Anish on 16th July 2019, then communication of acceptance is compete.
- As against Anish (Offeror): 14th July 2019
- As against Gauri (Accepter): 16th July 2019 The communication of a revocation is complete -
♦ As against the person who makes it, when it is put into a course of transmission to the person to whom it is
made, so as to be out of the power of the person who makes it;
♦ As against the person to whom it is made, when it comes to his knowledge.
Example 3: A proposes by a letter to B, to sell his house and sends letter on 27th September 2019. Letter reaches
to B on 5th October 2019. Thus, A can revoke his offer before communication of offer completed i.e. before 5th
October 2019.
Example 4: A offers to sale his house to B. The letter of acceptance was send by B on 25th November 2019 and it
reaches to A on 4th December 2019. In this case B can revoke his acceptance before 4th December 2019.
Question 30] Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post.
Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in
the light of the following:
(i) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance.
(ii) The telegram of revocation and letter of acceptance both reached together.
Ans.: The revocation of acceptance is valid. The acceptance can be revoked at any time before the letter of
acceptance is received by the offerer. In the case, A withdrew his acceptance by a telegram which reached B earlier
than the letter of acceptance. Hence, it is a valid revocation and A is not bound to purchase the house.
It the letter of acceptance and the telegram cancelling acceptance reach B at the same time, which of the two is
opened first decides the issue. If B opens the telegram first and reads it, revocation is valid but if the letter is read
first, revocation is not possible. Ordinarily, if a letter and a telegram reach simultaneously, a person is more likely
to open the telegram first, for a telegram is supposed to convey more significant message than a letter. If, therefore,
it is assumed that the telegram is read first (which is a normal thing), the revocation is valid. Thus, there would be
no change in the answer if the two reach together.
Question 31] When an offer does come to an end?
What are the various modes of revocation of offer as per Indian Contract, 1872?
Ans.: Offer may lapse or come to an end by various modes as given below:
(1) Offer may come to an end by communication of notice of revocation by the offeror at any time before
acceptance.
(2) If the offeree does not accept the offer within given time or if no time is given, then within reasonable time.
(3) If condition precedent is not fulfilled then offer may come to an end.
(4) Offer may come to an end by death or insanity of the offeror.
(5) When counter offer is made original offers come to an end.
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(6) If an offer is not accepted according to the prescribed mode.
(7) Offer may come to an end due to change in law.
Question 32] State the difference in rules of making offer and acceptance when the mode of making the same
varies from post to telephone and e-mail as governed by the Information Technology Act, 2000.
Ans.: Contracts by Post: Contracts by post are subject to the same rules as others, but because of their importance,
these are stated below separately:
(a) An offer by post may be accepted by post, unless the offeror indicates anything to the contrary.
(b) An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing
the offer is delivered to the offeree.
(c) An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is
posted, to offerors correct address; it binds the offeror, but not the acceptor. An acceptance binds the acceptor
only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his
acceptance before it reaches the offeror.
(d) An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be
revoked before it reaches the offeror.
Contracts over the Telephone: Contracts over the telephone are regarded the same in principle as those negotiated
by the parties in the actual presence of each other. In both cases an oral offer is made and an oral acceptance is
expected. It is important that the acceptance must be audible, heard and understood by the offeror. If during the
conversation the telephone lines go 'dead' and the offeror does not hear the offerees word of acceptance, there is
no contract at the moment. If the whole conversation is repeated and the offeror hears and understands the words
of acceptance, the contract is complete. [Kanhaiyalal v. Dineshwarchandra (1959) AIR M.P. 234]
CONSIDERATION
Question 33] What do you understand by term consideration under the Contract Act, 1872?
Ans.: Consideration [Section 2(d)]: When, at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise.
In simple words we can say that, - Consideration means, "Something in return" (quid pro quo). Without
consideration there is no contract. Contract without consideration is known as nudum pactum.
A valuable consideration in the sense of the law may consist either in some:
♦ Right
♦ Interest
♦ Profit
♦ Forbearance
♦ Detriment
♦ Loss
♦ Responsibility
Question 34] X, the uncle of Y, promised to pay ` 2,00,000 to Y if he refrained from drinking for two years, Y does
not drink for two years and thereby saves his money. Can he now claim ` 2,00,000 from X?
Ans.: In this case, Y restricted his lawful freedom of action upon the promise of his uncle to pay ` 2,00,000. This is
the consideration which is moving from him to support the promise of his uncle to pay him and in law mere
abstinence of an act is a lawful consideration. The agreement is made between competent parties; the object is
lawful and is made with free consent. This is, therefore, a contract. Now having fully performed his part of the
agreement, Y is entitled to ` 2,00,000. It is of no significance whether this turns out to be a benefit to Y in the form
of saving of his money.
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Question 35] State the exception to the rule is that: No Consideration no contract. Discuss.
CS (Foundation) - Dec 2002 (4 Marks), June 2003 (5 Marks)
No Consideration, no contract; subject to certain exceptions. Explain briefly.
Ans.: Consideration is one of essential element of valid contract. Without consideration there is contract. Contract
without consideration is known as nudum pactum.
No consideration, no contract [Section 25]: In following cases even if there is no consideration contracts are valid.
(1) Agreement made on account of natural love and affection. If they are written & duly registered.
(2) Compensation for voluntary services.
(3) Promise to pay time barred debt made in writing and signed by the person liable to pay the amount.
(4) Completed gifts.
(5) No consideration is required to make an agency.
(6) In case of charitable subscription, if a person (promisor) promises to pay certain amount and on the basis of
that promise, other person (promise) incurs liability, then promisor is bound to pay the amount promised, even if
there is absence of consideration.
Question 36] Madhuri gets into difficulties while swimming in public swimming pool and cries for help. Anil hears
the cry, removes his coat and dives into water and rescues Madhuri. Madhuri, who is full of gratitude, promises
to pay Anil ` 20,000 but fails to do so. The promise of Madhuri is not in writing. Advise Anil.
Ans.: As per Section 25 of the Contract Act, 1872, a promise to compensate for voluntary acts done by a party is
valid even though promise is not supported by consideration and is not in writing. Anil helped Madhuri voluntarily
but if she promised to pay Anil for that voluntary work; she cannot avoid her liability later on. Hence, Anil is advised
to register a case for recovery of money due to him.
Question 37] Father promised to pay his son a sum of ` 1 lakh if the son passed CS Executive examination in the
first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as
promised. Son files a suit for recovery of the amount. State along with reasons whether son can recover the
amount under the Contract Act, 1872.
Ans.: One of the essential elements of contract is that there should be an intention to create legal relationship.
Agreements of a social nature or domestic nature do not contemplate legal relationship and as such are not
contracts.
However, as per Section 25 of the Contract Act, 1872, agreement made on account of natural love and affection is
valid contract if it is written & duly registered. In given case fathers promise though made on account natural love
and affection is not written and duly registered and hence son cannot recover the amount of ` 1 lakh from father.
Question 38] X and Y are husband and wife, respectively. X, by a registered document, after referring to quarrels
and disagreement between himself and his wife Y, promised to pay his wife, a sum of money for her maintenance
and separate residence.
Whether this document is a contract enforceable by law? Give reasons with reference to decided case law, if any.
Ans.: Consideration is one of essential element of valid contract. Without consideration there is contract. Contract
without consideration is known as nudum pactum. However, there are certain exception to the rule that "no
consideration, no contract".
One of the exceptions is "agreement made on account of natural love and affection which are written & duly
registered".
As per facts given in case husband had promised to pay wife a sum of money for her maintenance and separate
residence which is duly registered but frequent quarrels between them show absence of natural love and affection
and hence it is not valid contract enforceable by law.
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Question 39] "Gratuitous promises are not enforceable by law." Explain the statement.
Ans.: A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promise,
the promisee is put to some detriment and the promisor was aware of the fact. In such case promisor is liable to
pay promised amount of subscription. [Kedar Nath v. Gorie Mohan]
Question 40] A person verbally promised the Secretary of the Mosque Committee to subscribe ` 5,000 for
rebuilding a mosque. Later, he declined to pay the said amount?
Ans.: The promise was not enforceable because there is no consideration for promisor.
However, if Mosque Committee incurs liability, on the basis of that promise, then promisor is bound to pay the
amount promised, even if there is absence of consideration.
Question 41] Anurag promises to pay ` 11,000 to the management committee of a school by way of a donation.
The management committee, on the basis of Anurag's promise, gets a Water Purifier System (Acquaguard)
installed in the school at a cost of ` 8,000 on credit. Now, Anurag refuses to pay the donation. What is the remedy
available to the management committee of the school? Give reasons.
Ans.: In case of charitable subscription, if a person (promisor) promises to pay certain amount and on the basis of
that promise, other person (promise) incurs liability, then promisor is bound to pay the amount promised, even if
there is absence of consideration.
The contract is binding on Anurag because the management committee has undertaken liability on the faith of
Anurag's promise.
Question 42] Discuss the legal rules as to consideration.
Ans.: Legal rules as to consideration are as follows:
(1) Consideration must move at the desire of the promisor.
(2) Consideration may move from the promisee or any other person.
(3) Consideration may be in form of an act, abstinence or forbearance or a return promise.
(4) Consideration may be past, present or future.
(5) Consideration need not be adequate.
(6) Consideration must be real and not illusory.
(7) Consideration must not be something which the promisor is already bound to do.
(8) Consideration must not be illegal or opposed to public policy.
Question 43] Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter.
By the terms of the deed, it was stipulated that an annuity of ` 20,000 should be paid every year to B, who was
the brother of Singh. On the same day A made a promise to B and executed in his favour an agreement to give
effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that
since B had not furnished any consideration, he has no right of action. Examining the provisions of Contract Act,
1872, decide, whether the contention of A is valid? CA (IPCC) - Nov 2009 (5 Marks)
Ans.: Consideration may move from the promisee or any other person. It is not necessary that the consideration
must be from promisee. It is immaterial who has furnished it, whether promisee, or any other person. In the given
case, consideration is moving from Mr. Singh to her daughter for the promise to pay ` 20,000 to uncle (B).
Therefore, his daughter (A) is not justified.
Question 44] Fire breaks out in A's building, B, a passerby, brings some buckets of water and saves A's Property
from fire, intending to do so gratuitously. Later on, B claims compensation from A on the ground that A has
enjoyed the benefit of his service. Will B succeed? Give reasons.
Ans.: No, B will not succeed because, consideration must move at the desire of the promisor. In this case, B has
saved A's property without any intention of charging for his services. He cannot claim any compensation.
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Question 45] Ajay gifted whole of his property to his daughter on the condition that she should pay ` 200 per
month to her uncle (father's brother). Later, she refused to pay her uncle on the ground that she did not receive
any consideration from her uncle. Is she justified?
Ans.: Consideration may move from the promisee or any other person. It is not necessary that the consideration
must be from promisee. It is immaterial who has furnished it, whether promisee, or any other person. In the given
case, consideration is moving from Ajay to daughter for the promise to pay ` 200 to uncle. Therefore, his daughter
is not justified.
Question 46] Anand is a heart patient. He goes to a heart institute and deposits ` 2 lakh, the fixed charges for the
operation. But before operation, the concerned doctor informs him that he will operate upon him correctly only
if the patient promises to pay him ` 50,000 more. Anand agrees to pay. However, after successful operation,
Anand refuses to pay this extra amount. Now the doctor files a suit against the patient for breach of contract.
Will the doctor succeed? Give reasons.
Ans.: Consideration must not be something which the promisor is already bound to do. The performance of legal
obligation is no consideration. In the given case, the doctor having accepted to perform the operation is bound to
render his best professional services. Thus, if there is a pre-existing obligation between the promisor and promisee,
a fresh promise to perform the existing obligation will be void for want of valid consideration.
Question 47] State the exception to the doctrine that a stranger to contract cannot maintain a suit.
What is meant by 'privity of contract'? Discuss briefly State the exception to privity of contract.
"Contract cannot confer rights or impose obligation arising under it on any person or agent except the parties to
the contract". Critically analyze this statement. CS (Executive) - Dec 2017 (5 Marks)
Ans.: When a contract is created between two or more person it confers rights or impose obligation under it on the
person executing the contract. A contract never bins third party. It is binding only party to contract.
A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract.
In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd. (1915) A.C. 847, D supplied tyres to a wholesaler X, on condition that
any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X
supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price.
Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages
from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X.
Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit.
A, who is indebted to B, sells his property to C, and C the purchaser of the property, promises to pay off the debt to
B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C. The leading
English case on the point is Tweddle v. Atkinson (1861) IB. In this case, the father of a boy and the father of a girl
who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take
up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband)
sued the executors of his father-in-law upon the agreement between his father-in-law and his father.
Held: The suit was not maintainable as the boy was not a party to the contract.
Exception to the doctrine of privity of contract: Both the Indian law and the English law recognize certain exceptions
to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a
party to a contract can enforce the contract:
(1) Beneficiary in a trust: A beneficiary under an agreement to create a trust can sue upon the agreement,
though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit. In Khawaja
Muhammad v. Hussaini Begum, (1910) 32 All. 410, it was held that where a Mohammedan lady sued her father-in-
law to recover arrears of allowance payable to her by him under an agreement between him and her own father in
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consideration of her marriage, she could enforce the promise in her favour insofar as she was a beneficiary under
the agreement to make a settlement in her favour, and she was claiming as beneficiary under such settlement.
(2) Assignee: An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of
death or insolvency), can sue upon the contract for the enforcement of his rights, title and interest. But a mere
nominee (i.e. the person for whose benefit another has insured his own life) cannot sue on the policy because the
nominee is not an assignee.
(3) Beneficiary in case of family arrangements or settlements: In cases of family arrangements or settlements
between male members of a Hindu family which provide for the maintenance or expenses for marriages of female
members, the latter though not parties to the contract, possess an actual beneficial right which place them in the
position of beneficiaries under the contract, and can therefore, sue.
(4) Agency: Principal can sue in case of contract entered through agent.
CAPACITY TO CONTRACT
Question 48] Who are competent to make a contract?
Write a short note on: Person disqualified from entering into contract
Ans.: As per Section 10, one of the essential elements of valid contract is that, the parties must be competent to
contract. Capacity to contract means competence of persons to enter into a valid contract.
Who are competent to contract [Section 11]: Every person is competent to contract if he fulfils all following three
qualifications:
(a) He is major.
(ib) He is of sound mind.
(c) He has not been disqualified to contract under any law.
Any person who does not fulfill the conditions laid down in Section 11 is disqualified from entering into contract.
Question 49] Write a short note on: Position of minor as regards his agreements
Examine the legal position of (i) a minor promisor (ii) a minor promise and (iii) minor as agent
Ans.: Position of minor as regards his agreements may be summed up as under:
♦ An agreement with or by a minor is void and in-operative ab initio. Minor cannot be promisor.
♦ Minor can be a promisee or beneficiary.
♦ Minor cannot rectify the agreement, which was entered during the minority on attaining the age of majority.
♦ Minor can always plead minority.
♦ No specific performance can be brought against agreement with minor.
♦ Minor cannot enter into a contract of partnership. But he may be admitted to the benefits of an already
existing partnership.
♦ Minor cannot be adjudicated an insolvent.
♦ Minor can be agent, but cannot be principal.
♦ A minor is liable in tort, (tort means civil wrong) But where a tort arises out of a contract a minor is liable.
♦ The guardian of minor shall not be liable for acts of minor.
♦ A minor can be admitted as a member in a company if shares are fully paid.
♦ A minor cannot be a guarantor.
♦ A minor can be an apprentice provided he is of at least 14 years of age.
♦ A minor can hold property.
Question 50] A, a minor, by fraudulently representing himself to be a major, induced another person, B, to lend
him ` 4,000. He refused to pay it and B sued him for recovery of money lend. Will he succeed in his suit?
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Ans.: An agreement with a minor is void and in-operative ab initio as minor cannot be promisor. If Court were to
ask A to repay the money, it means that the agreement is being enforced and each party is carrying out its respective
obligations. This leads to enforcement of a void agreement which is never the intention of the law. Hence, B cannot
claim his money.
Question 51] A, is 16 year of age. He lends ` 1,00,000 to B on the strength of a mortgage executed in his favour.
Is the borrower liable to repay the money? Give reasons.
Ans.: There is nothing in the Contract Act, 1872 which prevents a minor from being a promisee or transferee. The
Law does not regard a minor as incapable of accepting a benefit.
The borrower must repay the money to the minor. A minor can be a promisee or transferee and he can enforce an
agreement which is for his benefit in that capacity against third parties. Therefore, he can recover the money
advanced by him.
Question 52] Jhon, who is a known minor, fraudulently overstates his age and takes delivery of a motor car after
executing a promissory note in favour of the dealer for its price. He does not knowingly honour his promissory
note; that is to say he does not pay the price of the said car.
What is the remedy available to motor car dealer in above situation? Advice.
Ans.: An agreement with or by a minor is void and in-operative ab initio.
Where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the
transactions are set aside as being void, the Court may direct the minor to restore the property to the other party.
For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory
note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note,
but the Court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor.
Thus, motor car dealer cannot recover the amount of promissory note but can recover the motor car if is still with
the minor.
Question 53] Explain the legal position of a minor under the Contract Act, 1872 for necessaries supplied to him.
CS (Foundation) - June 2005 (5 Marks), Dec 2007 (5 Marks)
Explain, with suitable examples, the circumstances under which a minor's estate is liable to reimburse for
necessaries supplied to him. CS (Foundation) - Dec 2005 (5 Marks)
Ans.: A minor is liable to pay out of his property for "necessaries" supplied to him. It is to be noted that minor is
not personally liable, but what is liable is - his 'property'.
Necessaries: The term 'necessaries' is not defined in the Contract Act, 1872.
The English Sale of Goods Act, 1893, defines it in Section 2 as, "goods suitable to the condition in life of such infant
or other person, and to his actual requirement at the time of sale and delivery." Such goods need not necessarily
belong to a class of useful goods, but they must be:
- Suitable to the position and financial status of the minor, and
- Necessaries both at the time of sale and at the time of delivery.
Necessaries include:
(1) Necessary Goods: Necessary goods are not restricted to articles, which are required to maintain a bare
existence, such as bread and clothes, but include articles, which are reasonably necessary to the minor having,
regard to his station in life. A watch and a bicycle may well be considered to be necessaries. An engagement ring
may be a necessary, but not a vanity bag bought for the minor's fiancee.
(2) Services rendered: Certain services rendered to a minor have been held to be necessaries. These include:
- Education,
- Training for a trade,
- Medical advice,
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- Legal advice,
- Provision of a funeral for deceased husband of a minor widow, and
- A house given to a minor on rent for the purpose of living and continuing his studies.
As regards contracts which are for the supply of necessaries and which are beneficial to the minor, the private estate
of the minor is liable.
Loans incurred to obtain necessaries: A loan taken by a minor to obtain necessaries also binds him and is
recoverable by the lender as if he himself had supplied the necessaries. But the minor is not personally liable. It is
only his estate, which is liable for such loans.
Question 54] A, minor aged 17, represented to B, a money-lender, that he was 19 years old and then asked for a
loan of ` 500 stating that the amount was urgently required by him to complete his Higher Secondary Education,
The money-lender, without making any further inquiry, lent the amount to A. Can the money-lender recover the
amount from A after 2 years?
Ans.: An agreement with or by a minor is void and in-operative ab initio. However, a minor is liable to pay out of his
property for "necessaries" supplied to him. It is to be noted that minor is not personally liable, but what is liable is
- his 'property'. [Section 68]
The money-lender can recover the amount from A. Education is a thing necessary for any individual. Therefore, the
loan taken by A, in this case, can be repaid out of the properties belonging to him though minor is not personally
liable for the same.
Question 55] X, a minor was studying in M. Com. in a college. On 1st July, 2019 he took a loan of ` 10,000 from B
for payment of his college fees and to purchase books and agreed to repay by 31st December, 2019. X possesses
assets worth ` 2 lakhs. On due date X fails to pay back the loan to B. B now wants to recover the loan from X out
of his (X's) assets. Referring to the provisions of Contract Act, 1872 decide whether B would succeed.
CA (PE-II) - Nov 2006 (4 Marks)
Ans.: An agreement with or by a minor is void and in-operative ab initio. However, a minor is liable to pay out of his
property for "necessaries" supplied to him. It is to be noted that minor is not personally liable, but what is liable is
- his 'property'. [Section 68]
Similarly, a loan taken by a minor to obtain necessaries also binds him and is recoverable by the lender as if he
himself had supplied the necessaries. But the minor is not personally liable. It is only his estate, which is liable for
such loans.
As fasts given in case minor has assets worth ` 2 lakhs whereas loan taken for education is ` 10,000; thus lender can
recover his loan out of the asset but cannot make minor personally liable.
Question 56] Teji, a minor, broke his right leg in a football match. He engaged Curewell, a doctor, to set it. Does
the doctor have valid claim for his services? Give reasons.
CS (Foundation) - Dec 1994 (5 Marks), June 2001 (5 Marks) CS (Foundation) - June 2004 (5 Marks)
Ans.: A minor is liable to pay out of his property for "necessaries" supplied to him. It is to be noted that minor is not
personally liable, but what is liable is - his 'property'.
As regards contracts which are for the supply of necessaries and which are beneficial to the minor, the private estate
of the minor is liable. Thus, doctor have valid claim for his services.
Question 57] Write a short note on: Position of unsound mind minor as regards his agreements.
Ans.: One of the essential conditions of competency of parties to a contract is that they should be of sound mind. A
person who is of unsound mind cannot make a contract.
A person is of unsound mind if:
- An idiot
- A lunatic
- A drunken or intoxicated person.
Liability for necessaries supplied [Section 68]: Persons of unsound mind are liable for necessities supplied to them.
But even in such cases, no personal liability attaches to them. It is only their estate which is liable.
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Question 58] Discuss the contractual capacity of following:
(1) Body corporate/companies
(2) Alien enemies
(3) Corporations * 1 2
Ans.:
(1) Body Corporate/Companies: A Company and any other body corporate can enter into only such contracts
as are permitted by their constitution i.e. Memorandum of Association. If it exceeds its powers from its object clause
in the Memorandum, the contract is ultra vires (beyond the power) and is void. Further it cannot enter into contracts
of a strictly personal nature, as it is an artificial and not a natural person.
(2) Alien Enemies: An alien (the subject of a foreign state) is a person who is not a citizen of India. He may be:
(i) An alien friend (an alien whose State is at peace with the Republic of India), or (ii) An alien enemy (an alien
whose State is at war with the Republic of India)
Contracts with an alien friend, subject to certain restrictions, are valid.
Contracts with an alien enemy, may be studied under two heads, namely -
♦ Contracts during the war: During the continuance of the war, an alien enemy can neither contract with an
Indian subject nor can he sue in an Indian Court. He can do so only after he receives a license from the Central
Government.
♦ Contracts made before the war: Contracts made before the war may either be suspended or dissolved. They
will be dissolved if they are against the public policy or if their performance would benefit the enemy. For this
purpose even an Indian who resides voluntarily in a hostile country, or who is carrying on business there would be
treated as an alien enemy.
(3) Corporations: A Corporation is an artificial person created by law, having a legal existence apart from its
members. It may come into existence by a Special Act of the Legislature or by registration under the Companies Act,
2013. For example RBI is corporation as it is formed under Special Act, namely the Reserve Bank of India Act, 1934.
As regards a statutory corporation, i.e. a corporation formed by a Special Act of the Legislature, its contractual
capacity is limited by the Statute governing it.
Question 59] Explain the legal position regarding transaction with parda-nishin woman.
Ans.: Parda-nishin woman is a lady who is totally isolated from the ordinary social intercourse. She can avoid any
contract entered by her on the plea of undue influence and it is for the other party to prove that no undue influence
was used on her.
The other party must prove that:
- The nature of contract was fully explained to her,
- She had free and independent advise,
- She exercised her free will.
The protection granted also extended to illiterate and ignorant ladies, who are equally exposed to such danger and
risks.
FREE CONSENT
Question 60] What is consent? When consent is said to be free?
Ans.: Consent means acquiescence or act of assenting to an offer. One of the essential elements of valid contract is
that there must be free consent of the parties.
Consent is said to be free if it is not caused by coercion, undue influence, fraud, misrepresentation and mistake.
Question 61] Mention the main flaws in a contract. CS (Executive) - June 2015 (3 Marks)
Ans.: There may be the circumstances under which a contract made under these rules may still be bad, because
there is a flaw, vice or error somewhere.
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The chief flaws in contract are: (i) Incapacity (ii) Mistake (iii) Misrepresentation (iv) Fraud (v) Undue Influence (vi)
Coercion (vii) Illegality (viii) Impossibility.
Ans.: "Coercion" defined [Section 15]: When a person is compelled to enter into a contract by the use of force by
the other party, coercion is said to be employed. Coercion is the committing or threating to commit any act
forbidden by the Indian Penal Code, 1868. In English law coercion is termed as "Duress".
Example 1: S threatens to kill V if he does not lend ` 1,000 to him. V agrees to lend the amount. Here consent of V
is obtained by use of force and hence consent by V is not free. This contract is voidable at the option of V. As per
Section 72 S is bound to repay amount of ` 1,000, if taken from V.
Example 2: H held out a threat of committing suicide to his wife, if the wife does not sale certain property in her
name to H's brother. Wife transferred the property. In this case threat of suicide amounted to coercion and contract
is voidable at the option of wife.
Effect of Coercion:
(1) When an agreement is caused by coercion, the agreement is a contract voidable at the option of the party
whose consent was so obtained. But, it is to be noted that until contract is avoided by party whose consent was so
obtained, contract has to be treated as valid and in meantime third party acquires anything obtained by way of
coercion in good faith and for value, he gets good title.
(2) A person to whom money has been paid or anything is delivered under coercion must repay or return it.
Question 63] Mr. X coerces Mr. Y to enter into a contract to sell Y's house worth ` 50 lakhs to X for ` 20 lakhs.
Comment.
Ans.: When an agreement is caused by coercion, the agreement is a contract voidable at the option of the party
whose consent was so caused. Hence contract is voidable at the option of Mr. Y. Mr. X to whom money has been
paid or anything is delivered under coercion must repay or return it.
Question 64] Write a short note on: Undue influence
Ans.: "Undue influence" defined [Section 16(1)]: A contract is said to be induced by "undue influence" where the
relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other.
Presumption of undue influence: The following relationship usually raises a presumption of undue influence.
♦ Parent & child
♦ Guardian & ward
♦ Trustee & beneficiary
♦ Religious adviser & disciple
♦ Doctor & patient
♦ Solicitor & client
♦ Fiance & fiancee
No presumption of undue influence in the relationship of:
♦ Landlord & tenant
♦ Creditor & debtor
♦ Husband & wife Essentials of under influences:
(1) There must be relations between parties, which raise presumption of undue influence.
(2) One party must be in a position to dominate the will of other.
(3) Person dominating must obtain unfair advantage over the other.
Effect of undue influence:
(1) When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the
option of the party whose consent was so obtained. But, it is to be noted that until contract is avoided by party
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whose consent was so caused, contract has to be treated as valid and third party acquires anything obtained by way
of undue influence in good faith and for value, he gets good title.
(2) Such contract may be set aside by Court.
Question 65] Mr. X buys a ring from Mr. Y at a low price employing 'undue influence' and sells the ring to Mr. Z
who purchased against consideration and without knowing of Mr. X's undue influence'. Can Mr. Y recover the
ring from Z?
Ans.: When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the
option of the party whose consent was so obtained. But, it is to be noted that until contract is avoided by party
whose consent was so caused, contract has to be treated as valid and in meantime if third party acquires it in good
faith and for value, he gets good title.
In given case Mr. X had sold ring to Mr. Z before Mr. Y rescinds the contract. Mr. Z acted in good faith without
knowing X's undue influence and hence Mr. Z gets a good title and Mr. Y cannot directly recover it from Mr. Z.
Question 66] Distinction between: Coercion & Undue Influence
Ans.: Following are main points of distinction between coercion & undue influence
Points Coercion Undue Influence
Meaning When a person is compelled to enter into A contract is said to be induced by undue
contract by the use offeree by other party influence, where the relations subsisting
coercion is said to be employed. between the parties are such that one of the
parties is in a position to dominate the will of
the other and uses that position to obtain an
unfair advantage over the other
Purpose The purpose of coercion is to obtain the The purpose of undue influence is to obtain an
consent of the other party. unfair advantage.
Character Coercion is mainly of a physical character. Undue influence is mainly of moral character.
Punishment The party using coercion is liable under Indian The party exercising undue influence is not
Penal Code, 1860. criminally liable under the Indian Penal Code,
1860.
Criminal Act Coercion involves criminal act. Undue influence does not involve criminal act.
Relationship In case of coercion relation between parties is In undue influence nearer relationship
not important at all. between parties are important.
Question 67] A applies to a banker of a loan at a time where there is stringency in the money market. The banker
declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. Whether
the contract is induced by undue influence? Decide.
Ans.: As money is in short supply, interest rates are likely to go up. The banker is demanding for a higher rate of
interest in the ordinary course of business. Further, No presumption of undue influence arise in the relationship of
banker & client. It is not a case of undue influence, and hence can be enforced.
Ans.: Misrepresentation [Section 18]: Misrepresentation is a false statement which the person making it honestly
believes to be true.
Requirement of misrepresentation:
♦ It must be a representation of a material fact.
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♦ It must be made before conclusion of contract.
♦ It must be made with the intention that it should be acted upon by the person to whom it is addressed.
♦ It must actually have been acted upon and must have induced the contract.
♦ It must be wrong but the person who made it honestly believed it to be true.
♦ It must be made without any intention to deceive the other party.
Consequences of misrepresentation: The aggrieved party, in case of misrepresentation by the other party can:
(1) Avoid or rescind the contract.
(2) Accept the contract but insist that he shall be placed in the position in which he would have been if the
representation made had been true.
Question 69] Ajeet, owner of an apple orchard, believes that all the apple trees in his orchard are fruit-bearing
trees. However, he has no sufficient ground for his belief. Even then, Ajeet states to Baljeet that his orchard has
all fruit-bearing trees. Induced by this statement, Baljeet purchases the orchard. Later on, it is found that only
50% trees are fruit-bearing. Now, Baljeet files a suit for the repudiation of the contract. Will Baljeet succeed? Give
reasons.
Ans.: Misrepresentation is a false statement which the person making it honestly believes to be true. In given case
statement made by Ajeet will be treated as 'misrepresentation' as he has no sufficient ground for his belief that all
the apple trees in his orchard are fruit-bearing trees but in fact only 50% trees are fruit-bearing. Thus, Ajeet has
made a false statement which he honestly believes to be true; hence misrepresentation. This contract is voidable
at the option of Baljeet and he can avoid the contract.
Question 70] Write a short note on: Fraud CS (Foundation) - June 1999 (5 Marks) * 1 2
Ans.: Fraud [Section 17]: Fraud means and includes any of the following acts committed by a party to a contract
with intent to deceive other party or induce him to enter into the contract.
♦ When person knowingly makes a false statement.
♦ When person actively conceals material fact.
♦ When person makes a promise without any intention of performing it.
♦ When person does any act or omission as to law specially declared to be fraudulent.
Consequences of fraud: A contract induced by fraud is voidable at the option of the party defrauded. Until it is
avoided it is valid. The party defrauded has however, the following remedies:
(1) He can rescind the contract. Where he does so, he must act within a reasonable time. If in the interval, an
innocent third party has acquired an interest in the property for value, he cannot rescind the contract.
(2) He can insist on the performance of the contract on the condition that he shall be put in the condition in
which he would have been if the representation made had been true.
Question 71] Mr. Sham informs Mr. Ram that Mr. Sham's estate is free from encumbrances. Mr. Ram buys the
property fully relying on Mr. Sham. Subsequently it revealed that the estate was mortgaged. What will be the
position of Mr. Ram?
Ans.: Mr. Sham knowingly makes false statement which amounts to it is fraud as per Section 17 of the Contract Act,
1872 and hence contract is voidable at the option of Mr. Ram.
Question 72] Mr. Roy sells by auction, to Mr. Paul a cow which Mr. Roy knows to be unsound. Mr. Roy says
nothing to Mr. Paul about the cow's unsoundness. Whether this amounts to fraud by Mr. Roy? •
Ans.: Mr. Roy sells, by auction to Mr. Paul a cow, which Mr. Roy knows to be unsound. Mr. Roy says nothing to Mr.
Paul about cow's unsoundness. This is not fraud, as Mr. Roy said nothing. Thus, there is no inducement to Mr. Paul
to purchase a cow.
Question 73] K, who is-trying to sell an unsound horse, forges a Veterinary Surgeon's certificate stating the horse
to be sound and pins it on the stable door. P comes to examine the horse but the certificate goes unnoticed by
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him. He buys the horse and finds later on the horse to be unsound. He wants to avoid the agreement under the
plea that he has defrauded. Will he succeed?
Ans.: P will not succeed for though K attempted to defraud by putting up the surgeon's forged certificate as to the
soundness of the horse, P was not influenced by it. P bought the horse after his examination and not on the basis
of the certificate. Section 17 says that an attempt at deceit which does not deceive is not fraud. Hence, P will not
be able to set aside the purchase of horse.
Question 74] Silence of the party - Whether amount to fraud? Discuss.
Ans.: As a general rule, mere silence does not amount to fraud. A contracting party is not duty bound to disclose
the whole truth to other party or to give him the whole information in his possession. This will be so, even if such
disclosure would have an important bearing on the decision taken by the other party in relation to the contract.
When silence amounts to fraud? Silence amounts to fraud in following cases:
(1) If having regard to the circumstances of the case, it is the duty of the person keeping silence to speak, then,
silence shall amount to fraud. Duty to speak arise when one party response trust and confidence in other party.
(2) Where silence is, in itself, equivalent to speech.
(3) If seller fails to inform the buyer as to a latent defect, his silence amounts to fraud.
Question 75] Distinguish between: Misrepresentation & Fraud
CS (Foundation) - June 2004 (5 Marks), Dec 2002 (5 Marks) CS (Foundation) - Dec 2009 (5 Marks)
Ans.: Following are main points of distinction between fraud and misrepresentation.
Points Fraud Misrepresentation
Meaning Fraud means and includes any of the following Misrepresentation is a false statement which
acts committed by a party to a contract with the person making it honestly believes to be
intent to deceive other party or induce him to true.
enter into the contract.
♦ When person knowingly suggests a fact,
which is not true.
♦ Active concealment of fact.
Points Fraud Misrepresentation
♦ A promise made without any intention

of performing it.
♦ Any such act or omission as to law
specially declared to be fraudulent.
Intention to Fraud is deliberate or wilful. There is clear It is an innocent wrong, without any intention
deceive intention to deceive the other party. to deceive.
Belief The person making the false statement does The person making the statement believes it to
not believe it to be true. be true or does not know that it is false.
Remedy It entitles the aggrieved party to claim damages It only gives a right to avoid the contract
in addition to the right of rescinding the without any claim for damages.
contract.
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Punishment In certain cases, it may lead to prosecution for It is not a criminal act, and hence not
an offence of cheating under the Indian Penal punishable.
Code, 1860.
Question 76] When the aggrieved party lose the right to rescind or avoid the contract for misrepresentation or
fraud?
Ans.: In following cases aggrieved party loses the right to rescind or avoid the contract for misrepresentation or
fraud:
(1) If aggrieved party after becoming aware of the misrepresentation or fraud, takes a benefit under the contract
or in some other way affirms it.
Example: Lala induces Bala to buy his lorry on the false representation that it was "in good condition". When Bala
use the lorry, he discovers that lorry was in a very bad condition. Lala, however, agreed to bear 40% cost of repair
to which, Bala agreed. On a subsequent journey when lorry completely broke down, Bala wanted to rescind the
contract. Bala could not do so as his acceptance of the offer of the Lala to bear 40% cost of repair impliedly
amounted to final acceptance of the sale.
(2) Aggrieved party loses the right to rescind the contract if a third party has acquired right in the subject matter
of the contract in good faith and for value.
Example: Sangita purchases certain goods from Aruna by making a Misrepresentation. Sangita sells the goods to
Amruta before Aruna avoids/rescinds the contract. Thus, Aruna loses the right to rescind contract, because Amruta
(third party) acquired right to subject matter (i.e. goods).
Question 77] Explain the concept of ? misrepresentation' in matters of contract. Sohan induced Suraj to buy his
motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj complained that there
were many defects in the motorcycle. Sohan proposed to get it repaired and promised to pay 40% cost of repairs.
After a few days, the motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving
reasons. CA (PE-II) - Nov 2003 (4 Marks)
Ans.: If aggrieved party after becoming aware of the misrepresentation or fraud, takes a benefit under the contract
or in some other way affirms it, then he loses the right to rescind or avoid the contract.
Thus, Suraj cannot rescind the contract as his acceptance of the offer of the Sohan to bear 40% cost of repair
impliedly amounted to final acceptance of the sale.
Hence, contract is valid and Suraj cannot rescind the contract.
Question 78] Write a short note on: Mistake Distinction between: Unilateral & bilateral mistake
Ans.: Mistake may be defined as an erroneous belief about something.
(1) Mistake of law: Mistake of law may be:
(a) Mistake of law of country: A party cannot be allowed to get any relief on the ground that it had done a
particular act in ignorance of law. A mistake of law is therefore, no excuse.
(b) Mistake of foreign law: Mistake of foreign law is excusable since it is treated as if it were a mistake of fact.
When there is mistake of law of foreign country agreement is void.
(2) Mistake of fact: Mistake of fact may be:
(a) Bilateral mistake: Where both the parties to an agreement are under mistake as to matter of fact essential
to the agreement, there is bilateral mistake.
Example: Pavan agreed to purchase motor car from Chetan, which was lying in garage. Unknown to either party,
the car and garage were completely destroyed by fire a day before. There is bilateral mistake and agreement is void.
(b) Unilateral mistake: When in a contract only one of the parties is at mistake it is called as unilateral mistake.
A unilateral mistake is not allowed as a defence in avoiding a contract.
Example 1: Umesh offers to sell his house to Kalpesh for an intended sum of ` 44,000. By mistake he makes an offer
in writing of ` 40,000. Umesh cannot avoid a contract.
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Example 2: Prem buys a pen thinking that it worth ` 200 when it is worth only ` 50. Prem cannot subsequently avoid
the contract.
(3) Mistake as to identity of person: If there is mistake as to identity of person then contract become voidable.
In such case if any person has received any benefit from other person then he must restore it to such other person.
Question 79] Mr. X offers to sell his Maruti car to Mr. Y for and intended sum of ` 90,000. But by mistake he makes
an offer in writing for ` 70,000 instead of ` 90,000. Can Mr. X plead mistake as defence?
Ans.: When in a contract only one of the parties is at mistake it is called as unilateral mistake. A unilateral mistake
is not allowed as a defence in avoiding a contract. Hence Mr. X cannot plead mistake as defence.
Question 80] Avdesh contracts to sell a piece of silk to Bhupesh. Bhupesh thinks it is Chinese silk. Avdesh knows
that Bhupesh thinks so, but Avdesh knows that it is English silk. Avdesh does not correct Bhupesh's impression.
Subsequently, Bhupesh discovers that it is not Chinese silk. Can he repudiate the contract? Discuss.
Ans.: When in a contract only one of the parties is at mistake it is called as unilateral mistake. A unilateral mistake
is not allowed as a defense in avoiding a contract. Hence, Bhupesh cannot repudiate the contract.
LEGALITY OF OBJECT
Question 81] When consideration or object is unlawful?
What do you understand by 'unlawful consideration' and what would be its impact on an agreement.
Ans.: What consideration and objects are lawful, and what not [Section 23]: One of the essential elements of valid
contract is that - the object of agreement must be lawful. Thus, if object of an agreement is the performance of an
unlawful act, the agreement is unenforceable. The consideration or object of an agreement is unlawful in following
cases and agreement is void.
(1) If object or consideration is forbidden by law.
Example 1: Arun promises to obtain for Shrikant an employment in the public service and Shrikant promises to pay
` 10,000 to Arun. The agreement is void, as the consideration is unlawful.
Example 2: Amit promises Baban to drop a prosecution which he has instituted against Baban for robbery and Baban
promises to restore the value of the things taken. The agreement is void as its object is unlawful.
(2) If object of agreement is of such nature that, if permitted, it would defeat the provision of any law.
Example 1: Lalabhai was licensed under the Excise Act to run a liquor shop. In Excise Act, there is provision that,
person taking licence cannot sale, transfer or sub-lease of the licence or the creation of partnership to run the shop.
Lalabhai took Sarabhai into partner. In this case, object of partnership agreement is of such nature that, if permitted,
it would defeat the provision of Excise Act.
Example 2: An agreement by a debtor not to raise the plea of limitation is void.
(3) An agreement, which is made for a fraudulent purpose, is void.
Example: Nitin, Sunil & Bipin enter into an agreement for the division among them of gains acquired by making
fraud. The agreement is void as it is made for fraudulent purpose.
(4) When object or consideration of an agreement involves or implies injury to the person or property of
another.
Example: Ramu borrowed ` 1,000 from Pratapsing (Sawkar) and promised to work for him for 2 years without any
pay by executing bond. It was also agreed that, if Ramu make default in payment of ` 1,000 he will liable to pay
interest @30%. This agreement is void as at it involved injury to person i.e. Ramu.
(5) If the courts regards it as immoral.
Example 1: Lata a married women was given money to enable her to obtain divorce from her husband and then to
marry the lender. The agreement was immoral and void. The lender could not recover the money.
Example 2: A agrees to let her daughter to B for concubine. The agreement is void. (Concubine means - State of
living together as man and wife without being married).
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Example 3: A let a flat to B, (a woman) whom he knew to be a prostitute. Held, the agreement was unlawful if A
knew the purpose that B's object was to use the flat for immoral purposes.
Question 82] Write a short note on: Unlawful Agreement
Ans.: An unlawful agreement is agreement, which is not enforceable by law. It is void ab initio and is destitute of
legal effects altogether. It affects immediate parties only and has no further consequences.
Question 83] Write a short note on: Illegal Agreement * 1 2
Ans.: An illegal agreement is one which transgresses some rate of basic public policy or which is criminal in nature
or which is immoral. Illegal agreement is not only void as between immediate parties but has this further effect that
only the collateral transactions to it also become void.
(1) Reciprocal promise to do things legal, and also other things illegal [Section 57]: Where person reciprocally
promise, firstly, to do certain things which are legal and secondly, to do certain other things which are illegal, the
first set of promises is a contract, but second is a void agreement.
Example: A and B agree that A shall sale B a house for 110,000, but that, if B uses it as a gambling house, he shall
pay A ` 50,000 for it. The first set of reciprocal promises, namely, to sell the house and to pay ` 10,000 for it, is a
contract. The second set is for an unlawful object, namely, the B may use the house as a gambling house, and is a
void agreement.
(2) Alternative promise, one branch being illegal [Section 58]: In the case of an alternative promise, one
branch of which is legal and the other illegal, the legal branch alone can be enforced.
Example: A and B agree that A shall pay B ` 1,000, for which B shall afterwards deliver to A either rice or smuggled
opium. This is a valid contract to deliver rice, and a void agreement as to the opium.
Question 84] Write a short note on: An agreement opposed to public policy
Ans.: An agreement is said to be opposed to public policy when it is harmful to the public welfare. Some of the
agreements which are, or which have been held to be opposed to public policy and are unlawful are as follows.
(1) Agreement of trading with enemy.
(2) Agreement to commit crime.
(3) Agreement which interfere with administration of justice.
(4) An agreement not to prosecute an offender is an agreement for stifling prosecution and is unlawful.
(5) Maintenance & Champerty:
Maintenance is an agreement to give assistance, financial or otherwise, to another to enable him to bring or defend
legal proceeding when the person giving assistance has got no legal interest of his own in the subject matter.
Champerty is an agreement whereby one party is to assist another to bring an action for recovering money or
property, and is to share in the proceeds of the action.
(6) Agreement in restraint of legal proceedings.
(7) Agreements curtailing period of limitation.
(8) Sale of public offices & titles/trafficking in public offices and titles.
(9) Agreement in restraint of parental rights.
(10) Agreement restricting personal liberty.
(11) Agreement in restraint of marriage.
(12) Marriage brokerage agreement.
(13) Agreement interfering with marital duties.
(14) An agreement to defraud creditors or revenues authorities.
(15) Agreement in restraint of trade.
Question 85] Arun promises to Barun, who is named as a witness in a suit against Arun, in consideration of Barun
promises to abstain from the trial. Barun abstains, but Arun declines to make the payment. Can Barun recover
the money? CS (Foundation) - Dec 1999 (5 Marks)
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Ans.: One of the essential elements of valid contract is that the object and consideration is legal and is not opposed
to public policy.
In this case, consideration for refraining any person from the trial of a suit is considered to be as opposed to public
policy and the whole agreement is unlawful and void. Hence, Barun cannot recover the money.
Question 86] Amit promises to procure an employment for Bimal in a government department and Bimal
promises to pay ` 5,000 to Amit for the same. Amit gets the said job for Bimal. However, Bimal refuses to pay the
promised money to Amit who files a suit in the court of law to recover ` 5,000 from Bimal. Will Amit succeed?
Give reasons. CS (Foundation) - Dec 2007 (5 Marks)
Ans.: Amit's promise to procure an employment for Bimal in a government department is an agreement opposed
to public policy and unlawful, hence void. Thus, Amit will not succeed to recover ` 5,000.
Question 87] There was an agreement to lend ` 5 lakh to Bimla in consideration of her getting a divorce and
marrying Govind, the lender. Is the agreement enforceable? Give reasons.
Ans.: Agreement which involves interfering with marital duties is opposed to public policy and unlawful, hence void.
Hence, it is not enforceable.
Question 88] Amrit's wife Barkha paid ` 5,000 to Chandan to be given as a bribe to a jailor for procuring the release
of her husband from jail. The jailor failed to procure the release. Can Barkha recover the amount? Give reasons.
Ans.: Agreement which interfere with administration of justice is opposed to public policy and unlawful and hence
void. Thus, Barkha cannot recover the amount of ` 5,000 paid to Chandan given as a bribe to a jailor for procuring
the release of her husband from jail.
Question 89] Write a short note on: Agreement in restraints of trade
"Every agreement in which anyone is restrained from exercising a lawful profession, trade or business of any kind
is, to that extent, void." Discuss.
Ans.: Agreement in restraint of trade, void [Section 27]: Every agreement, by which, anyone is retrained from
exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception to agreement in restraint of trade: That is to say in following cases agreement even though in restraint
of trade are valid:
(1) Employment Agreement: An agreement of employment under which, employee agrees to serve a certain
employer for certain duration, and that he will not serve anybody else during such period is a valid agreement.
(2) Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the
purchaser of the goodwill, the contract is enforceable provided the restraint appears to be:
- Reasonable as to territorial limits and
- The length of time.
Example: N was a inventor and a manufacturer of guns and ammunition. He sold his world-wide business to M and
promised not to manufacture guns anywhere in the world for 25 years. The House of Lords held that the restraint
was reasonable as it was necessary for the protection of company.
[Nordenfelt v. Maxim Nordenfelt Guns & Co.]
(3) Restriction on existing partner: Section 11(2) of the Partnership Act, 1932 permits to provide that a partner
shall not carry on any business other than that of the firm while he is a partner.
(4) Restriction on outgoing partner: Section 36(2) and Section 54 of the Partnership Act, 1932 provide that a
partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business
similar to that of the firm within specified period or within specified limits. Such agreements are valid if the
restrictions are reasonable.
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Question 90] X, a physician practicing in New Delhi, took Y as his assistant for 3 years during which Y agreed not
to practice on his own in New Delhi. At the end of the year from the date of agreement with X, the assistant, Y,
left X and began his own independent practice in New Delhi. Has X any legal remedy against Y?
Ans.: Yes, X has got legal remedy against Y. He can apply to the Court asking for an injunction order restraining Y
from practicing on his own. The agreement between X and Y by which Y, an employee, binds himself during the
period of agreement not to compete with his employer is not an agreement in
restraint of trade or profession as may be deemed to be against public policy. This restraint imposed is reasonable,
for otherwise all agreements for personal service for a fixed period would be void. Hence, X can restrain Y from
carrying on his practice in New Delhi.
Question 91] A, a Mumbai doctor, employed another doctor B, as an assistant for a period of three years on a
salary of ` 10,000 per mensem. The agreement between A and B provided that after the termination of his
employment, B should not practice as a doctor in Mumbai within a radius of one mile of A's dispensary for a
period of one year and if B did so, B should pay ` 10,000 to A as liquidated damages. Immediately after the
termination of his employment he begins to practice as a doctor next door to A's dispensary. A thereupon sued
B for the recovery of ` 10,000. How would you decide?
Ans.: A cannot recover ` 10,000 from B as the agreement between them is void. Agreements in restraint of a lawful
trade or profession are void as per Section 27 of the Indian Contract Act, 1872.
An employer can impose restrictions on employee's conduct effective during the period of employment but not
after the termination of the employment. As between an employer and an employee there can be no agreement
whatever in restraint of trade after the term of employment is over, hence, the agreement between A and B is void,
and as such there is no question of breach of contract.
VOID AGREEMENT
Question 92] State the various agreements which have been expressly declared to be void by the Indian Contract
Act, 1872
Ans.: A void agreement [Section 2(g)]: A void agreement is one, which is not enforceable by law. Such agreement
does not give rise to any legal consequences and is void ab initio.
The following agreements have been expressly declared to be void by the Contract Act, 1872:
Section Nature of agreement
Section 11 Agreements by incompetent parties i.e. minor, idiot, persons of unsound mind.
Section 20 Agreements made under mutual mistake of fact.
Section 24 Agreements the consideration or object of which is unlawful in part.
Section 25 Agreements made without consideration.
Section 26 Agreement in restraint of marriage.
Section 27 Agreement in restraint of trade.
Section 28 Agreement in restraint of legal proceedings.
Section 29 Agreement the meaning of which is uncertain
Section 30 Agreement by way of wager.
Section 36 Agreement contingent on impossible events.
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Section 56 Agreements to do impossible acts.
Question 93] Distinguish between: Void Contract & Voidable Contract

CS (Foundation) - Dec 1999 (5 Marks), Dec 2002 (5 Marks) CS (Foundation) - June 2008 (5 Marks)
Ans.: Following are the main points of distinction between void & voidable contract:
Points Void Contract Voidable Contract
Meaning When a contract ceases to be enforceable at A contract which is enforceable by law at the
law, it becomes a void contract. option of one party, but not at the option of the
other is known as voidable contract.
Points Void Contract Voidable Contract
Status A void contract cannot create any legal rights. It A voidable contract takes its full and proper
is a total nullity. legal effect unless it is disputed and set aside by
the person entitled to do so.
Nature A void contact is valid when it is made. But A contract may be voidable since very beginning
subsequently it becomes void due to one reason or may subsequently become voidable.
or the other.
Rights A void contract does not provide any legal right A voidable contract gives right to the aggrieved
to the parties to the contract. party to rescind the contract and claim the
damages, etc. in certain cases.
Effect When a contract is void because of illegality its A voidable contract does not affect the
collateral transactions also becomes void. collateral transactions.
Question 94] Distinguish between: Illegal Agreement & Void Agreement

Ans.: Following are the main points of distinction between illegal & void agreement:
Points Illegal Agreement Void Agreement
Meaning An agreement, which involves the transgression A void agreement is one, which is not
of, some rule of basic public policy and is enforceable by law. Such agreement does not
criminal in nature or immoral. give rise to any legal consequences and is void
ab initio.
Collateral Collateral transactions to an illegal agreement Collateral transactions to void agreement are
transaction are not enforceable. enforceable.
Punishment Parties may be punished for making illegal Being void does not make a contract
agreement. punishable.
Question 95] "An agreement to do an act impossible itself is void". Explain.

Ans.: Agreement to do impossible acts [Section 56]: An agreement to do an act impossible in itself is void.
A contract to do an act which becomes impossible after the contract is made by reason of some event which the
promisor could not prevent then such contract becomes void when the act.
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Where one person has promised to be something which he knew to be impossible and the promisee did not know
to be impossible, such promisor must make compensation to such promise for any loss which the promisee may
sustains through the non-performance of the promise.
Illustrations:
(a) A agrees with B to discover treasure by magic. The agreement is void.
(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract
becomes void.
(c) A contract to marry B, being already married to C, and being forbidden by the law to which he is subject to
practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his
promise.
(d) A contract to take in cargo for B at a foreign port. A's Government afterwards declares war against the
country in which the port is situated. The contract becomes void when war is declared.
(e) A contract to act at a theatre for 6 months in consideration of a sum paid in advance by B. On several
occasions A is too ill to act. The contract to act on those occasions becomes void.
Question 96] whether agreement of which meaning is uncertain are valid?
Ans.: Agreements void for uncertainty [Section 29]: If the meaning of the agreement is not certain, such
agreements are void. Thus, agreements must be in clear words.
Question 97] Anita agree to sell a flower pot to Babita at a price fixed by Sita. Is it a valid contract? Give reasons.
Ans.: As per Section 29 of the Contract Act, 1872, if the meaning of the agreement is not certain, such agreements
are void. Thus, agreements must be in clear words.
As per the facts given in case, the price is capable of being made certain and as there is no uncertainly. Thus,
agreement is valid.
Question 98] Ajay agrees to sell his old car to Bijoy for ` 1,00,000 or ` 80,000. Is it a valid contract? Give reasons.
Ans.: As per Section 29 of the Contract Act, 1872, if the meaning of the agreement is not certain, such agreements
are void. Thus, agreements must be in clear words.
In this case, there is nothing to show which of the two prices is to be taken into consideration. Hence, the agreement
is void.
WAGERING AGREEMENTS
Question 99] Write a short note on: Wagering Agreements CS (Foundation) - Dec 2001 (5 Marks)
Discuss briefly whether an agreement by way of wager is a voidable contract.
CS (Foundation) - Dec 2007 (5 Marks) * 1
Ans.: Agreements by way of wager, void [Section 30]: Wagering agreement is an agreement between two parties
by which one promises to pay money or money's worth on the happening of some uncertain event in consideration
of the other party promise to pay if event does not happen. Wagering agreements are void.
Example: Rohit agrees to pay `00 to Sachin if Indian wins cricket match with Pakistan and Sachin agrees to pay ` 500
if Pakistan wins. This is wagering agreement and is void.
Essentials of a wagering agreement:
(1) There must be a promise to pay money or money's worth.
(2) The event must be uncertain.
(3) Each party must stand to win or lose.
(4) Neither party should have any control over the event.
(5) Neither party should have any other interest (i.e. other than the sum or stake to be win or lose) in the event.
A lottery is a wagering agreement. However a lottery authorized by State Government is not wagering agreement.
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Agreement not held as wager:
(1) A crossword competition involving a good measure of skill for its successful solution.
(2) According to Prize Competition Act, 1955, prize competitions in games of skill are not Wagers provided the
amount of prize does not exceed ` 1,000.
(3) An agreement to pay prize not exceeding ` 500 to the winner of a horse race not a wager.
(4) A contract of insurance.
(5) Share market transactions.
(6) Games of skill.
Effect of wagering agreements: Wagering agreements have been expressly declared to be void in India. In State of
Gujarat & Maharashtra they have been declared to be illegal. No suit can be brought for recovering anything alleged
to be won on any wager.
Suit to recover money deposited: Sometimes parties to the wagering agreement deposit money with a person
(called stakeholder). It is to be noted that winner cannot recover but a loser can recover his deposit from the
stakeholder. [Bridger v. Savage]
Question 100] A's son is ill and he calls a doctor B who, after examining the patient, says that he will cure him
within three days. A and B enter into a contract that if B effects the cure within three days, he will get ` 1,000, but
if he fails he will get nothing and will have to pay ` 500. Is this a wagering contract?
Ans.: Yes, this is a wagering contract. The doctor agrees to pay ` 500 if he fails to cure within three days and to
receive ` 1,000 if he succeeds. A wager is an agreement to pay money or money's worth on the determination of an
uncertain event. The intention of parties is to gamble. All these conditions are satisfied when A agrees to pay ` 1,000
or receive ` 500 depending upon his son being cured or not being cured. The doctor has also agreed to this. Hence,
the agreement is of a wagering character.
Question 101] A took a bet of ` 5,000 with B that a certain horse would win a certain race. Under this agreement
A had to deposit ` 1,000 with B. Since A had no money he approached his friend C, who advanced the sum to him
on condition that A was to return ` 2,000, if A should win his bet against B, but to return nothing if A lost. A won
his bet against B. Can C recover ` 2,000 from A?
Ans.: No. C cannot recover ` 2,000 from A. The contract between A and C is of wagering nature. A wagering contract
is a contract to give money or money's worth upon the determination of an uncertain event. Here, A promised to
return ` 2,000 if he wins bet against B and to pay nothing if he lost, after taking a loan of ` 1,000 from C. His
agreement with C is a 'wager', the uncertain event being A's winning against B. An agreement by way of wager is
void as per Section 30 of the Indian Contract Act, 1872. This, being a void agreement, cannot be enforced and C
cannot recover ` 2,000 from A.
CONTINGENT CONTRACT
Question 102] Write a short note on: Contingent contract CS (Foundation) - June 2000 (5 Marks) 1
Ans.: A contract may be divided into following two types:
(1) Absolute Contract: It is contract in which performance does not depends upon any event or condition.
(2) Contingent Contract [Section 31]: It is a contract to do or not to do something, if some event, collateral to
such contract, does or does not happen.
Example 1: Arun sends goods to Tarun on 'sale or return' basis. This is contingent contract depending on the act of
the Tarun to accept or reject the goods.
Example 2: When someone takes fire insurance policy it is a contingent contract as liability of insurance company
arises on when damages to the house by fire.
There are three essential characteristics of contingent contract:
(1) Its performance depends upon the happening or non-happening in future of some event.
(2) The event must be uncertain.
(3) The event must be collateral/incidental to the contract.
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Question 103] A agrees to construct a swimming pool of B for ` 2,00,000. The payment is to be made by B on the
completion of repair of swimming pool. Is this a contingent contract?
Ans.: As per Section 31, Contingent contract is a contract to do or not to do something, if some event, collateral to
such contract, does or does not happen.
Construction of a swimming pool does not depend upon any event. Hence, it is not contingent contract. It is in fact
absolute contract which is valid and enforceable.
Question 104] State the rules relating to contingent contract?
Explain the provisions regarding contingent contracts. CS (Foundation) - June 2003 (5 Marks)
Explain the meaning of contingent contract and state the rules relating to such contracts.
Ans.: Rules relating to contingent contracts are as follows:
(1) Enforcement of contracts contingent on an event happening [Section 32]: Contingent contracts to do or
not to do anything in an uncertain future event happens, cannot be enforced by law unless and until that event has
happened.
Example: A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract
becomes void.
(2) Enforcement of contract contingent on an event not happening [Section 33]: Contingent contracts to do or
not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event
becomes impossible, and not before.
Example: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be
enforced when the ship sinks.
(3) When event on which contract is contingent to be deemed impossible, if it is the future conduct of a living
person [Section 35]: If the future event on which a contract is contingent is the way in which a person will act at an
unspecified time, the event shall be considered to become impossible when such person does anything which
renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.
Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be
considered impossible, although it is possible that D may die and that C may afterwards marry B.
(4) Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time,
become void if the event does not happen or its happening becomes impossible before the expiry of that time.
[Section 35]
Example: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced
if the ship returns within the year, and becomes void if the ship is burnt within the year.
Example: A promise to pay B a sum of money if a certain ship does not return within a year. The contract may be
enforced if the ship does not return within the year, or is burnt within the year.
(5) Agreements contingent on impossible events, void [Section 36]: Contingent agreements to do or not to do
anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.
Example: A agrees to pay B ` 1,000 if two straight lines should enclose a space. The agreement is void.
Example: A agrees to pay B ` 1,000 if B will marry A's daughter, C. C was dead at the time of the agreement. The
agreement is void.
Question 105] Distinguish between: Wagering Agreement & Contingent Contract
Ans.: Following are main points of difference between a wagering agreement & contingent contract:
Points Wagering Agreement Contingent Contract
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Meaning Wagering Agreement is an agreement between Contingent contract is a contract to do or not to
two parties by which one promises to pay do something, if some event, collateral to such
money or money's worth on the happening of contract, does or does not happen.
some uncertain event in consideration of the
other party promise to pay if event does not
happen.
Reciprocal A wagering agreement consists of reciprocal Contingent contract may not contain reciprocal
Promises promises. promises.
Nature A wagering agreement is essentially of a Contingent contract may not be of a wagering

contingent nature. nature.
Void/valid A wagering agreement is void. Contingent contract is valid.
Interest In a wagering agreement, the parties have no In contingent contract the parties have other
other interest in the subject matter of the interest.
agreement except the winning or losing of the
amount of the wager.
Future In a wagering agreement the future event is the Contingent contract the future event is only
Event sole determining factor. collateral.
PERFORMANCE OF CONTRACT
Question 106] What do you understand by performance of contract? Also state the requisites of attempted
performance.
Ans.: Fulfilment of obligations under the contract is known as performance of contracts. Parties to the contract
must either perform or offer to perform their respective promises unless such performance is excused under the
provisions of the Contract Act or of any other law.
If one of party to contract is ready to perform his part but other party is not ready to accept performance, it is
known as tender or attempted performance. Tender is equivalent to actual performance.
Requisites of valid tender:
(1) It must be unconditional.
Example: D, a debtor offers to pay to C, his creditor on the condition that C sells his motor bike to him. This is not
valid tender.
(2) It must be for whole obligation. Unless otherwise agreed performance of part obligation cannot be treated
as attempted performance.
Example: D, a debtor offers to pay ` 1,000 out of amount due which is ` 10,000. This is not valid tender.
(3) It must be made at proper time and place.
Example: D owes C ` 10,000 payable on 30th June with interest. He offers to pay amount due on 30th May with
interest due up to 30th May. This is not valid tender.
(4) It must be made to proper person in proper from.
Is it required that parties to the contract must perform the contract personally. Comment.
CA (Foundation) - May 2001 (10 Marks)
Performance of a contract may be made only by the parties to the contract. Comment.
Ans.: Who can perform the contract [Section 40]: A contract may be performed by:
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(1) Promisor himself: Contracts which involve the exercise of personal skill, volition or diligence, or based upon
personal confidence must be performed by promisor himself. Such contracts come to an end on the death of
promisor.
(2) Agent: An agent is a person employed to do any act for another, or to represent another in dealing with third
persons. The person for whom such act is done, or who is so represented, is called the principal.
(3) Legal representatives: On death of person his legal representative is liable to perform the contract limited
to the value of the property they inherit from the deceased. However contracts which involve the exercise of
personal skill, volition or diligence, or based upon personal confidence cannot must be performed by legal
representative.
(4) Third persons: Where promisee accepts so then promisor gets discharged from his duties.
(5) Joint promisors: If provided so. If any of them or all die then legal representative of them.
Question 108] R promised to pay ` 10,000 on 30.10.2018 jointly to B and N for some consideration. B died on
1.9.2018. On 30.10.2018 N demanded payment of whole amount of ` 10,000. Whether N is justified?
Ans.: On death of person his legal representative is liable to perform the contract limited to the value of the property
they inherit from the deceased. Thus, N has no right to claim the whole amount and payment of ` 10,000 will be
jointly recovered by B and legal heirs of N.
Question 109] On 30.11.2019 Sham agrees to sell a painting to Ram f or ` 5,000 but Sham died on 8.12.2019.
Sham's son claimed ` 10,000. Can Ram obtain the painting at ` 5,000 which was agreed to by Sham?
Ans.: On death of person his legal representative is liable to perform the contract limited to the value of the property
they inherit from the deceased.
Son (legal heir) of Sham has to perform the contract and is liable to sell painting for ` 5,000 only. If he fails to do so
Ram can claim damages from him.
Question 110] What is the law relating to the performance of joint promise in case of a contract.
Ans.: Devolution means passing over from one person to another.
If two or more persons have made a joint promise, they are known as joint promisor. Ordinarily all of them must
jointly fulfil the promise. After death of any one of them, his legal representative jointly with surviving promisor,
fulfil the promise
If joint promisors does not discharge their obligation then provisions are as follows:
(1) Promisee may compel any one or more of such joint promisors to perform the whole of the promise.
Example: A, B and C jointly promise to pay D ` 60,000. D may compel all or any of them to pay him ` 60,000.
(2) When one of the joint promisors is compelled to perform the whole contract, he can call for a contribution
from others.
Example: A, B and C jointly promise to pay D ` 60,000. A is compelled to pay whole amount to D. A may recover `
20,000 each from B & C.
(3) If any of the joint promisors makes a default in making his contribution the remaining joint promisors must
bear the loss arising from such a default in equal shares.
Example 1: A, B and C jointly promise to pay D ` 60,000. C is unable to pay anything and A is compelled to pay whole
amount to D. A is entitled to recover ` 30,000 from B.
Example 2: A, B and C jointly promise to pay D ` 60,000. C is insolvent but his assets are sufficient to pay one half of
his debts. A is entitled to recover ` 10,000 from C and ` 25,000 from B.
(4) A release by the promisor of any of the joint promisor does not discharge the other joint promisor from
liability. The released joint promisor continuous to liable to the other joint promisors.
Example: A, B and C jointly promise to pay D ` 60,000. D releases A from his liability and files suit against B & C for
the payment of debt. B & C can still recover ` 20,000 from A as his contribution.
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Question 111] A, B & C are partners in a firm. They jointly promise to pay ` 1,50,000 to P. C became insolvent and
his private assets are sufficient to pay only l/5th of his share of debts. A is compelled to pay the whole amount
to P. Examining the provisions of the Contract Act, 1872, decide the extent to which A can recover and amount
from B. CA (PE-II) - Nov 2007 (5 Marks)
Ans.: As per Section 43 of the Contract Act, 1872, if any of the joint promisors makes a default in making his
contribution the remaining joint promisors must bear the loss arising from such a default in equal shares.
A, B & C have jointly promised to pay ` 1,50,000 to P. However, C became insolvent and his private assets are
sufficient to pay only l/5th of his share of debts. C's share is ` 50,000 and l/5th of this i.e. he is able to pay ` 10,000.
Thus, remaining amount of ` 1,40,000 (1,50,000 -10,000) has to be borne by A & B equally.
If A pay the whole amount then he can recover ` 10,000 from C and ` 70,000 from B.
A 70,000
B 70,000
C 10,000
Total 1,50,000
Question 112] Who can demand performance of contract?

Ans.:
(1) It is only promisee who can demand performance of the promise under a contract. It makes no difference
whether the promise is for the benefit of the promise or for any other person.
Example: A promises to B to sell his motor bike and give it to C on behalf of B. A does give the motor bike to C. C
cannot take action against A. It is only B who can enforce this promise against A. This is also as per doctrine of privity
of contract.
(2) In case of death of promisee, his legal representative can demand performance.
(3) In certain cases, a third party can also enforce performance as per doctrine of privity of contract.
Question 113] Write a short note on: Time and place of performance * 1
Ans.: Provisions as to time and place of performance are as follows:
(1) If time & date is specified for performance for promise then, performance must be given at specified time &
date.
(2) If no time is specified for performance, the promise must be performed within reasonable time.
(3) If no place is specified for performance of promise then promisor should apply to promisee for specify
reasonable place for performance.
Question 114] Write a short note on: Reciprocal Promises Reciprocal promises are to be performed
simultaneously. Comment.
Ans.: Reciprocal Promise [Section 2(f)]: Where contract is consist of two promises which are consideration for each
other then promises are called reciprocal promises.
(1) Simultaneous performance of reciprocal promises [Section 51]: When a contract consists of reciprocal
promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and
willing to perform his reciprocal promise.
Example: X & Y agrees that X shall sell the certain goods for which Y will pay on delivery. X need not to perform
unless Y is ready to pay and Y need not pay unless X is ready to deliver the goods.
(2) Order of performance of reciprocal promises [Section 52]: Where the order in which reciprocal promises
are to be performed is expressly fixed by the contract, they shall be performed in that order, and where the orders
is not expressly fixed by the contract, they shall be performed in that order which the nature of transaction requires.
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Example 1: X promises to make some furniture at the house of Y at a fixed price. X's promise to make furniture must
be performed first before Y pays the price.
Example 2: X promises to take a loan from Y and to furnish some security against the loan. Y need to perform his
promise of giving loan unless X furnishes security as nature of transaction requires that Y shall have security before
he gives the loan amount.
(3) Liability of party preventing event on which contract is to take effect [Section 53]: When a contract contains
reciprocal promises and one party to the contract prevents the other from performing his promise, the contract
becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party
for any loss which he may sustain in consequence of the non-performance of the contract.
Example: X and Y contracts that Y shall execute certain work for X for ` 15,000. Y is ready to execute his work but X
prevents him from doing so. The contract is voidable at the option of Y and if he rescinds the contract, is entitled to
recover from X compensation for any loss which he has incurred by the non-performance by X.
(4) Effect of default as to the promise which should be performed, in contract consisting or reciprocal promises
[Section 54]: When a contract consists of reciprocal promises, such that one of them cannot be performed, or that
its performance cannot be claimed till the other has been performed, and the promisor of the promise last
mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must
make compensation to the other party to the contract for any loss which such other party may sustain by the non-
performance of the contract.
Example: X contracts with Y to execute certain builder's work for a fixed price, Y supplying the timber and other
material necessary for the work. Y refuses to furnish timer and other material and the work cannot be executed. X
need not execute the work and Y is bound to make compensation to X for any loss caused to him by the non-
(5) Reciprocal promise to do things legal, and also other things illegal [Section 57]: Where persons reciprocally
promise, firstly to do certain things which are legal, and, secondly under specified circumstances, to do certain other
things which are illegal, the first set of promise is a contract, but the second is a void agreement.
Example: Amit and Rahul agree that Amit shall sell house to Rahul for ` 1,00,000 but if Rahul uses it as a gambling
house, he shall pay further to Amit ` 50,000 for it. The first set of reciprocal promises, namely to sell the house and
pay ` 1,00,000 for it, is a contract. The second set if for an unlawful object, namely that Rahul may use the house as
a gambling house is void agreement.
Ans.: Time is essence of contract means the contract must be performed within stipulated time; otherwise other
party can repudiate the contract.
Effect of failure to perform in a fixed time when time is essential [Section 55]: When a party to a contract promises
to do a certain thing at or before a specified time and fails to do such things at or before a specified time, the
contract becomes voidable at the option of the promisee.
If prices fluctuate rapidly in market time of delivery and payment are considered as essence of contract.
Effect of such failure when time is not essential: If it was not the intention of the parties that time should be of the
essence of the contract, the contract does not become voidable but the promisee is entitled to compensation from
the promisor for delayed performance.
Effect of acceptance of performance at time other than agreed upon: If promisee accepts late performance when
time is essence of contract, then promisee cannot claim compensation unless, at the time of acceptance that he
intends to claim compensation for loss.
Question 116] Write a short note on: Appropriation of payments
Appropriation is a right primarily of the debtor and for his benefit.
CA (Foundation) - Nov 2000 (5 Marks)
Ans.: First choice is with debtor to intimate for which particular debt payment is to applied [Section 59]: Where a
debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation
implying, that the payment is to be applied to the discharge of some particular debt, the payment if accepted, must
be applied accordingly.
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Example 1: A owes B, among the other debts ` 10,000 upon a promissory note which falls due on the 1st June. He
owes B no other debts of that amount. On 1st June, A pays to B ` 10,000. The payment is to be applied to discharge
of the promissory note which falls due on 1st June.
Example 2: A owes to B among the other debts the sum of ` 5,667. B writes a letter to A and demands payment of
this sum. A send to B ` 5,667. This payment is to be applied to discharge of the debt of which B had demanded
payment.
Second choice is of creditor if debt to be discharged is not indicated [Section 60]: Where the debtor has omitted
to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor
may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its
recovery is or is not barred by the law in force for the time being as to the limitations of suits. However, creditor
should not apply the payment to a disputed or unlawful debt.
The debt due may be principal and interest. In such case if debtor makes part payment then payment should be first
apportioned towards interest and after interest is fully paid off, to principal. [Rulia Devi v. Raghunath Prasad, AIR
1979 Pat. 115]
First in first out in other cases [Section 61]: Where neither party makes any appropriation, the payment shall be
applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the
time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge
of each proportionally.
Question 117] X lent three sums to Y of ` 10,000, ` 20,000 and ` 50,000. Y sent a sum of ` 10,000 asking X to
appropriate this money towards the third debt of ` 50,000. X wants to appropriate this money to the first loan.
Can he do so?
Ans.: As per Section 59 of the Contract Act, 1872, where a single payment is made by a debtor who owes several
sums to same creditor, the debtor has the primary right to specify the manner of appropriation.
Where debtor does indicate such manner, the creditor must do so or else he should refuse to accept the payment.
Since X has indicated to adjust the amount of ` 10,000 against third debt of ` 50,000, X must do so; he cannot adjust
it against first debt.
Question 118] A, a tenant, owes rent for the month of January, February, March and April. He sends the amount
of rent for the month of March. Is the landlord bound by this appropriation?
Ans.: Section 59 of the Contract Act, 1872, specifically provides that the right of determine the manner of
appropriation rests with the debtor. If he expressly intimates at the time of actual payment towards the payment
of which it should be applied, the creditor must do so. The landlord, therefore, must apply the rent in payment of
rent for the month of March.
Question 119] A took a loan from Punjab National Bank to the extent of ` 2,50,000. B guarantees the repayment
of this loan. Later, A secures another loan of ` 1,50,000 from the same bank. He tenders a sum of ` 2,00,000 to the
bank without any advice as to its manner of appropriation. Bank uses this money towards the settlement of loan
of ` 1,50,000 plus interest and remaining towards the loan guaranteed by B. A objects to this. Decide.
Ans.: Section 60 of the Contract Act, 1872 provides that where a debtor makes a single payment to a person, whom
he owes several sums and omits to prescribe the manner of appropriation and there are no other circumstances
indicating to which debt, the payment is to be appropriated, the creditor has the discretion to appropriate the
money to any lawful debt, even if it were time-barred.
In this problem, A fails to indicate the manner of appropriating and so the Bank is entitled to appropriate it in any
manner it likes towards any lawful debt. Therefore, A has no cause to object.
Question 120] Write a short note on: Assignments of contracts
Ans.: To assign means to transfer. Assignment of contract means transfer of contractual rights and liabilities to a
third party.
Rules relating to assignment:
(1) The rights and benefits under a contract not involving personal skill may be assigned.
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Example: A owes ` 500 to B. B can transfer his right to C to recover the amount from A.
(2) Contractual obligation involving personal skill or ability cannot be assigned Example 1: A promises to paint a
picture for B. Obligation of A cannot be transferred.
Example 2: A promises to marry B. Obligation of A cannot be transferred.
(3) A promisor cannot assign his liabilities or obligation under a contract without consent of promise or
transferee.
Example: A owes ` 1,000 B. A, B & C decides that debt of A will know be paid by C. Thus, with the consent of B
(promise) & C (transferee) A can transfer his obligation.
(4) An actionable claim can be transferred by an instrument in writing subject to provisions of the Transfer of
Property Act, 1882.
DISCHARGE OF CONTRACT
Question 121] State the various methods of termination of contracts.
CS (Foundation) - June 2004 (5 Marks) CS (Executive) - Dec 2014 (5 Marks)
Ans.: Termination of contractual relationship between the parties is known as discharge of contract. A contract may
be discharged by -
♦ Performance
♦ Agreement or consent
♦ Impossibility
♦ Lapse of time
♦ Operation of law
♦ Breach of contract
Question 122] Write a short note: Discharge by performance
Ans.: When the parties to the contract fulfil their obligation within the time and in manner prescribed, contract is
discharged by performance.
Example: A agrees to sale his Maruti 800 car to B for ` 50,000. When A delivers the car he is discharged and when B
pays ` 50,000 he is discharged.
Types of Performance:
(1) Actual Performance: When parties to contract actually fulfil the obligation arising under contract, it is known
as actual performance.
(2) Attempted Performance/Tender: If one of the party offers to perform but other party does not accept the
performance, it is known as' Attempted performance'. Party ready to perform is discharged from contract. Thus,
attempted performance or tender is equivalent to actual performance.
Question 123] Write a short note: Discharge by agreement or consent
Ans.: A contract may be discharged by making further agreement or taking consent of the parties.
The rule of law in this regard is: eodem modo quo quid constitutor eodem modo destitute i.e. a thing may be
destroyed in the same manner in which it is constituted.
Discharge by agreement may take place in following manner:
(1) Novation: Novation takes place when new contract is substituted for already existing contract.
Example: Ram owes ` 1,00,000 to Shyam. It is agreed between Ram & Shyam and Indra that Shyam shall accept
Indra as his debtor instead of Ram. This known as novation and original contract between Ram and Shyam comes
to an end. It is to be noted that, novation should take place before expiry of the time of original contract.
(2) Rescission: When all or some of the terms of the contract are cancelled it is known as rescission.
(3) Alteration: When terms of the contract are altered by mutual consent of the parties it is known as
Alternation.
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Example: M of Mumbai agrees to deliver 1,000 kg rice to P of Pune at his Shop No. 1 on 1st day of next month.
Latter, P request to M to deliver rice at Shop No. 2. This is known as Alternation.
(4) Remission: Remission means acceptance of a lesser fulfilment of promise made.
Example: B owes ` 20,000 to T. B pays ` 18,000 to T and T accept in satisfaction of the whole debt. This is known as
remission. B is discharged from payment of whole debt of ` 20,000.
(5) Waiver: When parties to the contract relinquish some or all rights arising under a contract it is known as
waiver.
(6) Merger: When inferior right merges into superior right it is known as merger.
Example: A gives his land to B on lease basis. Latter A sells the land to B. Here B's right as lessee merge into right as
owner.
Question 124] A owes B ` 10,000. C, who is friend of A, pays to B ` 5,000 in full satisfaction of B's Claim on A which
B accepts. Can B now recover the balance from A? Give reasons.
Ans.: Consideration may move from promise or any other person. In given case consideration has moved from C on
behalf of A to B. Further, contract is discharged when creditor accept a lesser fulfillment of promise made, which is
known as remission. Hence, A is discharged on payment of money by C to B.
Question 125] Write a short note: Discharge by lapse of time
Ans.: The law relating to limitation is incorporated in the Limitation Act, 1963. Section 3 of the said Act provides
that, any suit, appeal or application if made beyond period of limitation, it is the duty of the Court not to proceed
with such suit. The Courts in India are bound by the specific provisions of the Limitation Act, 1963. It specifies the
limitation period of 3 years for suit's relating to contract. Thus, if promisee to the contract does not take action
within period of 3 years then promisee is deprived of his remedy at law.
Question 126] Write a short note: Discharge by operation of law
Ans.: Discharge by operation of law includes, discharge:
(1) By death or serious illness: Where performance of contract involves personal skill or ability of the promisor,
contract is discharged/terminated on the death or serious illness of promisor.
(2) By merger
(3) By insolvency: When a person is adjudged insolvent under the provisions of Insolvency Law, he is discharged
from all liabilities incurred prior to his adjudication.
(4) By unauthorized alternation of the terms of a written agreement.
(5) When rights & liabilities becoming vested in the same person.
Example: A sells some goods to B for ` 2,000. B dies and as per his will all property of B is transferred to A. Contract
between A & B is discharged.
Question 127] A. Das entered into contract to sing for B. Roy at a concert for ` 10,000 which was received in
advance. A. Das being too ill could not sing. B. Roy demanded compensation for loss of profit which he would
have made if A. Das had been able to sing. State B. Roy's right.
Ans.: Where performance of contract involves personal skill or ability of the promisor, contract is
discharged/terminated on the death or serious illness of promisor. In given case contract is discharges due to illness
of A. Das and he is not liable to pay any damages to B. Roy.
Question 128] Write a short note: Discharge by breach of contract
Write a short note: Anticipatory breach of contract
CS (Foundation) - June 2004 (5 Marks), June 2007 (4 Marks) 1 2
Ans.: Breach of contract means breaking or non-fulfillment of obligation under a contract. Breach of contract may
be:
(1) Actual breach of contract: Actual breach of contract occurs, when at the time when the performance is due,
one party fails or refuses to perform his obligation under the contract.
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Example: A agrees to supply 10 bags of rice on 1st April. He does not supply the rice bags on that day. This is actual
breach of contract. Party not in breach i.e. B can treat the contract as so longer binding on him and sue for breach
of contract.
(2) Anticipatory breach of contract: When a party to executory contract declares his intention of not performing
the contract, it is known as anticipatory breach of contract.
\
Executory contract is a contract in which the promises of both the parties have yet to be performed.
Anticipatory breach may take place in any of the following ways:
(ia) Express Repudiation: When one of the party to the contract expressly declares that he is not going to perform
his part.
Example: A contracts to supply 100 bags of rice on 31.12.2018 to B. On 15.12.2018 he shows his unwillingness to
supply the rice. This is known as anticipatory breach of contract, by express repudiation.
(b) Implied Repudiation: Party does some act which is against the performance of his promise.
Example: X agrees to sell his car to Y on 30.12.2018. On 15.12.2018, X sells his car to Z. There is anticipatory breach
by implied conduct of X.
Right of the party not in breach or the aggrieved party in case of anticipatory breach is as follows:
♦ Rescind the contract: The aggrieved party may decide not to wait till the due date. It may rescind the contract
immediately and claim damages for breach.
♦ Treating the contract as alive: The aggrieved party may decide not to immediately rescind the contract and
wait for the due date of performance. Consequences of treating the contract alive are as follows.
The promisor may perform his promise when the time for its performance comes and the promisee will be bound
to accept the performance.
Example: On 1.1.2017 X agrees to supply 100 bags of rice to Y on 31.1.2017. On 15.1.2017 X shows his unwillingness
to Y for supply of 100 bags. Y does not take any action. On 31.1.2017 a supply 100 bags of rice, Y is bound to accept
it.
If aggrieved party decides not to immediately rescind the contract and wait for the due date of performance and
meanwhile if government imposes a ban, then contract becomes void and aggrieved party cannot claim damages.
Question 129] Ramaswamy of Chennai placed an order with Shah of Ahmedabad for supply of Urid Dhall on
10.11.2018 at a contracted price of ` 40 per kg. The order was for the supply of 10 tonne within a month's time
viz. before 9.12.2018. On 4.12.2018 Shah wrote a letter to Ramashwmy stating that the price of Urid Dhall was
sky rocketing to ` 50 per kg and he would not be able to supply as per original contract. The price of Urid Dhall
rose to ` 53 on 9.12.2018 Advise Ramaswamy citing the legal position. CA (PCC) - May 2007 (5 Marks)
Ans.: There is anticipatory breach of contract by Shah and Ramaswamy can claim damages.
In given case contract price is ` 40 per kg on 10.11.2018 which rose to ` 50 per kg as on 4.12.2018 and finally to ` 53
per kg on 9.12.2018.
Right of the party not in breach or the aggrieved party in case of anticipatory breach are as follows:
♦ Rescind the contract: Ramaswamy may decide not to wait till the due date and accordingly he may rescind
the contract immediately and claim damages for breach.
♦ Treating the contract as alive: Ramaswamy may decide not to immediately rescind the contract and wait for
the due date of performance. Consequences of treating the contract alive are as follows.
If Shah (promisor) may perform his promise when the time for its performance comes and Ramaswamy (promise)
will be bound to accept the performance.
If Ramaswamy decides not to immediately rescind the contract and wait for the due date of performance and
meanwhile if government imposes a ban, then contract becomes void and he cannot claim damages.
Question 130] Write a short note: Discharge by supervening impossibility
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How does a valid contract get discharged by impossibility of performance?
Ans.: Impossibility which arises subsequent to the formation of a contract is called as post-contractual or
supervening impossibility.
In England the doctrine of frustration is the parallel concept of "supervening impossibility".
A contract is discharged by supervening impossibility in the following cases:
(1) Accidental destruction of subject matter of contract: After formation of contract if subject matter is
destroyed without any fault of the either party, the contract is discharged.
Example: Ram owns a big hall which can be used for multi-purpose. Lata, a singer, takes the hall on hire for a show
to be performed on next Sunday. Before the show is performed, the hall was completely destroyed by a fire.
Contract between Ram and Lata becomes void, due destruction of subject matter. As per Section 65, if any person
receives any benefit under such contract he is bound to restore such benefit to the person from whom he had
received it. Thus, if Ram had received any benefit from Lata, in form of advance, he is bound to repay it to Lata.
(2) Change in particular state of things.
Example: Anil promises to marry Madhuri. Before marriage, Madhuri becomes mad. The contract is discharged, as
it becomes void due to change in particular state of thing.
(3) Serious illness or death or incapacity of party: Where a contract depends on the personal skill or
qualification of a party.
Example: A agreed with B to perform a dance show on a particular date. Before the date of show A was seriously
ill. Here contract between A & B is discharged.
(4) Change in law or stepping in of a person with statutory authority.
Example: A agreed to sale certain land to B. Before the sale is effected, the land was compulsorily acquired by the
Government. Here, contract is discharged due to Government action.
(5) The contract becomes void when war is declared and hence discharged.
Question 131] Write a short note: Impossibility of performance - not an excuse.
A agreed to supply to B certain goods to be produced from Indonesia. The goods could not be produced due to
riots and civil disturbances in Indonesia. Decide, whether the non-performance of the contract may be excused?
CS (Executive) - Dec 2017 (3 Marks) * 1
Ans.: Impossibility of performance is not an excuse for non-performance. Ordinarily when a person undertakes to
do something, he must do it unless its performance becomes absolutely impossible.
In the following cases, a contract is not discharged on the ground of supervening impossibility:
(1) Difficulty of performance: A contract is not discharged by the mere fact that it has become more difficult of
performance due to some un-contemplated events or delays.
(2) Commercial impossibility: A contract is not discharged merely because expectation of higher profits is not
realised, or the necessary raw material is available at a higher price because of the outbreak of war, or there is a
sudden depreciation of currency.
(3) Impossibility due to failure of a third person: Where a contract could not be performed because of the
default by a third person on whose work the promisor relied, it is not discharged.
(4) Strikes, lock-outs & civil disturbances: Such events do not discharge a contract unless the parties
have specifically agreed in this regard at the time of formation of the contract.
(5) Failure of one of the objects: When a contract is entered into for several objects, the failure of one of them
does not discharge the contract.
As per facts given in case, A agreed to supply B certain goods to be produced from Indonesia. However, goods could
not be produced due to riots and civil disturbances in Indonesia. As discussed above such events do not discharge
a contract unless the parties have specifically agreed in this regard at the time of formation of the contract. Thus,
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non-performance of contract by A cannot be excused and he will have to perform the contract as agreed otherwise
B may claim damages/compensation from A for nonperformance of contract.
Question 132] A agrees to pay B ` 1,000 if two straight lines should enclose a space. State with reasons whether
this agreement is valid?
Ans.: An agreement to do an act impossible in itself is void. In the given problem, A agrees to pay B ` 1,000 if two
straight lines should enclose a space, a phenomenon which requires at least three lines or more than two straight
lines. Consequently, enclosing a space by two straight lines is an act impossible in itself and hence the agreement
between A and B is void.
Question 133] A, a merchant in Uttar Pradesh, agreed to sell 100 bags of sugar to B, a merchant in Delhi, and
received ` 20,000 as an advance payment. Before the performance was due, the Government of Uttar Pradesh
issued an order banning any transfer of sugar to any other State except on Government account. What are the
rights of B?
Ans.: A contract which, subsequent to its formation becomes illegal or impossible becomes void. Since Uttar Pradesh
Government has banned any sale of sugar involving movement out of the State, the performance of the contract
has become illegal and as such it is a void contract. Therefore, B has no right to enforce the performance of contract
but he has the right to receive back ` 20,000.
Question 134] X entered into a contract with Y to build house for a fixed sum of ` 10,00,000. Owing to unexpected
shortage of skilled labour and of certain materials, the contract took 24 months to complete instead of the 12
months expected, and cost ` 12,50,000. X contended that the contract had been frustrated and that they were
entitled for the cost actually incurred. Advise Y.
Ans.: The doctrine of frustration does not apply in case the performance of the contract becomes more expensive
or less profitable than the parties anticipated. X agreed to construct house for a fixed sum of ` 10,00,000 and
shortage of skilled labour and materials made the contract less profitable. This is merely commercial impossibility
which is not covered by the " doctrine of frustration or supervening impossibility". As such, X must carry out his
obligations and is not entitled to claim ` 12,50,000. He can received fixed sum of ` 10,00,000 only.
Question 135] Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar) 5,000 bags to be
manufactured in his factory. The bags could not be manufactured because of strike by the workers and Akhilesh
failed to supply he said bags to Shekhar. Decide whether Akhilesh can be exempted from liability under the
provisions of the Contract Act, 1872.
CA (PE-11) - May 2004 (5 Marks)
Ans.: Impossibility of performance is, as a rule, not an excuse for non-performance.
A contract is not discharged by the mere fact that it has become more difficult of performance due to some un-
contemplated events or delays. Events such as these do not discharge a contract unless the parties have specifically
agreed in this regard at the time of formation of the contract. Hence, Akhilesh cannot be exempted, he has to
perform contract and if he does not perform he will be liable to pay damages to the Shekhar.
REMEDIES FOR BREACH OF CONTRACT
Question 136] State the various remedies available to aggrieved party in case of breach of contract?
Ans.: When contract is entered into between two or more parties, it gives rise to rights & obligation. Some time one
of the parties to contract may not perform or fails to perform his obligation as per requirement of contract. In that
case, party not in breach has means to enforce his rights, which are called as remedies for breach of contract. That's
why it said that - vbijus ibi remedium - where there is right, there is remedy. Thus, in case breach of contract parties
can enforce there right in a law Court. The appropriate remedy in any case will depend upon the subject matter of
contract and the nature of breach.
The remedies available to an aggrieved party on breach of contract are as follows:
♦ Rescission of a contract
♦ Suit for damages
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♦ Suit for specific performance
♦ Suit for injunction
♦ Suit for quantum merit
Question 137] Write a short note on: Rescission
Ans.: When a party to a contract has broken the contract, the other party may treat the contract rescinded and he
is absolved from all his obligations under the contract.
Example: A contract to supply 500 pairs of shoes by 1.1.2018 to B. A does not supply the shoes. B can treat the
contract rescinded and absolved from liability of payment of price of shoes.
Question 138] Write a short note on: Damages for breach of contract
What do you understand by ordinary damages? When can these damages be claimed?
Write a short note on: Liquidated Damages & Penalty CS (Foundation) - Dec 2004 (5 Marks)
Distinguish between: Ordinary Damages & Special Damages
Ans.: As per Section 73, when contract is broken by one party, other party can also claim damages, which naturally
arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to
be likely to result from the breach of it.
Such compensation is not to be given for any remote, indirect loss or loss of expected profit by reason of the breach.
The damages, which may be awarded to an injured party, may be of any of the following kinds.
♦ Ordinary/natural damages
♦ Special damages
♦ Exemplary/punitive/vindictive damages
♦ Nominal damages
♦ Damages for inconvenience & discomfort
♦ Liquidated damages/penalty
Meaning of damages: Damages means monetary compensation allowed for loss suffered by the aggrieved party
due to breach of a contract. The basic purpose of awarding damages is to put the aggrieved party in the same
position in which he would have been if other party duly performed contract.
Ordinary damages: When one of the party to the contract does not perform his obligation, the aggrieved party can
claim damages which naturally and directly arose in usual course of things from such breach. These damages are
awarded for such loss suffered by a party, which is direct consequence of breach. These are known as ordinary
damages.
Ordinary damages = Difference between (Contract price & market price on the date of breach)
Damages can be claimed for direct consequence of breach and not for indirect or remote consequence.
Claim for damages are based in celebrated case of Hadley v. Baxendale.
Facts of the case: X's mill was stopped by the breakdown of a shaft. He delivered the shaft to Y, a common carrier,
to be taken to a manufacturer to copy it and make a new one. X did not make known to Y that delay would result
in loss of profits. By neglect on the part of Y. the delivery of the shaft was delayed in transit beyond a reasonable
time and the mill was idle for a longer period than otherwise would have been. Held, Y was not liable for loss of
profits during the period of delay, as the circumstances communicated to Y did not show that a delay in the
delivery of the shaft would entail loss of profits to the mill.
Special Damages: When there exists special circumstances and it is brought to the notice of other party and such
other party makes breach, then party communicating special circumstances can claim special damages. Thus in
order to claim special damages following two conditions must be satisfied:
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♦ There exists special circumstances
♦ It is brought to the notice of other party & such other party makes breach
Example: A sends his special designed car in a show to be held at New Delhi. A engages B, a owner of PQR Transport
company to send a car and told B that if the car did not reach the destination on the stipulated date he (A) would
suffer a special loss. Car reached at New Delhi after the show is over. A can recover special damages from B.
Exemplary/vindictive/punitive damages: These damages are awarded with a view to punish the party in default.
Generally, these damages are not awarded by the Courts. However, in following cases, the Court may award such
damages, viz.
♦ Breach of promise to marry
♦ Wrongful dishonour of a customer's cheque by a banker
In a breach of promise to marry, the amount of the damages will depend upon the extent of injury to party's feeling.
In the banker's case, the smaller the amount of the cheque dishonored larger will be the damages.
Nominal damages: These damages consist of small amount e.g. a rupee or even 0.25 paise. These damages are
awarded so as to acknowledge to the plaintiff that he has proved & won his case.
Damages for inconvenience/discomf ort etc.: When a party to a contract has suffered substantial discomfort and
inconvenience as a result of breach of contract, he can file a suit for claiming compensation from a party at fault.
Damages, which are agreed upon in advance: Sometimes parties to the contract fix the damages that would be
payable in case of breach of contract. Such damages, which are agreed upon in advance by the parties may be of
following two types.
(a) Liquidated damages: If the specified amount represents fair & genuine pre-estimate of probable loss, such
specified sum is called as liquidated damages.
(b) Penalty: If the specified sum is disproportionate to the damages which are likely to result as a result of
breach, such specified sum is called as penalty.
In Indian law, there is no such difference between liquidated damages and penalty. As per Section 74, when a
contract has been broken, if a sum is named in the contract as the amount be paid in case of such
breach, the party complaining of the breach is entitled to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named.
Example: A borrows ` 500 from B and promise to pay ` 1,000 if he fails to repay on the given date. B is entitled to
recover such compensation, as the Court may consider reasonable. However, in no case the total amount including
compensation can exceed ` 1,000.
Payment of interest: Sometimes contract contains a clause providing for payment of interest in case of breach of
contract. If such interest is reasonable, Court may allow. However, if the interest is in nature of penalty, the Court
may award a reasonable compensation only.
Question 139] R, a retailer buys pens from W, wholesaler, and agrees to retail the pens at not less than ` 10 per
unit. R further agrees that in respect of any unit he sells at less than ` 10, he will pay W ` 500. R sells 10 units at `
7 each. W sues him for ` 500. Will W succeed?
Ans.: Section 74 of the Contract Act, 1872 provides that if a contract contains any stipulation by way of penalty in
case of breach, the party complaining is entitled to receive only reasonable compensation subject to the maximum
of penalty stipulated for. Hence, W would succeed in recovering a reasonable amount of compensation to be fixed
by the Court subject to the limit of ` 500 fixed by the parties.
Question 140] K entered into a contract with P for the purchase of 1,000 bags of rice at the rate of ` 1,000 per
bag. P has not supplied the goods within the due date and due to this K suffered a loss of ` 1,00,000 as he has to
purchase these bags at the rate of ` 1,100 per bag from the market to deliver the same to its customers.
CA (IPCC) - May 2018 (5 Marks)
Ans.: When a contract has been broken, the party who suffers is entitled to receive, from the party who has broken
the contract, compensation for any loss or damage caused to him which naturally arose in the usual course of things
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from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach
of it.
Thus, K is entitled to receive from P by way of compensation, the sum, by which the contract price falls short of the
price (i.e. @ ` 100 per bag) from the market price on the day of default. The amount of damages will be ` 1,00,000.
[i.e. 1,000 x 100]
Question 141] A employs B on a monthly salary of ` 5,000 for one year. After Six months, he removes B from the
job without his fault. B goes in search of job and meets with an accident. He spends ` 20,000 on medicines. Now,
he claims damages from A for the breach of contract and also for medical expenses of ` 20,000. Will he succeed
on the both counts? Give reasons?
Ans.: As per Section 73, when contract is broken by one party, other party can also claim damages, which naturally
arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to
be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss of
damage sustained by reason of the breach. Hence, B can claim damages for removal of job and not for medical
expenses.
Question 142] Rohit agreed to erect a plant for Roshan by 31st December, 2000. Rohit further agreed to pay `
1,000 per month as damages in case of delay beyond the agreed date. Roshan sued Rohit for ` 4,000 being the
loss caused to him as a result of delay of four months. What damages will you award and why?
Ans.: As per Section 74, when a contract has been broken, if a sum is named in the contract as the amount be paid
in case of such breach, the party complaining of the breach is entitled to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so named.
In this case also, Roshan can recover a reasonable compensation not exceeding ` 4,000.
Question 143] Arun is a shopkeeper. He enters into a contract with Bhanu, the wholesaler, for the supply of
crackers worth ` 1 lakh on the condition that the delivery must be made at least 7 days before Diwali. Arun also
makes known to Bhanu that if he fails to deliver the crackers in time, Arun is likely to suffer a loss of profit of `
25,000 which he expected to earn from the sale of crackers during Diwali season. But Bhanu supplies cracker 3
days after Diwali. Now Arun sues Bhanu for the loss of profit. Will Arun succeed? Give reasons.
Ans.: When there exists special circumstances and it is brought to the notice of other party and such other party
makes breach, then party communicating special circumstances can claim special damages. Thus, in order to claim
special damages following two conditions must be satisfied:
♦ There exists special circumstances.
♦ It is brought to the notice of other party & such other party makes breach.
In this case also Arun has made known to Bhanu about the loss of profit caused by the delayed delivery of crackers.
Hence, Arun is entitled to claim special damages.
Question 144] Dubious Textile enters into a contract with Retail garments Show Room for supply of
1,000 pieces of Cotton shirts at ` 300 per shirt to be supplied on or before 31st December, 2019. However on 1st
November, 2019 Dubious Textiles informs the Retail Garments Show Room that he is not willing to supply the
goods as the price of Cotton shirts in the meantime has gone up to ` 350 per shirt. Examine the rights of the Retail
Garments Show Room in this regard.
Ans.: Dubious Textiles has indicated its unwillingness to supply the cotton shirts on 1st November, 2019. It is
therefore called anticipatory breach of contract. Thus, Retail Garments show room can claim damages. The damages
will be calculated at the rate of t 50 per shirt i.e. the difference between contract price and market price, (i.e. 350 -
300 = 50)
Question 145] Under what circumstances can an aggrieved party institute a suit for 'injunction' and for 'specific
performance' of a contract? Explain with examples.
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Ans.: Specific performance: Sometimes monetary compensation may not be adequate remedy, in that case the
aggrieved party may pray to Court and get an order against other party to fulfil obligation it has .undertaken. This
is known as 'Specific Performance'. The law relating to specific relief in India is contained in 'Specific Relief Act,
1963'.
'Specific Relief' means relief in specie, which aims at the exact fulfilment of an obligation. This is also known as
'Equitable Relief'.
Injunction: Where a party is in breach of negative terms of a contract i.e. party is doing something which he
promised not to do, the Court may by issuing an order, restrain from doing what he promised not do so. Such an
order of the Court is known as injunction.
Example: W agreed to sings at L's theatre, and during a certain period to sing nowhere else. Afterwards W
contracted with Z to sing at another theatre and refused to perform the contract with L. Held, W could be restrained
by injunction from signing for Z.
Question 146] Anubhav, an author, enters into a contract with Balwant, a publisher, for writing a book for him.
But, subsequently Anubhav refuses to write the book for Balwant. Now, Balwant files a suit against Anubhav for
specific performance of the contract. Will Balwant succeed? Give reasons.
Ans.: Court does not grant specific performance of the contract where the contract is of personal nature or personal
services. In the given case, contract involves the personal qualification of Anubhav. Hence, Balwant will not get
order of specific performance against Anubhav.
Question 147] Miss X, a film actress agreed to work exclusively for a period of two years, for a film production
company. However, during the said period she enters into a contract to work for another film producer. Discuss
the rights of the aggrieved film production company under the Contract Act, 1872.
Ans.: Court does not grant specific performance of the contract where the contract is of personal nature or personal
services. However, where a party is in breach of negative terms, of a contract i.e. party is doing something which he
promised not to do, the Court may by issuing an order, restrain from doing what he promised not do so. Such an
order of the Court is known as injunction. The aggrieved film production company is advised to take injunction order
from Court to stop Miss X, from acting with other producer.
Question 148] Explain in brief the doctrine of quantum meruit.
Explain the concept of quantum meruit.
Ans.: Quantum meruit literally means 'as much earned’ i.e. in proportion to the extent of work done. Sometime
contract cannot be completed; in that case if one party has already executed some work, then he is entitled to get
a proportional amount to extent of work done. In case of breach of contract aggrieved party can claim 'Quantum
Meruit' plus damages. Quantum meruit is available only if original contract has discharged.
In following cases, a claim for quantum meruit may arise.
(1) When an agreement is discovered to be void/when a contract becomes void:
Example: K hired a godown from L for 12 months and paid the rent in advance. After about 7 months the godown
was destroyed by fire without the fault of either party. Here, contract has become void due to distraction of godown
and hence K can recover rent for unexpired period from L.
(2) No agreement as to remuneration: In a contract to render services, if there is no express or implied intention
to provide remuneration, the party rendering services can sue upon quantum merit for reasonable remuneration.
(3) When one party prevents the other from completion of contract.
In following cases, even party at fault can claim payment on quantum meruit.
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(a) Divisible contracts partly performed: Generally, no remedy is available to defaulting party, but even
defaulting party may be entitled to get payment on quantum meruit, if following conditions are satisfied
- The contract is divisible.
- The contract is partly performed.
- The party not in default has enjoyed the benefit of the part of the performances.
If above conditions are satisfied, a defaulting party may be entitled to get proportionate amount after deducting
compensation for loss/damage.
(b) Indivisible contract performed completely but badly: In such case party who has performed the contract
can claim the lump sum, but other party can make deduction for bad work.
Example: A agrees to repair the swimming pool of B for ` 50,000. The payment is to be made by B on the completion
of repair of swimming pool. A carried the repair in defective way. A can recover ` 50,000 less a deduction for bad
work.
Question 149] A agrees to print a book for B not knowing that it contains libellous matter. After printing a part
he discovers that it contains libellous matter. Can A (i) lawfully refuse to print the rest of the book, (ii) sue B for
the work done by him?
Ans.: Yes. A can refuse to print the rest of the book and if the work is divisible, he can sue B for the work done by
him. As the book contains libellous matter, it involves an injury to the person of another, for it is defamatory in
character. The consideration moving from A is printing of book containing libellous matter and hence it is unlawful.
The agreement between A and B is, therefore, void.
He can claim remuneration for the work done on the basis of quantum meruit only if total work is divisible into work
done and work undone. If this is not possible, no claim on the basis of quantum meruit can succeed.
QUASI CONTRACTS
Question 150] Write a note on: Quasi contracts CS (Foundation) - June 2000 (5 Marks)
Ans.: Quasi contracts are obligations created by law, regardless of agreement. Law of quasi contracts is also known
as law of restitution. Basically quasi contracts are not contracts at all, they are obligations imposed under the law.
In a contract, a promisor voluntarily undertakes an obligation in favour of the promisee. When a similar obligation
is imposed by law upon a person for the benefit of another even in the absence of a contract, such contracts are
the quasi-contracts.
These are based upon principles of equity, justice and good conscience.
Types of quasi-contracts:
(1) Supply of necessaries to persons incapable of contracting. [Section 68]
(2) Right to recover money paid for another person. [Section 69]
(3) Obligation of a person enjoying benefits of non-gratuitous act. [Section 70]
(4) Responsibility of a finder of goods. [Section 71]
Question 151] Enlist quasi-contracts dealt with under the Contract Act, 1872.
The position of finder of lost goods is that of bailee. CS (Executive) - June 2014 (5 Marks)
Ans.:
(1) Supply of necessaries to persons incapable of contracting [Section 68]: If necessaries are supplied to
persons incapable of contracting (minor or a person of unsound mind) then person supplying such necessaries is
entitled to be reimbursed from the property of such incapable person. Same is the case if money has been advanced
for the purchase of necessaries.
Example: A supplies B, a minor, necessaries suitable to his condition in life. A is entitled to be reimbursed from B's
property.
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(2) Reimbursement of person paying money due by another, in payment of which he is interested. [Section
69]: A person who is interested in the payment of money which another is bound by law to pay, and who therefore
pays it, is entitled to be reimbursed by the other.
Example: A purchase certain mills. There were overdue taxes on property by earlier owner. A paid taxes to save the
mills from being sold in execution. It was held that A had interest in the payments to safeguard his interest. Hence,
he can recover the amount from earlier owner.
(3) Obligation of a person enjoying benefits of non-gratuitous act [Section 70]: Where, a person does some act
or delivers something lawfully to another person with the intention of receiving payments for the same, in such a
case, the other person is bound to make payment if he accepts such services or goods or enjoys their benefit.
Example: A, a tradesman, leaves the goods at C's house by mistake. C treats the goods as his own. C is bound to pay
for the goods.
(4) Finder of goods [Section 71]: A person who finds goods belonging to another and takes them into his custody
is subject to the same responsibility as a bailee. He is bound to take care of such goods as man of ordinary prudence.
He is treated as owner against whole world except true owner.
Example: A finds diamond on B's shop. He hands it to B to keep until true owner is found. True owner did not appear
even advertisement in news paper. A claims the diamond from B, who refuses to return. B is bound to return
diamond to A as A is owner against whole world except true owner.
Responsibility of finder of goods:
♦ He must take care of goods as man of ordinary prudence.
♦ He must not to appropriate goods for his own use.
♦ He must not mix the goods with his own goods.
♦ He must try to find out true owner and to restore goods to the owner when the owner is traced.
Rights of finder of goods:
(a) Right of lien: Finder of goods has a right to retain the goods until he receives compensation for trouble and
expenses incurred in preserving the goods and finding out the owner.
(b) Right to sue for reward: Finder of goods can sue the owner for payment of any specific reward offered by
the owner for the return of goods lost, and retain the goods till payment of such reward.
(c) Right of sale: Finder of goods can sell the goods found, if:
♦ Owner cannot be found with reasonable diligence
♦ Owner, if found, does not pay the lawful charges of the finder
♦ Goods are in danger of perishing
♦ The lawful charges of finder, amount to 2/3rd of the value of goods.
(5) Liability for money paid or thing delivered by mistake or under coercion [Section 72]: A person to whom
money has been paid, or anything delivered, by mistake or under coercion must repay or return it.
Example: A pays the money to B by mistake. It is really due to C. B must refund the money to A. C however cannot
recover the amount from B as there is no privity of contract.
Question 152] W is the wife of H, who is Lunatic, purchases a diamond set of ` 10 lakh from Beauty Jeweller on
credit. Referring to the provisions of the Contract Act, 1872, decide whether the Beauty Jeweller is entitled to
claim the above amount from the property of H.
CA (PE-II) - June 2009 (5 Marks)
Ans.: As per Section 68 of the Contract Act, 1872, if necessaries are supplied to persons incapable of contracting
(minor or a person of unsound mind) then person supplying such necessaries is entitled to be reimburse from the
property of such incapable person. Same is the case if money has been advanced for the purchase of necessaries.
In this problem, Beauty Jeweller is not entitled to claim the price of diamond set from the property of H because
diamond set of worth ` 10 lakh is not a necessaries for W. It is a luxury for her.
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Question 153] Z rented out his house situated at Mumbai to W for ` 10,000 per month. A sum of ` 5 lakh, the
house tax payable by Z to the Municipal Corporation being in arrears, his house is advertised for sale by the
Corporation. W pays the Corporation, the sum due from Z to avoid legal consequences. Referring to the provisions
of the Contract Act, 1872, decide whether W is entitled to get the reimbursement of the said amount from Z?CA
(IPCC) - May 2010 (5 Marks)
Ans.: As per Section 69 of the Contract Act, 1872, a person who is interested in the payment of money which another
is bound by law to pay and who therefore pays it, is entitled to be reimbursed by the other.
W holding the house on rent basis and is naturally interested in preventing sale of the house. He makes the payment
of house tax dues to the corporation which Z is legally bound to pay. Hence, W can recover the amount from Z.
Question 154] A, a fruit merchant, sent a parcel of fruit on approval to E who was his regular customer but by
mistake the parcel was delivered to C. C, thinking the parcel was a birthday present from a friend, ate the fruits.
Advise the fruit merchant, A, as to his remedy, if any, available under the Contract Act, 1872.
Ans.: As per Section 70 of the Contract Act, 1872, where a person benefits by the delivery of certain goods by some
other person who never intended to do so gratuitously, the party benefited must compensate the other party. In
this case, fruit parcel was sent by A to B on approval and not free of charge if B had used it. It reached C, who took
benefit of it and as such must compensate A. Hence, C must pay for the fruits eaten.
Question 155] A finds a ring of B and sells it to a third person w Tho purchases it for value and in good faith. Can
the true owner, i.e. B can recover the ring from the person.
Ans.: As per Section 71 of the Contract Act, 1872, a person who finds goods belonging to another and takes them
into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as man of
ordinary prudence. He is treated as owner against whole world except true owner.
In given case sale by A to third person is not valid as A has no title. B can recover ring from third person and such
third person can recover damages from A for breach of "implied condition as to title" as per Sales of Goods Act,
1930.
Question 156] Ravi found a purse in a computer education centre. He deposited the purse with proprietor of the
centre so that the real owner can claim. However, no one claimed the purse. Ravi wants the purse back. Can he
succeed? CS (Foundation) - Dec 2002 (5 Marks)
Ans.: A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility as a bailee. He is bound to take care of such goods as man of ordinary prudence. He is treated as
owner against whole world except true owner.
In the given case, it is the duty of the Computer Education Center to return the purse to Ravi as in absence of real
owner he will be treated as owner.
Question 157] Ajay finds a mobile phone lying on a table in a Coffee House. He hands over the mobile phone to
Bijay, the manager of the Coffee House, so that the true owner can claim it back. However, no one claims the
mobile phone. After sometime, Ajay goes to Bijay, the manager, and requests him to return the mobile phone to
him. On Bijay's refusal, Ajay files a suit against him for recovery of the mobile phone. Will Ajay succeed? Give
reasons.
CS (Foundation) - June 1996 (5 Marks), June 2008 (5 Marks)
Ans.: A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility as a bailee. He is bound to take care of such goods as man of ordinary prudence. He is treated as
owner against whole world except true owner.
In the given case, Ajay can recover the mobile phone from Bijay because in absence of real owner Ajay will be
treated as owner.
INDEMNITY & GUARANTEE
Question 158] Write a short note on: Contract of indemnity
Ans.: Contract of indemnity [Section 124]: A contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself, or the conduct of any other person is called a contract of
indemnity. It is contingent contract.
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The person who promises to make the good loss is called as indemnifier.
The person who loss is to be made good is called as indemnified or indemnity holder.
Example 1: A contracts to indemnify B against the consequence of any proceedings which C may take against B in
respect of a certain sum of ` 10,000. This is a contract of indemnity.
Example 2: A & B goes into shop. B says to the shopkeeper, "Let A have goods, I will see you paid." This is a contract
of indemnity.
Example 3: A lost his share certificate. He applies to Company for issue of duplicate share certificate. Company asks
A to give an indemnity bond assuring to reimburse possible loss that may arise on account of issue of duplicate
share certificate. There is contract of indemnity between Company & A.
Question 159] Write a short note on: Rights of the indemnity-holder when sued
Ans.: Right of indemnity-holder when sued [Section 125]: Indemnity-holder acting within scope of his authority is
entitled to recover:
(1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to
indemnify apples.
(2) All cost for defending or bringing any suit if worked as a prudent person.
(3) All sums which he may have paid under the terms of any compromise of any such suit.
Question 160] A contract of guarantee is tripartite agreement. Comment.
Ans.: "Contract of guarantee", "surety", "principal debtor" & "creditor" [Section 126]: A contract of guarantee is
a contract to perform the promise made or discharge liability incurred by a third person in case of his default.
The person on whose behalf guarantee is given is called as principal debtor. (P)
The person who gives guarantee is called as surety. (S)
The person to whom guarantee is given is called as creditor. (C)
Example: C sold goods on credit to P, S promises to pay amount if P make default. This is contract of guarantee.
Contract of guarantee must have all the essential element of valid contract. Consideration received by principal
debtor is sufficient for surety and it not necessary to have any benefit or consideration to surety.
Question 161] What are the contracts of uberrimae fidei? Give any four examples.
What is meant by contracts of "uberrimae fidei"? Which contracts are in general may be treated as contracts of
"uberrimae fidei"? CS (Executive) - June 2017 (5 Marks)
Ans.: uberrimae fidei means 'utmost good faith'/'disclosure of all material facts'.
The creditor is under obligation to disclose all the material facts in respect of creditworthiness of principal debtor
to surety even if surety does not specifically ask.
Example: C engaged P as a clerk to collect money. P misappropriated some of C's receipt. This sum was made good
by P's relation and C agreed to retain P in his employment on fidelity guarantee. S gave his guarantee for P's duly
accounting. C did not inform S with P's previous dishonesty. Guarantee could not be enforced against S owing to
non-disclosure of P's previous dishonesty.
Contracts Uberrimae fidei: There are contracts which require the utmost good faith. There is a special duty to
disclose all the material facts and the failure to disclose such information give a right to rescind the contract at the
option of the other party. The following contracts are contracts uberrimae fidei:
(a) Contracts of insurance of all kinds: It is the duty of the assured person to disclose all the material information
or fact to the insurance company, affecting the risk covered. A concealment of a material fact will render the
contract void.
(b) Company prospectus: It is the duty on the part of every company to disclose each and every material
information in the prospectus. When it invites public to subscribe for its shares in or debentures of. The contract to
buy shares or debentures is voidable at the option of purchaser where there is a false statement or non-disclosure
in the prospectus.
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(c) Contracts of family arrangements: It is the duty of every member of the family to make full disclosure of
every material fact within his knowledge. Such a contract is not binding if either party has been misled by any
concealment of material facts.
(d) Contract for sale of land: It is the duty of vendor to show good title to the land that he has contracted to sell
to the purchaser.
Question 162] Distinguish between: Contract of indemnity & contract of guarantee
Ans.: Following are the main points of distinction between indemnity & contract of guarantee:
Points Contract of Indemnity Contract of Guarantee
Meaning A contract by which one party promises to save A contract of guarantee is a contract to perform
the other from loss caused to him by the conduct the promise made or discharge liability incurred
of the promisor himself, or the conduct of any by a third person in case of his default.
other person is called a contract of indemnity. It
is contingent contract.
Parties There are two parties to the contract of There are three parties to the contract of
indemnity viz. guarantee
- Indemnifier viz.
- Indemnity holder - Principal debtor,
- Surety,
- Creditor
No. of There is only one contract in case of indemnity. There are three contracts in contract of
contracts guarantee.
Liability The liability of indemnifier is primary and The liability of surety is collateral or secondary.
independent. Primary liability is that of principal debtor.
Nature The promise of the indemnifier is to save the The surety undertakes to discharge the liability
of person indemnified from a contingent risk. of the principal debtor, which is not contingent,
but is subsisting.
liability
Example A and B go into a shop. A says to the shopkeeper, A and B go into a shop. A says to the shopkeeper,
"Let B have the goods, I will see you paid." "Let B have the goods and if he does not pay, I
will."
Question 163] Write a short note on: Specific guarantee

Ans.: When guarantee extents to a single transaction it is known as specific or simple guarantee. It comes to an end
when the guaranteed debt is duly discharged or the promise is duly performed. A specific guarantee is irrevocable.
Ans.: Continuing guarantee [Section 129]: When a guarantee extents to a series of transaction it is called as a
continuing guarantee. The liability of the surety in case of a continuing guarantee extends to all the transaction until
the revocation of the guarantee.
Example 1: C employs P for collecting rent of Cs Zamindari. S gives guarantee for good work and honesty of P. This
is continuing guarantee.
Example 2: S guarantees payment to C for ` 10,000 for any goods C may supply to P from time to time. This is
continuing guarantee.
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Revocation of a continuing guarantee: A continuing guarantee cannot be revoked for transaction which has already
taken place.
Example: X guarantees repayment of advance made to A within 6 months subject to a maximum of ` 20,000. If `
10,000 has been advanced by the end of 2 months, guarantee is irrevocable insofar as this advance of ` 10,000 is
concerned. However, guarantee for balance of ` 10,000 may be revoked.
Method of revoking continuing guarantee:
(1) Express revocation [Section 130]: A continuing guarantee may be revoked by the surety at any time, as to
future transactions, by notice to the creditor.
(2) Death of surety [Section 131]: The death of the surety operates, in the absence of a contract to the contrary,
as a revocation of a continuing guarantee, as regards future transactions.
(3) Material alteration: If the contract between the creditor and the principal debtor is materially altered
without the consent of the surety, the contract of guarantee is revoked.
(4) Impairment of surety's remedy: If any act of the creditor impairs the remedy available to the Surety against
the principal debtor, it amounts to revocation of guarantee.
(5) Novation: When any new contract is substituted for an existing contract either between the same parties or
between different parties, it amounts to revocation of existing guarantee.
(6) Arrangement between principal debtor and creditor: If there is any arrangement between the principal
debtor and creditor, under which the creditor makes a composition of the debt, or gives time for repayment of the
debt or promises not to sue him, the continuing guarantee terminates.
(7) Loss of security: If the creditor loses or parts with any security belonging to the Principal Debtor, without the
consent of surety, then the surety is discharged from liability to the extent of the value of the security.
Question 165] Amit stands surety for Bikram for any amount which Chander may lend to Bikram from time to
time during the next 3 months subject to a maximum amount of ` 1,00,000. One month later Amit revokes the
surety, when Chander had already lent to Bikram ` 10,000. Referring to the provisions of the Contract Act, 1872.
Decide:
(i) Whether Amit is discharged from all the liabilities to Chander for any subsequent loan given to Bikram?
(ii) What would be your answer in case Bikram makes a default in paying back to Chander the already borrowed
amount of ` 10,000?
CA (PE-II) - Nov 2002 (6 Marks), CA (PCC) - May 2006 (5 Marks)
CA (IPCC) - Nov 2015 (5 Marks), Nov 2017 (5 Marks)
Ans.: As per Section 129 of the Contract Act, 1872, when guarantee extents to a series of transaction it is called as
a continuing guarantee. The liability of the surety in case of a continuing guarantee extends to all the transaction
until the revocation of the guarantee.
As per Section 130, Surety may revoke at any time, a continuing guarantee as to future transactions, by giving a
notice to the creditor. A continuing guarantee cannot be revoked for transaction which has already taken place.
Thus applying the above provisions in the given case,
(i) Amit is discharged from all the liabilities to Chander for any subsequent loan.
(ii) Answer in the second case would differ i.e. Amit is liable to Chander for ` 10,000 on default of Bikram since the
loan was taken before the notice of revocation was given to Chander.
Question 166] Mr. X in consideration, that Mr. Y will employ Mr. Z in collecting the rent of Zamind- ari, promises
to Mr. B to be responsible to the amount of ` 10,000 for the collection and payment by Mr. Z of the rent.
Decide, whether it is a contract of guarantee? Which type of guarantee it is? When such guarantee may be
revoked? CS (Executive) - Dec 2017 (5 Marks)
Ans.: As per Section 129 of the Contract Act, 1872, when guarantee extents to a series of transaction it is called as
a continuing guarantee. The liability of the surety in case of a continuing guarantee extends to all the transaction
until the revocation of the guarantee.
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As per Section 130, Surety may revoke at any time, a continuing guarantee as to future transactions, by giving a
notice to the creditor. A continuing guarantee cannot be revoked for transaction which has already taken place.
As per facts given in case, Mr. X in consideration, that Mr. Y will employ Mr. Z in collecting rent of Zamindari,
promises to Mr. Y to be responsible to the amount of ` 10,000 for due collection and payment by Mr. Z of these rent
is a continuing guarantee as it extends to series of transaction. Thus, Mr. X will be liable to Mr. Y if Mr. Z makes any
default up to amount of ` 10,000. Mr. X may revoke such continuing guarantee as to future transactions, by giving
a notice to the Mr. Y.
Question 167] The liability of a surety is co-extensive with that of the principal debtor. Explain this principle.
Ans.: Surety's Liability [Section 128]: Unless otherwise provided by the contract, the liability of surety is co-
extensive with that of the principal debtor. The surety's liability is secondary or contingent, since it arises only on
the default of principal debtor.
When the principal debtor defaults, the surety's liability begins and runs co-extensive with liability of principal
debtor, i.e. the surety will be liable for all those sums for all those sums for which the principal debtor is liable.
Example: S guarantees to C, the payment of a bill of exchange by P who is the acceptor. P dishonours the bill, S is
liable for the amount of the bill and also for interest or other charges that has become due on it,
i.e. what would have been payable by P shall be payable by S.
Question 168] Amar guarantees to Bimal the payment of a bill of exchange by Chirag, the acceptor. The bill is
dishonoured by Chirag. What is the extent of liability of Amar?
Ans.: As per Section 128, the liability of a surety is co-extensive with that of the principal debtor. Hence, Amar is
liable to pay amount of bill as well as noting charges and interest.
Question 169] Write a short note on: Rights of surety against principal debtor
Ans.: Surety has following rights against principal debtor:
(1) Right to be indemnified [Section 145]: There is an implied promise to indemnify the surety by the principal
debtor. The surety is entitled to recover from the principal debtor, all such sums he has rightfully paid to the creditor,
under the contract.
(2) Right to be relieved of liability: Before payment, the surety can compel the principal debtor to relieve him
from liability by paying off the ascertained debt.
Question 170] Write a short note on: Rights of surety against creditor Ans.: Surety has following rights against
creditor:
(1) Revocation of continuing guarantee [Section 130]: Surety may revoke at any time, a continuing guarantee
as to future transactions, by giving a notice to the creditor.
(2) Subrogation of creditors rights [Section 140]: On payment of a guaranteed debt surety is subrogated all the
rights of creditor. This means on payment of guaranteed debt surety steps into shoes of creditors.
(3) Security from creditor [Section 141]: Surety is entitled to the benefit of every security which the creditor
has against the principal debtor, irrespective of whether he knows the existence of such security or not.
(4) Suit against principal debtor: After the debt has become due, but before paying, surety may require the
creditor to sue the principal debtor. In such case, the surety shall reimburse the expenses of the creditor.
(5) Right or set off: On being sued by the creditor, the surety can rely on any set-off or counter claim which the
debtor has against the creditor.
(6) Right to equities: On payment of debt the surety is entitled to all equities which the Creditor could have
enforced against principal debtor and all persons claiming through him.
(7) In case of fidelity guarantee: Surety can call up the creditor or the employer to dismiss the employee whose
honesty was guaranteed, in case of proven dishonesty of such person.
Question 171] Write a short note on: Rights of surety against other co-sureties
Ans.: Surety has following rights against other co-sureties:
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(1) Right to demand equal contribution [Section 146]: In the absence of any contract to the contrary, each
surety is liable, and can demand from his co-sureties, equal contribution, for the discharge of whole debt or part of
debt that remains unpaid by the debtor.
(2) Right to contribute only agreed sums [Section 147]: Co-sureties bound in different sums shall pay equally
up to the limits of their respective obligations.
Question 172] Mr. D was in urgent need of money amounting ` 5,00,000. He asked Mr. K for the money. Mr. K
lent the money on the sureties of A, B & N without any contract between them in case of default in repayment
of money by D to K. D makes default in payment. B refused to contribute, examine whether B can escape liability?
CA (Intermediate) - May 2018 (4 Marks)
Ans.: As per Section 146 of the Contract Act, 1872, in the absence of any contract to the contrary, each surety is
liable, and can demand from his co-sureties, equal contribution, for the discharge of whole debt or part of debt that
remains unpaid by the debtor.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties A, B and N are
liable to pay equally, in absence of any contract between them.
Ans.: A surety is said to be discharged when his liability comes to an end. The various modes of his discharge as
below:
- Revocation
- Invalidation of contract
- Conduct of creditor
Question 174] Guarantee obtained by concealment of material fact is invalid.
Ans.:
(1) Misrepresentation [Section 142]: Guarantee obtained by misrepresentation made by creditor relating to a
material part of the transaction is invalid.
(2) Concealment [Section 143]: Guarantee obtained by creditor by means of silence as to some material
circumstances as to contract is invalid.
(3) Failure of co-surety to join a surety [Section 144]: When a contract of guarantee provides that a Creditor
shall not act on it until another person has joined in it as a co-surety, the guarantee is not valid of that other person
does not join.
(4) Failure of consideration: Where there is no consideration between the principal debtor and creditor, the
surety is discharged.
Question 175] Write short notes on: Discharge of surety by conduct of creditor Release by creditor of one of co-
surety, discharge the other sureties. Comment. * 1
Ans.:
(1) By variance in terns if contract [Section 133]: Any variance made in the terms of contract between principal
debtor and creditor, without the surety's consent, discharges the surety as to transaction subsequent to variance.
Example: A becomes surety to C for B's conduct as a Manager in C's Bank Afterwards B and C contract without A's
consent, that B's salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B
allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his surety ship by the
variance made without his consent, and is not liable to make good this loss.
(2) Release or discharge of principal debtor [Section 134]: Surety is discharged by any contract between
creditor and principal debtor, by which principal debtor is released, or by any act or omission of creditor, legal
consequence of which is discharge of principal debtor.
Example: A contracts with B for a fixed price to build a house for A within a stipulated time, B supplying the necessary
timber. C guarantees A's performance of the contract. B fails to supply timber C is discharged from his surety ship.
(3) Compounding with principal debtor [Section 135]: Surety is discharge by any contract between creditor and
principal debtor by way of which:
- Creditor makes a composition with principal debtor, or
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- Creditor agrees to give time to principal debtor, or
- Creditor agrees not to sue the principal debtor
But where the surety assents to such contract, he is not discharged.
Example: C, the holders of a overdue Bill of Exchange drawn by A as surety for B, and accepted by B, contracts with
X, to give time to B. In such case, A is discharged from the surety ship liability.
(4) Impairment of surety's eventual remedy [Section 139]: Surety is discharge, when the creditor does any act
which is inconsistent with the right of surety, or omits to do any act which his duty to the Surety requires him to do,
and the eventual remedy of the Surety against principal debtor is thereby impaired.
Example: D takes J as apprentice on a fidelity guarantee given by C. D also promises that he will, at least once a
month, see that J make up the cash. D omits to do this and J embezzles. C is not liable on his guarantee.
(5) Loss of security [Section 141]: The surety is discharge, when the creditor loses a security, or without Surety's
consent, parts with a security. The Surety is discharge only to the extent of the value of the lost or parted security.
Example: C, whose advance to B is secured by a decree, receives a guarantee for that advance from A, C later takes
B's goods in execution under the Decree, and then without A's knowledge, withdraws the execution A is discharged.
However surety is not discharges in following circumstances.
(a) Agreement with third party to grant time to principal debtor [Section 136]: When the creditor makes an
agreement with a third person to grant time to principal debtor, the surety is not discharged.
Example: F, holding an overdue bill drawn by A as surety for B, and accepted by B, contracts with Z to grant time to
B for its payment. A is not discharged.
(b) Creditor's forbearance to sue [Section 137]: Mere forbearance on the part of creditor to sue principal debtor
or to enforce any remedy against him does not discharge the surety.
Example: Z owes to Y a debt guaranteed by X. Debt becomes payable. Y does not sue for a year after it has become
payable. X is not discharged
(c) Release of one co-surety [Section 138]: When there are co-sureties, release of one of them by creditor does
not discharge the other sureties. Also, it does not free the surety so released from his responsibility towards other
co-sureties.
Question 176] A gives to C a continuing guarantee to the extent of ` 5000 for the vegetables to be supplied by C
to B from time to time on credit. Afterwards, B became embarrassed, and without the knowledge of A, B and C
contract that C shall continue to supply B with vegetables for ready money, and that the payments shall be
applied to the then existing debts between B and C.
Examining the provision of the Contract Act, 1872, decide whether A is liable on his guarantee given to C.
Ans.: As per Section 133 of the Contract Act, 1872, any variance made in the terms of contract between principal
debtor and creditor, without the surety's consent, discharges the surety as to transaction subsequent to variance.
In the given problem all the above requirements are fulfilled. Therefore, A is not liable on his guarantee for the
vegetable supplied after this new arrangement. The reason for such a discharge is that the surety agreed to be liable
for a contract which is no more there and he is not liable on the altered contract because it is different from the
contract made by him.
Question 177] C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts
with X to give time to B. Is A discharged from his liability?
Ans.: As per Section 136 of the Contract Act, 1872, when the creditor makes an agreement with a third person to
grant time to principal debtor, the surety is not discharged.
In the given question the contract to give time to the principal debtor is made by the creditor with X who is a third
person. X is not the principal debtor. Hence, A is not discharged.
BAILMENT & PLEDGE
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Question 178] Define 'bailment' as per the Contract Act, 1872
Ans.: "Bailment", "bailor" & "bailee" defined [Section 148]: 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 instructions of the person delivering them.
Bailor is the person delivering the goods.
Bailee is the person to whom the goods are delivered.
When a person, already in possession of goods belonging to another, contracts to hold them as bailee, he becomes
the Bailee and the owner becomes Bailor, even though the goods may not have been delivered by way of bailment.
Question 179] What are the essentials of bailment?
Ans.: Following are the essentials of bailment:
(1) Contract: Bailment may be express or implied .
(2) Delivery of the goods: Bailment involves delivery of possession of goods by bailor to bailee.
(3) Possession: Only possession in goods (and not ownership) is transferred.
(4) Modes of delivery [Section 149]: Delivery may be actual or constructive. Actual delivery is made by physically
handing over the goods. Constructive or symbolic delivery means doing something which has the effect of giving
delivery, e.g. delivery of railway receipt, handing over the key of car etc.
(5) Purpose: The delivery of goods must be for a certain purpose.
(6) Return of goods: The goods must be returned after the purpose in accomplished
(7) Consideration: The consideration is generally in the form of money payment either by the bailor or bailee.
The detriment suffered by the bailor, in parting with possession of the goods, is a sufficient consideration to support
the contract of bailment.
Question 180] Distinguish between: Gratuitous Bailment & Non-gratuitous Bailment
CS (Foundation) - Dec 2001 (5 Marks), Dec 2003 (5 Marks)
Ans.: Bailment may be classified into following types:
(1) Gratuitous Bailment: If no consideration passes from bailor to bailee, e.g. A gives book to B for exam.
(2) Non-gratuitous Bailment: It is bailment for consideration, e.g. A gives some goods to B, a transporter, to
deliver goods at Mumbai at specified address.
Question 181] What are the duties of the bailor?
Ans.: Duties of bailor are as follows:
(1) To disclose faults in goods [Section 150]:
- In case of gratuitous bailment: Bailor is bound to disclose known faults to bailee. If do not disclose then he
may liable to bailee for damages from such non-disclosure.
- In case of non-gratuitous bailment: Bailor is liable for damages whether or not he was aware of the existence
of faults.
(2) To bear expenses:
- In case of gratuitous bailment: Bailor shall repay all necessary expenses incurred by bailee for the purpose
of bailment.
- In case of non-gratuitous bailment: Bailor is liable only extraordinary expenses, and not the ordinary
expenses.
(3) Indemnify bailee for loss in case of premature termination of gratuitous bailment [Section 159]:
Bailor has the right to terminate the gratuitous bailment even it is for particular period. In such a case, Bailor has to
indemnify the bailee the excess of loss over benefit.
(4) Indemnify bailee for loss when bailor's title is defective [Section 164]: Bailor is responsible to the Bailee for
any loss which the Bailee may sustain by reason that the Bailor was not entitled to make bailment.
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Example: A lends an old discarded motor cycle to B gratuitously for 3 months. B incurs ` 500 on its repairs. If A asks
for the return of the motor cycle after I month, he will have to compensate B for expenses incurred by B in excess
of the benefit derived by him.
(5) Receipt of goods back on termination of bailment: When bailee returns the goods in accordance with the
terms, the bailor should receive them. If the bailor refuses to accept goods tendered by bailee, he shall compensate
the bailee for all necessary and incidental expenses incurred by him in keeping the things in good condition.
Question 182] A hires a carriage of B. The carriage is unsafe though B does not know this. A is injured.
Is B is liable to A for the injury? CS (Foundation) - Dec 2000 (4 Marks)
Ans.: Hiring of a carriage is non-gratuitous bailment. In case of non-gratuitous bailment, bailor is liable for damages
whether or not he was aware of the existence of faults. Hence, B is liable to A.
Question 183] What are the duties of bailee? * 1 2 3 4
Ans.: Duties of bailee are as follows:
(1) To take care of goods [Sections 151 & 152]: The bailee is bound to take care of the goods bailed to him as a
man of ordinary prudence. If bailee takes care of goods bailed as man of ordinary prudence then he will not be liable
if there is loss to goods.
(2) Not to make unauthorized use of goods [Section 153]: Bailee shall act in conformity with the terms of
contract of bailment. Where he does any act with regard to the goods bailed, inconsistent with the terms, the
contract becomes voidable at the option of bailor. The bailee cannot set up an adverse title against the bailor.
(3) Compensation for damage to goods [Section 154]: Bailee shall use the goods according to terms and
conditions of bailment. Where he does not use so and as a result, the goods suffer damage, he shall duly compensate
the bailor.
(4) Not to mix goods bailed with his own goods:
(a) With bailor's consent [Section 155]: Where the bailee, mixes the goods bailed with his own goods, with the
bailor's consent, both of them shall have interest in proportion to their shares in the mixture produced.
(b) Without bailor's consent: If the goods in the mixture
- Can be separated [Section 156]: Property in the goods remains with the respective parties. Bailee bound to
bear the expenses of separation or division, and also of any damage arising from the mixture.
- Cannot be separated [Section 157]: Bailee shall compensate the Bailor for the loss of his goods.
(5) Return of the goods bailed [Section 160]: Bailee shall, without demand, return the goods bailed to the bailor,
or deliver it according to his instructions. Such delivery shall be made as soon as the time for which they were bailed
expires, or the purpose for which it had been bailed is accomplished.
(6) Compensation for failure to return [Section 161]: Where by the fault of the bailee, goods are not returned
at the proper time and place. Bailee shall compensate bailor for any loss, destruction or deterioration of such goods
from that time.
(7) To return any accretion to goods [Section 163]: If there is any profit or increase from goods bailed shall be
delivered by the bailee to the bailor.
Example: A gives a cow to B. Cow has calf. B should deliver cow as well as calf.
(8) Delivery of goods to joint bailors [Section 165]: When goods are owned and bailed by joint owners, and in
the absence of contract to the contrary, the bailee shall deliver them back to one of joint owners, or according to
the directions of one joint owners without the consent of all.
Question 184] Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not return the
car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the return of car. In the
meantime a big fire occurred in the neighbourhood and the car was destroyed. Decide whether Mahesh can be
held liable under the provisions of the Contract Act, 1872.
359
Ans.: As per Section 160 of the Contract Act, 1872, bailee shall, without demand, return the goods bailed to the
bailor, or deliver it according to his instructions. Such delivery shall be made as soon as the time for which they were
bailed expires, or the purpose for which it had been bailed is accomplished.
As per Section 161, where by the fault of the bailee, goods are not returned at the proper time and place. Bailee
shall compensate bailor for any loss, destruction or deterioration of such goods from that time.
Thus, Mahesh is liable to for the loss caused by not delivering the car to Sunil within reasonable time even after
repeated reminders by Mahesh.
Question 185] A lends his car to B for a drive by him only. B allows C, an expert driver, to drive the car. C drives
the car care but hits with an electronic pole. The car is damaged. A file suit against B claiming damages. Will he
succeed? Give reasons. CS (Foundation) - June 1999 (5 Marks)
Ans.: As per Section 154, a bailee is responsible under the contract of bailment not to make an unauthorized use of
the goods bailed. If a bailee uses goods for an unauthorized purpose then he is liable to compensate the bailor for
any loss which may arise from such unauthorized use.
In given case car is given to B for a drive by him only. If B allows any other person it will be unauthorized use bailed
goods even if such other person is expert driver. Thus, B is liable for the damage to A's car.
Question 186] Write a short note on: Right of lien of bailee
Ans.: Lien means to withhold the property of another until lawful charges are paid.
Example: A client delivers books of account to CA to prepare income tax return. CA can withhold the books of
accounts until his charges are paid.
Bailee has a right to retain the goods when his lawful charges are not paid for. Two types of lien are:
- Particular lien [Section 170]
- General lien [Section 171]
Question 187] Distinguish between: General Lien & Particular Lien
Ans.: Following are the main points of distinction between general & particular lien:
Points General Lien Particular Lien
Meaning It is a right to retain all the goods or any property It is a right to retain those goods in respect of
of another until all the claims of holder are which bailee have rendered some service
satisfied. This is a right to retain the property of involving the exercise of labour or skill.
another for a general balance of accounts.
Persons Right of general lien can be exercised by bankers, Right of particular lien can be exercised by any
entitled factor, wharfingers, attorneys of High Court and bailee who has rendered some service by
policy brokers. exercise of his skill and labour in respect of the
goods bailed.
Condi Bailee is unpaid and Bailee need not have Bailee has worked upon the goods and
tion worked upon the goods bailed. remuneration remains unpaid.
Question 188] Define: 'Pledge' as per Contract Act, 1872

Ans.: Pledge is a bailment of goods as security for payment of a debt or performance of a promise. A pledge is
bailment for security. It is special kind of bailment.
Person who pledge the goods is known as pledger/pawnor.
Person to whom goods are pledged is known as pledgee/pawnee.
Question 189] A, the bailor, pledges a cinema projector and other accessories with Cine Association Co-operative
Bank Limited, the bailee, for a loan. A requests the bank to allow the pledged goods to remain in his possession
360
and promises to hold the same in trust for the bailee and also further promises to handover the possession of the
same to the bank whenever demanded. Examining the provisions of the Contract Act, 1872 decide, whether a
valid contract of pledge has been made between A, the bailor and Bank, the bailee?CA (PE-II) - May 2009 (5
Marks)
Ans.: Pledge is a bailment of goods as security for payment of a debt or performance of a promise. It is special kind
of bailment.
As per Section 149 of the Contract Act, 1872, delivery may be actual or constructive. Actual delivery is made by
physically handing over the goods. Constructive or symbolic delivery means doing something which has the effect
of giving delivery. For example, delivery of railway receipt, handing over the key of car etc.
In case constructive delivery there is change in the legal character of the possession of goods though not in the
actual or physical custody. Though the bailor continues to be in possession of the goods, it is the possession of the
bailee.
In the given problem the delivery of the goods is constructive. A constructive pledge comes into existence as soon
as the pawnor, without actually delivering the goods, promises to deliver them on demand. The transaction was,
therefore, a valid pledge. [Bank ofChittur Ltd. v. Narasimhulu AIR 1966 AP163]
Question 190] Distinguish between: Bailment and Pledge CS (Foundation) - June 2002 (5 Marks)
Ans.: Following are main points of distinction between bailment and pledge:
Points Bailment Pledge
Meaning Bailment is the delivery of goods, by one person Pledge is a bailment of goods as security for
to another, for some purpose, upon a contract payment of a debt or performance of a promise.
that they shall, when the purpose is A pledge is bailment for security.
accomplished, be returned or otherwise
disposed of, according to the instructions of the
person delivering them.
Points Bailment Pledge
Purpose Bailment may be for following purposes Pledge is bailment of goods for a specific
- Providing security for a loan, purpose, i.e. to provide a security for a loan or
fulfilment of an obligation.
- Fulfilment of an obligation,
- Delivering goods for repairs, safe custody,
etc.
Sale of There is no right of sale to the bailee. Bailee may Pledgee has a right of sale of goods pledged on
goods either: default of pledger by giving a notice.
- Retain goods, or
- Sue the bailor for non-payment of his
dues.
Use of Bailee can use the goods bailed as per terms of Pledgee has no right of using goods pledged.
goods contract.
Question 191] What are the rights of a pawnee/pledgee?

Ans.: Following are the rights of pawnee/pledge.
(1) Right of retainer [Section 173]: Pawnee may retain the goods pledged for
- Payment of the debt or the performance of promise,
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- Interest due on the debt, and
- All necessary expenses incurred by him with respect to possession or for preservation of goods pledged.
(2) Retainer for subsequent advances [Section 174]:
- Where the pawnee lends money to the pawnor subsequently, after the date of pledge, it shall be presumed
that he has a right of retainer over the goods already pledged in respect of the subsequent lending also.
- This presumption can be made invalid only by an express provision to that effect.
(3) Reimbursement of extraordinary expenses [Section 175]: Where the pawnee incurs extraordinary expenses
to preserve the goods pledged with him, he is entitled to receive such amount from the pawnor.
(4) Suit: Pawnee may institute a suit against pawnor when there is a default in payment of debt or performance
of promise at the stipulated time.
(5) Retention/sale of goods: Pawnee may retain the goods pledged as collateral security, or sell the goods
pledged by giving a reasonable notice to the pawnor.
(6) Surplus/deficit on sale: When there is a surplus on sale, pawnee shall pay the excess to the pawnor. In case
of deficit, pawnor shall be liable for the balance amount.
(7) No notice: Where the pawnee does not give a reasonable notice to the pawnor, the sale is valid, but pawnee
is liable to pay damages to pawnor.
(8) Right against true owner of goods [Section 178A]:
(a) Where the pawnor has acquired possession of pledged goods, under a voidable contract, but contract has
not been rescinded at the time of pledge, the pawnee acquires a good title to the goods, against the true owner.
(b) The title of pawnee is good only where he had no notice of the pawnor's defect in title and he acts in good faith.
Question 192] What are the rights of a pawnor?
Ans.: Following are the rights of pawnor/pledger.
(1) To get back goods: Pawnor is entitled to get back the goods pledged by payment of the sum of money, or
performance of the promise.
(2) To redeem goods before sale [Section 177]: When the pawnor makes a default in the payment of debt or
performance of promise, he still has a right to redeem the goods pledged at any subsequent time before the Pawnee
sells them. But, he has to pay such additional expenses to the pawnee that arose due to his default.
(3) Right to notice of Sale: In case of default by the pawnor, and the pawnee intends to sell the goods pledged,
a reasonable notice shall be given to the pawnor, so as — (a) to enable him to pay off the debt and take back the
goods, or (b) to oversee the sale so that the goods fetch the proper price.
(4) Goods in proper condition: Pawnor has a right to see that the pawnee takes proper care of goods pledged
and properly maintains them.
Question 193] "Goods can be pledged by the owner only." Discuss. State the circumstances in which the goods
can be pledged by non-owners. CS (Foundation) - Dec 2006 (5 Marks)
Ans.: The general rule is that only owner can create valid pledge. However, in following situation even non-owner
can create a valid pledge:
(1) Pledge by mercantile agent [Section 178]:
- A mercantile agent who is in possession of goods or of document of title to goods, with the consent of owner,
can pledge them while acting in the ordinary course of business as a mercantile agent.
- The pledge shall be valid only if the pawnee acts in good faith, and has no notice at the time of pledge that
the pawnor had no authority to pledge.
(2) Pledge by person in possession under voidable contract [Section 178A]: When the pawnor has obtained
possession of goods under a voidable contract by way of fraud, coercion but the contract is not rescinded at the
time of pledge, it is valid pledge. The pawnee obtains a good title to such goods provided that he acts in good faith
and had no notice of the defective title of the pawnor.
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(3) Pledge where pawnor has limited interest [Section 179]: Where the pawnor has only limited interest in the
goods pledge shall be valid only to the extent of such interest.
(4) Pledge by seller or buyer in passion after sale: A seller in possession of goods after sale and a buyer in
possession of goods before sale, can create a valid pledge provided the pawnee acts in good faith and has no notice
of prior sale.
Example: A sells 10 bags of sugar to B on a stipulation that delivery and payment to be made in next month. Before
goods are delivered to B, A pledges goods with C, who acts in good faith and has no notice of prior sale. The pledge
is valid.
(5) Pledge by co-owner in possession: If co-owner is in possession of goods with the consent of other co-owner
then co-owner in possession can create a valid pledge.
Question 194] Ajay found a defective video camera lying in a park. He pledged it with Vijay for ` 3,000. Mohan,
the real owner, came to know about it. Mohan sued Vijay to recover his camera. Vijay had incurred ` 500 on repair
to make the camera operational. Can Mohan recover his camera?
Ans.: Mohan can recover his camera but only paying ` 500 to Vijay. As per Section 179, where the pawnor has only
limited interest in the goods, pledge shall be valid only to the extent of such interest.
LAW OF AGENCY
Question 195] What do you understand by contract of agency?
Ans.: It is the relationship between two person where one person is employed (known as agent) by another (known
as principal) to act on behalf of that another with the third person.
'Agent' & 'Principal' defined [Section 182]: An agent is a person employed to do any act for another, or to represent
another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the
principal.
Who may employ agent [Section 183]: Any person who is of the age of majority according to the law to which he
is subject, and who is of sound mind, may employ an agent.
Who may be an agent [Section 184]: Any person may become an agent, but no person who is not of the age of
majority and sound mind can become an agent.
No consideration is necessary to create an agency. [Section 185]
The authority of an agent may be expressed or implied. [Section 186]
Question 196] Distinguish between: Agent & Servant
Ans.: Following are main points of distinction between agent and servant:
Points Agent Servant
Power to bind Agent has authority to create contractual Servant has no authority to bind his master.
parties relationship between his principal and a
third party
No. of Principal^ One person may act as agent for several Servant usually serves only on master
masters principals at the same time.
Remuneration Agent is remunerated by way of Servant is paid salary or wages as

commission. remuneration
Scope Scope of agent is limited; he cannot act as a Scope servant is wider; he can serve as an
servant. agent also.
Question 197] Briefly explain the various modes by which an agency may be created.
Write a short note on: Agency by holding out CS (Foundation) - June 1999 (5 Marks)
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Write a short note on: Agency by estopple CS (Foundation) - June 2001 (5 Marks) * 1
Ans.: Agency may be created by any of the modes:
(1) Express Agreement [Section 187]: An authority is express when it is given by words, spoken or written. The
usual form of a written contract of agency is power of attorney on a stamped paper.
Example: A residing in Satara, has a house in Pune. He appoints B in Pune, by a power of attorney, as a caretaker of
his house.
(2) Implied Agreement [Section 187]: An authority is said to be implied when it is to be inferred from the
circumstances of the case, and things spoken or written, or the ordinary course of dealings.
Example: A owns a shop in Noida but lives in Delhi. He visits the shop occasionally which is managed by B. B usually
orders goods from C in A's name for the shop, and pays them out of A's funds with A's knowledge. B has an implied
authority from A to order goods from C in his name for the shop.
Implied agency includes the following
(a) Agency by estoppel: Where a principal, by his word or conduct, induces some third person to believe that
acts or obligations of his agent were within his authority, he shall be estopped from denying it later.
Example: A tells T within presence of P that he (A) is agent of P. P does not object to this statement of A. T supplies
goods to A. P is liable to pay for the price of goods to T because by keeping silence he led T to believe that A is his
agent.
(b) Agency by holding out: It is a part of the law of estoppel. A principal cannot deny the agent's authority when
he does some prior positive or affirmative act establishing the agency of the other person.
Example: P allows his servant A to buy goods for him on credit from C and pays for them regularly. On one occasion,
P pays A cash to purchase goods. A purchases goods on credit and pockets the money C can recover the price from
P since through previous dealings, P has held out A as his Agent.
(c) Agency of necessity: Agency by necessity arises in the following circumstances.
♦ Emergency [Section 189]: An Agent has authority, in an emergency, to do all such acts, for protecting his
principal from loss, as would be done by a man of ordinary prudence, e.g. Agent may have to sell goods instantly if
it is of perishable nature, and cannot withstand until further instructions from Principal.
♦ A person entrusted with another's property: A person becomes an agent, where he is in possession of goods
belonging to another and is under compulsion to protect the same from loss or destruction. E.g. A horse sent by rail
was not taken delivery at the destination. The Station Master had to feed the horse. The Station Master becomes
an Agent by necessity and hence the owner shall compensate him.
♦ Husband-wife: When the husband and wife are living together and the husband does not provide for her
necessities, wife has an implied authority as an agent to pledge her husband's credit for bare necessaries.
(3) Operation of law: When the relationship arises between the persons as per provisions of the present
applicable laws, it is said to be an agency by operation of law.
Example: partners are considered as agents of each other and also of the Firm. The managements of a company is
considered to act as an agent of the company.
(4) Agency by ratification: Separately discussed.
Question 198] Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm to a
city by Aswin. Due to heavy rains, Rahul was stranded for more than two days. Rahul sold the tomatoes below
the market rate in the nearby market where he was stranded fearing that the tomatoes may perish. Can Aswin
recover the loss from Rahul on the ground that Rahul had acted beyond his authority?
Ans.: As per Section 189 of the Contract Act, 1872, an agent has authority, in an emergency, to do all such acts for
the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own
case, under similar circumstances.
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In the instant case, Rahul, the agent, was handling perishable goods like 'tomatoes' and can decide the time, date
and place of sale, not necessarily as per instructions of the Aswin, the principal, with the intention of protecting
Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not succeed against him for
recovering the loss.
Question 199] Write a short note on: Types of agents
Write a short note on: Mercantile agents CS (Foundation) - Dec 1996 (5 Marks)
Ans.: Agents can be classified into following types:
(1) Special Agent: When agent is appointed to perform a particular transaction, such agent is known as special
agent, e.g. Agent appointed for sale of a house property. Such agent has limited authority. Such agent cannot bind
principal for acts other than for which he is employed.
(2) General Agent: When agent is appointed to do all acts connected with a particular trade, business or
employment. Authority of such agent is wide and continues till agency is terminated. However, principal may limit
his authority.
(3) Universal Agent: When agent is appointed to do all acts for the principal, such agent is known as universal
agent. Authority of such agent is unlimited. All acts of agent bind his principal provided that his principal acts are
legal.
(4) Commercial or Mercantile Agents: Agent who is authorized to sell goods or consign goods for the purpose
of sale or to buy goods or to raise money on the security of goods is known as mercantile agent. It includes banker,
factor, auctioneer, broker, commission agent, & del credere agent.
(5) Non-mercantile Agents: These include solicitors, attorneys, C & F agents, insurance agents and wife, etc.
Question 200] Write short notes on: Pretended Agent
Ans.: A pretended agent is one who represents to be an agent of another when in reality he has not such authority
from him at all.
Liability of pretended agent [Section 235]: A person untruly representing himself to be an authorized agent of
another, and inducing a third person to deal with him as Agent, is liable (if his alleged employer does not ratify his
acts) to make compensation for any loss or damage incurred by such third person from such dealing.
No right to insist performance: The pretended agent has no right to proceed against that person (third party) for
Question 201] Write short notes on: Sub-agent CS (Foundation) - Dec 2006 (5 Marks)
A delegate cannot further delegate. Explain the statement and give the exception to the rule.
Ans.: "Sub-agent" defined [Section 191]: A sub-agent is a person employed by, and acting under the control of, the
original agent in the business of agency.
Appointment of sub-agent: The general rule is that delegate cannot further delegate. Hence, a sub-agent may be
appointed only where:
- Expressly permitted by the principal or inferred from the conduct of the principal.
- Ordinary custom of trade permits the delegation of authority by an agent.
- Nature of agency is such that it is necessary to appointment a sub-agent.
- Nature of job assigned to agent is purely clerical and does not involve exercise of discretion.
- In an unforeseen emergency.
Relationship between principal and agent:
- There is no privity of contract between the sub-agent and the principal.
- Sub-agent cannot sue the principal for remuneration.
- Principal cannot sue the sub-agent for any moneys due from him.
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- Principal has a concurrent right to proceed against the agent and sub-agent when the sub-agent is guilty of
fraud or wilful wrong.
Representation of principal by sub-agent duly appointed [Section 192]: A sub-agent properly appointed can
represent principal and bind him by his acts as if he were an agent originally appointed by the Principal.
Agent's responsibility for sub-agent appointed without authority [Section 193]:
- Where an agent, without having authority to do so, has appointed a sub-agent, he becomes the principal for
such sub-agent.
- The sub-agent cannot represent the original principal, or make the original principal responsible for his acts.
- Sub-agent can only bind the agent, who appointed him, by contracts entered into with third parties.
- The original agent of the principal is responsible to both the principal and third parties for any act of the sub-
agent.
Termination sub-agent's authority [Section 210]: The termination of authority of an Agent causes termination of
authority of all sub-agents appointed by him.
Question 202] Write short notes on: Substituted Agent
Ans.: Where an agent, holding authority to name another person, has named another person accordingly, such
person is known as substituted agent. Such agent works under the control and directions of principal. Privity of
contract exists between principal and substituted agent and he is directly liable to principal for his acts. Such agent
can directly claim remuneration from principal.
Question 203] Distinguish between: Sub-agent and substituted agent
Ans.: Following are the main point of distinction between sub-agent and substituted agent:
Points Sub-Agent Substituted Agent
Meaning Sub-agent is a person employed by, and acting Where an agent, holding authority to name
under the control of, the original agent in the another person, has named another person
business of agency. accordingly, such person is known as
substituted agent.
Appointing Sub-agent works under the control and Substituted agent works under the control
authority direction of the agent. and directions of principal.
Privity of There is no privity of contract between There is privity of contract exists between
contract principal & sub-agent. principal and substituted agent.
Delegation Agent delegates a part of his work to sub- Principal directly delegate part of work of
agent. agent to substituted agent.
Accountability Sub-agent is responsible agent. Substituted agent is directly responsible to

principal.
Right Sub-agent has right of action against agent for Substituted agent can sue the principal for
remuneration due to him. remuneration due to him.
Liabilities Agent is liable for acts of sub-agent as long as Agent is not liable for acts of substituted
sub-agency continues. agent.
Question 204] Discuss the nature and extent of authority of an agent

Ans.: Agent has the authority to do every lawful thing which is necessary in order to do such act.
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Example: P in New York appoints Z in Madras to collect a debt due to him from B. Z may take such action as is
necessary for collection of debt and giving a valid discharge for the same.
Agent has the authority to do every lawful thing necessary for the purpose, or usually done in the course of
conducting such business.
Example: A employs B as his agent to carry on his business of a ship-builder. B may purchase timber & other
materials, and hire workmen for the purpose of carrying on the business.
Enforcement and consequences of agent's contract [Section 226]: Contracts entered into through an agent, and
obligations arising from acts done by an Agent, may be enforced in the same manner and will have the same legal
consequences as if the contracts had been entered into and the acts are done by the principal in person.
The authority of an agent to bind his principal may be:
(1) Actual or real authority: It may be express or implied and depends upon nature of act or business or things
which are incidental to business, as are usually done in carrying it out, and usual customs and usages of trade.
(2) Ostensible or apparent authority: It coincides with actual authority or may at times exceed the actual
authority. Apparent authority emanates from some conduct of the principal. It may be created by
- Estoppel: If a person permits or represents another to act on his behalf, so that any reasonable person would
infer that a relationship of principal and agent had been created, then he will be estopped from denying his agent's
authority and getting himself relieved from his obligations to third parties by proving that no such relationship in
fact existed. The principal will be bound by the agent's acts if he has given sufficient grounds for another person to
believe that they are done with the principal's authority.
- Legal presumption: Where a married woman is cohabiting with her husband, there is a presumption that
she has the authority to pledge his credit for necessaries.
(3) Authority in an emergency [Section 189]: An agent has authority in an emergency to do all such acts for
protecting his principal from loss, as would be done by a person of ordinary prudence.
Question 205] Anish instructed Yogesh, a transporter, to send the consignment of tomatoes to Kolkata. After
covering half the distance, Yogesh found that tomatoes will perish before reaching Kolkata. He sold the same at
half the market price. Anish sued Yogesh. Will he succeed?
Ans.: As per Section 189, an agent has authority in an emergency to do all such acts for protecting his principal from
loss, as would be done by a person of ordinary prudence.
As per the facts given in case Yogesh will be treated as agent in emergency as tomatoes is perishing goods and he
sold the same at half price to save the Anish form bigger loss. Hence, Anish will not succeed.
Question 206] Write a short note on: Agency by ratification
Ans.: Ratification means confirm or accept or give consent after the act or event. As per Section 197 such ratification
may be express or implied in the conduct of principal. After ratification, principal is liable for all the act consequences
of act and also get all rights under the contract, from the date of action of agent.
Example: A without authority, buys goods for B, later B sells them to C on his own account, B's conduct implies a
ratification of purchase made for him by A.
Example: P, without Q's authority, lends money to R. Afterwards Q accepts interest on the money from R. Q's
conduct implies a ratification of the loan.
Requisites to a valid ratification:
(1) The agent must purport to act as agent for a principal who is in contemplation and is identifiable at the time
of contract.
(2) Principal must be in existence at the time of contract. For example, company cannot ratify the contracts
entered by promoters prior to incorporation.
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(3) Principal should have contractual capacity both at the time of contract and at the time of ratification. A minor
on whose behalf a contract is made, cannot ratify it on attaining majority.
(4) Ratification must be made within a reasonable time. What is reasonable time depends on the circumstances
of each case.
(5) Ratification is valid only when the principal who ratifies has a full knowledge of the facts. Ratification should
be done within a reasonable time.
(6) The act to be ratified must be a lawful one. Ratification of an illegal act or an act, which is void ab- initio, is
not possible.
(7) Ratification can be made of whole contract. Principal cannot ratify in part which is beneficial to him and leave
the rest. Ratification must be communicated to the party who is sought to be bound by act done by principal.
(8) Ratification should not put third party to damages.
(9) Ratification relates back to the date of the act of agent.
Question 207] State the duties of an agent.
Ans.: Duties of an agent are as follows:
(1) Not to delegate authority [Section 190]: The agent cannot lawfully employ another person to perform act/s,
which he has expressly or impliedly undertaken to perform himself. However, subject to trade practices, he can
appoint a sub-agent.
(2) To protect interest of principal in case of death [Section 209]: Agency terminates by death of the principal,
or principal becoming of unsound mind. Here, agent is duty bound to take on behalf of the representative of his late
principal, a reasonable steps for protection and reservation of interests entrusted to him.
(3) To act as per principal's directions [Section 211]: Agent is bound to conduct the business as per the
principal's directions. In the absence of any directions, he shall act as per the customs prevailing in the business.
Where the agent act otherwise, he shall be liable to make good any loss sustained, and account for any profits made
to the principal.
(4) To exercise skill and diligence [Section 212]: agent is bound to act with reasonable diligence and use the
skill he possesses to the proper conduct of the business.
(5) To render proper accounts [Section 213]: Agent shall render proper accounts to his principal on demand
rendering accounts does not mean showing the accounts but the accounts supported by vouchers.
(6) Communicate with principal [Section 214]: In case of difficulty, the agent shall use all his reasonable
diligence to communicate with his principal, and seek his instructions.
(7) Emergency [Section 189]: But in case of an emergency, the agent shall do all that a man of ordinary prudence
would do to mitigate the loss.
(8) Not to deal on his own account [Sections 215 & 216]: Agent shall not deal on his own account. He shall
however do so with the consent of his principal, and after acquainting him with all material facts of the
circumstances. If agent who is acting on behalf of principle makes any secret profit, the principle can recover such
excess profit or benefit from the agent.
(9) Pay all sums received [Section 218]: Agent is bound to pay to his Principal, all sums received on his account.
He shall be entitled to deduct advances or expenses made for the business or remuneration due to him.
(10) No remuneration for business misconduct [Section 220]: An agent who is guilty of misconduct in business
of agency is not entitled to any remuneration in respect of that part of business.
(11) Not to make secret profits: Except the lawful deductions towards his remuneration and expenses, the agent
should deliver to the principal all moneys including secret commissions and profits made by him.
(12) Not to disclose information: Agent is duty bound not to disclose any information, which he receives from
his principal for the conduct of business.
(13) Liable to pay damages: Agent is bound to pay damages to the principal for losses suffered due to following
the directions of the principal or non-exercise of reasonable & diligence.
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Question 208] ABC Ltd. sells its products through some agents and it is not the custom in their business to sell the
products on credit. Pintu, one of the agents sold goods of ABC Ltd. to Parul Pvt. Ltd. on credit which was insolvent
at the time of such sale. ABC Ltd. sued Pintu for compensation towards the loss caused due to sale of products to
Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim?
Ans.: As per Section 211 of the Contract Act, 1872, Agent is bound to conduct the business as per the principal's
directions. In the absence of any directions, he shall act as per the customs prevailing in the business. Where the
agent act otherwise, he shall be liable to make goods any loss sustained, and account for any profits made to the
principal.
In the present case, Pintu, the agents, sold goods of ABC Ltd. to Parul Pvt. Ltd. on credit which was insolvent at the
time of such sale. Also, it is not the custom in ABC Ltd. to sell the products on credit. Hence, Pintu must make goods
the loss to ABC Ltd.
Question 209] Ahuja of Delhi engaged Singh as his agent to buy a house in West Extension area. Singh bought a
house for ` 20 lakh in the name of a nominee and then purchased it himself for ` 24 lakh. He then sold the same
house to Ahuja for ` 26 lakh. Ahuja later comes to know the mischief of Singh and tries to recover the excess
amount paid to Singh. Is he entitled to recover any amount from Singh? If so, how much? Explain.
Ans.: As per Sections 215 & 216 of the Contract Act, 1872, agent shall not deal on his own account. He shall however
do so with the consent of his principal, and after acquainting him with all material facts of the circumstances. If
agent who is acting on behalf of principle makes any secret profit, the principle can recover such excess profit or
benefit from the agent.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover ` 6 lakhs from Singh being the amount of
profit earned by Singh out of the transaction.
Question 210] P appoints A as his agent to sell his estate. A, on looking over the estate before selling it, finds the
existence of a good quality Granite Mine on the estate, which is unknown to P. A buys the estate himself after
informing P that he (A) wishes to buy the estate for himself but conceals the existence of Granite Mine. P allows
A to buy the estate, in ignorance of the existence of Granite Mine. State giving reasons in brief the rights of P, the
principal, against A, the agent.
What would be your answer if A had informed P about the existence of Mine before he purchased the estate, but
after two months, he sold the estate at a profit of ` 1 lakh?
CA (PCC) - May 2008 (5 Marks)
Ans.: As per Sections 215 & 216 of the Contract Act, 1872, agent shall not deal on his own account. He shall however
do so with the consent of his principal, and after acquainting him with all material facts of the circumstances. If
agent who is acting on behalf of principle makes any secret profit, the principle can recover such excess profit or
benefit from the agent.
Hence in the first instance, though P had given his consent to A permitting the latter to act on his own account in
the business of agency, P may still repudiate the sale as the existence of the Granite Mine, a material circumstance,
had not been disclosed to him.
In the second instance, P had knowledge that A was acting on his own account and also that the mine was in
existence; hence P cannot repudiate the transaction. Also, he cannot claim any benefit from A as he had knowledge
that A was acting on his own account in the business of the agency.
Question 211] Suresh, an agent, has authority from his principal Bhupesh to sell goods on credit. Suresh sells
goods on credit to Chandan without making proper enquiries about Chandan's financial status. At the time of
sale, Chandan was insolvent. Is Suresh under a liability to compensate his principal Bhupesh? Why?
Ans.: As per Section 212, agent is bound to act with reasonable diligence and use the skill he possesses to the proper
conduct of the business.
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Suresh, an agent sells goods on credit to Chandan without making proper enquiries about Chandan's financial status.
Hence, Suresh has not acted with reasonable diligence and he is liable for loss to his principal.
Question 212] What is the liability of the principal when the agent exceeds his authority?
Responsibility of principal to third parties in a contract of agency.
Ans.: Principal how far bound, when agent exceeds authority [Section 227]: When an agent does more than he is
authorized to do, and when the part of what he does, which is within his authority, can be separated from the part
which is beyond his authority, so much only of what he does as is within his authority is binding as between him and
his principal.
Example: A, being owner of a ship and cargo, authorizes B to procure an insurance for ` 4,000 on the ship. B procures
a policy for ` 4,000 on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the
policy on the ship, but not the premium for the policy on the cargo.
Principal not bound when excess of agent's authority is not separable [Section 228]: Where an agent does more
than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is
within it, the principal is not bound to recognize the transaction.
Example: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of 6,000 rupees. A
may repudiate the whole transaction.
Question 213] State the circumstances when an agent is personal liable for the acts of his principal.
Ans.: Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Section 230]:
In the absence of contract to contrary, an agent cannot personally enforce contracts entered into by him, on behalf
of his principal and cannot be personally liable. This is because the agent merely acts on behalf of his principal.
Exceptions: The agent is personally liable in the following cases:
(1) Foreign principal [Section 230]: Where the contract is made by an agent for the sale or purchase of goods
for a merchant resident abroad.
(2) Undisclosed principal [Section 230]: Where the agent does not disclose the name of his principal.
(3) Principal cannot be sued [Section 230]: Where the principal, though disclosed, cannot be sued, e.g. Principal
becoming of unsound mind, subsequent to appointment of agent.
(4) Acting for a principal not in existence: Where the agent act for a principal who is not inexistence at the time
of making contracts, he shall be personally held liable, e.g. contracts entered into by Promoters before incorporation
of a Company are made in their personal capacity and hence personally liable.
(5) Agency coupled with interest [Section 202]: Where the agent has an interest in the subject matter of agency.
(6) Agent guilty of fraud [Section 202]: Where an agent is guilty of fraud or misrepresentation in matters that
are outside the scope of his authority, he is personally liable, and do not affect his principal.
(7) Agent exceeds authority & act not ratified: Where an agent acts either without any authority or exceeds his
authority, he shall be held personally liable when the principal does not ratify his acts.
(8) Agent receives or pays money: Where an agent receives or pays money by mistake or fraud to a third party,
he shall be personally liable to such third party. Also he can personally sue the third party if the fraud or mistake is
accountable to such third party.
(9) Express agreement for personal liability: Where an agent expressly agrees to be personally bound.
(10) Execution of contract in his own name: Where an agent executes a contract in his own name, without
disclosing that he is acting as agent for a principal, he shall be personally liable, e.g. An agent signs a negotiable
instrument without making it clear that he is signing it as an agent only, he shall be held personally liable on the
same. He would be personally liable as marker of P/N, even though he may be described as Agent.
(11) Trade custom or usage: Where trade usage or custom makes an agent personally liable.
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(12) Agent with special interest: An agent with special interest or with a beneficial interest, e.g. a Factor or
Auctioneer, can sue and be sued personally.
(13) Action against agent or principal [Section 233]: Where the agent is personally liable, a person dealing with
him may hold either him or his principal or both of them liable. The liability of principal and agent is joint and several.
(14) Exclusive liability [Section 234]: When a person who has made a contract with an agent induce the agent to
act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the
agent only will be held liable, he cannot afterwards hold liable that agent or principal respectively.
Question 214] What are the rights of an agent` 1 2 3 4 5
Ans.: Rights of agent are as follows:
(1) Right of retainer [Section 217]: The agent may retain, sums received on behalf of principal any law amount
due to him.
(2) Right to remuneration [Sections 219 & 220]: Payment of remuneration to agent becomes due on the
completion of performance of the act of agency. However, he shall not be entitled to any remuneration if he is guilty
of misconduct in the business.
(3) Right of lien [Section 221]: Agent is entitled to retain the goods, papers and other movable or immovable
property of the principal received by him. He can retain them only till the period the amount of commission,
disbursements and remuneration for services, is due.
(4) Right to be indemnified [Sections 222, 223 & 224]: Agent is entitled to be indemnified against all lawful acts
done by him in the exercise of authority.
(5) Right to compensation [Section 225]: When an agent suffers injury due to the principal's neglect or want of
skill, he is entitled to be compensated by the principal for such loss/injury.
(6) Right of stoppage in transit: Agent has a right to stop the goods in transit, like an unpaid seller, if he has
bought goods for the principal by incurring a personal liability, and he is personally liable to the principal for the
price of the goods sold.
(7) Liability of principal inducing others [Section 237]: When the agent has acted beyond authority or incurred
obligations to third parties on behalf of principal, and the principal induces such third party, by word or conduct,
that the acts of the agent are within authority, the principal shall be liable to such third parties.
Question 215] State the circumstances under which an agency comes to an end.
Ans.: Termination of agency may take place in any of the following ways:
By act of parties:
(1) Agreement: Agency may be terminated at any time by mutual agreement between principal and agent.
(2) Revocation by principal: Principal can revoke the agent's authority by notice.
(3) Renunciation by agent: An agent may, after giving reasonable notice to principal, renounce the business of
agency. Where an agency is for a fixed period and the agency is renounced without sufficient cause, principal shall
be compensated.
By operation of law:
(1) Completion of business: Agency is for a particular act or business and such act or business is completed.
(2) Impossibility of performance: The performance of the act of agency becomes impossible.
(3) Expiry of fixed period of time: The agency is for a fixed period of time, and such time has expired.
(4) Insanity or death of principal or agent [Section 209]: In such a case, the agent should take all reasonable
steps for the preservation of property, on behalf of principal or legal representatives of Principal, as the case may
be.
(5) Destruction of subject matter: An agency shall be terminated where its subject matter is either destroyed
or rendered unlawful.
(6) Insolvency of principal: Insolvency of principal terminates the agency.
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(7) Termination of sub-agent's authority: Termination of agent's authority puts an end to the subagent's
authority also.
(8) Dissolution of a company: Where a company is a principal or agent, the agency relationship terminates on
its dissolution.
(9) Principal or agent becoming alien enemy: Since contracts with alien enemy are not permissible, agency
terminates when the countries of their domiciles turn was enemies.
Question 216] Write a short note on: Irrevocable agency
Ans.: Termination of agency [Section 201]: Revocation of agency means termination of agency. The principal may
revoke the authority granted to the agent at any time but before the authority has been exercised so as to bind the
principal.
Revocation when authority partly exercised [Section 204]: Principal cannot revoke the authority granted to his
agent, after the authority has been partly exercised, so far as regards such acts and obligations that arise from acts
already done in the agency.
Compensation for revocation [Section 205]: When the principal revokes an agency without proper cause, he shall
compensate the agent, particularly when there is an express or implied contract for continuation of agency till a
stipulated time.
Notice of revocation [Section 206]: Principal shall give reasonable notice of revocation. Where he fails to give such
reasonable notice, he shall make good any loss or damage arising out of such revocation.
When termination of agent's authority takes effect [Section 208]: Termination of authority:
- As regards the Agent, takes effect only when it comes to the Agent's knowledge.
- As regards a third party, takes effect only when it comes to the knowledge of such third parties. Revocation
may be express or implied from the conduct of principal and agent. [Section 207]
Irrevocable Agencies: An agency which cannot be revoked is called an irrevocable agency. The following agencies
are irrevocable:
(a) When the agency is coupled with interest [Section 202]: Where the agent has himself an interest in the
property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract,
be terminated to the prejudice of such interest.
Example: A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from
A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
(b) When the agent has incurred a personal liability.
(c) Where the agent has exercised his authority partly.
Question 217] Sunil borrowed a sum of ` 3 lakh from Rajendra. Sunil appointed Rajendra as his agent to sell his
land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterwards, Sunil revoked
the agency. Decide under the provisions of the Contract Act, 1872 whether the revocation of the said agency by
Sunil is lawful? CA (IPCC) - May 2014 (5 Marks)
Ans.: As per Section 202 of the Contract Act, 1872, where the agent has himself an interest in the property which
forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to
the prejudice of such interest.
In the instant case the rule of agency coupled with interest applies and does not come to an end even on death,
insanity or the insolvency of the principal. Thus, revocation of agency by Sunil is not lawful.
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20
Chapter
SPECIFIC RELIEF ACT, 1963
INTRODUCTION: The law relating to specific relief is contained in Specific Relief Act, 1963. lfthereis wrong or injury,
there are two remedies are available, (i) to claim damages or to claim compensation or (ii) to obtain order from
Courts for fulfilment exact obligation by other party.
Sometimes monetary compensation may not be adequate remedy, in that case the aggrieved may pray to Court
and may get an order against other party to fulfil obligation it has undertaken. This is known as specific relief. The
Specific Relief Act, 1963 came into force on 1st March, 1964. It extends to the whole of India except the State of
Jammu and Kashmir.
INTRODUCTION
Question 1] Principles on which Court may grant specific performance?
Write a short note on: specific performance of the contract CS (Executive) - June 2010 (4 Marks)
Ans.: The general principles upon which the remedy of specific relief is granted are as follows:
(1) Damages not an adequate remedy: Where damages in money are not an adequate remedy, the Court grants
on equitable grounds the remedy of specific performance.
(2) Discretion of Court: The Court does not grant specific performance where compensation in money is an
adequate relief. But, the mere fact that damages are not an adequate relief is not in itself sufficient to entitle the
aggrieved part to claim specific performance. The power of the Court to grant specific performance is discretionary.
The principles which guide the Courts in granting specific relief are:
- He who comes to equity must come with clean hands.
- He who seeks equity shall do equity
- Delay defeats equity.
(3) Specific relief granted only for enforcing individual 'Civil Rights' and not for enforcing 'Penal Laws' [Section
4]: Specific relief can be granted only for the purpose of enforcing individual civil rights and not for the purpose of
enforcing a penal law. But where enforcement of a penal law is merely incidental to the grant of specific relief, the
Court will not refuse it if the relief claimed is with regard to the civil right affecting the person or property of the
plaintiff.
Example: A threatens to publish a libel (which is a crime under the Indian Penal Code) against B. B may seek
injunction against the publication of the libel which the Court may grant.
RECOVERY OF POSSESSION OF MOVABLE & IMMOVABLE PROPERTY
Question 2] State the provision of the Specific Relief Act, 1963 relating to recovery of immovable property.
If a person is dispossessed of immovable property without his consent and otherwise than in due course of law,
what legal remedy is available to him if he does not establish his title?
What remedies are available to a person under the provisions of the Specific Relief Act, 1963, when he is
dispossessed from the immovable property without his consent and otherwise than in due course of law? What
is the period of limitation prescribed for such a remedy?
Ans.: Recovery of immovable property [Section 5]: A person entitled to the possession of specific immovable
property may recover it in the manner provided by the Code of Civil Procedure, 1908. According to this Code, he
may file a suit for ejectment on the strength of his title to the property within 12 years of the date of dispossession.
Suit by person dispossessed of immovable property [Section 6(1)]: If any person is dispossessed without his
consent of immovable property otherwise than in due course of law, he can recover possession by filing a suit.
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Bar of suit [Section 6(2)]: No suit under this section shall be brought -
(a) After the expiry of 6 months from the date of dispossession or (,b) Against the Government.
No Appeal or Review: [Section 6(3)]: No appeal shall lie from any order or decree passed in any suit instituted under
this section, nor shall any review of any such order or decree be allowed.
Suit on the basis of title allowed [Section 6(4)]: Nothing in this section shall bar any person from suing to establish
his title to such property and to recover possession thereof.
Though the suit on the basis of possession is bared, a person can still recover the property disposed on the basis of
title as provided in Section 5.
The object of Section 6 is to discourage forcible dispossession and to enable the person dispossessed to recover
possession by merely providing previous possession and wrongful dispossession without proving title. [Lachman
v. Shambu Narain, ILR (1911) 33 ALL 174]
A suit u/ s 6 is maintainable between landlords and tenants. Heirs are also entitled to sue for recovery of
possession.
Question 3] Distinguish between remedies given under Section 5 & Section 6 of the Specific Relief Act, 1963?
Ans.: The difference between the remedies given under Section 5 & Section 6 of the Specific Relief Act, 1963 are as
follows:
Points Remedy under Section 5 Remedy under Section 6
Nature of Remedy under Section 5 is a regular one. Remedy under Section 6 is of summary nature.
remedy
Suit against Regular suit can be filed against the Summary proceedings cannot be filed against
governmen Government. the Government.
t
Defence The defendant can defeat the suit of the No such defence is available in the summary
plaintiff by pleading and proving better and proceedings.
superior title.
Limitation Limitation for the regular remedy is 12 years. Limitation for the summary remedy is 6
period Months.
Points Remedy under Section 5 Remedy under Section 6
Possibility The decree given in a regular suit is subject to The decision given in the summary proceedings
of review appeal and review as provided in the Code of is not applicable. It is not subject to review.
Civil Procedure, 1908.
Applicabilit Doctrine of res judicata applies to a decree in Doctrine of res judicata do not applies to a
y doctrine the regular suit. decree in the regular suit, but not to decision in
of res- the summary proceedings.
judicata
Question 4] X is dispossessed of a house without his consent, otherwise than in due course of law by Y. Has X got
any remedy under the provisions of Specific Relief Act, 1963?
Ans.: According to Section 6 of the Specific Relief Act, 1963, if any person is dispossessed without his consent of
immovable property otherwise than in due course of law, he can recover possession by filing a suit. However, X is
required to file a suit before the expiry of 6 months from the date of dispossession.
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Question 5] Rajeev is dispossessed of the house without his consent by Rohit, the owner, otherwise than in due
course of law. Rajeev files a suit for possession u/s 6 of Specific Relief Act, 1963 before the Senior Sub -judge,
Delhi, within 6 months from dispossession. The said suit is decreed.
Can Rohit:
(a) Prefer an appeal against the decree
(b) File a fresh suit for possession on the basis of his ownership? Give reasons.
immovable property otherwise than in due course of law, he can recover possession by filing a suit.
No suit under this section shall be brought after the expiry of 6 months from the date of dispossession; or against
the Government.
No appeal shall lie from any order or decree passed in any suit instituted under this section, nor shall any review of
any such order or decree be allowed.
Thus,
(1) Rohit cannot prefer an appeal.
(2) Rohit can prefer a suit on the basis of his title of ownership to the property.
Question 6] Raju forcibly takes possession of his house from Shyam, his tenant, on 1st March 2019. On 1st April
2019, Shyam initiates proceedings under Section 6 of the Specific Relief Act, 1963 against Raju to regain
possession of the house. Raju takes the defence that he being the owner of the house is entitled to retain the
possession of the house. Will Shyam succeed?
immovable property otherwise than in due course of law, he can recover possession by filing a suit. Raju forcibly
takes possession of his house from Shyam. Thus, Shyam is dispossessed without his consent of immovable property
otherwise than in due course of law. In view of this the Court will not accept plea of Raju and Shyam can regain the
possession of house as per the provisions of Section 6 of the Specific Relief Act, 1963.
Question 7] Kumar unlawfully takes possession of house X from Hemant on 4th April 2019. On 9th January, 2020,
Hemant initiates proceedings under Section 6 of the Specific Relief Act, 1963 against Kumar for regaining
possession of the house. Kumar pleads that he is entitled to take possession of the house because he is the owner
of the house. Decide?
immovable property otherwise than in due course of law, he can recover possession by filing a suit.
No suit under this section shall be brought after the expiry of 6 months from the date of dispossession; or against
the Government. Thus, Hemant will not succeed as suit was brought after 6 months.
Question 8] State the provision of the Specific Relief Act, 1963 relating to recovery of movable property.
Ans.: Recovery of specific movable property [Section 7]: A person entitled to the possession of specific movable
property may recover it in the manner provided by the Code of Civil Procedure, 1908.
Explanation 1: A trustee may sue under this section for the possession of movable property to the beneficial interest
in which the person for whom he is trustee is entitled.
Explanation 2: A special or temporary right to the present possession of movable property is sufficient to support a
suit under this section.
Examples:
(a) X bequeaths land to Y for his life, with remainder to Z. X dies, Y enters on the land, but Z, without Y's
consent, obtains possession of the title deeds, Y may recover them from Z.
(b) P pledges certain jewels to Q to secure a loan. Q disposes of them before he is entitled to do so. P, without
having paid or tendered the amount of the loan, sues Q for possession of the jewels. The suit should be dismissed,
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as P is not entitled to their possession, whatever right he may have to secure their safe custody. [Donald v.
Suckling (1866) L.R. 1 Q.B. 585]
(c) B receives a letter addressed to him by C. C gets back the letter without B's consent. B has such a property
therein as entitles him to recover it from C. [Oliver v. Oliver (1861) 11 C.B.N.S. 139]
(d) X deposits books and papers for safe custody with Y. Y losses them and Z finds them, but refuses to deliver
them to Y when demanded. Y may recover them from Z, subject to Z's right, if any, u/s 168 of the Indian Contract
Act, 1872.
(e) A, a warehouse-keeper, is charged with the delivery of certain goods to Z, which B takes out of A's
possession. A may sue B for the goods.
Question 9] State the provisions relating to delivery of movable property by a person who is not owner to the
persons entitled to immediate possession under the Specific Relief Act, 1963.
Ans.: Liability of person in possession, not as owner, to deliver to persons entitled to immediate possession
[Section 8]: Any person having the possession or control of a particular article of movable property, of which he is
not the owner, may be compelled specifically to deliver it to the person entitled to its immediate possession, in any
of the following cases:
(a) When the thing claimed is held by the defendant as the agent or trustee of the plaintiff.
(b) When compensation in money would not afford the plaintiff adequate relief for the loss of the thing claimed.
(c) When it would be extremely difficult to ascertain the actual damage caused by its loss.
(d) When the possession of the thing claimed has been wrongfully transferred from the plaintiff.
Explanation: The Court shall, in respect of any article of movable property claimed under clause (b) or
(c), presume -
(i) That compensation in money would not afford the plaintiff adequate relief for the loss of the thing claimed, or,
as the case may be;
(ii) That it would be extremely difficult to ascertain the actual damage caused by its loss.
Illustrations
(a) Anand, proceeding to Europe, leaves his furniture in charge of Bikram, as his agent during his absence.
Bikram, without Anand's authority, pledges the furniture to Chandan, and Chandan knowing that Bikram had no
right to pledge the furniture, advertises it for sale. Chandan may be compelled to deliver the furniture to Anand
or he holds it as Anand's trustee.
(b) Dinesh has got possession of an idol belonging to Firoz's family, and of which Firoz is the proper custodian.
Dinesh may be compelled to deliver the idol to Firoz.
(c) Richa is entitled to a picture by a dead painter and a pair of rare China vases. Rohan has possession of
them. The articles are of special character to bear an ascertainable market value. Rohan may be compelled to
deliver them to Richa.
Question 10] X, proceeding to America, leaves his furniture in charge of Y, as his agent during his absence. Y,
without X's authority, pledges the furniture to Z, and Z knowing that Y had no right to pledge the furniture,
advertises it for sale. Can X recover the furniture from Z? Give your answer stating relevant provisions of the
Specific Relief Act, 1963.
Ans.: As per Section 8 of the Specific Relief Act, 1963, any person having the possession or control of a particular
article of movable property, of which he is not the owner, may be compelled specifically to deliver it to the person
entitled to its immediate possession.
X left the furniture with Y as his agent to take care of furniture in his absence and without X's authority Y pledged
the furniture to Z and the Z is aware of the fact that Y had no such authority. As Z had no title, X (real owner) can
compel him to deliver the furniture as per provisions of Section 8 of the Specific Relief Act, 1963.
SPECIFIC PERFORMANCE OF CONTRACTS
Question 11] When may the Court order specific performance of the contract?
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State the contracts which can be specifically enforced under the Specific Relief Act, 1963.
Ans.: Specific performance of contracts which are enforceable at the discretion of the Court [Section 10]: The
specific performance of contract is enforceable at the discretion of the Court in following cases:
(a) When there exists no standard for ascertaining the actual damage caused by non-performance of the act
agreed to be done.
(ib) When the act agreed to be done is such that compensation in money for its non-performance would not afford
adequate relief.
(c) Where the contract is for movable property of not an ordinary article of commerce or of special value or
consists of goods which are not easily available in the market or where the property is held by the defendant as the
agent or trustee of plaintiff.
(d) Where the contract is for transfer of immovable property and the breach thereof cannot be relieved by
compensation in money.
Cases in which specific performance of contracts connected with trusts enforceable [Section 11]: Where the
contract connected with the performance of trust wholly or partially be enforced specifically when the contract is
within powers of the trustee.
Example: Ram is a trustee of land with power of lease it for 7 years. He enters into a contract with Shyam to grant
a lease of the land for 7 years, with a covenant to renew the lease at the expiry of the term. This contract cannot be
specifically enforced because trustee has acted in excess of his power.
Contracts specifically enforceable [Section 14(3)]: The Court may enforce specific performance in the following
cases:
(a) Where the suit is for the enforcement of a contract:
- To execute a mortgage or furnish any other security for securing the repayment of any loan which the
borrower is not willing to repay at once. However, if only a part of the loan has been advanced the lender is willing
to advance the remaining part of the loan in terms of the contract.
- To take up and pay for any debentures of a company.
(b) Where the suit is for:
- The execution of a formal deed of partnership, the parties having commenced to carry on the business of
the partnership; or
- The purchase of a share of a partner in a firm.
(c) Where the suit is for the enforcement of a contract for the construction of any building or the execution of
any other work on land.
Question 12] Aman is entitled to a picture by a dead painter and a pair of rare Chinese vases. Bhuvan has
possession of them. The articles are of special character to bear unascertainable market value. Can Bhuvan be
compelled to deliver these articles to Aman? Give reasons.
Ans.: As per Section 10 of the Specific Relief Act, 1963, specific performance can be granted, where the contract is
for movable property of not an ordinary article of commerce or of special value or consists of goods which are not
easily available in the market. Hence, Bhuvan can be compelled to deliver a picture to Aman as articles are of special
character to bear unascertainable market value.
Question 13] Ramni is appointed trustee of his property by Bhanu, authorizing him to sell the trust property and
to use the sale proceeds for the benefit of his sons, Mohit and Rohit. Ramni enters into an agreement with Sonu
to mortgage this property in his favour. Ramni fails to fulfil the promise. Sonu, therefore, files a suit for specific
performance against Ramni. Will he succeed?
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Ans.: As per Section 11 of the Specific Relief Act, 1963, a contract made by a trustee in excess of his powers or in
breach of trust cannot be specifically enforced. In the given case, the trustee is having the power to effect the sale
of the property, whereas, he entered into agreement for mortgaging the property, which is contrary of his powers.
Accordingly, Sonu cannot obtain specific performance against Ramni.
Question 14] Alpana agrees with Kalpana to start courier business in partnership. Later on, Alpana decides to be
a partner of Sapna. What should Kalpana do?
Ans.: As per Section 14(3) of the Specific Relief Act, 1963, the Court may enforce specific performance where the
suit is for the execution of a formal deed of partnership, and the parties have already commenced to carry on the
business of partnership.
In this case, Kalpana cannot file a suit against Alpana for the specific performance of the contract of partnership as
they have not started the business.
Question 15] Ram and Rahim entered into oral agreement to carry on business of sale of electric goods in
partnership. Accordingly, they started this business. Now, Ram files a suit against Rahim with prayer that Rahim
may be directed to execute a partnership deed. How will the Court decide?
suit is for the execution of a formal deed of partnership and the parties have already commenced to carry on the
business of partnership. As Ram and Rahim already started business, Ram is advised to file a suit for specific
performance; the Court may direct to execute the deed of partnership.
Question 16] Ram and Shyam entered into an oral agreement to carry on wheat business in partnership. The
contract is silent as to the duration of the business. Ram, thereafter, denies carrying on business in partnership.
Shyam files a suit for specific performance of contract against Ram. Will he succeed?
suit is for the execution of a formal deed of partnership, and the parties have already commenced to carry on the
business of partnership. In given problem, Ram & Shyam has not yet started the business so Shyam cannot sue for
specific performance for executing the formal deed of partnership.
Question 17] When Court must refuse order specific performance? CS (Inter) - June 1997 (4 Marks)
Indicate the contracts which cannot be specifically enforced under the Specific Relief Act, 1963.
A contract may not always be specifically enforced. Comment.
CS (Inter) - June 2007 (4 Marks), CS (Executive) - Dec 2011 (4 Marks)
Ans.: Contracts not specifically enforceable [Section 14(1)]: The Court may refuse to grant specific performance of
a contract in the following circumstances:
(a) Where compensation in money is an adequate relief.
(b) Where the contract runs into minute or numerous details.
(c) Where the contract is dependent upon personal qualification or personal volition.
(d) Where the contract is by its very nature not capable of specific performance e.g. contract to marry.
Question 18] Jolly agrees to sell 100 kg wheat at ` 50 per kg to Babita. On the date the fixed date Jolly fails to
supply the wheat, can Babita obtain specific performance this agreement?
Ans.: According to Section 14 of the Specific Relief Act, 1963, a contract for the non-performance of which
compensation in money is an adequate relief cannot be specifically enforced.
If Jolly fails to supply the wheat as agreed then Babita can be compensated by monetary compensation. So, Babita
cannot obtain specific performance. But, she can sue for damages and Court will award her ordinary damages.
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Question 19] Z is a writer. He enters into a contract with T to write a book for him. A does not write the book.
Can T file a suit against Z for specific performance? Answer with reason.
Ans.: According to Section 14 of the Specific Relief Act, 1963, where the contract is depends upon the personal
qualifications or volition of the parties, it cannot be specifically enforced. Accordingly, the contract between the
author and the publisher cannot be specifically enforced.
Question 20] Dr. Ghose agrees to perform a certain operation, takes an advance of ` 50,000 from patient. Dr.
Ghose refuses to operate. Examine whether patient can get a decree of specific performance from the Court
against Dr. Ghose? CS (Inter) - June 1999 (6 Marks)
qualifications or volition of the parties, it cannot be specifically enforced. Thus, a contract to perform an operation
by a doctor cannot be specifically enforced by the Courts, as it depends upon the personal qualification and
expertise of the doctor.
Question 21] Ashok contracts to buy Bhushan's business at the amount to be determined by two valuer, one to
be named by Ashok and the other by Bhushan. Both Ashok and Bhushan name their respective valuer. Before the
valuation is made, Ashok instructs his valuer not to proceed. Can Bhushan specifically enforce this contract?
qualifications or volition of the parties, it cannot be specifically enforced. Thus, a contract to make valuation of
business depends upon the personal qualification and expertise of the valuer. Such contract cannot be specifically
enforced by the Courts.
PERSON AGAINST WHOM SPECIFIC PERFORMANCE IS AVAILABLE
Question 22] Who may obtain specific performance of contract? Are there any personal bars in this regard?
Ans.: Who may obtain specific performance [Section 15]: The specific performance of a contract may be obtained
by:
(1) Any party thereto
(2) The representative in interest (i.e. agent) or the principal
(3) Where the contract is a settlement on marriage, or a compromise of doubtful rights between members of
the same family, any person beneficially entitled there under.
(4) Remainder-man.
(5) A reversioner in possession
(6) A reversioner in remainder
(7) The new company which arising out of the amalgamation.
(8) Promoters of a company, when the promoters of a company have, before its incorporation, entered into a
contract for the purpose of the company and such a contract is warranted by the terms of the incorporation of the
company and the company has accepted the contract and has communicated such acceptance to the other party
to the contract.
Generally, only a party to the contract can get its specific performance. The section gives the list of persons who
can sue for specific performance of a contract. The general principle is that in a suit for specific performance of a
contract, all the parties to the contract should be parties to the suit and no one else.
Meaning of certain terms:
Remainder-man is a term used in property law to refer a person who inherits or is entitled to inherit property
upon the termination of the estate of the former owner. A remainder-man holds an interest in the remainder and
will become its possessor at some future time. For example, if the owner of property gives a piece of his real
379
property to "to A for life, and then to B," B is entitled to a future interest, called a remainder, and B is termed a
remainderman. B's interest becomes possessory only on A's death.
Reversion means any future interest kept by a person who transfers property to another.
A reversion occurs when a property owner makes an effective transfer of property to another but retains some
future right to the property. For example, if Ram transfers a piece of property to Shyam for life, Shyam has the
use of the property for the rest of his life. Upon his death, the property reverts, or goes back, to Ram, or if Ram
has died, it goes to his heirs. Ram's right or the right of his heirs to take back the property upon Shyam's death,
are called reversionary interests.
SPECIFIC PERFORMANCE OF PART CONTRACTS
Question 23] What are the provisions of relating to 'performance of part contract' under Specific Relief Act, 1963?
Ans.: The general rule is that the Court normally does not grant specific performance of only a part of a contract.
However, as per Section 12 the Court may direct the specific performance of a part of a contract in the following
cases:
(1) Part left unperformed proportionately small [Section 12(2)]: Sometimes a party to a contract is unable to
perform the whole of his part of the contract. If the part which is left unperformed bears only a small proportion of
the whole in value and admits of compensation in money, the Court may at the suit of either party, direct the specific
performance of so much of the contract as can be performed, and award compensation in money for the deficiency.
Example: X contracts to sell to Y a piece of land consisting of 100 bighas for ` 1,00,000. It turns out that out of the
100 bighas 2 bighas belong to a stranger, who refuses to part with them. The 2 bighas are not necessary for the
enjoyment of the 98 bighas, nor so important that the loss of them may not be made good in money. X may be
directed at the suit of Y to convey to Y the 98 bighas and to compensate him for the loss of 2 bighas, or Y may be
directed at the suit of X to pay to X, on receiving the conveyance and possession of the land, the stipulated
purchase money, less a sum awarded as compensation for the deficiency.
(2) Part left unperformed considerably large [Section 12(3)]: Sometimes, the part of a contract which is left
unperformed may be considerably large. If the part of a contract which is left unperformed forms a considerable
portion of the whole or does not admit of compensation in money, the plaintiff is not entitled to a decree for specific
performance. But if the plaintiff relinquishes all claims to further performance and all rights to compensation either
for the deficiency or for the loss or damage sustained by him, he can sue for and the Court may grant specific
performance.
Example: X contracts to sell Y a piece of land consisting of 100 bighas. It turns out that 60 bighas of the land belong
to X and the other 40 bighas to Z, a stranger, who refused to part with them. X cannot obtain a decree against Y
for the specific performance of the contract but if Y is willing to pay the price agreed upon, and to take the 60
bighas which belong to X, waiving all rights to compensation either for deficiency of for loss sustained by him
through X's neglect or default, Y is entitled to a decree directing X to convey those 60 bighas to him on payment
of the purchase money.
Question 24] A contracts to sell B a piece of land consisting of 100 bighas for ` 1,00,000. It turns out that only 98
bighas of land belonged to A. How would you decide? CS (Inter) - Dec 1991 (5 Marks)
Ans.: According to Section 12(2) of the Specific Relief Act, 1963, if the part which is left unperformed bears only a
small proportion of the whole in value and admits of compensation in money, the Court may at the suit of either
party, direct the specific performance of so much of the contract as can be performed, and award compensation in
money for the deficiency.
In given case part left unformed is small portion of whole i.e. 2 bighas of land, hence Court may at the suit of either
Question 25] Alok contracts to sell a piece of land to Vimal consisting of 100 bighas for ` 10 lakhs and it turns out
that only 60 bighas of land belongs to Alok. Who can demand specific performance of contract and who cannot?
If there is a demand of specific performance from rightful party, what will be the consideration?
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Ans.: According to Section 12(3) of the Specific Relief Act, 1963, if the part of a contract which is left unperformed
forms a considerable portion of the whole or does not admit of compensation in money, the plaintiff is not entitled
to a decree for specific performance. But if the plaintiff relinquishes all claims to further performance and all rights
to compensation either for the deficiency or for the loss or damage sustained by him, he can sue for and the Court
may grant specific performance.
In the problem under consideration, Alok is not in a position to perform a substantial part of the contract and for
the part left unperformed, does not admit of compensation in money. Hence, ordinarily the Court will not order
specific performance of the contract.
However, the Court may grant specific performance of the part of the contract if:
(1) Vimal pays consideration for the whole of the contract without any abatement, and
(2) Relinquishes all claims to the performance of the remaining part of the contract.
Alok cannot demand specific performance of the contract, but Vimal can demand specific performance of the
contract to get the 60 bighas of land from Alok.
PERSON AGAINST WHOM SPECIFIC PERFORMANCE IS NOT AVAILABLE
Question 26] Who are the persons against whom specific performance of a contract cannot be enforced? Can the
court grant the specific performance of a contract to a plaintiff who is ready and willing to perform his part of the
agreement? CS (Inter) - June 2004 (4 Marks)
Mention persons against whom specific performance cannot be enforced?
Ans.: Personal bars to relief [Section 16]: Specific performance of a contract cannot be enforced in favour of a
person:
(a) Who would not be entitled to recover compensation for its breach, or
(b) Who has became incapable of performing, or violates any essential term of the contract or acts in fraud or
wilfully acts at variance in relation to contract, or
(c) Who fails to aver and prove that he has performed or has always been ready and willing to perform the
essential terms of the contract which are to be performed by him.
Contract to sell or let property by one who has no title, not specifically enforceable [Section 17]: A contract to sell
or let any immovable property cannot be specifically enforced in favour of vendor or lessor -
(a) Who knowing himself not have any title to the property, has contracted to sell or let the property.
Example: Arun without Chandan's authority contacts to sell to Balu an estate which Arun knows to belong to
Chandan. Arun cannot enforce specific performance of this contract even though Chandan is willing to confirm it.
(b) Who cannot give the purchaser or lessee a title free from reasonable doubt.
Non-enforcement except with variation [Section 18]: Where a plaintiff seeks specific performance of a contract in
writing, to which the defendant sets up a variation, the plaintiff cannot obtain the performance sought, except with
the variation so set up in the following cases, namely:
(a) Whereby fraud, mistake of fact or misrepresentation, the written contract of which performance is sought is in
its terms or effect different from what the parties agreed to, or does not contain all the terms agreed to between
the parties on the basis of which the defendant entered into the contract.
(b) Where the object of the parties was to produce a certain legal result which the contract as framed is not
calculated to produce.
(c) Where the parties have subsequently to the execution of the contract, varied its terms.
Example: X contracts in writing to let a house to Y for a certain term, at the rent of ` 10,000 p.m., putting it first
into tenantable repair. The house turns out to be not worth repairing. So with Y's consent, X pulls it down and
erects a new house in its place. Y contracting orally to pay rent at ` 12,000 p.m. Y then sues to enforce specific
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performance of the contract in writing. He cannot enforce it except with the variations made by the subsequent
oral contract.
Question 27] Ajeet contracts to sell Baljeet a house and garden in which there are ornamental trees, a material
element in the value of the property as a residence. Ajeet without Baljeet's consent, fells the trees. Baljeet refuses
to purchase the house. Can Ajeet enforce specific performance of the contract?
Ans.: As per Section 16 of the Specific Relief Act, 1963 a contract cannot be enforced in favour of a person who
violates any essential term of the contract or acts in fraud or wilfully acts at variance in relation to contract.
In the instant case, Ajeet, the seller of the house cut the ornamental trees without the consent of Baljeet. Hence,
he has violated the essential term of the contract and wilfully acted at variance with the relation intended to be
established by the contract of sale.
Thus, Ajeet cannot enforce specific performance of the contract.
Question 28] Rohan, without Sohan's authority, contracts to sell to Mohan an estate, which Rohan knows that it
belongs to Sohan. Sohan is willing to confirm it. Can Rohan enforce Specific Performance of this contract?
Ans.: As per Section 17 of the Specific Relief Act, 1963, a contract to sell or let any immovable property cannot be
specifically enforced in favour of a vendor or lessor or who knowing himself not to have any title to the property,
has contracted to sell or let the property.
In given case Rohan do not have title to estate and hence he cannot enforce specific performance of contract even
if Sohan is willing to confirm it.
Question 29] Bajeer, being in possession of certain land, contracts to sell it to Zegger. On enquiry, it turns out that
Bajeer claims the land as heir of Raja, who left the country several years ago and is generally believed to be dead,
but of whose death there is no sufficient proof. Can Zagger compel Bajeer for specific performance of the
contract? CS (Inter) - Dec 2002 (6 Marks)
Ans.: As per Section 17 of the Specific Relief Act, 1963, a contract to sell or let any immovable property cannot be
specifically enforced in favour of a vendor or lesser who knowing himself not to have any title to the property, has
contracted to sell or let the property.
Bajeer had only possession of land and not title and hence cannot compelled by the Zegger for specific performance
of the contract.
DISCRETION OF THE COURT
Question 30] State special circumstances covered by Section 20 of Specific Relief Act, 1963, where Court may at
its discretion refuse to grant specific performance of contract.
Ans.: Discretion as to decreeing specific performance [Section 20]: The jurisdiction to decree specific performance
is discretionary, and the Court is not bound to grant such relief merely because it is lawful to do so, but the discretion
of the Court is not arbitrary but based on sound and reasonable grounds guided by judicial principles and capable
of correction by a Court of appeal.
Section 20(2) lays down that the following are cases in which the Court may properly exercise discretion not to
decree specific performance:
(a) Where the terms of the contract or the conduct of the parties at the time of entering into the contract or the
other circumstances under which the contract was entered into are such that the contract, though not voidable,
gives the plaintiff an unfair advantage over the defendant.
(b) Where the performance of the contract would involve some hardship on the defendant which he did not
foresee whereas its non-performance would involve no such hardship on the plaintiff.
(c) Where the defendant entered into the contract under circumstances which though not rendering the
contract voidable, makes it inequitable to enforce specific performance.
The Court may properly exercise discretion to decree specific performance in any case where the plaintiff has done
substantial acts or suffered losses in consequences of a contract capable of specific performance.
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The Court shall not refuse to any party specific performance of a contract merely on the ground that the contract is
not enforceable at the instance of the other party.
Specific performance is a discretionary remedy. The Court is not bound to decree specific performance merely
because it is lawful to do so. Courts can take into consideration the conduct of the parties and the circumstances
attending its execution and may exercise discretion in granting or withholding a decree for specific performance.
However, this discretion is not an arbitrary discretion but one governed by sound principles of equity
Question 31] Anil files a suit against Bimal for specific performance of contract for sale of House-X. Bimal takes
the defence that this House was given to him by his father under a will with a condition that if Bimal will sell this
house within a period of 12 years, Chirag will become entitled to get 3/4th of the price of the house. Hence, a
decree for specific performance should not be passed against him. Will he succeed?
Ans.: As per Section 20 of the Specific Relief Act, 1963, the Court may in its discretion, refuse to grant specific
performance where the terms of the contract or the conduct of the parties at the time of entering into the contract
or the other circumstances under which the contract was entered into are such that the contract, though not
voidable, gives the plaintiff an unfair advantage over the defendant.
In the given case, if the defendant (i.e. Bimal) can satisfy the Court that at the time of formation of contract, the
impugned condition that 3/4th of the sale proceeds will entitled by the other, had escaped from his mind and he
would suffer a great loss if the specific performance is granted. He should also satisfy the Court that if the contract
is not performed, the other party would not suffer much loss.
Thus, if Bimal satisfies the Court about two conditions stated above then Court will not grant any decree against
Bimal.
DAMAGES & COMPENSATION
Question 32] Write a short note on: Court's power to award damages & compensation in certain cases under
Specific Relief Act, 1963
What are the circumstances under which the court may, in its discretion, award damages instead of specific
performance of a contract? CS (Inter) - June 2007 (5 Marks)
Ans.: Power to award compensation in certain cases [Section 21]: The Court is empowered to award compensation
in a suit for specific performance of a contract in following cases:
(1) The Court can award compensation instead of granting specific performance.
(2) In addition to granting specific performance, the Court can award compensation if only granting specific
performance is not sufficient.
(3) In determining the amount of any compensation, the Court shall be guided by the principles of Section 73 of
the Contract Act, 1872.
(4) Compensation can be awarded only if plaintiff has specifically has claimed such compensation in plaint.
However, the Court shall at any stage at the proceeding, allow him to amend the plaint for claiming compensation.
Power to grant relief for possession, partition, refund of earnest money [Section 22]: Any person, suing for the
specific performance of a contract for the transfer of immovable property may, in an appropriate case ask for:
(a) Possession or partition and separate possession, of the property in addition to any such performance or
(ib) Any other relief to which he may be entitled in case his claim for specific performance is refused.
Liquidation of damages not a bar to specific performance [Section 23]: Even if the parties have agreed for
liquidated damages, in the contract itself, specific performance of that contract may be decreed by the Court in
proper cases but in that case the payment of the sum named in the contract will not be decreed.
Bar of suit for compensation for breach after dismissal of suit for specific performance [Section 24]:
It imposes a bar on suit for compensation for breach of a contract after dismissal of the suit for specific performance.
Question 33] A gave power of attorney to B to sell half of his land comprising of 30 bighas. B executed an
agreement to sell in favour of C, agreeing to sell the entire 30 bighas of land and received ` 1,00,000 as earnest
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money and put C in possession of property. On dispute by A, C files a suit for specific performance. Will he
succeed?
Ans.: Section 22 of the Specific Relief Act, 1963 gives power to the Court to grant relief of possession, partition,
refund of earnest money in case of refusal of specific performance by the defendant, will be applicable in this case.
Accordingly, C will not succeed in getting specific performance of the complete deal as B has no authority to sell 30
bighas of land.
He will partially succeed to the extent of getting half of the land i.e. 15 bighas of A for which the agent B had
authority to sell. As regards, half of the earnest money of ` 1,00,000 paid, this can be refunded or adjusted against
the sale price of 15 bighas of land at the discretion of Court.
RECTIFICATION OF INSTRUMENT
Question 34] Write a short note on: Rectification of an instrument
Ans.: Rectification means correction of an error in an instrument.
When instrument may be rectified [Section 26]: Where a contract reduced into writing in pursuance of a previous
agreement, but fails to express the real intension of the parties, the Court will rectify the instrument in accordance
with their true intension.
The Court allows rectifying the instrument if following conditions are satisfied.
(1) There must a complete agreement and it must be in writing.
(2) There must be clear evidence of mutual mistake or of fraud.
(3) It does not show the real intention of the parties.
However, this section doesn't apply to the Article of Association of company to which Companies Act, 2013 applies.
It should be noted that no relief for the rectification of an instrument shall be granted to any party under this section
unless it has been specifically claimed.
The only limitation placed on the Courts discretion is that the rectification can be done without prejudice to the
right acquired by third persons in good faith and for value.
Example: X agrees with Y to sell his house together with one of the 3 godowns adjacent to it but in deed of
agreement. Purporting to incorporate this agreement all the 3 godowns are by fraud of Y included under the terms
of the sale. The Court may bind the parties to the real intension.
RESCISSION OF CONTRACT
Question 35] In what circumstances may rescission of contracts be sought under the Specific Relief Act, 1963?
Ans.: Rescission means the revocation of a contract.
Rescission of contracts [Section 27]: Any person interested in a contract may sue to have it rescinded and Court
may allow rescission in following cases:
(1) Where the contract is voidable or terminable by the plaintiff.
Example: X sells a field to Y. There is a right of way over the field of which X has direct personal knowledge but
which he conceals from Y. Y is entitled to have the contract rescinded.
(2) Where the contract is unlawful and the defendant is more to blame than plaintiff.
Example: P, an attorney, induces his client R, a Hindu Widow, to transfer property to him for the purpose of
defrauding R's creditors. R is entitled to have the instrument of transfer rescinded. However, the Court may refuse
to rescind a contract.
(3) Where the plaintiff has expressly or impliedly rectified the contract.
(4) Where due to change in circumstances parties cannot be put to in original position.
Example: When subject matter of contract has been destroyed or its value or quality considerably diminished.
(5) When third party acquires interest without notice.
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(6) Where only a part of the contract is sought to be rescinded and such part is not severable from the rest of
the contract.
Question 36] A person suing for rescission cannot in the alternative sue for specific performance, but a person
suing for specific performance can sue of rescission. CS (Inter) - Dec 2007 (4 Marks)
Ans.: This statement is true and is explained in Section 29 of the Specific Relief Act, 1963. It says that the plaintiff
suing for specific performance may sue for the contract to be rescinded if it cannot be specifically performed.
CANCELLATION OF INSTRUMENT
Question 37] In what circumstances may the cancellation of an instrument be sought under the Specific Relief
Act, 1963? CS (Inter) - Dec 1993 (7 Marks)
Ans.: When cancellation may be ordered [Section 31]: A written document which is void or voidable against a
person may cause him in some cases a serious injury, if it is left outstanding. In such a case, if he has any such
apprehension, he may file a suit to have the document adjudged void or voidable.
Example: X, the owner of a ship, by fraudulently representing it to be seaworthy, induces Y, an underwriter, to
insurer ship, Y may obtain the cancellation of the policy.
Conditions for relief:
(1) The instrument sought to be cancelled is void or voidable against the plaintiff.
(2) He has reasonable apprehension of serious injury from the instrument if it is left outstanding.
(3) That the apprehended injury is serious and in view of the circumstances of the case the Court considers it
reasonable and necessary to cancel the document.
If the instrument has been registered under the Registration Act, 1908 the Court shall also send a copy of its decree
to the officer in whose office the instrument has been registered.
Instruments may be partially cancelled [Section 32]: Where an instrument is evidence of different rights or
different obligations, the court may, in a proper case, cancel it in part and allow it to stand for the residue.
Example: X executes a deed of mortgage in favour of Y for loan of ` 1,20,000. A gets back the deed from Y by fraud
and endorses on it a receipt for ` 1,20,000 purporting to be signed by Y. Y's signature is forged. Y is entitled to have
the endorsement cancelled, leaving the deed to stand in other respects.
Question 38] Pankaj is the owner of a ship. He takes an insurance policy declaring fraudulently that the ship is
sea-worthy. But, the ship is not sea-worthy. Has the insurance company any right against Pankaj? Give answer
with reasons. CS (Inter) - June 2006 (5 Marks)
Ans.: According to Section 31 of the Specific Relief Act, 1963, any person against whom a written instrument is void
or voidable and who has reasonable apprehension that such instrument, if left outstanding may cause him serious
injury, may sue to have it adjudged void or voidable; and the Court may in its discretion adjudge it and order it to
be delivered up and cancelled. Hence, insurance company can sue to cancel an insurance policy.
DECLARATORY DECREE
Question 39] Write a short note on: Declaratory decree CS (Inter) - June 2008 (4 Marks)
When will the Court grant a declaratory decree? CS (Inter) - Dec 1995 (5 Marks)
When can the Court refuse to grant a declaratory decree? What is the effect of a declaratory decree.
Ans.: Discretion of court as to declaration of status or right [Section 34]: The Court may grant a declaratory decree
in favour of plaintiff when the plaintiff satisfies the Court as to the following:
- That he is entitled to a legal character or right to property.
- He will also have to prove that the defendant is either denying, or interested to deny his title to such
character or right.
The declaration cannot be sought on speculative grounds.
When Court refuses to grant declaratory decree: However, the Court will refuse to grant a declaratory decree
where the plaintiff, being able to seek further relief than a mere declaration of title, omits to do so.
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Instances of legal status are:
♦ Status of an adopted son
♦ Priest of a temple
♦ Legal character by marriage
♦ Legitimacy or illegitimacy
♦ Divorce on the ground of impotency
Effect of declaration [Section 35]: A declaration is binding only on:
- The parties to the suit,
- Persons claiming through them respectively, and
- Where any of the parties are trustees, on the persons for whom, if in existence at the date of the declaration, such
parties would be trustees.
Such declaratory decrees are not judgments-in-rem and as such cannot bind strangers.
Question 40] A is properly in possession of certain lands. The inhabitants of neighbouring village claim a right of
way across the land. What is the remedy available to A?
Ans.: According to Section 34 of the Specific Relief Act, 1963, any person entitled any legal character or to any right
as to any property may institute a suit against any person denying or interest in denying his title to such character
or right and the Court may in its discretion make therein declaration that he is so entitled. Thus, A may sue for a
declaration that the inhabitants of neighbouring village are not entitled to the right so claimed.
Question 41] A files a suit against B for declaration that house X belongs to him. He also prays for delivery of
possession of the house to him. The Court passes a declaratory decree in favour of A and orders that possession
of the house be delivered to A. Now, C files suit against A for delivery of house X to him on the ground that the
house belongs to him. A pleads in defence that the Court has already made a declaration that house X belongs to
him. Will the Court accept this defence?
Ans.: According to Section 35 of the Specific Relief Act, 1963, a declaratory decree is binding only on the parties to
the suit in which there decree is passed, or on persons claiming through such parties respectively.
Since, C was not party to the suit in which decree was passed, it is not binding against him. The Court will, therefore,
not accept the defence of A.
Question 42] Madhav, a Hindu, in a suit to which Urvashi, his wife is the defendant, seeks a declaration that his
marriage was duly solemnized and prays for an order of restitution of conjugal rights. The Courts makes the
declaration and order of restitution of conjugal rights. Chanchal, a third party, claims that Urvashi is his wife and
prays to the Court to annul the declaration made in favour of Madhav. Decide.CS (Inter) - June 2001 (5 Marks),
Dec 2002 (5 Marks)
Ans.: According to Section 35 of the Specific Relief Act, 1963, a declaratory decree is binding only on the parties to
the suit in which there decree is passed, or on persons claiming through such parties respectively.
Since, Chanchal was not party to the suit in which decree was passed, it is not binding against him.
PREVENTIVE RELIEF
Question 43] Write a short note on: Preventive relief CS (Inter) - June 1995 (5 Marks)
What is meant by 'preventive relief' under the Specific Relief Act, 1963? How is it granted? Discuss.
Ans.: Preventive relief means preventing a party from doing such things or act, which he is under an obligation not
to do. It is directed to prevent the violation of negative act and the therefore it is called as preventive relief. The
power upon Courts to prevent and to restrain is absolutely necessary for effective administration of justice.
Preventive relief how granted [Section 36]: Preventive relief is granted at the discretion of the court by injunction,
temporary or perpetual.
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Temporary injunctions [Section 37(1)]: Temporary injunctions are such as are to continue until a specific time, or
until the further order of the court, and they may be granted at any stage of a suit, and are regulated by the Code
of Civil Procedure, 1908.
Perpetual injunctions [Section 37(2)]: A perpetual injunction can only be granted by the decree made at the hearing
and upon the merits of the suit; the defendant is thereby perpetually enjoined from the assertion of a right, or from
the commission of an act, which would be contrary to the rights of the plaintiff.
Question 44] What is an injunction? When does the Court grant an injunction to perform the negative agreement?
Ans.: Where a party is in breach of a negative term of a contract i.e. where he is doing something which he promised
not to do, the Court may by issuing an order, restrain him from doing what he promised not do so. Such an order of
the Court is known as injunction.
Examples:
(a) Lata agreed to sings at Shankar's theatre, and during a certain period to sing nowhere else. Afterwards Lata
contracted with Omkar to sing at another theatre and refused to perform the contract with Shankar. Lata could be
restrained by injunction from signing for Omkar.
(b) Katarina a film actress, agreed to act exclusively for Karan for a year and for no one else. During the year she
contracted to act for Sanjay. She could be restrained by injunction from doing so.
(c) The directors of a public company are about to pay dividend out of capital or borrowed money. Any of the
shareholders may sue for an injunction to restrain them.
(d) The directors of a fire and life insurance company are about to engage in marine insurance. Any of the
shareholders may sue for an injunction to restrain them.
Injunction to perform negative agreement [Section 42]: Where a contract comprises an affirmative agreement to
do a certain act, coupled with a negative agreement, express or implied, not to do a certain act and the Court is
unable to compel specific performance of the affirmative agreement, then Court may grant an injunction to perform
the negative agreement.
Question 45] Ragini, a singer agreed to sing at Lakshmi's theatre from January to April, 2009 and not to sing
anywhere else during that period. Afterwards, she entered into a contract to sing at Kamala's theatre during the
said period and refused to sing at Lakshmi's theatre during that period. Lakshmi filed an injunction application to
appropriate court. What relief Lakshmi is entitled to get, and for which part Court may refuse to grant injunction?
Decide giving reasons.
CS (Inter) - Dec 1996 (5 Marks), Dec 2007 (6 Marks) CS (Executive) - Dec 2009 (6 Marks)
Ans.: When a contract involves personal qualification or volition, the Court will not enforce the specific performance
of its material terms. In this case the agreement by the defendant to give performance at the plaintiff's theatre for
four month, would not be enforced by the Court, since it involves personal volition of the party.
As per the provision of Section 42 of the Specific Relief Act, 1963, although the Court is unable to compel specific
performance of the affirmative agreement, yet it can order for performance of the negative agreement. Accordingly
Lakshmi will get order of injunction from the Court for restraining the Ragini from performing in another theatre.
Question 46] What do you understand by 'temporary injunction'?
Under what circumstances Court may grant temporary injunction? CS (Inter) - Dec 1993 (8 Marks)
Ans.: A temporary injunction is a Court Order prohibiting an action by a party to a lawsuit until there has been a
trial or other Court action. The purpose of a temporary injunction is to maintain the status quo and prevent
irreparable damage or preserve the subject matter of the litigation until the trial is over. After the
trial, the Court may issue a permanent injunction or dissolve the temporary injunction. It is a provisional remedy
granted to temporarily curb activity until the court can make a final decision after trial.
Question 47] What do you understand by perpetual injunction? In which cases Court may grant perpetual
injunction?
Write a short note on: Perpetual injunction CS (Executive) - June 2010 (4 Marks)
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Ans.: A perpetual or permanent injunction is a type of order issued by a Court after a full trial on the merits of a
case. A permanent injunction order is typically issued for the purpose of requiring a person or entity to permanently
stop acting in a certain manner. Perpetual injunction is one that is granted by the judgment that ultimately disposes
of the injunction suit. It is ordered at the time of final judgment. This type of injunction must always be a final relief.
Permanent injunctions are regarded as perpetual conditions that produced them remain permanent.
Perpetual injunction when granted [Section 38]: When the defendant invades or threatens to invade the plaintiff's
right to, or enjoyment of, property, the Court may grant a perpetual injunction in the following cases, namely:
♦ Where the defendant is trustee of the property for the plaintiff.
♦ Where there exists no standard for ascertaining the actual damage caused or likely to be caused.
♦ Where compensation in money could not afford adequate relief.
♦ Where the injunction is necessary to prevent a multiplicity of judicial proceedings.
Question 48] Distinguish between: Temporary Injunction & Perpetual Injunction
CS (Inter) - June 2000 (4 Marks), CS (Inter) - Dec 2003 (4 Marks)
Ans.: Following are main points of distinction between temporary and perpetual injunction:
Points Temporary Injunction Perpetual Injunction
Meaning A temporary injunction is a Court Order A perpetual or permanent injunction is a

prohibiting an action by a party to a lawsuit type of order issued by a Court after a full
until there has been a trial or other Court trial on the merits of a case.
action.
Nature A temporary injunction is provisional in Perpetual injunction is permanent in nature

nature as it does not and cannot conclude or as it concludes or determines rights upon
determine a right. the merits of the suit.
Governing Temporary injunctions also known as Perpetual injunctions are granted under
statute interlocutory and are granted under the Civil Section 38 of the Specific Relief Act, 1963.
Procedure Code 1908.
Stage of granting It is granted before plaintiff establishing his Perpetual injunction can be granted after
case at the trial and continues up to a hearing the defendant and upon the merits
specified time. of the suit.
Replacement Temporary injunction may be replaced by Perpetual injunction cannot be replaced by

perpetual injunction on merits of the case. temporary injunction.
Question 49] Write a short note on: Mandatory injunction

Ans.: Sometimes, to prevent the breach of an obligation and to compel the performance of certain acts, Court may
at its discretion grant an injunction, such injunctions are known as mandatory injunction.
The mandatory injunctions may be one of the following type -
(i) Restitutory
(ii) Prohibitory
Examples:
(a) A, by new buildings, obstruct light to the access and use of which B has acquired a right under the Limitation
Act, 1963. B may obtain an injunction not only to restrain A from going on with the buildings, but also to pull down
so such of them as obstructs B's light.
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(b) A threatens to publish statements concerning B which would be punishable under the Indian Penal Code,
1860. The Court may grant an injunction to restrain the publication, even though it may be shown not to be injurious
to B.
(c) A being's medical adviser, threatens to publish A's written communication with him, showing that B has led
an immoral life. B may obtain an injunction to restrain the publication.
Question 50] Distinguish between: Remedies of specific performance and Remedies of injunction
Ans.: Following are main points of distinction between remedies of specific performance and remedies of injunction:
Points Remedies of specific performance Remedies of injunction
Meaning Sometimes monetary compensation may not Where a party is in breach of a negative terms, of
be adequate remedy, in that case the a contract i.e. where is he doing something which
aggrieved may pray to Court and may get an he promised not to do, the Court may by issuing
order against other party to fulfil obligation it an order, restrain him from doing what he
has undertaken. This is known as specific promised not do so. Such an order of the Court is
relief. known as injunction.
Order Orders of specific performance are issued to Orders of injunctions are issued from prohibiting
do specifically what party has agreed to do. a person from doing what he has promised not to
do.
Coverage Specific performances are issued for Injunctions can be issued for con tracts as well for
performance of contracts. torts.
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21
CHAPTER
SALE OF GOODS ACT, 1932
INTRODUCTION: The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. It applies to the whole of
India except the State of Jammu & Kashmir.
The contacts for sale of goods are subject to the general principles of the law relating to contracts i.e. the Contact
Act, 1872. A contract for sale of goods has, however, certain peculiar features such as, transfer of ownership of the
goods, delivery of goods rights and duties of the buyer and seller, remedies for breach of contract, conditions and
warranties implied under a contract for sale of goods, etc. These peculiarities are the subject matter of the
provisions of the Sale of Goods Act, 1930.
Initially, this was part of Contract Act, 1872. Later, this was deleted in Contract Act, and separate the Sale of Goods
Act was passed in 1930.
APPLICABILITY & MEANING OF VARIOUS TERMS
Question 1] Discuss the scope and applicability of Sale of Goods Act, 1930.
Ans.: The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. The Act extends to the whole of
India, except the State of Jammu & Kashmir. The Act came into force with effect from 1st July 1930. This Act has 7
chapters.
The contracts for sale of goods are subject to the general principles of the law relating to contracts i.e. the Contract
Act, 1872. A contract for sale of goods has, however, certain peculiar features such as, transfer of ownership of the
goods, delivery of goods rights and duties of the buyer and seller, remedies for breach of contract, conditions and
warranties implied under a contract for sale of goods, etc. These peculiarities are the subject matter of the
provisions of the Sale of Goods Act, 1930.
Applications of provisions of Contract Act, 1872 [Section 3]: The provisions of the Contract Act, 1872 shall continue
to apply to contracts for sale of goods unless they are inconsistent with this Act.
Question 2] Define 'Buyer' & 'Seller' as per Sale of Goods Act, 1930.
Ans.: Buyer [Section 2(1)]: Buyer means a person who buys or agrees to buy goods.
Seller [Section 2(13)]: Seller means a person who sells or agrees to sell goods
Question 3] Define 'Goods' as per Sale of Goods Act, 1930. CA (Foundation) - May 2001 (5 Marks)
Ans.: As per Section 6, goods from the subject matter of a contract of sale. Hence, it is necessary to know the
meaning of the term 'goods'.
Goods [Section 2(7)]: Goods mean every kind of movable property other than actionable claim and money. It
includes stocks & shares, growing crops, grass and things attached to or forming part of the land which are agreed
to be served before sale or under the contract of sale.
Goods includes
- Movable property - Trees which are agreed to be served before sale
- Stocks - Animal & birds
- Shares - Computer software
- Growing crops - Lottery tickets
- Grass - Advance license
- Steam - Coins of antiquity
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- Electrical energy - Jubilee coins
Goods do not include
- Actionable claims
- Current money
- Land
- Standing trees
- Immovable property
Question 4] Define 'Delivery' & 'Delivered State' as per Sale of Goods Act, 1930.
Ans.: Delivery [Section 2(2)]: Delivery means voluntary transfer of possession from one person to another.
Delivered State [Section 2(3)]: Goods are said to be in delivered state, when they are in such state that the buyer
would be bound to take the delivery of them in accordance with the contract.
Question 5] Write a short note on: Type of goods as per Sale of Goods Act, 1930.
Write a short note on: Contingent goods CS (Foundation) - June 2008 (5 Marks)
Write a short note on: Future goods and specific goods
Ans.: Various types of goods as per Sale of Goods Act, 1930 are as follows:
(1) Existing Goods: These are goods owned and possessed by seller at the time of contract of sale. The existing
goods may be:
(a) Specific Goods [Section 2(14)]: Goods which are identified and agreed upon at the time the contract of sale
is made are specific goods.
(b) Unascertained Goods: Goods which are not identified and agreed upon at the time of contract of sale are
unascertained goods. They are not definite and specific. They are defined by description only.
(c) Ascertained Goods: Goods which are ascertained subsequent to formation of contract of sale are
ascertained goods.
Example: Suppose you goes in fruit shop. There are different types of fruits. All fruits are existing goods. You agree
with fruit seller to buy particular type of mangoes, which are specific goods. Till you select mango they are
unascertained goods. But, once you select mango they become ascertained goods.
(2) Future Goods [Section 6(1)]: Goods which are not possessed by seller at the time of contract of sale but will
be manufactured or produced or acquired by the seller, after the contract of sale are known as future goods. In case
of future goods, the contract operates as an 'agreement to sell' the goods.
Example: X makes a contract with Y, a farmer to purchase all wheat produced in his field during a season. At the
time of making contract, Y was not in possession of wheat, so it is future goods.
In case of existing goods there is 'contract of sale' and in case of future goods there is 'agreement to sale'.
(3) Contingent Goods [Section 6(2)]: When acquisition of the goods depends upon happening or non-happening of
future uncertain event such goods are known as contingent goods. In case of contingent goods, the contract
operates as "contract for sale" of goods.
Example: X, a fisherman agrees to sell fish to Y that may be caught in sea. Getting fish in sea is uncertain future
event. Here fish is contingent goods.
Question 6] Distinguish between: Future Goods & Contingent Goods
Ans.: Following are main points of distinction between future goods and contingent goods.
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Points Future Goods Contingent Goods
Meaning Goods which are not possessed by seller at the When acquisition of the goods depends upon
time of contract of sale but will be happening or non-happening of future
manufactured or produced or acquired by the uncertain event such goods are known as
seller, after the contract of sale are known as contingent goods.
future goods.
Uncertainty There is no uncertainty in case of acquisition of There is uncertainty in case of acquisition of

future goods. contingent goods.
Scope Future goods do not include contingent goods. Contingent goods include future goods.
Effect of In case of future goods, the contract operates as In case of contingent goods, the contract
contract an "agreement to sell' the goods. operates as "contract for sale" of goods.
Example X makes a contract with Y, a farmer to purchase X, a fisherman agrees to sell fish to Y that may
all wheat produced in his field during a season. be caught in sea. Getting fish in sea is uncertain
At the time of making contract, Y was not in future event; hence fish in this case is
possession of wheat, so it is future goods. contingent goods.
Question 7] Write short notes on: Document of title to goods

Ans.: Document of title to goods [Section 2(4)]: Document of title to goods includes -
(a) Bill of lading,
(b) dock-warrant,
(c) Warehouse keeper's certificate,
(d) Wharfingers' certificate,
(e) Railway receipt,
(f) Multimodal transport document,
(g) Warrant or order for the delivery of goods.
It also includes any other document used in the ordinary course of business as proof of the possession or control of
goods or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the
document to transfer or receive goods thereby represented.
A document amounts to a document of title only where it shows an unconditional undertaking to deliver the goods
to the holder of the document.
Question 8] Write short notes on: Document showing title
Ans.: A document showing title does not confer any right to transfer by way of endorsement and delivery.
A share certificate is a 'document showing title' but not a document of title. It merely shows that the person named
in the share certificate is entitled to the share represented by it. It does not allow that person to transfer the share
by endorsement or delivery.
FORMATION OF CONTRACT OF SALE
Question 9] Define 'Contract of Sale'.
What are the essentials of contract of sale?
State briefly the essential element of a contract of sale under the Sale of Goods Act, 1930. Examine whether there
should be an agreement between the parties in order to constitute a sale under the said Act.
CA (PE-II) - Nov 2004 (6 Marks) * 1
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Ans.: Contract of sale of goods [Section 4(1) & (2)]: A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property (i.e. ownership) in goods to the buyer for a price. A contract of sale may
be absolute or conditional.
In above definition the word 'transfer' signifies 'sale' and word 'agrees to transfer' signifies agreement to sale. Thus,
the term 'contract of sale' includes both 'sale' and 'an agreement to sell'. The contract of sale may be absolute or
conditional. It may be express or implied.
Sale & agreement to sale defined [Section 4(3)]: Where under a contract of sale the property in the goods in
transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell.
When an agreement to sell becomes a sale [Section 4(4)]: An agreement to sell becomes a sale when the time
elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
Essentials of contract of sale:
(1) Two parties: There must be two parties; seller & buyer. A person cannot buy his own goods. The sale has to
be made to another person. However, there may be a contract of sale between one part- owner and another.
Example 1: X and Y are part-owner. X renouncing his right give the whole property to Y for a consideration. This is
sale by X & Y to Y.
Example 2: Distribution of goods among partners on dissolution is not a sale because they are undivided joint
owners of the goods.
Example 3: Partner can buy goods from the firm or sell goods to the firm.
(2) Transfer of ownership: In case of 'sale' property in goods is immediately transferred from seller to buyer. In
case of 'agreement to sell', the transfer of property is to take place in future.
(3) Subject matter: The subject matter of a contract of sale must be goods.
(4) Consideration: Consideration in a contract of sale should be 'money' to seller and 'goods' to buyer. However,
the consideration may be partly in money and partly in goods.
Example 1: X contract to sell 100 mobile to Y for ` 3,500 per mobile. This is contract of 'sale'.
Example 2: X contract to sell 100 mobile to Y, if Y gives 100 calculators and ` 3,000 per mobile. This is contract of
'sale'.
Example 3: X contract to sell 100 mobile to Y, if Y gives 700 calculators. This is 'barter' or 'exchange' and not a
contract of 'sale', because goods are offered in return for goods.
(5) Other essentials of a valid contract: All other essential elements of a valid contract viz. free consent, legality
of object, competency of parties should also be present.
Question 10] Distinguish between: Sale and agreement to sell
CS (Foundation) - June 2002 (5 Marks), Dec 2005 (5 Marks) CS (Foundation) - Dec 2007 (5 Marks)
Ans.: Following are the main points of distinction between sale and agreement to sell:
Points Sale Agreement to sell

Meaning
If the property in the goods is immediately If property in the goods is to take place at a
transferred from the seller to the buyer, it is future time or subject to fulfilment of some
called a sale. condition it is called an agreement to sell.
Type of It is executed contract. It is executory contract.

contract
Type of In 'sale' goods are specific & ascertained. In' agreement to sell' goods are future &
goods contingent.
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Rights Sale creates a right in rem. (right against whole Agreement to sell creates a right in personam,
Risk word) (right against a specific person)
In 'sale' property in goods transferred to buyer, In 'agreement to sell' property in the goods is to
so buyer bears the risk of loss. take place at a future time or subject to
fulfilment of some condition, so seller continues
to bear the risk.
Example X agrees to sale 100 bags of wheat to Y which X, a farmer makes a contract with Y to sell all
are ready for delivery. This is contract of 'sale'. wheat produced in his field during a season. This
is contract of 'agreement to sell'.
Sales tax A 'sale' is liable to sales tax. An 'agreement to sell' is not liable to sales tax.
Rights of In 'sale' if buyer has paid price, he can sue the In 'agreement to sell' if buyer has paid price, he
buyer seller for non-delivery of goods. cannot sue the seller for non-delivery of goods.
He can sue for damages only.
Breach of In 'sale' if there is breach of contract by buyer, In 'agreement to sell' if there is breach of
contract by seller can: contract by buyer, seller can sue only for
buyer (a) Sue for price of goods even if goods are damages and not for price.
in his own possession
(b) Resell the goods
(c) Exercise right of lien
(d) Exercise right of stoppage in transit.
Breach of In 'sale' if there is breach of contract by seller, In 'agreement to sell' if there is breach of
contract by buyer can: contract by seller, buyer can sue only for
seller (a) File a suit for damages against seller. damages.
(b) File a suit for delivery of goods.
Insolvency In a 'sale' if buyer become insolvent seller must In 'agreement to sell' if buyer becomes
of buyer give the goods to Official Assignee/Receiver. insolvent, seller is not under obligation to give
Seller can claim only rateable dividend for the the goods to Official Assignee/Receiver.
price of goods.
Insolvency In a' sale' if seller become insolvent Buyer can In 'agreement to sell' if seller becomes insolvent
of seller claim the goods from the Official buyer can claim only a rateable dividend for
Assignee/Receiver. price paid from the Official Assignee/Receiver.
Question 11] What are the consequences of "destruction of goods" under the Sale of Goods Act, 1930, where the
goods have been destroyed after the agreement to sell but before the sale is affected.
Ans.: If property in the goods is to take place at a future time or subject to fulfilment of some condition it is called
an agreement to sell. In agreement to sell property in the goods is to take place at a future time or subject to
fulfilment of some condition, so seller continues to bear the risk.
Question 12] Distinguish between: Sale and contract for work and labour
A dentist agreed to supply a set of artificial teeth to a patient. Is it contract of 'sale'.
CWA (Inter) - Dec 2001 (2 Marks) Sale and bailment are same.
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Do you agree? CWA (Inter) - June 2010 (4 Marks)
Ans.: Following are the main points of distinction between sale & contract for work and labour:
Points Sale Contract for work and labour
Meaning If the property in the goods is immediately It is a contract for executing certain work and
transferred from the seller to the buyer, it is involves exercise of skill.
called a sale.
Effect In 'sale' there is delivery and transfer of Contract for work and labour involves transfer
ownership of goods by seller to buyer. of some material and exercise of skill and labour
in goods belonging to other person.
Examples (1) X agrees to sale 100 bags of wheat to Y (1) X gives his old car to Y for repair and also
which are ready for delivery. This is contract of request to replace some old parts. This is
'sale'. contract for work and labour.
(2) A dentist agreed to supply a set of (2) X, an artist, agreed to paint a picture of Y.
artificial teeth to a patient. The entire material Y supply canvas and other material. This is
found by dentist. It was held that it contract of contract for work and labour.
'sale'. (3) X gives gold biscuit to Y, a goldsmith, to
(3) X contracted for sale of a fur coat of make ornaments and deliver back to Y for
special design and colour as per customer's 12,000. This contract for work and labour.
requirement. This is contract of 'sale'.
Question 13] Distinguish between: Sale & Hire purchase

Ans.: Following are the main points of distinction between sale & hire purchase:
Points Sale Hire Purchase
Meaning If the property in the goods is immediately Hire purchase is a contract in which goods are
transferred from the seller to the buyer, it is delivered and the price is allowed to be paid
called a sale. in instalments on the condition that property
If price is allowed to be paid in instalment, but (ownership) in goods will be passed only on
property (ownership) in goods is transferred payment of all the instalments.
immediately, it is 'sale'.
Act The Sale of Goods Act, 1930 The Hire Purchase Act, 1972 (Repealed)
Position In 'sale' buyer becomes owner of the goods. Hire purchaser is only a bailee until pays all
the instalments.
Termination Buyer cannot terminate contract. Hire purchaser has an option to terminate the
contract.
Resale buyer/ If buyer had not paid full price and sells the If hire purchaser had not paid all the
hire purchaser goods to third party for a value, who are instalments sells the goods to third party
acting in good faith, will get good title contract, then the third party would not get a
good title, since the hirer himself had not title
to goods.
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Points Sale Hire Purchase
Default by If buyer makes default seller can If hire purchaser makes default the seller can
buyer/hire (a) Sue for the price of goods and take repossession of the goods.
purchaser
(b) Exercise right of lien.
Question 14] Distinguish between: Sale & Bailment CS (Foundation) - June 2011 (5 Marks)
Ans.: Following are the main points of distinction between sale & bailment:
Points Bailment
-
Sale
Meaning If the property in the goods is immediately Bailment is the delivery of goods, by one
!■■■ . A:,-, transferred from the seller to the buyer, it is person to another, for some purpose, upon a
called a sale. contract that they shall, when the purpose is
accomplished, be returned or otherwise
disposed of, according to the instructions of
the person delivering them.
Consideration In contract of sale there is consideration to A contract of bailment may be entered without
both the parties. consideration. This happens in gratuitous
bailment.
Return of In contract of sale buyer is not required to In contract of bailment, the bailee has to
goods return the goods. return the goods after the purpose is over.
Risk Risk follows ownership and hence in case of In contract of goods ownership is with bailor as
contract of sale risk of goods with buyer. only possession is transferred to bailee and
hence risk of goods is with bailor.
Act Contract of sale is governed the Sale of Goods Contract of bailment is governed the Contract
Act, 1930 Act, 1872.
Question 15] Write a short note on: Formalities of contract of sale

Ans.: Contract of Sale how made [Section 5]: A contract of sale is made by an offer to buy or sell goods for a price
and the acceptance of such offer.
The contract may provide for:
(a) Immediate delivery of the goods or immediate payment of the price or both, or
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(b) For the delivery or payment by instalments, or
(c) That the delivery or payment or both shall be postponed.
A contract of sale may be made in:
(a) Writing or by word of mouth, or
(b) Partly in writing and partly by word of mouth or
(c) May be implied from the conduct of the parties.
Question 16] Write a short note on: Specific goods perishing before making of contract
Ans.: Goods perishing before making of contract [Section 7]: If before or at the time of contract of sale of specific
goods:
(a) If such goods are perished or
(b) Become so damaged as no longer to answer to their description, without the knowledge of the seller then
contract is void.
Example: X agrees to sell mangoes identified by marks and lying at warehouse to Y. The mangoes are perished at
the time of contract. X had no knowledge that mangoes are perished. The contract is void.
Question 17] Write a short note on: Specific goods perishing before sale but after agreement to sell.
Ans.: Goods perishing before sale but after agreement to sell [Section 8]: Where there is an agreement to sell
specific goods, and subsequently without any fault on the part of the seller or buyer the goods perish or become so
damaged as no longer to answer to their description, the agreement is thereby avoided. That is to say contract
becomes void.
Buyer is not liable as property in goods has not passed to him. Seller is also not liable to deliver the goods as goods
have been perished or damaged before sale. Seller is liable to bear the loss as property in goods has not been passed
to buyer.
Example 1: X Ltd. sales a motorcar to Y on trial basis for a period of 7 days with a condition that if Y is not satisfied
with due performance of the car, he can return the car. The car was destroyed in accident at the place of Y before
the expiry of 7 days. Y is not liable to pay price of goods. X Ltd. has to bear the loss due to destruction of car in
accident.
Example 2: A sold 200 quintals of wheat to C. Before the wheat could be delivered to B the Government of India
requisitioned the whole wheat lying with A in public interest. It was held that contract had become void.
Note: The words "not answering their description under the contract" mean that they are no longer
'merchantable' goods.
Sections 7 & 8 are applicable only to 'specific goods' and not to 'unascertained goods'. If the agreement is to sell
'unascertained goods', the perishing of such goods in the possession of seller will not relive him of his obligation
to deliver goods and if he does not deliver the other goods, he will be liable to pay damages.
Question 18] A agrees to sell to B 100 bags of flour which are in his store-room. Before the date of delivery the
store-room got flooded with water. Consequently the 100 bags of flour got destroyed. Does B have any rights
against A?
In the above case, had there been no reference to the 100 bags lying in A's store-room in particular, would it have
made any difference in respect of A's liability to B?
Ans.: As per Section 8 of the Sale of Goods Act, 1930, where there is an agreement to sell specific goods, and
subsequently without any fault on the part of the seller or buyer the goods perish or become so damaged as no
longer to answer to their description, the agreement is thereby avoided. Thus, contract becomes void.
Section 8 is applicable only to 'specific goods' and not to 'unascertained goods'. If the agreement is to sell
'unascertained goods', the perishing of such goods in the possession of seller will not relive him of his obligation to
deliver goods and if he does not deliver the other goods, he will be liable to pay damages.
Applying the above provisions, answer to given case is as follows:
(i) Due to destruction of specific goods i.e. 100 bags of flour, contract had become void.
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(ii) A is liable to deliver 100 bags of flour to B on due date failing which he will be held liable for breach of contract
as there is no specific reference to goods in this case and thus section 8 is not applicable.
Question 19] With a view to boost the sales Hanuman Automobiles sells a motorcar to Mr. A on trial basis for a
period of three days with a condition that if Mr. A is not satisfied with the performance of the car, he can return
back the car. However, the car was destroyed in a fire accident at the place of Mr. A before the expiry of three
days. Decide whether Mr. A is liable for the loss suffered.
subsequently without any fault on the part of the seller or buyer the goods perish or become so
damaged as no longer to answer to their description, the agreement is thereby avoided. Thus, contract becomes
void.
In the given case that the subject matter of the contract i.e. Motorcar was destroyed before the transfer of property
from the seller to the buyer. As no ownership is passed on to the buyer, risk is also not passed on to him. The
ownership and risk is still with seller (i.e. Hanuman Automobiles).
Therefore, in the present case Mr. A is not liable for the loss suffered due to the fire accident over which A has no
control. Hanuman Automobiles will have to bear whatever loss that has taken place due to the fire accident.
Question 20] Aman contracted to erect machinery on Sapan's premises on the condition that the price shall be
paid on completion of work. During the progress of work the premises and machinery were destroyed by an
accidental fire. Referring to the provisions of the Sale of Goods Act, 1930, decide whether the parties are bound
to perform their promises and can Aman recover the price of the work actually done?CA (PE-II) - Nov 2007 (5
Marks)
subsequently without any fault on the part of the seller or buyer the goods perish or become so damaged as no
longer to answer to their description, the agreement is thereby avoided. Thus, contract becomes void.
In the given case the premises and machinery destroyed because of accidental fire before the risk passes to the
buyer and therefore both parties were excused from further performance. Aman having contracted for an entire
work for a specific price to be paid on completion of work and therefore Aman could not recover any price of the
work actually done.
Question 21] Define: 'Price' as per Sale of Goods Act, 1930.
How is price ascertained in a contract of sale?
Ans.: Price [Section 2(10)]: Price means the money consideration for a sale of goods.
(1) Ascertainment of price [Section 9(1)]: The price may be:
(a) Fixed by the contract, or
(b) Agreed to be fixed in a manner provided by the contract, or
(c) Determined by the course of dealings between the parties.
(2) Reasonable price [Section 9(2)]: Where the price is not determined the buyer shall pay the seller a
reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular
case.
(3) Valuation by third party [Section 10]: Where there is an agreement to sell goods on the terms that the price
is to be fixed by the valuation of a third party and such third party cannot or does not make such valuation, the
agreement is thereby avoided.
If the goods or any part thereof have been delivered to, and appropriated by, the buyer, he shall pay a reasonable
price.
Where such third party is prevented from making the valuation by the fault of the seller or buyer, the party not in
fault may maintain a suit for damages against the party in fault.
Question 22] Write a short note on: Stipulation as to time
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Ans.: Stipulations as to time [Section 11]: Unless otherwise agreed, stipulations as to time of payment are not
essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not
depends on the terms of the contract. However, delivery of goods must be made without any inordinate delay.
CONDITION & WARRANTIES
Question 23] Write a short note on: Condition
Ans.: A stipulation in a contract of sale with reference to goods may be a condition or a warranty.
Condition [Section 12(2)]: A condition is a stipulation essential to the main purpose of the contract. Breach of
condition gives rise to right to claim damages as well as to treat the contract as repudiated.
Example: X places an order to Y for some Lorries to be used for heavy traffic in a hilly area. The Lorries suppli ed
were unfit. There is breach of condition and Y can repudiate the contract.
In a contract of sale, condition may be express or implied.
(1) Express Condition: Express conditions are those which are expressly provided in contract and may be
written or oral.
(2) Implied Conditions: Implied conditions are those which the law implies into the contract. Question 24]
Write a short note on: Warranty
Ans.: Warranty [Section 12(3)]: A warranty is a stipulation collateral to the main purpose of the contract. Breach
of warranty gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated.
Example: X sells car to Y and also promises to replace or repair some part, if any defect occur within 1 year.
Stipulation to replace or repair some part is a warranty.
Note: Whether a stipulation in a contract of sale is condition or a warranty depends in each case on the
construction of the contract. A stipulation may be a condition, though called a warranty.
Question 25] Distinguish between: Condition and warranty
Ans.: Following are the main points of difference between condition and warranty:
Basic Condition Warranty
Meaning A condition is a stipulation essential to the A warranty is a stipulation collateral to the

main purpose of the contract. main purpose of the contract.
Effect of Breach of condition gives rise to right to claim Breach of which gives rise to a claim for
breach damages as well as to treat the contract as damages but not to a right to reject the goods
repudiated. and treat the contract as repudiated.
Depth Condition goes directly to the root of the Warranty does not go directly to the root of
contract. the contract.
Inter Breach of condition may be treated as a breach Breach of warranty cannot be treated as a
changeability of warranty in certain situation. breach of condition.
Example X places an order to Y for some Lorries to be X sells car to Y and also promises to replace or
used for heavy traffic in a hilly area. The Lorries repair some part, if any defect occur within 1
supplied were unfit. There is breach of year. Stipulation to replace or repair some part
condition and Y can repudiate the contract. is a warranty.
Question 26] When can a condition be treated as a warranty under the Sale of Goods Act, 1930? When does a
'condition' become a 'warranty' and vice versa?
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Ans.: When condition to be treated as warranty [Section 13]: In following cases, a breach of condition can be
treated as a breach of warranty.
(1) Buyer's discretion: Buyer instead of repudiating contract can treat breach of condition as breach of warranty
and claim damages.
(2) Acceptance of goods by buyer: Where the contract of sale is not severable (divisible) and the buyer has
accepted the goods the breach of condition can only be treated as a breach of warranty.
Example: X sells some goods to Y. After delivery Y intimates the seller that he has accepted the goods. For a long
time Y didn't see whether goods are proper or not. Know if contract of sale is not severable, the breach of condition
can only be treated as a breach of warranty. Thus, Y can claim damages but cannot repudiate contract.
However, where there is a term in the contract, that the buyer can reject the goods and repudiate the contract, the
buyer can still exercise his right as the breach of condition.
Note: If a breach of condition treated as a breach of warranty, the right to repudiate the contract is deemedto be
lost.
Question 27] Discuss the provision of the Sale of Goods Act, 1930 with regard to implied condition as to title and
as to sample. CS (Foundation) - June 1996 (10 Marks)
Explain the implied conditions in a contract for sale of goods by sample. Give example.
Write short notes on: Implied conditions as to sample and description
State the implied condition 'as to title' and 'as to sample' in a contract of sale of specific goods.
Ans.: Implied conditions are those which the law implies into the contract.
(1) Condition as to title [Section 14]: In a contract of sale there is an implied condition on the part of the seller
that:
(a) In the case of a sale, he has a right to sell the goods and
(b) In the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to
pass.
In other words, in 'contract of sale', seller should have good and valid title, so that he can transfer good and valid
title to buyer. If it turns out that seller's title is defective, then buyer can repudiate the contract.
Example 1: X brought a bike from Y. Y had no title to the bike. He had stolen bike from Z. X had to hand over it true
owner, Z. There is breach of implied condition as to title from Y and X can recover the price of bike as well as can
claim damages from Y.
Example 2: X brought some tins of condensed milk for the USA. The tins were labelled in such a way as to infringe
the Nestle's trademark. As a result, they were detained by the custom authorities. To get the clearance from custom
authorities, X agreed to remove the labels. He made loss after selling the goods with removed labels. It was held
that the seller had broken the condition that he had title to sell the goods. [Niblett v. Confectioner's Material Co.
Ltd., 1921 3K. B. 387]
(2) Sale by description [Section 15]: Where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description.
Example 1: A told B that he was a buyer of good old rice. B showed a sample of good new rice to A without saying
anything. A took it to mean that the rice shown was old rice and agreed to buy 200 kg. A is not bound to accept rice
which is new rice and which does not correspond to the description given by him.
If the sale is by sample as well as by description, the bulk of the goods should correspond with the sample as well
as with the description.
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Example 2: N agreed to sell oil described as "pure ghee, warranted only equal to sample". The goods tendered were
equal to sample, but contained mixture of groundnut oil. The buyer could reject the goods as goods are not as per
description.
(3) Condition as to quality or fitness [Section 16(1)]: Generally, there is no implied condition as to quality or
fitness of goods for any particular purpose. It is the duty of the buyer to thoroughly examine the goods before he
buys. If he makes wrong choice, he cannot blame seller for the reason that goods are not fit for particular purpose.
However, in following cases seller is liable for breach of implied condition as to quality or fitness.
(a) Buyer makes known to seller the exact purpose for which goods are required.
(b) Buyer has indicated to the seller that he relies on seller's skill or judgment and seller's business is to sell
goods of such description.
Exceptions: However, implied condition as to quality or fitness does not apply:
(a) Where the specific goods are sold under their patent or trade name.
(b) When the buyer is suffering from an abnormality and does not indicate that fact to the seller while
purchasing specified article.
(c) Where the goods are capable of being put to multiple uses and the buyer does not indicate to the seller the
exact purpose for which the goods are required.
Example 1: A purchased a hot water bottle from a chemist. The bottle burst and injured his wife. There is breach of
condition as to fitness and thus chemist was liable for refund of price plus damages.
Example 2: X bought a Computer Y. The computer was defective right from the beginning and it did not work in
spite of repairs. X can return computer and claim refund.
Example 3: D told T, a motor car dealer, that he wanted a car suitable for touring purposes. T recommended car of
'Brand X' and D thereupon brought the car. The car was uncomfortable and unsuitable for touring purpose. Thus, D
could reject the car and recover the price and the mere fact that D brought the car under its trade name did not
necessarily exclude the condition of fitness.
(4) Condition as to merchantability [Section 16(2)]: Where goods are bought by description from a seller who
deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality. It
applies to goods whether or not the goods are sold under a patent or trade name.
Goods are said to be of merchantable quality, if they are in such condition as a man of ordinary prudence would
accept them as goods.
Example 1: X buys chocolates from Y. After eating chocolates X's wife falls seriously ill. Latter it found that chocolates
were poisonous. X can repudiate the contract and can claim damages as chocolates were not of merchantable
quality.
Example 2: X brought radio from Y. the radio was defective and did not work even after several repairs. This amounts
to breach of implied conditions as to merchantability and X can repudiate the contract and recover the price from
Y.
Example 3: S supplied 500 mobiles to B. If on opening of package, B found that mobiles are dented, scratches and
other defects which make them unsalable, there is breach of implied conditions as to merchantability and B can
return the mobile and will not be liable to pay the price.
(5) Condition as to wholesomeness: In case of eatables, in addition the condition as to merchantability, there
is implied condition as to wholesomeness.
Example 1: X brought milk from Y. The milk contained typhoid germs. X's wife got infection and died. Milk was not
wholesome, hence X can recover damages.
Example 2: X bought a bun which contained stone. At the time of consumption X's teeth were broken. There is
breach of implied conditions as to wholesomeness and he can recover the damages from the seller.
(6) Sale by sample [Section 17]: In the case of a contract for sale by sample there is an implied condition that:
(a) The bulk shall correspond with the sample.
(ib) Buyer shall have a reasonable opportunity of comparing the bulk with the sample.
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(c) The goods shall be free from any defect, rendering them un-merchantable, which would not be apparent on
reasonable examination of the sample.
Question 28] Mr. Buyer purchased a Scooter for ` 15,000 on 1.7.2002 from Mr. Seller. Mr. Buyer was running the
Scooter from the date of purchase. Mr. Unknown who was the True Owner has now demanded the Scooter from
Mr. Buyer who was not aware that Mr. Seller has no title to it. State the legal position.
Ans.: As per Section 14 of the Sale of Goods Act, 1930, in 'contract of sale', seller should have good and valid title,
so that he can transfer good and valid title to buyer. If it turns out that seller's title is defective, then buyer can
repudiate the contract.
In given case, "implied condition as to title" is violated by Mr. Seller.
Mr. Buyer can recover the price of car as well as can claim damages from Mr. Seller.
Mr. Buyer will have to hand over car to real owner Mr. Unknown.
Question 29] Jolly bought a second hand car from Yogesh for ` 85,000 and paid for it. After Jolly had used the car
for six months he was deprived of it because Yogesh had no title to it. Can Jolly recover the price of the car from
Yogesh. Advice Jolly. CS (Foundation) - Dec 2002 (5 Marks)
Ans.: As per Section 14 of the Sale of Goods Act, 1930, in 'contract of sale', seller should have good and valid title,
so that he can transfer good and valid title to buyer. If it turns out that seller's title is defective, then buyer can
repudiate the contract.
In given case, "implied condition as to title" is violated by Yogesh. Jolly can recover the price of the car as well as
can claim damages from Yogesh.
Question 30] A contracts to sell B, by showing sample, certain quantity of rape-seed oil described as 'foreign
refined rape-seed-oil'. The oil when delivered matches with the sample, but is not foreign refined rape-seed oil.
Referring to the provisions of Sale of Goods Act, 1930 advise the remedy, if any, available to B.CA (PE-II) - Nov
2006 (4 Marks)
Ans.: As per Section 15 of the Sale of Goods Act, 1930, where there is a contract for the sale of goods by description,
there is an implied condition that the goods shall correspond with the description. In this case, A supplied refined
rape oil which did correspond with the sample but was not correspond to the description of foreign refined rape-
oil. Hence, the B has the right to repudiate the contract.
Question 31] A inspects a hot water bottle at a chemist's shop and enquires whether it will stand boiling water.
A is told that it will stand hot water but not boiling water and then he buys it. The moment A puts hot water into
the bottle, it bursts causing him an injury. Has A any remedy against the chemist? Would there be any difference
if he had asked for the hot water bottle under its patent name of "fuller's flaw lets Bottle"?
Ans.: As per Section 16(2) of the Sale of Goods Act, 1930, where goods are bought by description from a seller who
deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality.
The term 'merchantable quality' is not defined in the Sale of Goods Act, 1930. For the present case it means, the
bottle must be properly sealed. In other words, if the goods are purchased for self-use, they should be reasonably
fit for a purpose for which it is being used. In the instant case, on an examination of hot water bottle, it exploded
and injured the buyer. Applying the provisions of Section 16(2), A would succeed in claiming damages from the
owner of the shop.
Question 32] For the purpose of making uniform far the employees, Bansi Bhaiya bought dark blue coloured cloth
from Vivek but did not disclose to the Seller the purpose of said purchase. When uniform were prepared and
used by the employees, the cloth was found unfit. However, there was evidence that the cloth was fit for caps,
boots and carriage lining. Advice Bansi Bhaiya whether he is entitled to have any remedy?
Ans.: As per Section 16 of the Sale of Goods Act, 1930, generally, there is no implied condition as to quality or fitness
of goods for any particular purpose. It is the duty of the buyer to thoroughly examine the goods before he buys. If
he makes wrong choice, he cannot blame seller for the reason that goods are not fit for particular purpose.
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In this case, the cloth supplied is capable of being applied to a variety of purposes, the buyer should have make
known to the seller the specific purpose for which he required the goods, but he did not do so. Hence, the implied
condition as to the fitness for the purpose does not apply.
Hence, Bansi Bhaiya is not entitled to have any remedy.
Question 33] Mr. Amit was shopping in a self-service Super market. He picked up a bottle of cold drink from a
shelf. While he was examining the bottle, it exploded in his hand and injured him. He files a suit for damages
against the owner of the market on the ground of breach of condition. Decide, under the Sale of Goods Act, 1930,
whether Mr. Amit would succeed in his claim?
Ans.: As per Section 16 of the Sale of Goods Act, 1930, generally, there is no implied condition as to quality or fitness
of goods for any particular purpose. It is the duty of the buyer to thoroughly examine the goods before he buys. If
he makes wrong choice, he cannot blame seller for the reason that goods are not fit for particular purpose.
In the instant case, on examination of bottle of cold drink, it exploded and injured the buyer, which amounts breach
of implied condition of quality and fitness. Thus, Mr. Amit will succeed in claiming damages from the seller.
Question 34] Write a short note on: Implied Warranties CS (Foundation) - Dec 2005 (5 Marks)
Ans.: The implied warranties in a contract of sale are as follows:
(1) Warranty of quiet possession: In a contract of sale, there is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods.
®
(2) Warranty from freedom from encumbrances [Section 14]: In a contract of sale, there is an implied warranty
that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to
the buyer before or at the time when the contract is made.
(3) Warranty as to quality or fitness [Section 16]: An implied warranty or condition as to quality or fitness for
particular goods may be annexed by usage of trade and customs.
(4) Warranty to disclosure of dangerous nature of goods: If goods are of hazardous or dangerous nature, seller
must disclose this fact to buyer otherwise he will be liable in damages.
Question 35] What is the doctrine of caveat emptor? What are the exceptions to this doctrine?
Write short notes on: Caveat emptor CS (Foundation) - June 1994 & 1995 (5 Marks)
State the rule of caveat emptor and explain the exception to this rule.
Write short notes on: Doctrine of Caveat emptor
CS (Foundation) - June 2000 (5 Marks), Dec 2002 (5 Marks) CS (Foundation) - June 2005 (5 Marks)
Ans.: Caveat emptor means "let the buyer beware". Generally, it is no part of the seller's duty in a contract of sale
of goods to give to the buyer an article suitable for a particular purpose, or of a particular quality. Also, the seller is
under no obligation to point out the defects in the goods. It is the duty of the buyer to thoroughly examine the
goods or to make known to seller the purpose for which goods are required, before he buys. If he makes wrong
choice, he cannot blame seller.
Example: Where dogs were sold 'subject to all faults', and these dogs, being infected, caused typhoid to other
healthy dogs of the buyer. Seller was not bound to disclose that the dogs were unhealthy.
Exceptions: The doctrine of caveat emptor will not applicable in the following situations.
(This means buyer can repudiate the contract and sue the seller for damages)
(1) Where buyer makes known to seller the exact purpose for which goods are required or buyer has indicated
to the seller that he relies on seller's skill or judgment and seller's business is to sell goods of such description.
(2) Where goods are bought by description and goods are not merchantable quality.
(3) Where the seller makes a misrepresentation or fraud and buyer relies on it.
(4) Where the seller actively conceals a defect in the goods.
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(5) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the
usage of trade. In such cases, the principle of caveat emptor will not apply.
Question 36] A goes to B shop and purchase a silk-saree thinking that it is made of Banarsi silk. The shopkeeper
knows that A thinking is wrong. He however does not correct A impression. Later on when A discover that the
saree is not made of Banarsi silk he wants to avoid the contract. Would A succeed? Give reasons.
Ans.: Generally, it is no part of the seller's duty in a contract of sale of goods to give to the buyer an article suitable
for a particular purpose, or of a particular quality. Also, the seller is under no obligation to point out the defects in
the goods. It is the duty of the buyer to thoroughly examine the goods or to make known to seller the purpose for
which goods are required, before he buys. If he makes wrong choice, he cannot blame seller.
In the given case, A himself has made the selection without depending upon the skills and judgment of the seller.
Therefore, A cannot avoid the contract.
TRANSFER OF PROPERTY
Question 37] What are the provisions of Sale of Goods Act, 1930 relating to 'transfer of property' in goods?
Write short notes on: Passing of property in specific goods CS (Foundation) - June 1997 (5 Marks)
When does the property in goods pass from the sellers to buyer?
When does the property in goods pass from sellers to buyer in a contract for sale of ascertained and unascertained
goods. CS (Foundation) - June 1999 (8 Marks)
What is meant by 'specific goods'? State the rules regarding passing of property from a seller to a buyer in a
contract for the sale of specific goods. CS (Foundation) - June 2005 (8 Marks) * 1 2 3 4 5
Ans.: One of the essential of contract of sale is that property in goods (i.e. ownership) is transferred from seller to
buyer. Following are the provision relating to transfer of property:
(1) Goods must be ascertained [Section 18]: Where there is a contract for the sale of unascertained goods, no
property in the goods is transferred to the buyer unless and until the goods are sanctioned or ascertained.
(2) Property passes when intended to pass [Section 19]: Where there is a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend
it to be transferred.
For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the
conduct of the parties and the circumstances of the case.
Example 1: X offered to sell a car to Y for ` 50,000 after doing some repair work, which was accepted Y. While car
being repaired, it was destroyed without the fault of any party. It is clear from the contract that parties had intention
to pass property in goods after repair and car had destroyed before repair, hence no property in goods was
transferred to Y and X has to bear the loss.
Example 2: There was mixed contract of storage and sale of wheat between X and Y. It was agreed between both
of them that X will deliver the wheat for storage and Y will name the day on which he wants to buy. The property in
wheat will not pass to Y until he will name a particular day.
If parties have not decided as to when property in goods is to pass, then following rules contained in Sections 20 to
24 has to be followed.
(3) Specific goods in a deliverable state [Section 20]: Where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and
it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed.
Example: X sales a machine to Y which was ready for delivery. Y tells X that he will take delivery next day. At night,
machine was destroyed by fire without the fault of any party. As machine was in a deliverable state, property in
goods had passed to Y and he has to bear the loss.
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(4) Specific goods to be put into a deliverable state [Section 21]: Where there is a contract for the sale of
specific goods and the seller is bound to do something to the goods for the purpose of putting them into a
deliverable state, the property does not pass until such thing is done and the buyer has notice thereof.
Example: There was contract for the sale of heavy machine which was embedded in a concrete floor. A part of the
machine was destroyed while being removed. The buyer can refuse to buy the machine as it was not in a deliverable
state.
(5) Specific goods in a deliverable state, when the seller has to do something in order to ascertain price
[Section 22]: Where there is a contract for the sale of specific goods in a deliverable state,
but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the
purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice
thereof.
(6) Sale of unascertained goods and appropriation [Section 23]: Where there is a contract for the sale of
unascertained or future goods by description and goods of that description and in a deliverable state are
unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with
the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be expressed or
implied, and may be given either before or after the appropriation is made.
(7) Goods sent on approval or on 'sale or return' [Section 24]: Separately discussed.
Question 38] Mr. Bose settled the price after selecting two chairs. He arranges to take delivery of chairs next day
and agrees to pay next month. Said chairs were destroyed by fire before delivery. Seller demanded the price. Mr.
Bose refused. State legal position.
Ans.: As per Section 20 of the Sale of Goods Act, 1930, where there is an unconditional contract for the sale of
In given case, chairs are specific goods which are in a deliverable state and hence the property in the goods has
been passed to the buyer when the contract is made. Mr. Bose has to bear the loss and has to pay price of the
chairs.
Question 39] There was a contract between X and Y for the sale of haystack on X's (seller's) land, on a certain day,
the price to be paid by the same day of the next month. The hay was destroyed by fire. Decide in the light of the
provisions of the Sale of Goods Act, 1930, as to who is liable for the loss.
Ans.: As per Section 20 of the Sale of Goods Act, 1930, where there is an unconditional contract for the sale of
Applying these provisions, the property in the goods passes to the buyer Y as soon as the contract is made, and
therefore, the buyer Y is liable for the loss. [Tarling v. Baxter]
Question 40] X agreed to purchase 100 bales of cotton from Y from his large stock. X sent his men to take delivery
of cotton. On completion of packing of only 70 bales there was accidental fire and entire stock including packed
70 bales were destroyed. There was no Insurance cover. Who will bear the loss?
Ans.: As per Section 21 of the Sale of Goods Act, 1930, where there is a contract for the sale of specific goods and
the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.
In the given case, in respect of 70 bales which have been packed, the buyer will have to bear the loss as they were
in a deliverable state and the buyer had notice thereof.
In respect of 30 bales which have not been packed, the seller has to bear the loss as they were not in a deliverable
state.
Question 41] A certain quantity of oil was bought. The oil was to be filled into barrels by the seller and then taken
away by buyer. Some barrels were filled in the presence of the buyer but before the remainders could be filled a
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fire broke out the entire quantity of oil was destroyed. State the liabilities of buyer and seller.
Ans.: As per Section 21 of the Sale of Goods Act, 1930, where there is a contract for the sale of specific goods and
the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.
In the given case, in respect of barrels which have been filled up, the buyer will have to bear the loss as they were
in a deliverable state and the buyer had notice thereof.
In respect of barrels which have not been filled up, the seller has to bear the loss as they were not in a deliverable
state.
Question 42] Write short notes on: Goods sent on "Approval" or "Sale or Return".
CWA (Inter) - Dec 2004 (4 Marks)
Ans.: Goods sent on approval or on 'sale or return' [Section 24]: When goods are delivered to the buyer on sale or
return terms, the property passes to the buyer:
(a) When buyer signifies his approval or acceptance to the seller or
(b) Buyer does any act adopting the transaction or
(c) If buyer does not signify his approval or acceptance to the seller but retains the goods without giving notice
of rejection, beyond a specified time and if not time has been specified, beyond a reasonable time.
In case of 'sale or return' basis if goods get lost before property passes to buyer without the fault of either party,
the loss has to be borne by seller.
Example 1: A delivers his watch to B on sale or return basis. B delivers the same watch to C on sale return basis.
Property in goods gets transferred from A to B, when B delivers watch on sale or return basis to C.
Example 2: X delivered car to Y on sale or return terms. Y pledged the car with Z. Property in goods gets transferred
from X to Y, when Y pledge car with Z.
Question 43] A delivers his watch to B on sale or return basis. B delivers the same watch to C on sale return basis.
C delivers it to D on sale or return basis and D delivers the same watch to E sale or return basis. While in the
possession of E the watch is damaged. Who will bear the loss?
Amar delivers some cotton bales to Bharat on 'sale or return basis'. Bharat, then delivers the same goods to
Chandan and Chandan further delivers it to Dhruv on the same terms and conditions on which Amar delivers to
Bharat. Before Dhruv could give his acceptance, goods are suddenly destroyed by fire. Who is to bear the loss
under these circumstances? Give reasons in support of your answer.
Ans.: As per Section 24 of the Sale of Goods Act, 1930, when goods are delivered to the buyer on sale or return
terms, the property passes to the buyer, if buyer does any act adopting the transaction.
Property in goods gets transferred from A to B, when B delivers watch on sale or return basis to C, from B to C, when
C delivers watch on sale or return basis to D and from C to D, when D delivers watch on sale or return basis to E.
Ownership is with D and hence he will bear the loss.
Question 44] Ankur agreed to sell a horse to Eswar on condition that Eswar will keep the horse for 10 days on
trial basis and have the option to return the horse within the stipulated period, if he does not find the horse
suitable. Elowever, the horse died on the third day without any fault of either seller or buyer. State the legal
position. CS (Foundation) - June 2003 (5 Marks)
terms, the property passes to the buyer:
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of rejection, beyond a specified time and if not time has been specified, beyond a reasonable time.
In case of 'sale or return' basis if goods gets lost before property passes to buyer without the fault of either party,
the loss has to be borne by seller.
In given case horse died on 3rd day where as buyer have time of 10 days to signify his assent and he has not yet
given his approval adopting the transaction. Thus, property in horse has not been passed to the buyer and hence
seller will bear the loss.
Question 45] Sanjay delivers some goods to Tarun on 'sale or return' basis for 7 days. State the legal position in
each of the following different situations:
(i) Such goods are destroyed by fire on the second day itself with no fault of Tarun.
(ii) Tarun informs acceptance of goods over phone to Sanjay and immediately thereafter goods are destroyed by
fire.
(iii) These goods are further delivered by Tarun to Umesh on fourth day, and then by Umesh to Vivek on same
terms. The goods are stolen while in the custody of Vivek.
(iv) Tarun neither returns goods nor gives any notice of rejection even after the expiry of ninth day. Goods are
destroyed by fire on the tenth day.
(v) Tarun retains goods but gives the notice of rejection on the seventh day. Goods are destroyed by fire on
the eighth day. CS (Foundation) - Dec 2008 (5 Marks)
terms, the property passes to the buyer:
of rejection, beyond a reasonable time.
In case of 'sale or return' basis if goods get damaged or lost before property passes to buyer without the fault of
either party, the loss has to be borne by seller.
Keeping in view provisions of Section 24, answer to given cases are as follows:
(i) Goods are destroyed by fire before approval with no fault of Tarun; hence loss has to be born by Sanjay.
(ii) Goods are destroyed by fire after approval; hence loss has to be born by Tarun.
(iii) Property in goods gets transferred from Sanjay to Tarun, when Tarun delivers watch on sale or return basis to
Umesh, from Tarun to Umesh, when Umesh delivers watch on sale or return basis to Vivek. Ownership is with Umesh
and hence he will bear the loss.
(iv) Tarun has retained goods beyond specified time i.e. 9th day, property in goods has transferred from Sanjay
to Tarun and hence loss has to be born by Tarun.
(v) Tarun has given notice of rejection before specified time, hence sale is not completed and property in goods
is still with Sanjay and he has to bear the loss.
Question 46] L delivered sarees valuing ` 50,000 to R on 'Sale or Return Basis'. R further delivered these sarees to
V and V to M on the same terms and conditions. Subsequently, these sarees were burnt by fire while in the
custody of M. L filed a suit against M for the recovery of the price, with reference to provisions of the Sale of
Goods Act, 1930, examine whether L's suit for the price shall be maintainable.
CA (PE-II) - June 2009 (5 Marks), Nov 2009 (5 Marks)
terms, the property passes to the buyer, if buyer does any act adopting the transaction.
Property in goods gets transferred from L to R, when R delivers sarees on sale or return basis to V, from V to M,
when V delivers sarees on sale or return basis to M. Ownership is with V and hence he will bear the loss.
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Question 47] When seller may reserve the right to dispose of goods in case of contract of sale or make a
conditional appropriation?
Ans.: Reservation of right of disposal [Section 25]:
(1) Where there is a contract for the sale of specific goods or where goods are subsequently appropriated, the
seller may reserve the right of disposal of the goods until certain conditions are fulfilled. In such case, the property
in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
Example: Ram sends goods to Shyam by carrier on a condition that payment shall be made within 10 days of the
receipt of the goods. The property in goods does not pass to Shyam if he does not make payment in 10 days even
though he takes custody of goods from the carrier.
(2) Where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of
lading or railway receipt, the goods are deliverable to the order of the seller or his agent, the seller is prima facie
deemed to reserve the right of disposal.
(3) Where the seller of goods draws on the buyer for the price and transmits to the buyer the bill of exchange
together with the bill of lading or the railway receipt, to secure acceptance to payment of the bill of exchange, the
buyer is bound to return the bill of lading or the railway receipt if he does not honour the bill of exchange, and, if
he wrongfully retains the bill of lading or the railway receipt, the property in the goods does not pass to him.
Example: X (seller) of Mumbai take a bill of lading in the name of Y (buyer) at Goa, but sends it to Z (agent of X) at
Goa. If goods get destroyed while in sea, X has to bear the loss as he has deemed to have reserved the right of
disposal by sending the bill of lading to his agent.
Question 48] Risk prima facie passes with ownership.
Risk passes with property. Comment.
Ans.: Risk Prima facie passes with property [Section 26]: Unless otherwise agreed, the goods remain at the seller's
risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer,
the goods are at the buyer's risk whether delivery has been made or not.
If deliver has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault
as regards any loss which might not have occurred but for such fault.
Question 49] When can a non-owner of goods convey a better title than what he himself has?
Explain briefly the exception to the general rule contained in the maxim nemo dat quod non habet
"No one can give a better title to the goods than what he himself has". Comment on this statement and also
discuss the exception to this rule as per the Sale of Goods Act, 1930.
Ans.: Nemo dat quod non habet means, "No one can give a better title to the goods than what he himself has". Only
a true owner can transfer to another person, valid title over the goods. A seller who does not have the ownership
cannot confer the same upon the buyer.
Transfer by non-owner: Where goods are sold by a person who is not the owner thereof and who does not sell
them under the authority or with the consent of the owner, the buyer acquires no better title to the goods.
Exceptions:
(1) Estoppel [Section 27]: Where the real owner by his conduct leads to believe the buyer that seller has
authority to sell, buyer gets a good title.
Example: In presence of Z, X sell goods to Y by telling that goods belong to him (X). Z does not object X's statement.
Y gets a good title and Z will be estopped from denying want of authority of X.
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(2) Sale by a mercantile agent [Section 27]: If goods are sold through mercantile agent buyer gets a good title
if following conditions are fulfilled:
(a) Such a mercantile agent is in possession of the goods or of a document of title to the goods, with the consent
of the owner.
(b) Such a mercantile is acting in the ordinary course of business of a mercantile agent.
(c) Buyer acts is good faith and has not at the time of the contract of sale notice that the seller has no authority
to sell.
Example: X gives his car to A, a mercantile agent for sale not below ` 1,00,000. A sells the car for ` 75,000 to Y. Y
bought in good faith and without notice of instruction given by X to A. Y gets a good title.
(3) Sale by joint owner [Section 28]: If one of several joint owners of goods has the sole possession of goods
with the permission of other co-owners, the property in the goods is transferred to person who buys in good faith
and has not notice that the seller has no authority to sell.
(4) Sale by person in possession under voidable contract [Section 29]: When the seller of goods has obtained
possession under a contract voidable, but the contract has not rescinded at the time of the sale, the buyer acquires
a good title to the goods, provided he buys them in good faith and without notice of the seller's defect of title.
Example: X purchases jewellery from Y, by making fraud. But before Y terminate the contract, X sells the jewellery
to Z who buys it in good faith and without notice of X's defective title. Z gets a good title.
(5) Sale by person in possession after sale [Section 30]:
(o) Seller in possession of goods after sale can pass on good and valid title if subsequent transferee receives the
goods in good faith and for consideration.
(b) Similarly, buyer who is possession of goods to whom property in goods has not been passed sell goods,
subsequent transferee gets good title if he receives the goods in good faith and for consideration.
Example 1: B buys a mobile from S which he agrees to deliver to B next day. S sells the same mobile to T who pays
a higher price than B. T buys in good faith and without notice of previous sale. T gets a good title.
Example 2: B bought TV on hire purchase from S. B sold it to T, who purchased it good faith. T gets a good title.
(6) Sale by unpaid seller [Section 54]: Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sells the goods, the buyer acquires a good title as against the original buyer.
(7) Sale by finder of goods: Finder of goods can sell the goods, if:
♦ Owner cannot be found with reasonable diligence.
♦ Owner, if found, does not pay the lawful charges of the finder.
♦ Goods are in danger of perishing.
♦ The lawful charges of finder, amount to 2/3rd of the value of goods.
(8) Sale by a pawnee: If the pawnor makes default in payment of the debt, the pawnee may sell the thing
pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount
due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater that the amount so due, the pawnee shall pay over the surplus to the pawnor.
Question 50] J, the owner of a Fiat car wants to sell his car. For this purpose he hand over the car to P, a mercantile
agent for sale at a price not less than ` 50,000. The agent sells the car for ` 40,000 to A, who buys the car in good
faith and without notice of any fraud. P misappropriated the money also.
J sues A to recover the car. Decide giving reasons whether J would succeed.
Ans.: As per Section 27 of the Sale of Goods Act, 1930, if goods are sold through mercantile agent buyer gets a good
title if following conditions are fulfilled:
(a) Such a mercantile agent is in possession of the goods or of a document of title to the goods, with the consent
of the owner.
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(b) Such a mercantile is acting in the ordinary course of business of a mercantile agent, Buyer acts is good faith
and has not at the time of the contract of sale notice that the seller has no authority to sell.
In the instant case, P, the agent, was in the possession of the car with J's consent for the purpose of sale. A, the
buyer, therefore obtained a good title to the car. Hence, J in this case, cannot recover the car from A.
Question 51] Aman, Raman and Chaman were joint-owners of a truck and possession of the said truck was with
Raman. Sudhir purchased the truck from Raman without knowing that Aman and Chaman were also co-owners
of the truck. Decide in the light of the provisions of the Sale of Goods Act, 1930 whether the sale between Raman
and Sudhir is valid. CA (PE-II) - May 2008 (5 Marks)
Ans.: No one can give a better title to the goods than what he himself has. However, as per Section 28 of the Sale
of Goods Act, 1930, if one of several joint owners of goods has the sole possession of goods with the permission of
other co-owners, the property in the goods is transferred to person who buys in good faith and has not notice that
the seller has no authority to sell.
In given case, one of the joint owner Raman had possession of Truck and Sudhir had purchased the truck without
knowing that Aman and Chaman were also co-owners of the truck. Hence, applying the provision of Section 28
property in Truck has been passed to the Sudhir.
Question 52] B buys goods from A on payment but leaves the goods in the possession of A. A then pledges the
goods to C who has no notice of the sale to B. State whether the pledge is valid and whether C can enforce it.
Decide with reference to the provisions of the Sale of Goods Act, 1930.
Ans.: Section 30 of the Sale of Goods Act, 1930 provides an exception to the general rule that no one can give a
better title than he himself possesses. As per the provisions of the Section 30, if a person has sold goods but
continues to be in possession of them or of the documents of title to them, he may pledge them to a third person
and if such person obtains them in good faith without notice of the previous sale, he would have good title to them.
Accordingly, C, the pledgee who obtains the goods in good faith from A without notice of the previous sale, gets a
good title. Thus, the pledge is valid.
PERFORMANCE OF CONTRACT
Question 53] Write short notes on: Kinds of delivery of goods
Ans.: Delivery [Section 2(2)]: Delivery means voluntary transfer of possession from one person to another.
Delivery [Section 33]: Delivery of goods sold may be made by doing anything which the parties agree shall be treated
as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised
to hold them on his behalf. Delivery of goods may be actual, symbolic or constructive.
(1) Actual delivery: When goods are physically handed over to buyer or his authorised agent, it is known as
actual delivery.
(2) Symbolic delivery: Where goods are bulky or heavy and it is not possible to hand over physically goods to
buyer in such case delivery is made by handing over some symbol, which is known as symbolic delivery.
Examples:
(a) Delivering the key of the warehouse where goods are stored.
(b) Delivering bill of lading which will enables the holder to receive the goods on the arrival of ship.
(3) Constructive delivery: When the person in possession of goods acknowledges that he holds the goods on
behalf of and at the disposal of buyer, it is known as constructive delivery.
Examples:
(a) Where the seller after having sold the goods, hold them on behalf of buyer there is constructive delivery.
(b) Where seller sells the goods lying in warehouse and warehouse keeper holds the goods on behalf of buyer
by making necessary entries in his books there is constructive delivery.
Question 54] Explain the various provisions relating to performance of contract of sale.
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What are the rules regarding delivery of goods?
Delivery of the goods and payment of the price are concurrent conditions. Comment.
CA (Foundation) - Nov 1997 (5 Marks) 4
Ans.: Sections 31 to 44 deals with various provisions relating to performance contract of sale, which are as follows:
(1) Duties of seller and buyer [Section 31]: It is the duty of the seller to deliver the goods and of the buyer to
accept and pay for them, in accordance with the terms of the contract of sale.
(2) Payment and delivery are concurrent conditions [Section 32]: Unless otherwise agreed, delivery of the
goods and payment of the price are concurrent conditions. Thus, the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price and the buyer shall be ready and willing to pay the
price in exchange for possession of the goods.
(3) Delivery [Section 33]: Delivery of goods sold may be made by doing anything which the parties agree shall
be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person
authorised to hold them on his behalf. Delivery of goods may be actual, symbolic or constructive.
(4) Effect of part delivery [Section 34]: A delivery of part of goods, in progress of the delivery of the whole has
the same effect, for the purpose of passing the property in such goods, as a delivery of the whole, but a delivery of
part of the goods, with an intention of severing it from the whole, does not operate as a delivery of the remainder.
(5) Buyer to apply for delivery [Section 35]: Apart from any express contract, the seller of goods in not bound
to deliver them until the buyer applies for delivery.
(6) Rules as to delivery [Section 36]: Parties by making contract can decide the place of delivery. Apart from any
such contract:
(a) Goods sold are to be delivered at the place at which they are the time of the sale, and
(b) Goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to
sell.
(c) If goods are not in existence, at the place at which they are manufactured or produced.
(7) Time for delivery [Section 36]:
(a) Where goods are in possession of seller: Where under the contract of sale the seller is bound to send the
goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable
time.
(b) Where the goods are in the possession of a third person: There is no delivery by seller to buyer unless and
until such third person acknowledges to the buyer that he holds the goods on his behalf.
(c) Expenses of delivery: Unless otherwise agreed, the expense of and incidental to putting the goods into a
deliverable state shall be borne by the seller.
(8) Delivery of wrong quantity [Section 37]:
If there is short delivery:
- Buyer can reject the whole goods or
- Buyer can accept and pay as per the agreed rate.
If there is excess delivery:
- Buyer can reject in full or
- Buyer can accept agreed quantity and reject the excess or
- Buyer can accept the whole goods.
If there is mixed delivery with other goods:
- Buyer can accept the contracted goods and reject the rest or
- Buyer can reject the entire lot.
(9) Instalment deliveries [Section 38]:
(a) Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by instalments.
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(b) If contract is for delivery of goods in instalments, and seller makes no delivery or defective delivery the buyer
is not under an obligation to accept the balance of goods.
(c) If buyer neglects or refuses to take delivery of goods or pay for one or more instalments the seller is not
required to deliver the balance of goods.
(10) Delivery to carrier or wharfinger [Section 39]:
- Where the seller is authorised for delivery of the goods to a carrier, or delivery of the goods to a wharfinger
for safe custody, is prima facie deemed to be a delivery of the goods to the buyer.
- The seller shall makes such contract with the carrier or wharfinger on behalf of the buyer for safe
transmission or safe custody and if the seller omits so to do, and the goods are lost or damaged in course of transit
or whilst in the custody of the wharfinger, the buyer may decline to treat the delivery to the carrier or wharfinger
as a delivery to himself, or may hold the seller responsible in damages.
- Where goods are sent by the seller by a sea route the seller shall give such notice to the buyer as may enable buyer
to insure them during their sea transit and if the seller fails so to do, the goods shall be deemed to be at his risk
during such sea transit.
(11) Risk where goods are delivered at distant place [Section 40]: Where the seller agrees to deliver goods at his
own risk at place other than that where they are when sold, the buyer shall take any risk of deterioration in the
goods necessarily incident to the course of transit.
(12) Buyer's right of examining the goods [Section 41]: Where goods are delivered to the buyer which he has not
previously examined, he is not deemed to have accepted them unless and until he has a reasonable opportunity of
examining them for the purpose of ascertaining whether they are in conformity with the contract.
Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford
the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in
conformity with the contract.
(13) Buyer not bound to return rejected goods [Section 43]: Unless otherwise agreed, where goods are delivered
to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller,
but it is sufficient if he intimates to the seller that he refuses to accept them.
(14) Liability of buyer for neglecting or refusing delivery of goods [Section 44]: When the seller is ready and
willing to deliver the goods and requests the buyer to take delivery, but buyer does not take delivery within a
reasonable time, buyer is liable to the seller for any loss occasioned by his neglect or refusal to take delivery and
also for a reasonable charge for the care and custody of the goods.
Question 55] Amit sells to Sachin a specific horse which is to be delivered to Sachin the next week.
Sachin is to pay the price on delivery. In the next week, Sachin was ready to pay price for the horse.
But Amit was not in position to deliver the horse to Sachin. Amit asks Sachin to take the delivery of
horse after another week. The horse dies before it is delivered to and paid for. Who shall bear the
loss? Explain. CS (Foundation) - June 2002 (5 Marks)
Ans.: As per Section 32 of the Sale of Goods Act, 1930, unless otherwise agreed, delivery of the goods and payment
of the price are concurrent conditions. Thus, the seller shall be ready and willing to give possession of the goods to
the buyer in exchange for the price and the buyer shall be ready and willing to pay the price in exchange for
possession of the goods.
In the given case Amit's main duty is to deliver the horse to the buyer Sachin. He has failed to perform his part under
the contract of sale. Hence, Amit will bear the loss.
Question 56] Mr. X delivered 100 MT steel pipes to Mr. Y100 MT which were not as per specification, hence Mr.
Y refused to accept and informed Mr. X to take back at his cost and risk. Mr. X rejected Mr. Y's request and
demanded to return to Mr. X freight paid. State the correct position.
Ans.: As per Section 43 of the Sale of Goods Act, 1930, unless otherwise agreed, where goods are delivered to the
buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it
is sufficient if he intimates to the seller that he refuses to accept them.
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As per facts given in case, 100 MT pipes is not per specification and hence Mr. Y have right to reject the goods. It is
sufficient if Mr. Y informs to Mr. X that he has rejected the goods. As per Section 43 Mr. Y has no duty to return the
goods to Mr. X. Thus, Mr. X cannot demand to return the goods and also he cannot recover the fright paid.
Question 57] As per sales order A is to supply 20 MT of sugar to B. A however supplied 22 MT and billed
accordingly. B paid cost of 20 MT which was ordered by B. Can A take any action against B?
Ans.: Section 37 of the Sale of Goods Act, 1930 makes the following provisions relating to delivery of wrong quantity:
(1) If there is short delivery:
- Buyer can reject the whole goods or
- Buyer can accept and pay as per the agreed rate.
(2) If there is excess delivery:
- Buyer can reject in full or
- Buyer can accept agreed quantity and reject the excess or
- Buyer can accept the whole goods.
(3) If there is mixed delivery with other goods:
- Buyer can accept the contracted goods and reject the rest or
- Buyer can reject the entire lot.
If B has accepted whole quantity of 22 MT, he to pay for it. If he wants to pay for only 20 MT, he has to return excess
2 MT.
Question 58] When buyer deemed to have accepted the goods as per the provisions of the Sale of Goods Act,
1930?
Ans.: Acceptance [Section 42]: The buyer is deemed to have accepted the goods:
- When he intimates to the seller that he has accepted them, or
- When the goods have been delivered to him and he does any act in relation to them which is inconsistent
with the ownership of the seller, or
- When, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has
rejected them.
UNPAID SELLER
Question 59] Who is an unpaid seller?
Ans.: "Unpaid seller" defined [Section 45]: The seller of goods is deemed to be an unpaid seller:
(a) When the whole of the price has not been paid or tendered, or
(b) When a bill of exchange or other negotiable instrument has been received as conditional payment and the
condition has not been fulfilled by reason of the dishonour of the instrument or otherwise.
"Seller" includes any person who is in the position of a seller, as an agent of the seller to whom the bill of lading has
been endorsed, or a consignor or agent who has paid himself, or is directly responsible for, the price.
Small Dues: Even if a small balance is pending, the seller is still regarded as an unpaid seller.
Question 60] Unpaid seller of goods is bailee. Comment.
Ans.: The above statement is incorrect. 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 instructions of the person delivering them. The primary condition delivery of goods to another
person is missing hence unpaid seller is not bailee.
Question 61] Ramen sold 50 kg of rice to Khagen who paid by cheque and Ramen gave the delivery order to
Khagen. Khagen resold such rice to Bhaben who purchased on good faith and for consideration. Khagen's cheque
was dishonoured. Ramen refused to deliver rice to Bhaben on the plea of non-payment. Advise Bhaben.
Ans.: On dishonour of cheque Ramen becomes unpaid seller and he can exercise right of lien until payment of price
of goods. Property in goods remains with Ramen and Khagen cannot make resale of goods as he has no valid title.
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If Bhaben has paid price to Ramen, he can recover it along with damages, as there is breach of implied condition as
to title by Khagen.
Question 62] Write a short note on: Unpaid seller's rights
Who is an unpaid seller? State the rights of an unpaid seller under the Sale of Goods Act, 1930
Ans.: Rights of an unpaid seller against the goods [Section 46(1)]:
(1) When property in goods has passed to the buyer:
♦ Right of lien on the goods in his possession
♦ Right of stoppage of goods in transit if the buyer becomes insolvent
♦ Right of resale
(2) When property in goods has not passed to the buyer:
Right of withholding delivery (+) above three remedies.
Rights of an unpaid seller against the buyer [Section 46(2)]:
♦ Right to file a suit for price
♦ Right to file a suit for damages and
♦ Right to file a suit for interest
Question 63] Write a short note on: Unpaid seller's right of lien
When can an unpaid seller of goods exercise his right of lien over the goods under the Sale of Goods Act, 1930?
Can he exercise his right of lien even if the property in goods has passed to the buyer? When such a right is
terminated? Can he exercise his right even after he has obtained a decree for the price of goods from the Court?
Ans.: Lien means to withhold the property of another until lawful charges are paid. When unpaid seller retains the
possession of goods and requires the buyer to pay for price of goods, seller is said to be exercising right of lien.
The right of lien can be exercised by unpaid seller on only for price of goods and not for other charges like godown
charges, interest.
Right of lien depends upon possession. If possession is lost right of lien also lost.
Seller's Lien [Section 47]: The unpaid seller of goods who is in possession of goods is entitled to retain possession
until payment or tender of the price in the following cases, namely:
(a) Where the goods have been sold without any stipulation as to credit.
(ib) Where the goods have been sold on credit, but the term of credit has expired.
(c) Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for
the buyer.
Part delivery [Section 48]: Where an unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder. If part delivery treated as full delivery right of lien lost.
Termination of lien [Section 49(1)]: The unpaid seller of goods loses his lien:
(a) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without
reserving the right of disposal of the goods.
(b) When the buyer or his agent lawfully obtains possession of the goods.
(c) By express or implied waiver of right of lien.
Express Waiver: If contract of sale expressly provides that seller cannot retain possession of goods, it is an express
waiver of lien.
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Implied Waiver: If it inferred from the circumstances of the case or conduct of seller that there is waiver of right of
lien, it is implied waiver of lien.
Example: X sells goods to Y on 2 months credit. After 2 months, X allows one more month to pay price of the goods.
Seller by his conduct impliedly waived his right of lien.
Decree form Court [Section 49(2)]: The unpaid seller of goods does not lose his right of lien because he has obtained
a decree for the price of the goods.
Question 64] Write a short note on: Unpaid seller's right of stoppage in transit
Ans.: When an unpaid seller stop the goods during the continuance of transit and regain the possession of goods, it
is said that seller is exercising right of stoppage in transit.
As soon as right of lien ends right of stoppage in transit starts.
Right of stoppage in transit [Section 50]: When the buyer of goods becomes insolvent, the unpaid seller who has
parted with the possession of the goods has the right of stopping them in transit. Seller may resume possession of
the goods as long as they are in the course of transit, and may retain them until payment or tender of the price.
Duration of transit [Section 51]:
(1) Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other
bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery from such carrier or
other bailee.
(2) If the buyer or his agent obtains delivery of the goods before their arrival at the appointed destination, the
transit is at an end.
(3) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the
buyer or his agent that he holds the goods on his behalf and continues in possession, the transit is at an end. It is
immaterial that a further destination for the goods may have been indicated by the buyer.
(4) If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them, the
transit is not deemed to be at an end, even if the seller has refused to receive them back.
(5) WTien goods are delivered to a ship transit continues if carrier is an agent of seller, but if carrier is acting as
agent of buyer transit ends as soon as goods are loaded into ship.
(6) Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent, the transit
is deemed to be at an end.
(7) Where part delivery of the goods has been made to the buyer or his agent in that behalf, the remainder of
the goods may be stopped in transit. If part delivery treated as full delivery right of stoppage in transit is lost.
How stoppage in transit is effected [Section 52]: The unpaid seller may exercise his right of stoppage in transit
either by taking actual possession of the goods, or by giving notice of his claim to the carrier or other bailee in whose
possession the goods are.
Such notice may be given either to the person in actual possession of the goods or to his principal.
When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he
shall re-deliver the goods to the seller. The expenses of such re-delivery shall be borne by the seller.
Question 65] Mr. Sham orders on Mr. Ram to deliver certain goods at Mumbai. While the goods are lying at
Mumbai Railway Station, Station Master informs Mr. Sham that the goods are held at station at Mr. Sham's risk,
but Mr. Sham became insolvent. Has Mr. Ram any right as an unpaid seller?
Ans.: As per Section 50 of the Sale of Goods Act, 1930, when the buyer of goods becomes insolvent, the unpaid
seller who has parted with the possession of the goods has the right of stopping them in transit.
As per Section 51, if, after the arrival of the goods at the appointed destination, the carrier or other bailee
acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession, the transit
is at an end.
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In given case Station Master informs Mr. Sham that the goods are held at station at Mr. Sham's risk, hence transit
ends and property in goods has been transferred to Mr. Shaym. As Mr. Shaym has become insolvent Mr. Ram can
claim only rateable dividend.
Question 66] Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by Railway. Shyam
receives delivery of 100 bales sent by lorry, but before he receives the delivery of the bales sent by railway, he
becomes bankrupt. Ram being still unpaid, stops the goods in transit. The official receiver, on Shyam's insolvency
claims the goods. Decide the case with reference to the provisions of the Sale of Goods Act, 1930.
is at an end.
As per facts given in case, no communication to buyer has been made regarding arrival of Goods at Railway Station
and hence transit has not come to an end and thus being unpaid seller Ram can exercise the right to stoppage in
transit.
Question 67] A, an agent of a buyer, had obtained goods from the Railway organization and loaded the goods on
his truck. In the meantime, the Railway organization received a notice from B, a seller, for stopping goods in
transit as the buyer had become insolvent. Referring to the provisions of the Sale of Goods Act, 1930 decide
whether the Railway organization can stop the goods in transit, as instructed by the seller?
is at an end.
In the given case the transit was at an end as soon as the agent of the buyer obtained goods from the Railway
Organization. Therefore Railway Organization cannot act as instructed by the seller.
Ans.: Following are the main points of distinction between right of lien and stoppage in transit:
Points Right of lien Right of stoppage in transit
Meaning When unpaid seller retains the possession of When an unpaid seller stop the goods during
goods and requires the buyer to pay for price of the continuance of transit and regain the
goods, seller is said to be excising right of lien. possession of goods, it is said that seller is
excising right of stoppage in transit.
Purpose Purpose of right of lien is retaining possession Purpose of right of stoppage of goods in transit
of goods. is regaining possession of goods.
Insolvency Right of lien can be exercised whether buyer Right of stoppage in transit can be exercised
of buyer has become insolvent or not. only when the buyer is insolvent.
How right Seller himself has to exercise this right. Seller can exercise this right through the carrier
exercised or bailee with whom the goods are lying.
Question 69] Write a short note on: Effect of sub-sale or pledge by buyer on unpaid seller's right of lien and
stoppage in transit
Ans.: Effect to sub-sale or pledge by buyer [Section 53]: The unpaid seller's right of lien or stoppage in transit is not
affected by any sale or other disposition (like pledge) of the goods by the buyer, unless the seller has assented.
416
However, where a document of title to goods has been issued or lawfully transferred to any person as buyer or
owner of the goods and that person transfers the document to a person who takes the document in good faith and
for consideration, the unpaid seller's right of lien or stoppage in transit is defeated i.e. lost.
Where the transfer is by way of pledge, the unpaid seller may require the pledgee to have the amount secured by
the pledge satisfied in the first instance, as far as possible, out of any other goods or securities of the buyer in the
hands of the pledgee and available against the buyer.
Question 70] X sells certain goods to Y and sends the goods by transport. X also sends transport receipt to Y. Y
becomes insolvent. During the transit of goods Y transfers transport receipt to Z. Z is not aware of Y's insolvency.
State with reasons, whether X being an unpaid seller can exercise the right of stoppage of goods in transit.
Would your answer be different if Z was aware of Y's insolvency before the assignment of the railway receipt in
favour of Z?
Ans.: As per Section 53 of the Sale of Goods Act, 1930, the unpaid seller's right of lien or stoppage in transit is not
affected by any sale or other disposition (like pledge) of the goods by the buyer, unless the seller has assented.
However, where a document of title to goods has been issued or lawfully transferred to any person as buyer or
owner of the goods and that person transfers the document to a person who takes the document in good faith and
for consideration, the unpaid seller's right of stoppage in transit is defeated i.e. lost.
(1) In given case, buyer (Y) has transferred the transport receipt (document of title) to Z, who takes in good faith,
and for consideration, hence X's right of lien or stoppage in transit is defeated i.e. lost.
(2) If Z was aware of Y's insolvency, then he had not acted in good faith hence seller's right of stoppage in transit
is not defeated.
Question 71] Write a short note on: Unpaid seller's right of resale
Who is an unpaid seller? Can an unpaid seller resell the goods and if so when.
Ans.: Unpaid seller's right of resale [Section 54]: The unpaid seller can re-sell the goods already sold, if -
- Goods are of a perishable nature.
- Where the unpaid seller gives notice of resale to the buyer.
If resale price is:
Less than contracted price: Seller can recover balance from buyer.
More than contracted price: Seller is not bound to give extra to buyer.
Example: X sells some goods to Y for ` 5,000. X is in possession of goods. He gives notice to Y to pay for the goods
and take the delivery. Y does not pay for the goods. If X resale the goods at market price which is ` 4,500 he can still
recover ` 500 from buyer and if X resale at market price which is ` 6,000, he is not bound to repay excess amount
i.e. ` 1,000 to buyer.
However, if X does not give the notice of resale and sales the goods at ` 4,500, he cannot recover the ` 500 from
buyer. If he resale the goods at ` 6,000, he will have to repay excess amount i.e. ` 1,000 to buyer.
Conditions to exercise right of resale: Right of resale can be exercised by unpaid seller only when he is in possession
of the goods either by:
- Exercise of his lien on the goods or
- Has regained possession from the carrier by issuing a notice of stoppage in transit upon buyer's insolvency.
Good title to subsequent buyer: The subsequent buyer acquires good title thereof as against the original buyer,
even if no notice of re-sale has been given by the seller to the original buyer.
Question 72] What are the remedies available in case of breach of contract of sale by the buyer to the seller?
Ans.: An unpaid seller has the following remedies against the buyer in case of breach of contract:
(1) Suit for price [Section 55]: Where the buyer wrongfully neglects or refuses to pay for the goods according to
the terms of the contract, the seller may sue him for the price of the goods.
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(2) Damages for non-acceptance [Section 56]: Where the buyer wrongfully neglects or refuses to accept and
pay for the goods, the seller may sue him for damages for non-acceptance.
(3) Damages for non-delivery [Section 57]: Where the seller wrongfully neglects or refuses to deliver the goods
to the buyer, the buyer may sue the seller for damages for non-delivery.
(4) Specific performance [Section 58]:
(a) A suit of specific performance can be initiated only in respect of specific or ascertained goods.
(b) The Court may by its decree direct that the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on payment of damages.
(c) The decree may be unconditional, or upon such terms and conditions as to damages, payment of the price
or otherwise, as the Court may deem just.
(5) Interest by way of damages and special damages [Section 61]: Discussed separately.
Question 73] Write a short note on: Remedy for breach of warranty by seller
Ans.: Remedy for breach of warranty [Section 59]: Where there is a breach of warranty by the seller, or where the
buyer elects or is compelled to treat any breach of a condition as a breach of warranty, the buyer is not entitled to
reject the goods but he can sue the seller for damages for breach of warranty.
Question 74] Write a short note on: Anticipatory breach in a contract of sale
Ans.: Repudiation of contract before due date [Section 60]: Where either party to a contract of sale repudiates the
contract before the date of delivery, the other may:
- Either treat the contract as subsisting and wait till the date of delivery, or
- He may treat the contract as rescinded and sue for damages for the breach.
Question 75] Write a short note on: Interest by way of damages and special damages
Ans.: Interest by way of damages and special damages [Section 61]: The seller or the buyer can recover interest or
special damages in a case of a breach of the contract. The Sale of Goods Act, 1930 does not have provision relating
to interest or special damages. The Court may award interest or special damages as per provisions of Sections 73 &
74 of the Contract Act, 1872.
Question 76] Suraj sold his car to Sohan for ` 75,000. After inspection and satisfaction, Sohan paid ` 25,000 and
took possession of the car and promised to pay the remaining amount within a month. Later on Sohan refuses to
give the remaining amount on the ground that the car was not in a good condition. Advise Suraj as to what remedy
is available to him against Sohan.
Ans.: As per the Section 55, where the buyer wrongfully neglects or refuses to pay for the goods according to the
terms of the contract, the seller may sue him for the price of the goods.
As per the Section 61, the seller can recover interest in a case of a breach of the contract. The Court may award
interest as per provisions of the Contract Act, 1872.
Hence, Suraj will succeed against Sohan for recovery of the remaining amount as well as interest as per Sections 55
& 61 of Sale of Goods Act, 1930.
AUCTION SALES
Question 77] Write a short note on: Auction Sales
In an auction sale there is offer and acceptance. Explain. * 1 2
Ans.: Auction sale is a public sale where bids are invited and goods are sold to highest bidder.
Presenting goods for auction sale is 'invitation to make an offer'. When bidder makes bid, it is an 'offer' and 'sale'
is complete when auctioneer accepts the bid.
Auctioneer can accept bid any of following manner:
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♦ By saying 1, 2 & 3.
♦ By saying going, going, gone.
♦ By fall of hammer.
Provisions relating to auction sale [Section 64]:
(1) Sale in lots: In the case of sale by auction, where goods are put up for sale in lots, each lot is prima facie
deemed to be the subject of a separate contract of sale.
(2) Completion of sale: The sale is complete when the auctioneer announces its completion by the fall of the
hammer or in other customary manner and, until such announcement is made, any bidder may withdraw his bid.
Example: X makes a bid at an auction sale but withdraw it before the fall of hammer. One of the condition of sale
was, "bid once made shall not be withdrawn", which X knew. Offer/bid withdrawn by X is valid and sale is not
completed.
(3) Right of seller to bid: A right to bid may be reserved by the seller and, where such right is expressly reserved,
the seller or any one person on his behalf may, bid at the auction.
Where the sale is not notified to be subject to a right to bid on behalf of the seller, such sale may be treated as
fraudulent by the buyer.
(4) Reserved price: The sale may be notified to be subject to a reserved or upset price.
(5) Pretended bidding: When seller appoints a person to make bid on his behalf to get higher price, it is known
as pretended bidding. Person appointed by seller is known as 'puffers'.
If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.
(6) Knock out agreemeni/cartel: It is a secret agreement between bidders by which they agrees not to compete
with each other and only one of them will bid and they will distribute privately anything obtained at action sale.
Question 78] A purchased a typewriter at a public auction. Neither the auctioneer nor A knew at that time that
the typewriter was a stolen property. Has the true owner any claim against A or the auctioneer?
Ans.: The true owner can recover the typewriter from the buyer but he has no cause of action against the
auctioneer. The auctioneer is not liable to the true owner because the auctioneer was only acting as an agent of
some principal, against whom the true owner can take action.
419
22
CHAPTER
PARTNERSHIP ACT, 1932
INTRODUCTION! The Partnership Act, 1932 waspassed to define and amend thelaw relating to partnership. It is old
mercantile law. Partnership is special types of Contract. Originally, this was part of the Contract Act, 1872, but later
converted into separate Act.
Basic provisions of the Contract Act, 1872, i.e. legal agreement, consideration, free consent, competency of parties,
etc. are also applicable to partnership contract. Partnership Act, 1932 has 8 chapters.
PARTNERSHIP MEANING, ESSENTIALS & TRUE TEST
Question 1] Discuss the scope of the Partnership Act, 1932
Ans.: Extent & Commencement [Section 1]: The Act extends to whole of India except the State of Jammu and
Kashmir. It came into force on 1st October, 1932.
Scope: The Partnership Act, 1932 deals with partnership in general.
Application of certain provisions of the Contracts Act, 1872 [Section 2]: The expression used but not defined in this
Act and defined in the Contract Act, 1872, shall have the meanings assigned to them in that Act. The general
principles of the Contracts Act, 1872 which formally contained the provisions of the law of partnership shall apply
so far as they are not inconsistent with the Act.
Question 2] Define the following terms:
(i) Act of firm (ii) Third party (iii) Partner (iv) Firm (v) Firm Name
Ans.: Act of firm [Section 2(a)]: Act of firm means any act or omission by all the partners, or by any partner, or agent
of the firm which gives rise to a right enforceable by or against the firm.
Third party [Section 2(d)]: Third party used in relation to a firm or to a partner therein means any person who is
not a partner in the firm.
Partners [Section 4]: Persons who have entered into partnership with one another are called individually partners.
Firm [Section 4]: Persons who have entered into partnership with one another are collectively called firm. Firm
Name [Section 4]: The name under which their business is carried on is called the firm name.
Question 3] Who may be partner in firm?
Ans.: Persons competent to be partners:
(1) All persons competent to enter into a valid contract can enter into partnership for carrying on a business.
(2) A minor cannot become a partner, but with the consent of all others, he can be admitted into the benefits
of partnership.
(3) A Company can become a partner.
(4) Partnership with alien friends is possible, but not with alien enemies.
Question 4] Define 'partnership'. Discuss the essential elements of partnership.
CS (Foundation) - June 1995 (10 Marks), Dec 1998 (10 Marks) CS (Foundation) - June 2010 (5 Marks)
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all
or any of them acting for all. Comment. * 1
Ans.: Partnership [Section 4]: Partnership is the relation between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all.
Essentials: Following are the essentials of partnership:
(a) Association of two or more persons
(b) Carrying on business
(c) Agreement/contract
(d) Sharing the profits of the business
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(e) Mutual agency among partners Essential elements of partnership:
(1) Association of two or more persons: Minimum 2 persons are required to form partnership. Maximum
number for partner is 50 whether it is banking or any other business.
(2) Carrying on business: Partnership can be formed only for the purpose of carrying on some business.
Associations created for charitable, religious and social purposes are not partnerships.
As per Section 2(b) "business" includes every trade, occupation and profession. In the definition of partnership the
word "business" is used in the sense of "carrying on business" which suggests continuity or repetition of acts. But it
does not mean that it should be confined to lengthy operations, it may consist of a single adventure of a single
undertaking, if there is continued participation of two or more persons for acquisition of gains.
(3) Agreement: The relationship of partnership arises from contract and not from status. Agreement may be
express or implied. Further, the agreement must be a valid agreement and for a lawful object and purpose and
between the persons competent to contract.
(4) Sharing of profit:
♦ Sharing the profits of business is the essence of partnership but it cannot be the conclusive evidence as to
existence of partnership.
♦ Sharing of profits implies sharing of losses as well, unless agreed otherwise. Partners may shares profit in
one ratio and losses in some other ratio.
♦ A person may become a partner only in profits and not for losses by agreement between all partners.
♦ Ratio in which profits and losses will be shared is based on agreement amongst the partners.
♦ Though sharing of profits of a business is essential, it does not mean that everyone who participates in the
profits of a business is necessarily a partner.
Example: A Manager, as a part of his remuneration, may be given a share in profits of the business. He does not
thereby become a partner.
(5) Mutual Agency: Partnership business is carried on by all or any of them acting for all. Hence, a partner is
both an agent and a principal. Partner by his acts bind other partners and is in turn bound by acts of other partners.
It is to be noted that all partners should not actively participate in business. Business may be managed by one or
more partners and remaining partners will be bound by their acts provided such acts relate to carrying on firm's
business and have been done in the firm's name.
(6) Consideration: As no consideration is required to create agency u/ s 185 of the Contract Act, 1872, no
consideration is required to create partnership which is an extension of law of partnership.
Question 5] "The relationship of partnership arises from an agreement and not from status". Comment.
Ans.: Partnership not created by status [Section 5]: Partnership is the result of a contract and cannot arise by status.
Following are not deemed to be partners -
(a) The members of HUF carrying on a family business as such.
(b) Burmese Buddhist husband and wife carrying on business.
Partnership is of a contractual nature and springs from an agreement between persons. In a Partnership, upon the
death of a partner, a fresh contract has to be made and the legal heir cannot become partner. Becoming or ceasing
to be a partner solely rests on the agreement and not on the status, say by birth or death as in the case of a HUF.
Question 6] "Sharing of profits is prima facie evidence of partnership but not conclusive evidence". Discuss this
statement and bring out the true test of partnership.
State the essentials of partnership and its true test. CS (Foundation) - June 2002 (4 Marks)
True test of partnership is mutual agency. Explain.
What test would you apply for determining the existence of partnership firm?
421
Ans.: Mode of determining existence of partnership [Section 6]: In determining whether a group of persons is or
is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together.
Sharing of profits: Sharing of profits is an important criterion but is not conclusive test. Receipt by a person of a
share of profits of a business or a payment contingent upon the earning of profits or varying with the profits earned
by the business, does not by itself make him a partner with the persons carrying on the business.
Specific exclusions from partnership:
(i) Joint owners sharing profit are not partners.
(ii) A partnership is not created when share or payment is received by -
♦ Money lender
♦ Servant or agent as remuneration.
♦ Widow or child or a deceased partner as annuity.
♦ A previous owner or part owner of the business, as consideration for sale of goodwill.
Existence of mutual agency: Mutual agency is the foundation of partner's liability, the true test, in determining
whether a partnership exits, is to see whether relations of principal and agent exits between parties and not merely
profit sharing. Thus, every partner is principal as well as an agent of other partners. This unique feature distinguishes
a partnership from co-ownership or simple agreements for sharing profit.
Question 7] State with reasons whether any partnership is created in following cases:
(i) Ram and Rahim buy 100 bales of cotton, which they agree to sell for their joint account, each party sharing
profits and bearing losses equally.
(ii) Dinesh and Ranvir buy 100 bales of cotton agreeing to divide these between them.
(iii) 'A' a trader, owed money to XY&Z. He agreed to pay XY&Z out of the profits of his business (run under the
supervision of X, Y & Z) what he owed to them.
Ans.: As per Section 4 of the Partnership Act, 1932, partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any of them acting for all.
Considering the provisions of the Section 4, answer to given case is as follows:
(i) Ram and Rahim buy 100 bales of cotton, which they agree to sell for their joint account, each party sharing
profits and bearing losses equally. Thus, all the essential elements are present namely - business, association of two
persons, agreement, mutual agency and hence Ram and Rahim are partners in respect of such account.
(ii) If Dinesh and Ranvir buy 100 bales of cotton and agrees to divide between them, it does not create
partnership. Essential elements namely - business & mutual agency are missing in agreement and hence Dinesh and
Ranvir are not partners.
(iii) 'A' a trader, owed money to X, Y & Z. He agreed to pay X, Y & Z out of the profits of his business (run under the
supervision of X, Y & Z) what he owed to them. This arrangement does not make X, Y & Z partners with A in business.
The last essential which requires mutual agency is missing and hence it is not a partnership.
Question 8] A is a publisher. He agrees to publish at his own expense a book written by B, and to pay Y half the
net profits. Does this create a relationship of partnership between A and B? Give reasons.
to share the profits of a business carried on by all or any of them acting for all. The agreement between A and B
does not create partnership. The last essential which requires mutual agency is missing and hence it is not a
partnership.
Question 9] A and B are joint owner of a house. They rent it out to C and divide the net rent equally. Are they
partners? Give reasons. CS (Foundation) - June 1997 (5 Marks)
to share the profits of a business carried on by all or any of them acting for all.
422
The agreement between A and B does not create partnership. Essential elements namely - business & mutual agency
are missing in agreement and hence A and B are not partners.
Question 10] What do you understand by 'partnership deed'? What are the contents of such deed?
Ans.: The written document which contains the mutual rights and obligations of partners is known as partnership
deed. The partnership deed is also called as 'Partnership Agreement', 'Constitution of Partnership', 'Articles of
Partnership' etc. The deed must be properly drafted and stamped according to the provisions of the Indian Stamp
Act, 1899. Each partner should be given a copy of the deed and if the firm is to be registered, a copy of the deed
should be filed with the Registrar of Firms. The partnership deed is not a public document and therefore binds only
third parties so far as they have notice of it.
Contents of Partnership Deed: The exact terms of the partnership deed (or agreement) will depend upon the
circumstances but generally a partnership deed contains the following covenants:
♦ Firm name.
♦ Business to be carried by the firm.
♦ Names and permanent addresses of partners.
♦ Nature and scope of business.
♦ Address of business places.
♦ Commencement and duration of partnership.
♦ Capital and the contribution made by each partner.
♦ Provision for further capital and loans by partners to the firm.
♦ Partner's drawings.
♦ Interest on capital, loans, drawings and current account.
♦ Salaries, commission and remuneration to partners.
♦ Profit (or loss) sharing ratio of partners.
♦ Keeping of proper books of account, inspection and audit, Bank Accounts and their operation.
♦ Accounting period and how such accounts are to be prepared.
♦ Rights, powers and duties of the partners.
♦ Whether and in what circumstances, notice of retirement or dissolution can be given by a partner?
♦ Provision that death or retirement of a partner will not bring about dissolution of partnership.
♦ Valuation of goodwill on retirement, death, dissolution etc.
♦ The method of valuation of assets and liabilities on retirement or death of any partner.
♦ Provision for expulsion of a partner.
♦ Provision regarding the allocation of business activities to be performed by individual partners.
♦ The arbitration clause for the settlement of disputes. The terms contained in the partnership deed may be
varied with the consent of all the parties, and such consent may be express or implied by a course of dealing. [Section
11(1)]
Question 11] Distinguish between: Partnership and Hindu undivided family (HUF)
CS (Foundation) - Dec 2003 (5 Marks), June 2007 (5 Marks) CS (Foundation) - Dec 2008 (5 Marks)
Ans.: Following are the main points of distinction between partnership & HUF:
Points Partnership HUF
Meaning Partnership is the relation between persons The HUF can be defined as a family that
who have agreed to share the profits of a consists of a common ancestor and all his
business carried on by all or any of them lineal male descendants and their wives and
acting for all. unmarried daughters.
423
Creation Partnership is created by agreement. Right in joint family is created by status i.e. by
birth of a male child in the family.
Maximum no. A partnership with objects of acquisition for No restriction as to maximum number of
of members gains cannot be formed beyond 50 numbers members.
of partners. [Section 464 read with Rule 10 of
the Companies (Miscellaneous) Rules, 2014]
Points Partnership HUF
Registration Registration of partnership is not compulsory Registration is not required.

but the Partnership Act, 1932 had made it
indirectly essential to enjoy certain benefits.
Management All partners are equally entitled to a right of Right of management of joint family business
management of the business. generally vests in Karta, the governing male
member of the family.
Authority to Every partner binds the firm by his acts and is Karta has the authority to contract for the
bind bound by the act of firm. family business.
Liability Liability of all partners is unlimited. Only the liability of Karta is unlimited.
Coparceners liable only to the extent of their
share.
Right to verify A partner can bring a suit against the firm for On separation of joint family, a member is not
accounts accounts, provided he also seeks the entitled to ask for accounts of the family
dissolution of the Firm. business.
Governed by Partnership is governed by the Partnership HUF is governed by Hindu Law.

Act, 1932.
Minor Minor cannot become a partner, but can be Minor becomes a member by his birth.
admitted to benefits of partnership, with
consent of all partners.
Death Death of a partner leads to dissolution of Death of a member in HUF does not lead to
partnership. dissolution.
Question 12] Distinguish between: Partnership & Company

CS (Inter) - June 2005 (4 Marks), CS (Executive) - Dec 2013 (4 Marks)
Ans.: Following are the main points of distinction between partnership and company:
Points Partnership Company
Meaning Partnership is the relation between persons A company means company formed and
who have agreed to share the profits of a registered under the Companies Act, 2013. A
business carried on by all or any of them company may be private company or public
acting for all. company.
Legal status A partnership firm has no separate existence A company is a separate legal entity distinct
apart from its members. from its member.
424
Governing Act Partnership is governed by the Partnership A company is governed by the Companies Act,
Act, 1932. 2013.
Minimum Minimum two persons are required to form a Minimum number of members required to
membership partnership. form a company are:
♦ For private company: 2
♦ For public company: 7
♦ For one person company: 1
Maximum A partnership with objects of acquisition for Maximum number of member are:
membership gains cannot be formed beyond 50 numbers ♦ For private company: 200
♦ For public company: Unlimited
Registration Registration of partnership is not compulsory Registration of company is compulsory under

but the Partnership Act, 1932 had made it the Companies Act, 2013.
indirectly essential to enjoy certain benefits.
Capital Minimum capital is not specified. Minimum capital for the private and public
companies will be as specified in Rules.
[Prior to the Companies (Amendment) Act,
2015, minimum paid up capital for private
company was ` 1,00,000 & for public company
was ` 5,00,000]
Points Partnership Company
Management All partners have a right to take part in the Affairs of company are managed by Board of
day- to-day affairs of the firm. Directors. Members cannot take part into
day- to-day business.
Mutual agency Every partner is principal as well as an agent A member of company is not an agent of other
of other partners. member or company.
Transfer of A partner cannot transfer his interest without A shareholder can freely transfer his share.
interest consent of all other partners. However, private company can put
restrictions on transfer of shares.
Liability of a Liability of a partner is unlimited. Liability of a member is limited up to unpaid

member amount on share.
Audit It is not compulsorily for partnership firm to Company has to get their accounts
get their accounts compulsory audited. compulsorily audited as per the provisions of
the Companies Act, 2013.
Question 13] Distinguish between: Partnership and co-ownership
Ans.: Following are the main points of distinction between partnership firm and co-ownership:
425
Points Partnership Co-ownership
Meaning Partnership is the relation between persons When two or more persons hold a property
who have agreed to share the profits of a and agrees to share profit, their relationship is
business carried on by all or any of them called co-ownership/joint ownership.
acting for all.
Business Agreement must be to carry on business. There is no necessity for any separate
business.
Number of A partnership with objects of acquisition for There is no limit on the number of persons
members gains cannot be formed beyond 50 numbers being co-owners.
Creation Partnership arises from a contract. It may arise by contract and also by status,
e.g., A and B inherit a house from their father.
Transfer of Partner cannot transfer his interest/share Co-owner may transfer his interest/share to a
interest without consent of all other partners. third party without consent of other co-
owners.
Agency Every partner is principal as well as an agent A co-owner is not the agent of other co-
of other partners. owners.
Sharing of Partnership involves sharing of profits and It does not always involve sharing of profits or
profit/loss losses. losses because it may exist without any
business.
Lien A partner has a lien on the firm property. A co-owner has no lien on the property.
TYPES OF PARTNERSHIP
Question 14] What are the types of partnership firms?
What do you mean by partnership at will? CS (Foundation) - June 1997 (2 Marks)
There can be different kinds of partners. State briefly about any five kinds of partners.
CS (Foundation) - Dec 2008 (5 Marks) * 1
Ans.: Various types of partnerships are as follows:
(1) Partnership at will [Section 7]: Where no provision is made by contract between the partners for the duration
of their partnership, or when no provision is made as to whom and how the partnership will come to an end, the
partnership is known as partnership-at-will.
The partnership-at-will has no fixed or definite date of termination and, therefore, death or retirement of a partner
does not affect the existence of such partnership.
Dissolution of partnership at will [Section 43]: Partnership-at-will can be dissolved at any time by any of the
partners by giving notice in writing to all other partners. The firm is dissolved as from the date mentioned in the
notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.
(2) Particular Partnership [Section 8]: When two or more persons come together for particular adventures or
undertakings it is known as particular partnership. Where the adventure is complete, such partnership can be
dissolved. When the persons decide to continue partnership after completion of adventure, it becomes a
partnership at will.
426
Example: A and B enter into a joint trading adventure for sale of sesame seeds grown in both their fields during its
harvest season. The partnership comes to an end after the sale.
(3) Partnership for fixed term: It is a partnership entered into for a fixed duration, after the expiry of which it
comes to an end. When the partners carry on the business even after the expiry of the said period, it is said to be
partnership at will.
(4) Sub-partnership: When a partner of a firm agrees to share his own share of profits with an outsider, it is
called sub-partnership and such outsider is called a sub-partner. A partner is free to make an agreement of sub-
partnership, provided it does not affect the position of other partners with reference to him.
Important points relating to sub-partnership:
♦ A sub-partner is not connected with the firm.
♦ A sub-partner has no relationship with other partners.
♦ A sub-partner has no right to take part in firm's business.
♦ A sub-partner cannot examine the firm's accounts.
♦ A sub-partner can claim his agreed share from the partner with whom he enters into subpartnership.
TYPES OF PARTNER
Question 15] Explain the provisions of the Partnership Act, 1932 relating to the creation of partnership by holding
out. Up to what extent such partner will be liable to the partnership firm?
Write a short note on: Partner by estoppels or holding out
Write a short note on: Sleeping or dormant partner CS (Foundation) - June 2009 (5 Marks)
Ans.: Various types of partners are as follows:
(1) Actual/Ostensible Partner: Active partner is one who is actively engaged in the conduct of the business of
partnership. He is the agent of other partners, in the ordinary course of business. Acts of such partner are binding
to the firm and he is bound by the act of other partner which is done in ordinary course of business and in the firm's
name.
(2) Nominal Partner: He is a partner only by name and only his name is used. He is not entitled to share profits,
but held liable. He shall give notice of his retirement or otherwise terminating his relationship with the firm.
(3) Sleeping/Dormant Partner: He is one who contributes to the capital and has a share in Profits, but does not
actively participate in the business. He is liable like any other Partner, but where specifically excluded, he is not so.
He is not required to give notice after he ceases to be a partner, nor does his insanity dissolve the firm.
(4) Partner in profits only [Section 13(b)]: When all partners agree that a partner shall share only profits and
not losses then such partner is known as partner in profit only. Even though such partner shares profit and not loss,
but he is liable for all the debts of the firm are jointly and severally with other partners.
(5) Sub-partner: A sub-partnership comes into existence when one of the partners agrees to share his profits
from the firm with a stranger. Such third party is called a sub-partner. He is not a partner in the eyes of law and,
therefore, has no right against the firm. He is also not liable for the debts of the firm.
(6) Partner by estoppels or holding out [Section 28]: Anyone who by words spoken or written or by conduct
represent himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in
that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person
representing himself or represented to be a partner does or does not know that the representation has reached the
person so giving credit.
In other words, if the behaviour of a person arouses misunderstanding that he is a partner in a firm, when actually
he is not; such a person is stopped from later on denying the liabilities for the acts of the firm. Such a person is
called partner by estoppels and is liable to all third parties.
Holding out means to represent, a stranger, who represent himself to be partner in a firm and induces other to give
credit to the partnership are called as partner by holding out.
427
Example 1: Arun introduces Balu as a partner in his business to Chandan. Balu, in fact, was not a partner but he did
not deny the statement. Chandan advanced a loan to Arun. Arun could not repay the loan. Balu is responsible for
the repayment of loan because, Balu is a partner by estoppel.
Example 2: Where a partner retires, but does not give notice, he holds himself to be a partner. He can be held liable
by establishing the fact that he has held himself as partner and on faith of such representation a third party has lent
money to the firm.
Exceptions to doctrine of holding out: The doctrine of Holding Out is not applicable in the following cases:
1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable for the
torts of another simply because that other person held himself to be his partner.
2. It does not extend to bind the estate of a deceased partner, where after a partner's death the business of
the firm is continued in the old firm name.
3. It also does not apply where the Holding Out partner has been adjudicated insolvent.
Question 16] Rohit is not a partner in a particular firm. But, he knowingly permits himself to be represented as a
partner of that particular firm to San jay, who on the faith of such a representation gives credit to the firm. Is
Rohit liable as a partner in the firm?
Ans.: As per Section 28 of the Partnership Act, 1932, if a person represents himself or knowingly permits himself to
be represented as a partner of a particular firm, when actually he is not, such person is liable as partner of the firm.
Thus, a stranger, who represents himself to be partner in a firm and induces other to give credit to the partnership
firm are called as partner by holding out. Hence, Rohit is liable as a partner by holding out.
Question 17] A, B & C are partners in a firm. A introduces D to X as a partner in business. D, in fact, was not a
partner in the firm's business. D did not deny this statement. X advanced a loan of ` 20 lakhs to the firm. On firm's
failure to repay the loan X wants to hold D responsible for the repayment of the above loan. Referring to the
provisions of the Partnership Act, 1932 decide whether X would succeed in recovering the loan from D.CA (PE-II)
- Nov 2006 (5 Marks)
Ans.: As per Section 28 of the Partnership Act, 1932, if a person represents himself or knowingly permits himself to
be represented as a partner of a particular firm, when actually he is not, he is liable as partner of the firm.
Thus, a stranger, who permits himself to be represented as partner in a firm and induces other to give credit to the
partnership are called as partner by holding out. Hence, D becomes a partner by estoppels as he did not deny the
statement given by A. If firm fails to pay the loan, D is liable to make repayment of loan.
PARTNERS RIGHTS, DUTIES & LIABILITIES
Question 18] Explain the duties of a partner in partnership firm.
Write a short note on: General duties of partner
Ans.: Various duties of partner are as follows:
(1) General duties [Section 9]: Partners are bound-
(a) To carry on the business of the firm to the greatest common advantage of the firm.
(ib) To be just and faithful to each other.
(c) To render true accounts and full information.
(2) To act within authority: A partner is bound to act within the scope of his actual or apparent authority. When
he exceeds his authority and other partners do not ratify his unauthorized act, he will be liable to compensate the
firm and to other partners for any loss.
(3) Duty to indemnify for loss caused by fraud [Section 10]: Every partner shall indemnify the firm for loss
caused to it by his fraud in the conduct of the business of the firm.
(4) Not to carry on any other business [Section 11]: When there is a restraint in the contract, the partners shall
not carry on any other business while he continues to be a partner.
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(5) Act diligently [Section 12]: Every partner is bound to attend diligently to his duties in the conduct of the
business.
(6) Not to claim remuneration [Section 13]: A partner is not entitled to receive remuneration for taking part in
the conduct of the firm's losses.
(7) Contribution for losses [Section 13]: Unless otherwise agreed to between the partners, every partner is
bound to contribute equally for the firm's losses.
(8) Indemnify for loss due to wilful neglect [Section 13]: A partner shall indemnify the firm for any loss caused
to it by his wilful neglect in the conduct of the business of the firm.
(9) Not to make personal profits [Section 16]: A partner should not make personal profits from any transaction
of the firm, using of firm's property, business connection, using of firm's name, etc.
Example: Ravi and Karan were partners in a business as suppliers of computers and were regular contractors to
Government. Karan, without knowledge of Ravi, supplied to Government certain computers and made huge profits.
Ravi is entitled to claim profit from Karan.
(10) Not to carry on competing business [Section 16]: A partner shall not carry on business which is of the same
nature as and competing with that of the firm, he shall account for the same and pay all such profits to the firm.
Example: A & B were partners in a firm dealing in purchase and sale of computers. B started making of computer
software business individually. Making of computer software is different activity and not similar to purchase and
sale of computers. Hence, sharing of profits by B from making of computer software with A is not covered u/s 16.
(11) Not to assign right [Section 29]: A partner shall not assign his rights or interest in the firm to an outsider
without the consent of other partners. If he does so, the partnership may be dissolved.
Question 19] A and B entered into an agreement to carry on a business of manufacturing and selling toys. Each
one of them contributed ` 35 lakhs as their capital with a condition that A and B will share the profits equally, but
the loss, if any is to be borne by A alone. Referring to the provisions of the Partnership Act, 1922 decide whether
there exists a partnership between A and B.
Ans.: As per Section 13 of the Partnership Act, 1932, subject to the contract between the partners, the partners are
entitled to share profits & losses equally. When all partners agree that a partner shall share only profits and not
losses then such partner is known as partner in profit only and such partnership is valid. Hence, there exists a
partnership between A and B.
Question 20] A and B, who work in partnership, deal in purchase and sale of cloth. B starts cloth manufacturing
business individually. A files a suit against B for sharing of profit of cloth manufacturing business with him. Will
he succeed? Give reasons. CS (Foundation) - Dec 1996 (5 Marks)
Ans.: As per Section 16 of the Partnership Act, 1932, a partner shall not carry on business which is of the same
nature as and competing with that of the firm, he shall account for the same and pay all such profits to the firm.
In given case, B has started cloth manufacturing business individually. Cloth manufacturing is different activity and
not similar to purchase and sale of cloth. Hence, sharing of profits by B from manufacturing of clothes with A is not
covered u/s 16. Hence, A will not succeed.
Question 21] What are the rights of a partner under the Partnership Act, 1932` 1 2 3 4 5
Ans.: Various rights of partner are as follows:
(1) Right to take part in business [Section 12]: A partner has right to take part in the conduct and management
of the business of firm.
(2) Right to be consulted [Section 12]: A partner has right to be consulted by other partner affecting the firm's
business and to put his views before any decision is taken. All matters shall be decided by majority.
(3) Right of access to books of account [Section 12]: Every partner has right to have access, inspect and copy
any books of account of the firm.
(4) Right to share profits: Unless otherwise agreed partners share the profits and losses of the Firm equally.
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(5) Right to interest on capital [Section 13]: No interest is generally allowed on capital contributed by partners.
If the partnership agreement provides for the payment of interest on capital, it shall be payable only out of profits.
When there are losses, interest on capital will not be allowed. If profit is insufficient, the interest on capital will be
allowed to the extent of profit.
Example: R & S are partners with the capital of ` 37,500 and ` 22,500 respectively, sharing profit and losses in the
ratio of 4:1. As per Partnership Deed interest payable on capital is 10% p.a. Find the interest on capital for both the
partners when the profits earned by the firm is ` 3,600.
Ans.: Interest on capital as per partnership deed:
R = 37,500 x 10% = 3,750 S = 22,500 x 10% = 2,250 Total interest = 3,750 + 2,250 = 6,000 However, profit is available
is only 3,600.
Thus, interest of 6,000 will be restricted to 3,600. [R = 2,250 & S = 1,350] (Divided in capital ratio & not in profit
sharing ratio)
(6) Right to interest on advances [Section 13]: Where a partner has advanced any amount to the firm over and
above his capital, he will be will be entitled to interest at a rate agreed upon, and if no rate is agreed, at 6% p.a.
(7) Right to be indemnified [Section 13]: A partner has right to be indemnified for lawful acts done in ordinary
course of business and in case of an emergency, as man of ordinary prudence for the purpose of protecting the firm
from loss.
(8) Right to use property of the firm [Section 15]: Every partner has right to hold and apply the property of the
firm exclusively for the purpose of the business of firm.
(9) Right as agent of firm [Section 18]: Every partner is an agent of the firm for the purpose of the firm's
business.
(10) Right to bind the firm [Section 19]: Act of a partner which is done in ordinary course of business binds the
firm.
(11) Right in emergency [Section 21]: A partner in an emergency, to do all such acts as are necessary to protect
the firm from loss, as would be done by a man of ordinary prudence.
(12) Right to object admission of new partner [Sections 30 & 31]: Consent of all partners is required to admit
any person as partner, and to admit a minor into the benefits of partnership.
(13) Right to retire: Partner has a right to retire with the consent of all the other partners, or in accordance with
an express agreement between the partners, or in case of partnership at will, by giving notice in writing to all the
other partners.
(14) Right not to be expelled: Separately discussed.
(15) Right of outgoing partner to carry on a competing business: An outgoing partner has a right to carry on a
competing business. However, if he is restrained from carrying on competing business for a specified period and
within specified local limits, he cannot carry on a competing business.
If outgoing partner carries on competing business, he shall not use the firm name; or solicit the firm's customers; or
to represent himself in any way as carrying on the business of the firm.
(16) Right of outgoing partner to share subsequent profits: If after cessation of partner, firm carries on the
business with the firm's property without final settlement of accounts of outgoing partner, then:
(a) Outgoing partner is entitled to such share of profits made since his cessation, in proportion to use of his
share of the firm's property or
(b) He can claim interest at 6% p.a. on his share in the firm's property.
Question 22] What are the liabilities of a partner?
Ans.: Liabilities of partners are as follows:
(1) For failure of general duties: A partner shall be liable when he fails in his general duty i.e., he —
♦ Does not carry on the business to the greatest common advantage of the firm.
♦ Is not just and faithful to other partners.
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♦ Fails to render true accounts and full information.
(2) To indemnify for loss caused by fraud [Section 10]: Every partner shall be liable to indemnify the firm for
any loss caused to it by his fraud in the conduct of the business of the firm.
(3) To contribute to losses equally [Section 13]: In the absence of contract to the contrary, every partner is
liable to contribute equally to the losses of the firm's business.
(4) To indemnify for wilful neglect [Section 26]: Where, by the wrongful act or omission of a partner acting in
the ordinary course of the business of a firm, loss or injury is caused to any third party,
the firm is liable for such loss or injury. A partner is liable to indemnify the firm for any loss caused to it by his wilful
neglect in the conduct of the firm's business.
(5) To surrender personal profits [Section 16]: A partner is liable to account for and pay to the firm, profits
which he derives for himself from any transaction of the firm, or use of firm's property or business connection, use
of firm's name, etc.
(6) To account for profits from competing business [Section 16]: Where a partner carries on any business which
is of similar nature to that of the firm or competing to the firm, he shall account for the same and pay all such profits
to the firm.
(7) Joint & several liabilities [Section 25]: Every partner is liable, jointly with all the other partners and also
severally for all acts of the firm done when he was a partner.
(8) Liability towards third parties: All partners are liable to third parties for acts of the firm. In this respect, there
is no difference between active partners and dormant/nominal partners, all are equally liable.
(9) Rights and liabilities after change in firm [Section 17]: Rights, duties and liabilities of partners of a firm,
unless otherwise agreed upon, shall remain the same as they were in the beginning, even after -
♦ Change in the constitution of firm or
♦ On the expiry of the term of firm or
♦ Even when the firm has taken up additional ventures after the completion of the work for which the firm
was constituted.
Question 23] A, B and C enter into a partnership agreement under which C is not liable for the losses. D filed a
suit against A, B and C. Examine the position of C.
Ans.: When all partners agree that a partner shall share only profits and not losses then such partner is known as
partner in profit only.
As per Section 25 of the Partnership Act, 1932, every partner is liable, jointly with all the other partners and also
severally for all acts of the firm done when he was a partner. Even though C shares profit and not loss, but he is
liable for all the debts of the firm jointly and severally with other partners. Therefore, C is liable to D, jointly with A
and B.
Question 24] Amar, Bimal and Chander are partners of a firm carrying on banking business. Dhruv, a customer of
the firm, deposits his ornaments with the firm for safe custody. Amar and Bimal sell these ornaments and
misappropriate the money. Chander, being a sleeping partner, does not know anything about this act of Amar
and Bimal. Now, Dhruv institutes a suit against the firm including all the partners. Chander intends to escape his
liability on the ground of being a sleeping partner. Will Chander succeed? Give reasons.CS (Foundation) - Dec
2006 (5 Marks)
Ans.: As per Section 25 of the Partnership Act, 1932, every partner is liable, jointly with all the other partners and
also severally for all acts of the firm done when he was a partner.
In the given case, Chander will not succeed to escape his liability on the grounds of being a sleeping partner. He will
be jointly and severally liable along with other partners for the acts of the firm.
Question 25] Ajit, Baljit and Charanjit are partners in a firm carrying on money lending business. Daljit, a
customer, deposits his jewellery with the firm for safe custody. Ajit and Baljit sell this jewellery and
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misappropriate the money. Charanjit, being a sleeping partner, has no knowledge about this sale. Now, Daljit
files a suit against all the three partners. Can Charanjit be held liable? Give reasons.
Ans.: As per Section 25 of the Partnership Act, 1932, every partner is liable, jointly with all the other partners and
also severally for all acts of the firm done when he was a partner.
In the given case, Charanjit will not succeed to escape his liability on the grounds of being a sleeping partner. He will
be jointly and severally liable along with other partners for the acts of the firm.
AUTHORITY OF PARTNERS
Question 26] What is meant by authority of a partner? What are the limitations for implied authority of partner?
Ans.: Authority of partner means the capacity of a partner to bind the firm by his act. Authority of partner may be
express or implied:
Express Authority [Section 11]: Where authority of a partner is conferred by mutual agreement, it is called as
express authority.
Implied Authority [Section 19]: Where authority of a partner is not conferred by mutual agreement, but acts of
partner which are excised in ordinary course of business and which bind the firm is known as implied authority of
partner.
Implied authority of partner is subject to following conditions.
(1) Act must relate to normal business: Act done by partners must relate to normal business of the firm. If the
act is of a nature that which is not common to business carried on by firm, it will not bind the firm even if it has been
done in the firm's name.
Example: A partner of a firm dealing in computers gives an order for wine worth ` 10,000 in firm's name. It does not
relate to normal business of the firm. The firm will not be bound by it as act is not within implied authority of a
partner.
(2) Act must be in usual way of carrying on business: Act must be done in the usual way of carrying on the firm's
business. What is usual and what is unusual in a business depends on nature of business and usage of trade.
Example: Buying and selling of goods, drawing and accepting bills of exchange, taking loan, etc, are normal activities
for a trading concern. But, for a firm of solicitors, activities like taking loan, drawing and accepting bill of exchange
are not considered to be a usual activity.
(3) Act must be in the firm's name: The act done must be in firm's name or should, in some manner, expressing
or implying an intention to bind the firm.
Example: X and Y are partners as a retail trader in food grain business. X buys rice on credit from a wholesaler in
firm's name and gives to his wife. This act of the partner will bind the firm because taking goods on credit is normal
activity in any trading business. The firm will be liable to pay for the rice, even though X had misappropriated it for
his personal use.
Question 27] What is meant by implied authority of a partner? State the acts for which a partner has implied
authority to bind the firm. CS (Foundation) - Dec 1995 (10 Marks), Dec 2001 (8 Marks)
Ans.: Following acts of partner are considered within implied authority of partner. [Section 19 (1)]
(1) Purchase goods dealt or used by the firm on behalf of the firm.
(2) Sale of the goods of the firm.
(3) Receiving payments of debts due to the firm and issuing receipt for it.
(4) Settlement of accounts with third parties.
(5) Appointment of employees.
(6) Borrowing money.
(7) Pledging goods of the firm as security.
(8) Drawing, accepting & endorsing negotiable instruments.
(9) Hiring solicitor.
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No implied authority [Section 19(2)]: In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to:
(1) Submit a dispute to arbitration relating to the business of the firm.
(2) Open a banking account in his own name on behalf of the firm.
(3) Compromise or relinquish any claim or portion of a claim by the firm.
(4) Withdraw a suit or proceeding filed on behalf of the firm.
(5) Admit any liability in a suit or proceeding against the firm.
(6) Acquire immovable property on behalf of the firm.
(7) Transfer immovable property belonging to the firm.
(8) Enter into partnership on behalf of the firm.
Restriction or extension of partners implied authority [Section 20]: The partners, by mutual agreement, can restrict
or extend the implied authority of any partner. If any act done by a partner on behalf of the firm which falls within
his implied authority, binds the firm, unless the person with whom he is dealing knows of the restriction or does not
know or believe that partner to be partner. So, a third party is not affected by limitation of implied authority unless
he has actual notice of it.
Question 28] A & R are carrying on business in partnership. In partnership deed, it is provided that none of the
partners should borrow money except with the consent of both. A borrowed a sum of ` 1,00,000 from S for
business of the firm without consent of R. Is the firm liable? Give reasons for your answer.
Ans.: Where authority of a partner is not conferred by mutual agreement, but acts of partner which are exercised
in ordinary course of business and which bind the firm is known as implied authority of partner.
A borrowed money for business purposes. In a trading firm, power to borrow money falls within the usual course
of business and hence within the implied authority of a partner. Hence, the firm shall be held liable to S.
Question 29] A & B are Practicing Company Secretaries and are working in partnership. A places order with for
supply of ten bags of wheat on credit. The order is placed in the name of the firm. A signs it as one of the partner.
Is the firm liable to pay the price of wheat? Give reasons.
Ans.: Where authority of a partner is not conferred by mutual agreement, but acts of partner which are exercised
in ordinary course of business and which bind the firm is known as implied authority of partner.
As per facts given in case, the firm provides professional service of Company Secretary. In case firm is providing
professional service then there is no implied authority to purchase goods on behalf of firm. The firm is not liable to
pay for the wheat. A will be personally held liable for his act.
PROPERTY OF FIRM
Question 30] Write a short note on: Property of a partnership firm What constitute partnership property or
property of the firm?
Ans.: The partners, by an agreement, are free to determine as to what shall be the property of the firm and what
shall be treated as a separate property of one or more of the partners.
When there is no such agreement, and to ascertain whether a certain property belongs to the firm or not, the
following shall be considered.
♦ Source from which the property had been acquired.
♦ Purpose for which the property was acquired.
♦ Mode in which the property was obtained.
♦ Manner in which such property has been dealt.
Property of firm [Section 14]: Subject to contract between the partners, the property of the firm includes all
property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase
or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the
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goodwill of the business. Unless the contrary intention appears, property and rights and interest in property
acquired with money belonging to the firm are deemed to have been acquired for the firm.
Application of firm's property [Section 15]: Subject to the contract between the partners, the property of the firm
shall be held and used by the partners exclusively for the purposes of the business.
Partner's property: When a partner's property is used for firm's business, it does not automatically become the
firm's property. But, where the partner's have an intention to make it as firm's property, it can be made so.
Question 31] A, B & C are partners. A, without the authority of B and C, purchases 100 shares of Reliance
Industries Ltd., out of firm's money in his own name. To whom property in shares belongs? Give reasons.
Ans.: As per Section 14 of the Partnership Act, 1932, unless the contrary intention appears, property and rights and
interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
The shares are acquired out of money of partnership firm; hence it is property of firm even though they stand in the
name of A.
Question 32] Write a note on: Goodwill in a partnership business.
Ans.: Goodwill is the value of reputation of business. It is profit expected in future above the normal level of profits.
Goodwill is an intangible asset. Goodwill is generally valued at the time of admission or retirement. Property of
partnership includes goodwill of the firm. [Section 14]
Return of premium on premature dissolution [Section 51]: Where a partner has paid premium on entering into
partnership for a fixed term, and it is dissolved before the expiry of such term (otherwise than by death), he shall
be entitled to repayment of the premium or part thereof.
In determining the part of premium, regard shall be had to —
(a) The terms upon which he became a partner;
(b) The length of time during which he was a partner.
Right to carry on business when goodwill is sold [Section 55]:
(a) When the firm's goodwill is sold upon dissolution, a partner may carry on competing business with that of
the buyer of goodwill.
(b) However, in view of an agreement with the buyer of goodwill, the partner may not -
♦ Use the firm's name
♦ Represent as carrying on of the firm's business
♦ Solicit the firm's customers.
MINOR AS PARTNER
Question 33] Describe the provisions of the Partnership Act, 1932 regarding the admission of minor in the
partnership firm. State the rights and liabilities of such minor before and after he attains majority.
Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a minor in the
partnership firm.
What are the rights and liabilities of a minor as a partner in a partnership firm?
Explain the position of a minor in a partnership firm. CS (Foundation) - June 2007 (5 Marks)
Ans.: As per Section 11 of the Contract Act, 1872, an agreement with or by a minor is void and in-operative ab initio.
Minor cannot be promisor. However, all agreements with minor are not void; if agreement is for the benefit of
minor then it is valid and enforceable.
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Minors admitted to the benefits of partnership [Section 30]: If all the partners agree, a minor may be admitted to
the benefits of an already existing firm. There must be at least two major partners before a minor is admitted into
the benefits of partnership.
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Share of profits & property: Such minor has a right to such share of the property and of the profits of the firm as
may be agreed upon.
Inspection & copying of accounts: Minor has a right to access and inspect and copy any of the accounts of the firm.
Liability of minor: Minor's share is liable for the acts of the firm but the minor is not personally liable for any such
act.
Filing of suit: Minor has right to file a suit for his share of profits of the firm's property when he is not given his due
share. This right can be exercised only when he decides to sever his connections with firm.
Election by minor: At any time within 6 months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he
has elected to become or that he has elected not to become a partner in the firm.
If he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.
Exercise of option by minor on attaining majority:
(1) If minor elects to become a partner: When the minor elects to become a partner of his own volition or by
his failure to give public notice within the specified time -
(a) He becomes personally liable to third parties for all acts of the firm done since he was admitted to the
benefits of the firm.
(b) His share in the property and profits of the firm remains the same as he was entitled as a minor.
(2) If minor elects not to become a partner: If minor elects not to become partner:
(i) His right and liabilities continue to be those of a minor up to the date of giving public notice. (ii) His share is not
liable for any acts of the firm done after the date of the public notice.
(iii) He is entitled to sue the partners for his share of the property and profits in the firm.
Question 34] X and Y are partners of firm 'Batliwala & Co.'. Z, a minor son of Y is admitted into benefit of
partnership. Soon after admission of Z, Y dies and the business of the firm is carried on. During this period X
speculates and loses heavily. The creditors of the firm demand losses from X & Z. The consultant of Z, advised
him that he is liable up to his capital investment in the firm. Offer your comments.
Ans.: If all the partners agree, a minor may be admitted to the benefits of an already existing firm. There must be
at least two major partners before a minor is admitted into the benefits of partnership.
Minor's share is liable for the acts of the firm but the minor is not personally liable for any such act.
When Y dies the partnership between X and Z comes to an end and there cannot be partnership between X and Z
as Z is minor. The losses arise after the end of partnership. As such Z incurs no liability for the losses after the death
of Y.
Question 35] A, B & C are partners. They admit D, a minor, to the benefit of partnership. Within the six months
of attaining majority, D gives a public notice that he has become a full-fledged partner. But all other partners
refuse to take him. Can D become a partner or not? Give reason.
Ans.: As per Section 30 of the Partnership Act, 1932, deals with the exercise of option by minor on attaining majority.
Section 30 provides that at any time within 6 months of his attaining majority, or of his obtaining knowledge that
he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice
that he has elected to become or that he has elected not to become a partner in the firm.
In given case, D has given public notice within 6 months of his attaining majority and his contention that he has
become a full-fledged partner is correct.
RECONSTITUTION
Question 36] Write short notes on: Reconstitution of partnership firm
Ans.: Partnership firm may be reconstituted by any of the following mode:
♦ Admission
♦ Retirement
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♦ Expulsion
♦ Insolvency
♦ Death
♦ Transfer of interest
Question 37] Write short notes on: Admission of partner
Explain the provision of Indian Partnership Act, 1932 relating to admission of partner.
Ans.: Introduction of a partner [Section 31]: No person shall be introduced as a partner into a firm without the
consent of all the existing partners. Following are the important points relating to admission of new partner:
(a) Such new partner is not liable for any act done by the firm before his admission.
(,b) Where he specifically agree to bear the past liabilities, he will be liable to other partners for such past liabilities?
(c) Third parties cannot hold him liable since there is no privity of contract between the new partner and
creditors.
(d) Any act of the old partners cannot be ratified by the new partner as he was not in existence as a principal at
the time when such acts were done.
(e) A minor opting to become a partner on attaining majority shall be liable for the acts of the firm done since
the date of his admission into the benefits of partnership.
Question 38] Write short notes on: Retirement of partner
What are the liabilities of retiring partner? CS (Foundation) - June 1995 (2 Marks)
Explain the legal provision relating to retirement of partner.
Ans.: Retirement of partner [Section 32]: A partner may retire:
(a) With the consent of all the other partners,
(ib) In accordance with an express agreement by the partners,
(c) Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
Liability of retiring partner: A retiring partner may be discharged from any liability to any third party for acts of the
firm done before his retirement by an agreement made by him with such third party and the partners of the
reconstituted firm. Such agreement may be implied by a course of dealing between such third party and the
reconstituted firm after he had knowledge of the retirement.
A retired partner along with other partners continues to be liable to third parties for acts done by any of them in
the firm name before retirement, until public notice is given of his retirement.
However, a retired partner is not liable to any third party who deals with the firm without knowing that he was a
party.
Public Notice: Public notice of retirement of partner can be given by:
♦ Retired partner or
♦ Any other partner.
Question 39] A, B & C are partners. C is a sleeping partner who has not been known by creditors to be partner of
A & B. C retires without giving the public notice of his retirement. Is C liable for subsequent debts incurred by A
and B?CS (Foundation) - June 2003 (5 Marks)
Ans.: A sleeping partner is one does not actively participate in the business. He is not required to give notice after
he ceases to be a partner.
As per Section 32 of the Partnership Act, 1932, a retiring partner may be discharged from any liability to any third
party for acts of the firm done before his retirement by an agreement made by him with such third party and the
partners of the reconstituted firm. However, a retired partner is not liable to any third party who deals with the firm
without knowing that he was a party.
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As per the facts given in case, C is a sleeping partner who has not been known by creditors to be partner of A & B.
Thus, considering above stated provisions, being a sleeping partner, C is not required to give public notice of his
retirement and he is not liable for the debts incurred by the firm after his retirement.
Question 40] Write short notes on: Expulsion of partner
Ans.: Expulsion of a partner [Section 33]: A partner can be expelled from the firm if the following conditions are
fulfilled:
(a) Decision of expulsion particular partner is taken by majority of the partners.
(b) The contract/partnership deed provides for such expulsion.
(c) Such right of expulsion is exercised in good faith and for the firm's benefit.
The test of good faith includes:
♦ That the expulsion must be in the interest of the partnership.
♦ That the partner to be expelled is served with a notice.
♦ That the partner has been given an opportunity of being heard.
When a partner is expelled without fulfilling above condition then expulsion is null and void.
Position of expelled partner: The provisions of Section 32 regarding liability of a retired partner to third parties and
giving of public notices apply to an expelled partner also, as if he was a retired partner.
Question 41] P, Q & R were three partners. P by his willful neglect has caused much loss to the firm. Q and R by a
resolution decided to expel P from the firm. By the same resolution, they admit S into partnership in place of P.
P objects to this arrangement. Decide.
Ans.: As per Section 33 of the Partnership Act, 1932, a partner can be expelled from the firm if the following
conditions are fulfilled:
If P has expelled after complying with above stated provisions and procedure, his expulsion is valid. After expulsion
P does not remain partner in the firm and hence he cannot object admission of S.
Question 42] Ram & Co., a firm consists of three partners A, B and C having one third share each in the firm.
According to A and B, the activities of C are not in the interest of the partnership and thus want to expel C from
the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act.
Ans.: As per Section 33 of the Partnership Act, 1932, a partner can be expelled from the firm if the following
conditions are fulfilled:
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Thus, in the given case A and B the majority partners can expel the partner only if the above conditions are satisfied
and procedure as stated above has been followed.
Further the invalid expulsion of a partner does not put an end to the partnership and it will be deemed to continue
as before.
Question 43] Write short notes on: Insolvency of partner
Ans.: Insolvency of partner [Section 34]: Where a partner in a firm is adjudicated an insolvent, he ceases to be a
partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.
Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an
insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any
act of the insolvent, done after the date on which the order of adjudication is made.
Question 44] Write short notes on: Death of partner
Ans.: Liability of estate of deceased partner [Section 35]: The firm is generally dissolved on the death of a partner.
When under a contract between the partners, the firm is not dissolved by the death of partner -
(a) Estate of deceased partner remains liable only for such acts as were done during the tenure of his partnership
and
(b) His estate is not liable for any act of the firm done after his death.
Public Notice: No public notice is required on the death of a partner.
Question 45] P, Q & R are partners in a firm. During the course of business, the firm ordered with LMN Ltd. textile
machinery. After the order was placed, but before delivery of machinery, P expired. Thereafter the remaining
partners became insolvent and the firm was unable to pay for the machine. Examining the provisions of the
Partnership Act, 1932, answer the following:
(i) Whether P's private estate will be liable for price of machinery purchased?
(ii) Against whom can the creditors obtain a decree for recovery of price?
Ans.: As per Section 35 of the Partnership Act, 1932, where the contract between partners does not provide for
dissolution of the partnership firm in the event of death of a partner, the estate of a deceased partner shall not be
liable for any act of the firm done after his death.
P is dead before machinery is delivered to the firm and hence P or his legal heir are not liable for price of the
machinery. Hence, only the remaining partners shall be held liable for the price of the machinery.
Question 46] Write short notes on: Right of outgoing partner to carry on competing business
Ans.: Rights of outgoing partner to carry on competing business [Section 36]: An outgoing partner may carry on a
business competing with that of the firm and he may advertise such business, but he may not:
(a) Use the firm-name,
(b) Represent himself as carrying on the business of the firm, or
(c) Solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
Agreement in restraint of trade: A partner may make an agreement with his partners that on ceasing to be a partner
he will not carry on any business similar to that of the firm within a specified period or within specified local limits
and such agreement shall be valid if the restrictions imposed are reasonable.
Question 47] Discuss the right of outgoing partner to share subsequent profits as provided in Section 37 of the
Partnership Act, 1932.
Ans.: Right of outgoing partner to share subsequent profits [Section 37]: Where any member of a firm has died or
otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with
the property of the firm without any final settlement of accounts as between them and the outgoing partner then,
the outgoing partner is entitled:
(A) To such share of the profits made since he ceased to be a partner as may be attributable to the use of his
share of the property of the firm or
(B) To interest at 6% p.a. on the amount of his share in the property of the firm.
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Ramu, Shamu & Raju were partners sharing profits and losses in the ratio of 3:2:2. On 1st October, 2019, Ramu died.
Profit earned by the firm for the period 1.1.2019 to 31.12.2019 was ` 46,600 out of which profit up to 1st October,
2019 was ` 35,700.
Capital accounts balance of partners on 1st October, 2019 was as follows:
Ramu = ` 87,414 Shamu = ` 55,276 Raju = ` 55,276
How much claim can be made by Ramu's Executors as per Section 37 of Partnership Act, 1932 for the period
1.10.2019 to 31.12.2019?
Hint: As per Section 37 of Partnership Act, 1932, in case of settlement of deceased partner's account on the date
other then the date of death, the executor of deceased partner has a choice to take Either -
(A) Profit earned on un-settled capital = Profit x Unsettled capital as on 1.10.2009/Total capital as on 1.10.2009
= 10,900 x 87,414/ 87,414 + 55,276 + 55,276
= 10,900 × 87,414 1,97,966
= ` 4,813
(B) Interest on capital @ 6% i.e. 87,414 x 6% x 3/12 = ` 1,311.
Option A is beneficial, therefore heirs of Ramu will opt for proportionate share of profit i.e. ` 4,813.
Question 48] State with reason whether continuing guarantee given to a firm is affected due to change in
constitution of the firm.
Ans.: Revocation of continuing guarantee by change in firm [Section 38]: A continuing guarantee given to a firm,
or to a third party in respect of the transactions of a firm, is in the absence of agreement to the contrary, revoked
as to future transactions from the date of any change in the constitution of the firm.
Question 49] Rohit becomes a surety to the firm "SH & Co." for Rahul's conduct as cashier to the firm.
Subsequently constitution of firm is changed and the name of the firm was changed to "NS & Co.". After this,
Rahul committed misappropriation of cash. Referring to the provisions of the Partnership Act, 1932, state
whether Rohit is liable for misappropriation of cash by Rahul.
Ans.: As per Section 38 of the Partnership Act, 1932, a continuing guarantee given to a firm, or to a third party in
respect of the transactions of a firm, is in the absence of agreement to the contrary, revoked as to future
transactions from the date of any change in the constitution of the firm. Thus, due to change in constitution
continuing guarantee given to firm comes to an end and hence Rohit is not liable for misappropriation of cash by
Rahul.
DISSOLUTION
Question 50] What is dissolution? Discuss the types of dissolution?
Ans.: When there is change/end in relation between partners it is known as dissolution.
(1) Dissolution of partnership: Any change in the relations of partners is called dissolution of partnership. This
may happen due to admission, retirement or death of partner.
Example: A, B and C are partners. On death of B, A and C continue the business of the firm. There is a reconstitution
on B's death with A and C as partners of new firm.
(2) Dissolution of firm [Section 39]: Dissolution of partnership between all the partners of a firm is called dissolution
of the firm. Business of firm is completely stopped, its assets are realized, liabilities are paid off and surplus remains
then it is distributed among partners according to their share.
Example: A and B contract that the firm shall be dissolved after completion of Project X. Upon completion, firm is
dissolved and there is no relationship between them.
Question 51] Distinguish between: Dissolution of partnership & dissolution of firm
Ans.: Following are the main points of distinction between dissolution of partnership & dissolution of firm:
Points Dissolution of Partnership Dissolution of Firm
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Meaning Any change in the relations of partners is called Dissolution of partnership between all the
dissolution of partnership. This may happen due partners of a firm is called dissolution of the firm.
to admission, retirement or death of partner.
Business Business of the firm continues as before. Business of the firm comes to an end.
Relation Relation of partners continues to exist but in a Relation of partners comes to an end.
changed form.
Account In case of dissolution of partnership 'Revaluation In case of dissolution of partnership 'Realization

Account' is opened. Account' is opened.
Close of Books of account are not closed. Books of account are closed.
books
Question 52] Explain the grounds on which a partnership firm may be dissolved by the Court.
Write a short note on: Dissolution of partnership firm CS (Foundation) - Dec 2001 (5 Marks)
Distinguish between dissolution of partnership & dissolution of firm. On what ground a partnership firm may be
dissolved by the order of Court. CS (Foundation) - Dec 1997 (10 Marks) 1 2
Ans: Modes of dissolution of partnership firm are as follows:
By order of the Court [Section 44] Other modes
Partner's insanity Incapacity of partner Partner quality Mutual agreement [Section 40]
of misconduct Breach of agreement Transfer of Compulsory dissolution [Section 41] Happening of
interest by a partner Heavy losses of firm Just and certain contingencies [Section 42] Notice of
equitable grounds. partnership at will [Section 43]
Dissolution by order of the Court [Section 44]: The Court may, at the suit of a partner, dissolve a firm on the
following grounds:
(1) Insanity: If a partner has become of unsound mind, the firm is dissolved. The Court may order dissolution
based on a petition made by any of the other partners or by the next friend of the insane partner.
(2) Permanent incapacity: A partner becomes permanently incapable of performing his duties as a partner.
Application to Court shall be made by the partner who is not incapacitated.
Example: If a partner was diagnosed for paralysis which on evidence was found to be curable, dissolution shall not
be granted.
(3) Misconduct: If a partner is found guilty of conduct which is likely to affect the carrying on of business of the
firm then application to Court shall be made by any partner who is not guilty of misconduct for dissolution of firm.
Example 1: Tina & Karina are partners. Tina has adulterous relations with Karina's husband. This is a sufficient
ground for the compulsory dissolution of the firm.
Example 2: Lokesh & Shalini were partner in a business. Shalini was travelling without ticket. This is sufficient ground
for compulsory dissolution of firm, as the conviction of Shalini was for dishonesty.
Sufficient grounds for dissolution:
♦ Gambling on a Stock Exchange
♦ Persistent refusal or neglect by a partner to attend to business
♦ Taking a way of partnership books by a partner.
(4) Persistent breach of agreement: The Court may dissolve a firm if:
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(a) Partner wilfully and persistently commits breach of partnership agreement as management.
(b) Partner conducts himself in such a way that it is not reasonably practicable for the other partners to carry on
business in partnership with him.
(5) Transfer of interest: The Court may order dissolution when a partner has in any way -
(a) Transferred the whole of his interest in a firm to a third party.
(b) Allowed his share to be charged on account of a decree passed by a court towards payment of liabilities of
that partnership.
(c) Allowed his share to be sold in the recovery of arrears of land revenue.
(6) Business working at loss: The firm has been continuously suffering losses and in future also the business
cannot be carried on except at a loss, then application to Court shall be made by any partner for dissolution of firm.
(7) Any other just & equitable grounds: If, on any other ground, it can be proved to the satisfaction of the Court
that it is just and equitable to dissolve the firm, the Court may order dissolution. Sufficient reasons include:
♦ Deadlock in management
♦ Disappearance of substratum of business
♦ Partners not on speaking terms Dissolution by other modes:
(1) Mutual agreement [Section 40]: Firm may be dissolved -
♦ With the consent of all the partners, or
♦ In accordance with the contract between them.
Contract for dissolution may be express or implied.
(2) Compulsory dissolution [Section 41]: Firm is automatically dissolved, if -
(a) All partners, or all but one partner, of firm are declared insolvent.
(b) Some event happens which makes it unlawful for business of the firm to be carried on or for the partners to
carry it on in partnership.
(3) Certain events happening [Section 42]: In the absence of contract to contrary, a firm is dissolved on:
(i) Expiry of fixed term, where the firm is constituted for a fixed term.
(ii) Completion of one or more adventures or undertaking, when the Firm is constituted for such adventures or
undertakings;
(iii) Death of a partner or
(iv) Adjudication of a partner as insolvent.
(4) By giving notice in case of partnership at will [Section 43]: In partnership at will, firm may be dissolved by any
partner giving notice in writing to all the other partners of his intention to dissolve the firm. Dissolution is effective
from the specific date mentioned in notice. If no date has been mentioned, firm is dissolved from the date when
the notice is communicated.
Question 53] Discuss the rights and liabilities of the partners upon dissolution of the firm.
Ans.: Liabilities on dissolution
(1) Liability for acts of partners done after dissolution [Section 45]: Until public notice is given of the
dissolution, the partners continue to be liable as such to third parties for any act done by any of them which would
have been the act of the firm if done before dissolution. Public notice may be given by any partner.
However, estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been
known to the person dealing with the firm to be a partner, retires from the firm, is not liable for acts done after the
date on which he ceases to be a partner.
(2) Application of property towards firm's and personal debts [Sections 46 & 49]: Firm's property shall be
applied first to pay firm's debts and if there is any surplus, then, the share of each partner shall be applied in the
payment of his separate debts or paid to him directly.
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Separate property of any partner shall be applied first in the payment of his separate debts and surplus, if any, in
the payment of the debts of the firm.
(3) Continuing authority of partners for purposes of winding-up [Section 47]: The authority to bind the firm,
other mutual rights and liabilities of partners continue, insofar as may be necessary to wind up the affairs of the
firm, and to complete the transaction that had begun but left unfinished at the time of dissolution. The firm is not
bound by the acts of a partner who is declared insolvent.
(4) Surrender personal profits earned after dissolution [Section 50]: Any profits from transactions undertaken
in firm name or by use of firm's property after the dissolution by death but before completion of winding up made
by surviving partner or representative of a deceased partner shall be surrendered to the firm.
(5) Return of premium on premature dissolution [Section 51]: Where a partner has paid premium on entering
into partnership for a fixed term, and it is dissolved before the expiry of such term, he shall be entitled to repayment
of the premium or part thereof.
(6) Duty not to carry on similar business for specified period of time [Section 54]: Partners may enter into an
agreement that some or all of them will not carry on business similar to that of the firm within a specified period;
or within specified local limits.
Rights on dissolution:
(1) Right of indemnity when partnership is rescinded for fraud or misrepresentation [Section 52]: A
contract creating partnership is rescinded on the fraud or misrepresentation of any parties thereto. The party
entitled to rescind, is entitled to have indemnified for loss.
(2) Right to restrain from use of firm name or property [Section 53]: After dissolution of a firm, any partner
may restrain any other partner from carrying on similar business in firm name or by using firm's property for own
benefit, until the affairs are fully wound up. However, where any partner has bought the firm's goodwill, he can use
the firm's name.
(3) Right to carry on business when goodwill is sold [Section 55]:
(a) When the firm's goodwill is sold upon dissolution, a partner may carry on competing business with that of
the buyer of goodwill.
(b) However, in view of an agreement with the buyer of goodwill, the partner may not -
♦ Use the firm's name
♦ Represent as carrying on of the firm's business
♦ Solicit the firm's customers.
(c) Agreement in restraint of trade: The partner shall not carry on competing business for such specified period
and within such specified local limits if there is any special agreement between the parties thereto.
Question 54] A, B, C, D & E are partners in a firm. They decided to dissolve the firm from 1st January, 2006 but
failed to give a public notice of its dissolution and continued the business of the firm even after that date. D died
on 5th January, 2006 and E was declared insolvent on 10th January, 2006. On 11th January, 2006, A borrowed in
the firm's name ` 20,000 from R who was ignorant of the dissolution. Discuss the liability of partners. CS
(Foundation) - June 2007 (5 Marks)
Ans.: As per Section 45 of the Partnership Act, 1932, until public notice is given of the dissolution, the partners
continue to be liable as such to third parties for any act done by any of them which would have been the act of the
firm if done before dissolution. Public notice may be given by any partner.
In the given case, A had borrowed money in the name of the firm but after the death of D and E had been declared
insolvent. Hence, as per Section 45, the rest of the partners i.e. A, B and C will be liable to pay the debt to R.
Question 55] Manjeet and Navneet are working under a trade partnership. They execute a deed declaring that
the partnership is dissolved from 10th of December. However, a public notice of dissolution is not given. They
continued the business. In January, Manjeet endorses a bill of exchange in the firm's name to Umesh who is not
aware of the dissolution. Is the firm liable on the bill? Give reasons. CS (Foundation) - Dec 2007 (5 Marks)
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Ans.: As per Section 45 of the Partnership Act, 1932, until public notice is given of the dissolution, the partners
continue to be liable as such to third parties for any act done by any of them which would have been the act of the
firm if done before dissolution. Public notice may be given by any partner. Hence, the firm would be liable in this
case.
Question 56] X, enters into partnership with Y. As per the terms of agreement they have decided to continue
partnership for 10 years. Accordingly X pays premium of ` 2,00,000 to Y who is aware of the fact that X is
inexperienced and incompetent. After the expiration of 1 year, Y complains that X's incompetency is injurious to
the business and calls upon to dissolve the partnership. X thereupon files a suit for the dissolution of the
partnership and for a return of a proportionate part of premium. Decide.
Ans.: As per Section 51 of the Partnership Act, 1932, where a partner has paid premium on entering into partnership
for a fixed term, and it is dissolved before the expiry of such term, he shall be entitled to repayment of the premium
or part thereof.
As per the facts given in case, partners have decided to continue partnership for 10 years and for this X had paid `
2,00,000 but partnership comes to end before the expiry of fixed term and thus X shall be entitled to repayment of
the proportionate premium of ` 1,80,000.
Question 57] Discuss the rules as to settlement of accounts between the partners upon dissolution.
Ans.: Sales of goodwill after dissolution [Section 55]: Goodwill, shall, subject to agreement between partners, be
included in the assets. It may be sold either separately or along with the assets of the firm.
Payment of losses [Section 48]: Losses, including deficiencies of capital, shall be paid
♦ First out of profits
♦ Next out of capital
♦ Finally, if necessary, by the partners individually in their profit sharing ratio.
Assets [Section 48]: Appreciation of firm's assets, including any sums contributed by partners to make up
deficiencies of capital, shall be applied in the following manner and order:
♦ Payment of the firm's debts to third parties
♦ Payment of each partner's advances to the firm other than capital
♦ Payment of each partner's capital
♦ Residue if any shall be divided among the partners in their profit sharing ratio.
Loss due to insolvency of a partner - Rule in Gamer v. Murray: Where a partner's capital account has a debit balance
and he is unable to bring in necessary cash to make up the deficiency, it is called loss arising out of partner's
insolvency. Such loss shall be made up by the solvent partners by:
♦ Bringing in cash equal to their respective shares of the loss on realization, to show that the partner bearing
the loss is solvent.
♦ Bearing the loss in the ratio of their last agreed capitals.
REGISTRATION OF FIRM
Question 58] Is registration of partnership firm mandatory? State the procedure for registration. Write a short
note on: Registered partnership. CS (Foundation) - Dec 1994 (5 Marks)
*1
Mode of effecting registration of a partnership firm.
Ans.: Registration of a firm is not mandatory under the Act. Certain privileges are available only to registered firms,
thus indirectly making it compulsory to register so as to enjoy those privileges. Registration does not create
partnership, but is only the evidence of existence of partnership. It is advantageous both to the firm and also
outsiders.
Provision & procedure for registration of partnership [Sections 58 & 59]:
(1) Time: Registration of partnership may be effected at any time during the continuance.
(2) Application form & fee: Application for registration has to be made in prescribed form along with prescribed
fee.
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(3) Signing & verification: Application for registration has to be signed by all the partners, or their agent specially
authorized in this behalf.
(4) Registration by Registrar: If Registrar is satisfied that all requirement relating to registration of firm has been
fulfilled, issues a certificate of registration.
(5) Effective date of registration: Registration is effective form the date, when Registrar makes entries in the
'Register of Firms' and not from the date of presentation of the statement to him.
Important Note:
(1) Names that are undesirable will not be permitted; like use of Crown, Emperor, Empress, Royal, King,
Queen, Empire, Imperial.
(2) Use of words that indicate sanction, patronage or approval of the Government shall not be allowed unless
specially consented to in writing by the Government.
Question 59] What are the effects of non-registration of a partnership firm?
Write a short note on: Consequence of non-registration of a partnership firm
"Registration of partnership firm is not compulsory, yet it is desirable." Comment.
Ans.: Effects of non-registration [Section 69]: Registration of firms is not compulsory, but an unregistered firm
suffers from the following disabilities as mentioned:
(1) Suit between partners and firm: A partner of an unregistered firm cannot sue the firm or any other partner
of the firm to enforce a right arising from a contract, or conferred by the Partnership Act.
(2) Suit between firm and third party: An unregistered firm cannot file a suit against a third party to enforce
any right arising from a contract. However, third party can file suit against unregistered firm.
(3) Claim of set-off: An unregistered firm or a partner thereof cannot claim a set-off or other proceeding to
enforce a right arising from a contract above ` 100.
Non-registration not to affect the following [Section 69]:
(1) Even if firm is unregistered partners can sue for -
♦ Dissolution of the firm or
♦ Settlement of accounts of a dissolved firm or
♦ Realizing the property of a dissolved firm.
(2) Right of the firm to institute a suit or claim of set-off not exceeding ` 100.
(3) An unregistered firm can bring a suit against third parties to enforce a right arising otherwise than out of a
contract, e.g., for enforcing a trademark.
Question 60] A, B and C are partners of an unregistered firm. D owes this firm. ` 1,000 on a contract. The firm files
a suit against D. The suit is dismissed for non-registration of firm. The firm is registered later on. Can the firm now
successfully bring the suit against D?
Ans.: As per Section 69 of the Partnership Act, 1932, registration of firms is not compulsory, but an unregistered
firm suffers from certain disabilities. This Section requires that the firm must be registered at the time of instituting
the suit. Since, in the given case, a fresh suit is filed and at this time the firm is a registered firm, the firm will be
entitled to institute a valid suit.
Question 61] A infringes the trade mark of an unregistered partnership firm. The firm files a suit against A. Will it
succeed? Give reasons. CS (Foundation) - June 1995 (3 Marks)
Ans.: An unregistered firm can bring a suit against third parties to enforce a right arising otherwise than out of a
contract. Hence, firm can bring a suit for infringement of trade mark.
444
Question 62] A, B & C, who are partners of an unregistered firm, sell washing machine to D for ` 10,000 on credit
basis. After some time, the firm purchases form D a photocopying machine for ` 40,000 on credit basis. On failure
to pay the price, D files a suit against the firm, but the firm insists that the amount of ` 10,000 should be adjusted
against the claim in question. Will the firm succeed? Give reasons.
firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third
party to enforce any right arising from a contract. However, third party can file suit against unregistered firm.
Further an unregistered firm cannot claim a set-off or other proceeding to enforce a right arising from a contract
above ` 100. Hence, firm will not succeed in claiming set-off as amount is exceeding ` 100.
Question 63] Aman and Barun are partners carrying on the business of shoe making. Their firm is not registered.
The firm purchases raw material worth ` 20,000 on credit from Chetan. But the firm refuses to pay the price of
raw material on the plea of its non-registration. Chetan institutes a suit against the firm to claim the amount due.
Will Chetan succeed? Give reasons.
firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third party to enforce any right
arising from a contract. However, third party can file suit against unregistered firm.
Non-registration of a firm does not affect right of third party to file a suit to claim the amount due. The firm cannot
take the plea of its non-registration. Hence, Chetan will succeed.
Question 64] Aman, Bhuvan and Chaman are partners in a partnership firm. Their firm is unregistered. After
sometime, Aman and Bhuvan decide to get their firm registered. They request Chaman also to put his signature
on the registration papers. Chaman refuses to do so. Now Aman and Bhuvan file a suit against Chaman for
compelling him to join in the registration of firm. Will they succeed? Give reasons.CS (Foundation) - June 2009 (5
Marks)
firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third party to enforce any right
arising from a contract. However, third party can file suit against unregistered firm. Hence, Aman and Bhuvan will
not succeed in their suit against Chaman for compelling him to join in the registration of firm. The only remedy of
such partners is to institute a suit for dissolution. [Keshav Lai v. Chuni Lai, AIR 1941 Rangoon 196]
MISCELLANEOUS
Question 65] Can a firm file a suit for libel or slander?
Ans.: Suit for libel or slander: A firm is merely a collection of partners and cannot bring a suit for libel or slander.
Libel or slander against a firm implies a libel or slander of its partners. Such partners or any one may file the suit for
libel or slander. [P.K. Oswal Hosiery Mills v. Tilak Chand, AIR 1969, Punj. 150]
Defamation is an attack on the reputation of a person. It means that something is said or done by a person which
affects the reputation of another.
Defamation may be classified into following two heads:
(1) Libel: It is a representation made in some permanent from, e.g. written words, pictures, caricatures,
cinema films, effigy, statue and recorded words.
(2) Slander: It is the publication of a defamatory statement in a transient form, statement of temporary nature
such as spoken words or gestures.
Defamation is tort as well as a crime in India.
Question 66] When unanimous consent of the partners is required under the provisions of the Partnership Act,
1932?
Ans.: Matters requiring unanimous consent of the partners are as follows:
(1) Making a change in the nature of the business
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(2) For admission of a new partner
(3) Transfer by a partner of his interest in the firm
(4) Admission of a minor into the benefits of the firm
Question 67] What is illegal partnership or associations?
Ans.: In order to prevent the mischief arising from large trading undertakings being carried on by large fluctuating
bodies so that persons dealing with them did not know with whom they were contracting, the law has put a ceiling
on the number of persons constituting an association or partnership. An unincorporated company, association or
partnership consisting of large number of persons has been declared illegal.
Prohibition of association or partnership of persons exceeding certain number [Section 464 of the Companies Act,
2013]: No association or partnership consisting of more than prescribed persons shall be formed for the purpose of
carrying on any business, unless it is registered as a company or is formed under any other law for the time being
in force. The number of persons which may be prescribed under this section shall not exceed 100.
Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.
Question 68] What are the salient features of the Limited Liability Partnership (LLP)?
Ans.: The salient features of the Limited Liability Partnership (LLP) are as follows:
♦ The LLP is a body corporate and a legal entity separate from its partners.
♦ Any 2 or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing
their names to an incorporation document and filing the same with the ROC, form a LLP.
♦ The LLP has a perpetual succession.
♦ The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be
governed by an agreement between partners or between the LLP.
♦ A LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being
limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both tangible and
intangible in nature.
♦ No partner would be liable on account of the independent or un-authorized acts of other partners or their
misconduct.
♦ Every LLP shall have at least 2 partners and shall also have at least 2 individuals as Designated Partners, of
whom at least one shall be resident in India.
♦ A LLP shall maintain annual accounts reflecting true and fair view of its state of affairs.
♦ A statement of accounts and solvency shall be filed by every LLP with the ROC every year.
♦ The accounts of LLPs shall also be audited.
♦ The Central Government has power to investigate the affairs of an LLP by appointment of competent
inspector for the purpose.
♦ The Indian Partnership Act, 1932 shall not be applicable to LLPs.
♦ A partnership firm, a private company and an unlisted public company may convert themselves to LLP in
accordance with provisions of the proposed legislation.
♦ The Central Government has made rules for carrying out the provisions of the LLP Act.
Question 69] Distinguish between: Limited Liability Partnership (LLP) and Partnership
Ans.: Following are the main points of distinction between LLP and Partnership:
Points Limited Liability Partnership Partnership
Meaning Limited liability partnership means a Partnership is the relation between persons
partnership formed and registered under who have agreed to share the profits of a
Limited Liability Partnership Act, 2008.
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business carried on by all or any of them
acting for all.
Separate legal LLP is a separate legal entity and therefore, A partnership firm is not distinct from the
entity can be sued or it can sue others without several persons who compose it.
involving the partners.
Liability of The partners of a LLP would have limited Partners of a firm would have unlimited
partners liability i.e. they would not be liable beyond liability.
the money contributed by them.
Effect of The retirement or death of a partner would The death or retirement of a partner would
retirement or not dissolve the LLP. dissolve the partnership firm.
death
Property In a LLP, property of the LLP belongs to the LLP In a partnership, the property of the firm is
and not to the individuals comprising it. the property of the individuals comprising it.
Formation LLP is formed by an incorporation document A partnership can be formed either orally or
and an LLP agreement, thus, giving it legality. by a deed of agreement whether registered or
not
Maximum There shall not be any upper limit on number As per Section 464 of the Companies Act, 2013
partners of partners in an LLP maximum number of partners are 100.
However, Rule 10 of Companies
(Miscellaneous) Rules, 2014 prescribes 50
persons in this regard.
Perpetual A LLP has perpetual succession, i.e. the death The death or insolvency of a partner dissolves
succession or insolvency of a shareholder or all of them the firm, unless otherwise provided.
does not affect the life of the LLP,
Business with A partner of LLP in his separate capacity as a Whereas an individual partner would not be
partners legal person can do business with the LLP able to conduct business transaction with the
since the LLP is a separate legal entity by partnership firm of which he is a partner.
itself.
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23
CHAPTER
NEGOTIABLE INSTRUMENTS ACT. 1881
Introduction: The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is
an Act to define and amend the law relating to promissory notes, bills of exchange and Cheques. The Act does not
affect the custom or local usage relating to an instrument in oriental language i.e. Hundi.
INTRODUCTION & DEFINITIONS
Question 1] What do you understand by the term 'negotiable instrument'?
State the essential characteristics of the negotiable instruments.
Ans.: Negotiable instrument [Section 13]: A negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer.
Important characteristics of negotiable instruments:
♦ The holder of the instrument is presumed to be the owner of the property contained in it.
♦ They are freely transferable.
♦ A holder in due course gets the instrument free from all defects of title of any previous holder.
♦ The holder in due course is entitled to sue on the instrument in his own name.
♦ The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 6
months from the date of issue).
♦ Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved.
Question 2] Write a short note on: Promissory Note
Ans.: Promissory Note [Section 4]: A promissory note is an instrument in writing (not being a bank-note or a
currency-note) 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.
Illustrations: X signs instruments in the following terms:
(a) I promise to pay B or order ` 500.
(,b) I acknowledge myself to be indebted to B in ` 1,000, to be paid on demand, for value received.
(c) Mr. B, I O U ` 1,000.
(d) I promise to pay B ` 500 and all other sums which shall be due to him.
(e) I promise to pay B ` 500, first deducting any money which he may owe me.
(f) I promise to pay B ` 500 seven days after my marriage with C.
(g) I, promise to pay B ` 500 on D's death, provided D leaves me enough to pay that sum.
(h) I promise to pay B ` 500 and to deliver to him my black horse on 1st January next.
The instruments respectively marked (a) and (b) are promissory notes.
The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.
Specimen of a promissory note:
` 10,000 New Delhi
September 25,2019
On demand, I promise to pay Ramesh, s/o Ramlal of Meerut or order a sum of ` 10,000 (Rupees ten thousand
only), for value received.
To, Ramesh Sd/-
Sanjeev
Address ………. Stamp
448
Parties to a promissory note: There are two parties involved in a promissory note. They are:
(a) Maker: The person who makes the note and promises to pay the amount stated therein. In the above
specimen, Sanjeev is the maker or drawer.
(b) Payee: The person to whom the amount is payable. In the above specimen it is Ramesh.
Features of a promissory note:
(1) A promissory note must be in writing, duly signed by its maker and properly stamped as per Indian Stamp
Act.
(2) It must contain an unconditional undertaking or promise to pay. Mere acknowledgement of indebtedness is
not enough.
Example 1: If someone writes 'I owe ` 5,000 to Satya Prakash', it is not a promissory note.
Example 2: If it is written 'I promise to pay Suresh ` 5,000 after my sister's marriage', is not a promissory note.
(3) It must contain a promise to pay money only.
Example: If someone writes 'I promise to give Suresh a Maruti car' it is not a promissory note.
(4) The parties (i.e. maker & payee) to a promissory note must be certain.
(5) A promissory note may be payable on demand or after a certain date.
Example: If it is written 'three months after date, I promise to pay Satinder or order a sum of ` 5,000 only' it is a
promissory note.
(6) The sum payable mentioned must be certain or capable of being made certain.
Question 3] X promises by way of a promissory note to pay Y, his partner, a sum of ` 1,00,000 in the event of
latter's retirement from the partnership firm. Decide giving reasons for your answer whether the promissory note
is valid in this case. CS (Foundation) - Dec 2001 (4 Marks)
Ans.: As per Section 4 of the Negotiable Instruments Act, 1881, one of the essential conditions for a promissory
note is that, it must contain an unconditional undertaking or promise to pay. If it contains condition such promissory
note is not valid. Hence, promise by X to pay Y, his partner, a sum of ` 1,00,000 in the event of retirement from the
partnership firm is not a valid promissory note.
Question 4] State giving reason whether, the following instruments are valid promissory note under the
Negotiable Instruments Act, 1881:
(i) X promises to pay Y, by a promissory note, a sum of 5,000, fifteen days after the death of B.
(ii) X promises to pay Y, by a promissory note, a sum of 500 and all other sum, which shall be due.
CA (Inter) - Nov 2000 (4 Marks)
Ans.: As per Section 4 of the Negotiable Instrument Act, 1881, a promissory note is an instrument in writing (not
being a bank-note or a currency-note) 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.
In view of provisions of Section 4, answer to given problem is as follows:
(i) If "X promises to pay Y, by a promissory note, a sum of 5,000, fifteen days after the death of B" is a valid
promissory note as event is certain i.e. death of B, even though date is uncertain.
(ii) If "X promises to pay Y, by a promissory note, a sum of 500 and all other sum, which shall be due" is not a
valid promissory note as sum payable is not certain.
Question 5] State giving reason whether, the following instruments are valid promissory note under the
Negotiable Instruments Act, 1881:
(i) I owe you a sum of ` 1,000. 'A' tell to 'B'.
(ii) 'X' promises to 'Y' a sum of ` 10,000, six month after ‘Y marriage with 'Z'.
CA (PE-II) - Nov 2002 (4 Marks), May 2004 (6 Marks)
449
Ans.: As per Section 4 of the Negotiable Instrument Act, 1881, a promissory note is an instrument in writing (not
being a bank-note or a currency-note) 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.
In view of provisions of Section 4, answer to given problem is as follows:
(i) If A tell to B that he owes ` 1,000 to him, it is acknowledgement of debt and not a promissory note. Second
reason for not being a promissory note is that such acknowledgement is oral not in writing.
(ii) If 'X' promises to 'Y a sum of ` 10,000, six months after 'Y marriage with 'Z', it is not a valid promissory note
as it depends upon condition/ event which may or may not happen.
Question 6] Define a bill of exchange. CS (Foundation) - June 2001 (3 Marks)
Define a bill of exchange as per the Negotiable Instruments Act, 1881 and explain its salient features.
CA (Inter) - May 2002 (8 Marks)
Ans.: Bill of exchange [Section 5]: A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument.
Specimen of a bill of exchange:
` 10,000. New Delhi
November 14,2015
I, Ramesh, s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil Kumar of Ahmedabad, Gujarat or
order, on demand, the sum of ` 10,000 (Rupees Ten Thousand only) with interest at the rate of 10% p.a., for value
received.
Sd/-
Ramesh
To Stamp
Sashikant
Ahmedabad, Gujarat
Parties to a bill of exchange: There are three parties involved in a bill of exchange. They are:
(a) Drawer: The person who makes the order for making payment. In the above specimen, Ramesh is the
drawer.
(b) Drawee: The person to whom the order to pay is made. He is generally a debtor of the drawer. In the above
specimen, Sashikant is the drawee.
(c) Payee: The person to whom the payment is to be made.
Features of a bill of exchange
(1) A bill must be in writing, duly signed by its drawer, accepted by its drawee and properly stamped as per
Indian Stamp Act.
(2) It must contain an order to pay. Words like 'please pay ` 5,000 on demand and oblige' are not used.
(3) The order must be unconditional.
(4) The order must be to pay money and money alone.
(5) The sum payable mentioned must be certain or capable of being made certain.
(6) The parties to a bill must be certain.
Question 7] Distinguish between: Bill of exchange & promissory note.
CS (Foundation) - June 1994 (7.5 Marks), Dec 1995 (5 Marks)
Ans.: Following are the main points of distinction between bill of exchange & promissory note:
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Point Bill of exchange Promissory note
Meaning A bill of exchange as an instrument in writing Promissory note is an instrument in writing

containing an unconditional order, signed by (not being a bank note or a currency note)
the maker, directing a certain person to pay a containing an unconditional undertaking,
certain sum of money only to or to the order signed by the maker, to pay a certain sum of
of a certain person, or to the bearer of the money only to or to the order of a certain
instrument. person or to the bearer of the instrument.
Liability of the The liability of the maker/ drawer is The liability of the maker/drawer is primary
maker secondary & conditional upon non-payment and absolute.
by the drawee.
Order/Promise It contains an unconditional order. It contains an unconditional promise.
Who draws It is drawn by the creditor. It is made by the debtor.
Acceptance Acceptance by the drawee is a must. Acceptance is not required.
Payee Drawer of the bill may be payee also. The maker of the note cannot be payee.
Parties There are three parties: drawer, drawee & There are two parties - maker & payee.
payee.
Question 8] Define a 'Cheque' and state the essential features.

CA (Inter) - May 2001 (8 Marks), CA (PE-II) - Nov 2004 (4 Marks)
Ans.: Cheque [Section 6]: A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in the
electronic form.
Requirement of cheque:
♦ Cheque should be in writing.
♦ It must have express and clear order to pay.
♦ Order to pay should be unconditional.
♦ Signed by maker of instrument
♦ Payee should be certain.
♦ Cheque should be drawn on a specified banker.
♦ Amount payable should be certain.
♦ Order should be for payment in terms of money only. (i.e. in cash not in kind)
♦ It is always payable on demand and not after certain days.
♦ Cheque is not required to be stamped.
♦ Instrument may be made payable to certain person or his order, or to bearer
♦ Consideration is required, but it is presumed, unless proved otherwise.
Question 9] Distinguish between: Cheque & Bill of Exchange
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CA (Inter) - Nov 1998 (6 Marks), Nov 2001 (8 Marks)
CA (IPCC) - May 2011 (8 Marks), May 2012 (8 Marks)
Ans.: Following are the main points of distinction between cheque & bill of exchange:
Ans.: Following are the main points of distinction between cheque & bill of exchange:
Points Cheque Bill of Exchange
Meaning A 'cheque' is a bill of exchange drawn on a A bill of exchange is an instrument in writing

specified banker and not expressed to be containing an unconditional order, signed by
payable otherwise than on demand. the maker, directing a certain person to pay a
certain sum of money only to or to the order
of a certain per son, or to the bearer of the
instrument.
Drawn on It must be drawn on a specified banker. It may or may not be addressed to banker.
Payable to It can be made payable to bearer. It cannot be made payable to bearer on

bearer demand.
On demand It must be made payable on demand. It cannot be made payable 'on demand'.
Grace days There is no grace period. If it is not payable on demand, at sight or on

presentment; grace period of 3 days is
available.
Crossing Cheque can be crossed. It cannot be crossed.
Presentation Presentation of for acceptance is never Presentation for acceptance is required.

required.
Stamping It is not required to be stamped. It is required to be stamped.
Due date There is no due date for presentation of It is required to be presented for payment on
cheque. due date.
Points Cheque Bill of Exchange
Stop payment Bankers has to stop payment of cheque if There is no provision to stop payment if party
drawer is dead or insolvent and Bank has to instrument is dead or insolvent or becomes
notice of the same insolvent after signature.
Notice of Notice of dishonour is not required, unless Notice of dishonour is usually required.
dishonour holder intends to take criminal action u/s 138.
Noting & It cannot be noted and protested. It can be noted and protested.
protesting
Criminal Criminal liability gets attracted if cheque is There is no criminal liability for dishonour of
liability dishonoured. Bill of Exchange.
Question 10] Write short note on: Electronic Cheque
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Ans.: A cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque,
and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometrics signature) and asymmetric crypto system.
The provision of electronic cheque has been made to permit payment by electronic cheque instead of a physical
cheque. Presently, all cheques must be on paper, which have to be physically handled from payee's bank to drawer's
bank via clearing house. Electronic cheque will eliminate all this physical movement. The cheque can be
electronically presented to Drawer's Bank through 'electronic clearing house'. Thus, all work will be handled without
a trace of paper.
Question 11] What is a 'truncated cheque'?
Ans.: Truncated cheque means a cheque drawn in electronic form by using any computer resource and signed in a
secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with
electronic signature.
A truncated cheque means a cheque which is truncated during the clearing cycle, either by the clearing house during
the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the further physical movement of
the cheque in writing.
Presently, all cheques must be on paper, which have to be physically handled from payee's bank to clearing house
to drawer's bank. The idea is that the payee will deposit a paper cheque with his bank as per present practice. The
collecting bank, instead of sending physical cheque, will sent its electronic image for clearance. In order to ensure
that the cheque is not presented again, the physical cheque (i.e. paper cheque) will be truncated. Once a paper
cheque is 'truncated', its further movement can be only by electronic means and not by physical movement.
Question 12] Distinguish between: Electronic and Truncated Cheque.
Ans.: Following are the main points of distinction between electronic and truncated cheque:
Points Electronic Cheque Truncated Cheque
Form The electronic cheque is never in paper form. The truncated cheque is initially a regular cheque
on paper. It is submitted to bank as usual for
clearance.
Original The original writing itself is in electronic form. The truncated cheque is duly written and signed
writing on paper. It is subsequently converted into
electronic form.
Signature Original signature is digital signature. Original signature is in ink.
Question 13] Define the following terms as defined in the Negotiable Instruments Act, 1881:
(i) Drawer & Drawee (ii) Drawee in case of need (iii) Acceptor
(iv) Acceptor for honour (v) Payee
Ans.: Meaning of certain terms [Section 7]:
(i) Drawer & Drawee: The maker of a bill of exchange or cheque is called the "drawer"; the person thereby directed
to pay is called the "drawee".
(ii) Drawee in case of need: When in the Bill or in any endorsement thereon the name of any person is given in
addition to the drawee to be resorted to in case of need, such person is called a 'drawee in case of need'.
The Bill is drawn as an order to drawee to pay certain amount to payee. If drawee refuses to honour the Bill, another
person may be named in the Bill in case of need. Such person is known as 'drawee in case of need'. If drawee
dishonours or does not accept the bill, it should be presented to drawee in need.
453
(iii) Acceptor: After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than
one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person
on his behalf, he is called the "acceptor".
(iv) Acceptor for honour: When a bill of exchange has been noted or protested for non-acceptance or for better
security, and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such
person is called an "acceptor for honour".
(v) Payee: The person named in the instrument, to whom or to whose order the money is by the instrument directed
to be paid, is called the "Payee".
Question 14] What do you mean by an acceptance of a negotiable instrument? Examine validity of the following
in the light of the provisions of the Negotiable Instruments Act, 1881:
(i) An oral acceptance
(ii) An acceptance by mere signature without writing the word "accepted".
CA (Inter) - Nov 1998 (8 Marks), CA (PE-II) - May 2003 (6 Marks)
Ans.: The acceptance of a bill is indication by the drawee of his assent to the order of the drawer. Until drawee gives
his acceptance he is not liable for the bill.
Essentials of valid acceptance:
♦ Acceptance must be in writing and signed.
♦ The word 'accepted' may or may not be written, but signature is essential. [Manakchand v. Chartered Bank]
♦ Only drawee can accept the bill except in case of 'drawee in case of need' is mentioned on the instrument.
♦ An authorized agent can accept the bill on behalf of principle.
♦ If there are several drawees, any one of them can accept but he cannot bind others unless all drawees are
partners.
♦ Acceptance can be conditional or qualified, but holder is bound to accept qualified acceptance.
♦ If bill is drawn in sets, acceptance is required to be given in only one part.
Question 15] Explain the meaning of 'holder' & 'holder in due course' of a negotiable instruments.
Who is holder in due course? CA (PE-II) - Nov 2004 (4 Marks), Nov 2005 (6 Marks)
Write a short note on: Holder in due Course
Ans.: Holder [Section 8]: The holder of negotiable instrument means any person -
- entitled in his own name to the possession thereof and
- to receive or recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or
destruction.
If a bill is lost or stolen, the thief or person who found the instrument is not 'holder'.
Holder in due course [Section 9]: Holder in due course means any person -
- who for consideration became the possessor of a negotiable instrument, before the amount mentioned in it
became payable and
- without having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title, (i.e. he obtains instrument in good faith)
Question 16] Discuss with reasons, in the following given conditions, whether 'M' can be called as a "holder"
under the Negotiable Instruments Act, 1881:
454
(1) 'M' the payee of the cheque, who is prohibited by a Court order from receiving the amount of the cheque.
(2) 'M' the agent of 'Q' is entrusted with an instrument without endorsement by 'Q' who is the payee.
CA (IPCC) - Nov 2016 (4 Marks)
Ans.: As per Section 8 of the Negotiable Instruments Act, 1881, holder of negotiable instrument means any person
-
- entitled in his own name to the possession thereof and
- to receive or recover the amount due thereon from the parties thereto.
On applying the above provision in the given cases -
(1) 'M' is not a 'holder' because to be called as a 'holder' he must be entitled not only to the possession of the
instrument but also to receive the amount mentioned therein.
(2) No, 'M' is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet
he cannot be called the holder thereof because he has no right to sue on the instrument in his own name.
Question 17] Distinguish between: Holder & Holder in due course CA (Inter) - Nov 2000 (6 Marks)
Ans.: Following are the main points of distinction between 'holder' & 'holder in due course':
Points Holder Holder in due course
Meaning The holder of negotiable instrument means Holder in due course means any person -
any person - - who for consideration became the possessor
- entitled in his own name to the possession of a negotiable instrument, before the
thereof and amount mentioned in it became payable and
Points Holder Holder in due course
- to receive or recover the amount due - without having sufficient cause to believe
thereon from the parties thereto. that any defect existed in the title of the
person from whom he derived his title.
Position A 'holder' may or may not be a 'holder in due A 'holder in due course' is obviously holder.
course'.
Title Holder (who is not holder in due course) A holder in due course acquires a good title
cannot acquire a good title if the title of the even if title of prior party was defective.
prior party was defective.
Mode Mere holder need not necessarily be for A person can become a 'holder in due course'
consideration e.g. heir of deceased holder only after paying or transferring some
becoming entitled to the bill is 'holder' not consideration.
'holder in due course'. Similarly assignee of
bill is holder but not holder in due course.
Acquisition of Holder may acquire instrument even after Holder in due course must possess/acquire
instrument maturity, but in such case he will not be bill before maturity.
'holder in due course'.
Enforcement of A holder cannot enforce instrument which A holder in due course can enforce instrument
instrument was previously obtained by unlawful means even if it was previously obtained by unlawful
or unlawful consideration. means or unlawful consideration.
455
Fictitious bill Holder (who is not holder in due course) A 'holder in due course' can claim payment on
cannot claim payment on fictitious bill. fictitious bill.
Fraud & Instrument initially issued or obtained under A 'holder in due course' can enforce
coercion fraud, coercion without consideration cannot instrument initially issued or obtained under
be enforced by holder, is not 'holder in due fraud, coercion or without consideration.
course'.
Question 18] State the privileges of a "holder in due course" under the Negotiable Instruments Act, 1881.
CA (Inter) - Nov 2001 (7 Marks), CA (PE-II) - Nov 2004 (6 Marks)
CA (PCC) - Nov 2008 (5 Marks)
Ans.: A holder in due course has the following privileges:
(1) A person who had signed inchoate instrument is liable to holder in due course for full value as long as stamp
value is sufficient to cover the amount. [Section 20]
(2) Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument
is duly satisfied. [Section 36]
(3) If payee or drawer of the instrument is fictitious, the acceptor is liable to holder in due course, if the signature
of the drawer and endorser as appearing on instrument tallies, (same person draw and then endorse the
instrument) [Section 42]
(4) Parties to the instrument are liable to holder in due course even if it was an accommodation bill i.e. raised
without consideration. [Section 43]
(5) If bill was lost, the possessor is not entitled to get anything on Bill, but the holder in due course is still entitled
to get full amount of Bill.
(6) The holder in due course gets better title even if there was defect in title of the transferor. The title of holder
in due course is not affected by the any offence or fraud (but not forgery) by previous party as long as he is not party
to offence/fraud. [Section 58]
(7) In suit by holder in due course, maker of promissory note, drawer of bill of exchange or cheque cannot deny
validity if the instrument as originally drawn. [Section 120]
(8) In suit by holder in due course, maker of promissory note, drawer of bill of exchange or cheque cannot deny
payee's capacity to endorse the promissory note or Bill. [Section 121]
In brief, all defects in Bill or Promissory note are cleaned when it comes in the hands of 'holder in due course'. He
gets good a title even if transferor or any earlier party had defective title. He gets a good title even if there is
fraud/offence (but not forgery).
Question 19] On a Bill of Exchange for ` 1 lakh, X's acceptance to the Bill is forged. 'A' takes the Bill from his
customer for value and in good faith before the Bill becomes payable. State with reasons whether 'A' can be
considered as a 'Holder in due course' and whether he (A) can receive the amount of the Bill from 'X'.
Ans.: As per Section 9 of the Negotiable Instruments Act, 1881, 'holder in due course' means any person
- who for consideration became the possessor of a negotiable instrument, before the amount mentioned in it
became payable and
- without having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title, (i.e. he obtains instrument in good faith)
As 'A' in this case prima facie became a possessor of the bill for value and in good faith before the bill became
payable, he can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument
cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he
cannot retain the money. The true owner may sue on tort the person who had received.
456
A holder in due course is protected when there is defect in the title. But he derives no title when there is entire
absence of title as in the case of forgery. Hence 'A' cannot receive the amount on the bill.
Question 20] Mr. A is the payee of an order cheque. Mr. B steals the cheque and forges Mr. A signatures and
endorses the cheque in his own favour. Mr. B then further endorses the cheque to Mr. C, who takes the cheque
in good faith and for valuable consideration. Examine the validity of the cheque as per the provisions of the
Negotiable Instruments Act, 1881 and also state whether Mr. C can claim the privileges of a Holder-in-Due course?
Ans.: Forgery confers no title and a holder acquires no title to a forged instrument. A forged document is a nullity.
The property in the instrument remains vested in the person who is the holder at the time when the forged
signatures were put on it. Forgery is also not capable of being ratified. In the case of forged endorsement, the person
claiming under forged endorsement even if he take it for value and in good faith, cannot acquire the rights of a
holder in due course. Therefore, Mr. C acquires no title on the cheque. [Mercantile Bank v. D'Silva, 30 Bom. L. R.
1225] Such a holder is not a holder in due course and hence no privilege is available.
Question 21] What is meant by 'Payment in due course' of a negotiable instrument? When does such payment
operate as discharge of negotiable instrument? CA (Inter) - May 1999 (7 Marks)
Write a short note on: Payment in due course
Ans.: Payment in due course [Section 10]: Payment in due course means -
(a) Payment in accordance with the apparent tenor of the instrument.
(b) Payment is made in good faith.
(c) Payment is made without negligence.
(d) Payment is made to person in possession thereof.
Payment is made when payer has no reasonable ground for believing that person in possession of instrument is not
entitled to receive payment of the amount.
To whom payment should be made [Section 78]: Payment of the amount due on a promissory note, Bill or cheque
must be made to the holder of the instrument.
Discharge from liability [Section 82]: Please see the Answer ofQue. No. 84.
Discharge by allowing drawee more than 48 hours to accept [Section 83]: Please see the Answer ofQue. No. 84
Question 22] Define the terms 'Inland instrument & Foreign instrument' under the Negotiable Instrument Act,
1881.
Ans.: Inland instrument [Section 11]: Following types of instrument are called inland instrument:
(a) The instrument drawn in India and payable in India.
(b) The instrument drawn in India on resident person whether payable in India or outside India.
(c) The instrument drawn in India upon a person resident outside India but payable in India.
Since a promissory note is not drawn on any person, an inland promissory note is one which is made payable in
India.
Examples:
(a) A bill drawn in India, payable in USA, upon a person in India is an inland instrument.
(b) A bill drawn in India and payable in India but drawn on a person in USA is also an inland instrument.
Foreign instrument [Section 12]: An instrument which is not an inland instrument is deemed to be a foreign
instrument.
Question 23] Distinguish between: Inland bills & Foreign bills CA (Inter) - May 2000 (7 Marks)
Ans.: Following are the main points of distinction between bills & foreign bills:
Points Inland Bills Foreign Bills
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Meaning Following types of bills are called inland An instrument which is not an inland
instrument: instrument is deemed to be a foreign
(a) The bills drawn in India and payable in instrument.
India.
(b) The bills drawn in India on resident
person whether payable in India or outside
India.
(c) The bills drawn in India upon a person
resident outside India but payable in India.
Copies Inland bills are drawn in a single copy. Foreign bills are drawn in triplicate.
Noting or In case of dishonour of inland bills noting is In case of dishonour of foreign bills protesting
protesting required. is required.
Question 24] What do you understand by the terms 'negotiation' and 'endorsement' under the Negotiable
Instrument Act, 1881?
Write a short note on: Endorsement CS (Foundation) - Dec 2001 (5 Marks)
Ans.: Negotiation [Section 14]: When a promissory note, bill of exchange or cheque is transferred to any person,
so as to constitute that person the holder thereof, the instrument is said to be negotiated.
Endorsement [Section 15]: When the maker or holder signs negotiable instrument for the purpose of negotiation
the instrument is said to be endorsed. In simple words when the instrument is transferred in favour of another it is
known as endorsement.
An instrument is endorsed by signing on the back or face of instrument.
A person making endorsement is called the 'endorser'.
Question 25] What is endorsement? Explain the various types of endorsement.
Ans.: Types of endorsement [Section 16]: If the endorser signs his name only, the endorsement is said to be
'endorsement in blank'.
Specimen:
S. Shroff
If he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the
endorsement is said to be 'endorsement in full'.
Specimen:
Pay B. Batliwala or order S. Shroff
The person in whose favour the instrument is endorsed is called 'endorsee'.
Liability of endorsee and payee are same [Section 16(2)]: The provisions of the Act relating to a payee shall apply
with the necessary modifications to an endorsee.
Question 26] What do you understand by the term 'ambiguous instruments'?
Explain the provisions relating to 'inchoate instrument' under the Negotiable Instrument Act, 1881.
Ans.: Ambiguous instruments [Section 17]: Where an instrument may be construed either as a promissory note or
bill of exchange. This may happen if wording of instrument is not clear.
Example: Demand draft issued by one branch on another may either be treated as promissory note or as Bill of
Exchange.
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Question 27] If the negotiable instrument contained different amount in words and in figures then which amount
the holder can claim on such instrument?
Ans.: Where amount is stated differently in figures & words [Section 18]: If the amount undertaken or ordered to
be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or
ordered to be paid.
Question 28] What do you understand by the terms 'demand instrument' & 'time instrument' under the
Negotiable Instrument Act, 1881?
Ans.: Demand Instruments [Section 19]: A promissory note or bill of exchange, in which no time for payment is
specified, and a cheque, are payable on demand.
Time Instruments: Time instruments are those which are payable at sometime in the future. Therefore, a
promissory note or a bill of exchange payable after a fixed period, or after sight, or on specified day, or on the
happening of an event which is certain to happen, is known as a time instrument.
Question 29] Explain the provisions relating to 'inchoate instrument' under the Negotiable Instruments Act, 1881.
Ans.: Inchoate means insufficient or incomplete. If a person signs a blank or incomplete stamp paper and delivers
it to another person, he thereby gives authority to person to whom he delivers the instrument to fill in the blank.
Such instrument is known as inchoate instrument.
Example: If stamp paper was sufficient to cover amount of ` 10,000 and the amount was left blank while signing,
the holder can fill the amount of ` 10,000. Such holder (who filled in the blanks) cannot recover amount more than
what was intended to be paid to him. However, holder in due course can recover the whole amount from any
previous party, including the drawer. Note that the provision is valid only when the instrument is delivered to
another person after signature. Thus, if signed instrument is stolen, there is no 'delivery'.
Inchoate stamped instruments [Section 20]: Where one person signs and delivers to another a paper stamped in
blank or incomplete, he thereby prima facie authorize the holder to complete the negotiable instrument. If no
amount is specified, he has authority to fill amount not exceeding the amount covered by the stamp. The person so
signing shall be liable upon such instrument to any holder in due course for such amount.
However, he is liable to holder (who is not holder in due course) only for the amount actually payable to him. A
holder who is not holder in due course is not entitled to recover full amount as shown in the Bill of Exchange.
Example: Mayank signs his name on a blank but stamped instrument and gives it to Pratik with authority to fill up
as promissory note for ` 3,500. However, Pratik fill the amount as ` 5,000. The stamp is sufficient to cover ` 5,000.
Pratik then hands it over Sagar for 15,000 for value. Sagar has no knowledge of the fraud. In such case, Mayank is
liable to Sagar for ` 5,000 but to Pratik for ` 3,500. [Lloyds Bank v. Cooke, (1907) 1 KB 794]
Section 20 does not apply to cheque as cheque is not required to be stamped. [C T Joseph v.IV Philip, AIR 2001 Ker.
300]
Another important point to be noted in this connection is that filling of value up to the value covered by stamped is
not material alteration. [Section 87]
Question 30] 'A' signs, as maker, a blank stamped paper and gives it to 'B', and authorizes him to fill it as note for
` 500, to secure an advance which 'C is to make to 'B'. 'B' fraudulently fills it up as note for f 2,000, payable to 'C',
who has in good faith advanced ` 2,000. Decide, with reasons whether ‘C is entitled to recover the amount and if
so, up to what extent? CA (Inter) - Nov 1999 (8 Marks)
Ans.: Inchoate means insufficient or incomplete. If a person signs a blank or incomplete stamp paper and delivers
it to another person, he thereby gives authority to person to whom he delivers the instrument to fill in the blank.
Such instrument is known as inchoate instrument.
As per Section 20 of the Negotiable Instrument Act, 1881, where one person signs and delivers to another a paper
stamped in blank or incomplete, he thereby prima facie authorize the holder to complete the negotiable instrument.
If no amount is specified, he has authority to fill amount not exceeding the amount covered by the stamp. The
person so signing shall be liable upon such instrument to any holder in due course for such amount.
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Thus, if stamp paper was sufficient to cover amount of ` 2,000 then A is liable to pay full amount to C who is holder
in due course.
Question 31] Distinguish between: Inchoate instrument & Ambiguous instrument
Ans.: Following are the main points of distinction between inchoate & ambiguous instrument:
Points Inchoate instrument Ambiguous instrument
Meaning If a person signs a blank or incomplete stamp Where an instrument may be construed
paper and delivers it to another person, he either as a promissory note or bill of
thereby gives authority to person to whom he exchange, such instrument is called
delivers the instrument to fill in the blank. ambiguous instrument.
Such instrument is known as inchoate
instrument.
Points Inchoate instrument Ambiguous instrument
Suit Holder of inchoate instrument can sue only Holder of ambiguous instrument can sue it
after amounts are filled up. after electing to treat it either as promissory
note or bill of exchange.
Negotiability Inchoate instrument are not negotiable Ambiguous instrument can be negotiated.
instrument. It can be negotiated only after
amount is filled up.
Question 32] Referring to the provisions of the Negotiable Instrument Act, 1881, explain the meaning of following
words:
(t) At sight (ii) After sight (iii) Maturity (iv) Days of grace
Ans.: 'At sight' - 'On presentment' [Section 21]: In a promissory note or bill of exchange the expressions "at sight"
and "on presentment" mean on demand.
After sight: The expression 'after sight' means, in a promissory note, after presentment for sight, and, in a bill of
exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance.
Maturity [Section 22]: The maturity of a promissory note or bill of exchange is the date at which it falls due. Thus,
the date which comes after adding three days to the due date of a bill, is called the date of maturity.
Days of grace: Every instrument payable otherwise than on demand is entitled to 3 days of grace.
Question 33] Write a short note on: Bill at sight
Ans.: Bill at sight means the instruments in which no time for payment is mentioned. A cheque is always payable on
demand. A promissory note or bill of exchange is payable on demand -
(a) When no time for payment is specified, or
(b) When it is expressed to be payable on demand, or at sight or on presentment.
Notes:
(i) 'At sight' and 'presentment' means payable on demand.
(ii) An instrument payable on demand may be presented for payment at anytime.
(iii) Days of grace is not to added to be calculate maturity for such types of bill.
Question 34] Write a short note on: Bill after date
Ans.: Bill after date means the instrument in which time for payment is mentioned. A promissory note or bill of
exchange is a time instrument when it is expressed to be payable -
(a) after a specified period.
(b) on a specific day
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(c) after sight
(d) on the happening of event which is certain to happen
Notes:
(i) The expression 'after sight' means -
(a) in a promissory note, after presentment for sight;
(b) in a bill of exchange, after acceptance or noting for non-acceptance or protest for non-acceptance.
(ii) A cheque cannot be a time instrument because the cheque is always payable on demand.
Question 35] State briefly the rules laid down under the Negotiable Instruments Act, 1881 for determining the
date of maturity of a bill of exchange.
CA (Inter) - May 2000 (5 Marks), May 2018 (5 Marks) CA (PE-II) - Nov 2005 (4 Marks)
Ans.: Date of maturity of Bill & promissory notes [Sections 24 to 25]: Due date is calculated as follows:
♦ When period of bill is stated in days, calculation will be in days which include the date of payment but exclude
the date of transaction.
♦ When period of bill is stated in months, calculation will be in months ignoring the days in months.
♦ If due date of bill falls on public holiday, the due date will be preceding business day.
♦ If due date of bill falls on sudden public holiday, the due date will be next business day.
♦ Days of grace are not allowed on bill payable on demand.
♦ If bill is drawn using words after sight then calculation will start from the date of acceptance.
Note: The term of a Bill after sight commences from the date of acceptance of the bill whereas the term of a Bill
after date of drawing a bill commences from the date of drawing of bill.
Practical examples on calculation of date of maturity:
(1) On 1.1.2019, X draws a bill on Y for ` 8,000 for 3 months. Maturity date = ?
Ans.: Bill is drawn on 1.1.2019 and 3 months end on 1.4.2019. Three grace days will be added and hence maturity
of the bill will be on 4.4.2019.
(2) On 15.8.2019, X draws a bill on Y for 3 months for ` 1,20,000. 18th Nov was a sudden holiday. Maturity date
=?
Ans.: Bill is drawn on 15.8.2019 and 3 months end on 15.11.2019. Three grace days will be added and hence maturity
of the bill will be on 18.11.2019. However, if due date of bill falls on sudden public holiday, the due date will be next
business day. Hence, maturity date will be on next business day i.e. 19.11.2019.
(3) On 16.6.2019 X draws a bill on Y for ` 1,25,000 for 30 days. 19th July is a public holiday. Maturity date = ?
Ans.: Bill is drawn on 16.6.2019 and 30 days ends on 16.7.2019. Three grace days will be added and hence maturity
of the bill will be on 19.7.2019. However, if due date of bill falls on public holiday, the due date will be preceding
business day. Hence, maturity date will be on preceding business day i.e. 18.7.2019
(4) X draws a bill on Y for ` 1,00,000 on 1.1.2019. Y accepts the same on 4.1.2019 for period of 3 months after
date. What will be the maturity date of the bill?
Ans.: Bill is drawn on 1.1.2019 and 3 months ends on 1.4.2019. Three grace days will be added and hence maturity
of the bill will be on 4.4.2019. Counting will start from 1.1.2019 and not from 4.1.2019.
(5) X draws a bill on Y for ` 67,000 on 1.1.2019 for 3 months after sight, date of acceptance is 6.1.2019. What
will be the maturity date of the bill?
Ans.: Bill is drawn on 1.1.2019 for 3 months after sight and the date of acceptance is 6.1.2019. 3 months ends on
6.4.2019. Three grace days will be added and hence maturity of the bill will be on 9.4.2019. Counting will start from
6.1.2019 and not from 1.1.2019 because if bill is drawn using words 'after sight' then calculation will start from the
date of acceptance.
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Question 36] Ascertain the date of maturity of a bill payable hundred days after sight and which is presented for
sight on 4th May 2019. CA (Inter) - May 2000 (3 Marks)
Ans.: In given case the date of presentment for sight i.e. 4th May is to be excluded. The period of 100 days ends on
12th August (May 27 days + June 30 days + July 31 days + August 12 days). Three grace days are to be added. The
date maturity will be 15th August. Since 15th August is public holiday preceding business date i.e. 14th August will
be taken as date of maturity.
Question 37] Calculate the date of maturity of the following bills of exchange explaining the relevant rules relating
to determination of the date of maturity as provided in the Negotiable Instruments Act, 1881:
(i) A bill of exchange dated 31st August, 2019 is made payable 3 months after date.
(ii) A bill of exchange drawn on 15th October, 2019 is payable 20 days after sight and the bill is presented for
acceptance on 31st October, 2019. CA (PCC) - Nov 2007 (3 Marks)
Hint: (i) 3.12.2019 (ii) 23.11.2019.
PARTIES TO NOTES, BILLS & CHEQUES
Question 38] What is the position of minor to a negotiable instrument?
Ans.: Capacity to make, etc., promissory notes, etc. [Section 26]: Every person capable of contracting, according
to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement,
delivery and negotiation of a promissory note, bill of exchange or cheque.
Minor can draw but cannot accept instrument: A minor may draw, endorse, deliver and negotiate such instrument
so as to bind all parties except himself.
Estoppel is not applicable against the minor. As per Section 120, a maker cannot deny validity of instrument as
originally made. However, minor can deny the validity.
Corporation can make instrument if empowered by law: A corporation can make, endorse or accept instruments
only in cases in where they are empowered under the law for the time being in force.
Question 39] X a major, and M, a minor, executed a promissory note in favour of P. Examine with reference to
the provisions of the Negotiable Instrument Act, the validity of the promissory note and whether it is binding on
X and M.
Ans.: As per Section 26 of the Negotiable Instrument Act, 1881, a minor may draw, endorse, deliver and negotiate
any negotiable instrument so as to bind all parties except himself.
Hence, the instrument is valid. The instrument is binding on X but not on M.
Question 40] Can an agent having general power of attorney sign the negotiable instrument on behalf of
principle?
Write a short note on: Liability of an agent signing negotiable instrument on behalf of principle
Ans.: Agency [Section 27]: A person who can sign the instrument can authorize an agent to sign the instrument in
his name. However, a general authority to transact business and to receive and discharge debts on behalf of
principle does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his
principal. Thus, specific authority to agent is required to draw, accept and endorse a negotiable instrument. A
general power of attorney is not sufficient.
An authority to draw bills of exchange does not of itself import an authority to endorse.
Liability of agent signing [Section 28]: An agent who signs his name to a promissory note, bill of exchange or cheque
without indicating thereon that he signs as agent, he is personally liable on the instrument.
However, if some person had induced him to sign stating that he will not be liable personally, then an agent who
signs will not be liable to such person, who misguided him to sign the instrument.
Question 41] Write a short note on: Liability of legal representative signing negotiable instrument
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Ans.: Liability of legal representative signing [Section 29]: A legal representative of a deceased person who signs
his name to a promissory note, bill of exchange or cheque is liable personally unless he expressly limits his liability
to the extent of the assets received by him as such.
Question 42] State liability of drawer in case the negotiable instrument is dishonoured by the drawee or acceptor?
Ans.: Liability of drawer [Section 30]: The drawer of a bill of exchange or cheque is bound to compensate the holder
in case of dishonour by the drawee or acceptor.
The liability of drawer arises only if due notice of dishonour has been given to the drawer. However, if the drawer
is aware of dishonour i.e. he has knowledge that the instrument has been dishonoured the drawer shall be liable to
the holder. (Obviously notice in such case is not required as he is aware of the fact that instrument is dishonoured)
Question 43] Write a short note on: Liability of drawee of cheque
Ans.: Liability of drawee of cheque [Section 31]: The drawee of a cheque (i.e. banker) having sufficient funds in the
accounts of drawer must pay the cheque when presented for payment. If the banker fails to do so, he must
compensate the drawer of cheque for any loss or damage caused by such default. Normally, banker is liable to pay
the amount of cheque only when there is sufficient balance in the account of drawer.
Question 44] Write a short note on: Liability of maker of note and acceptor of bill
Ans.: Liability of maker of note and acceptor of bill [Section 32]: In the absence of a contract to the contrary, the
liability is as follows:
(a) In case of promissory note - the liability is of maker.
(ib) In case of bill of exchange - the liability is of acceptor.
The maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount
thereof at maturity according to the apparent tenor of the note.
If the bill is accepted by the acceptor at the time of or after maturity, he must pay the amount on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or
bill for any loss or damage sustained by him and caused by such default.
Question 45] Who can be acceptor under the provisions of the Negotiable Instruments Act, 1881? If there is more
than one drawee then can any one of them give acceptance on behalf of all other?
Ans.: Only drawee can be acceptor except in need or for honour [Section 33]: Only following person can be
acceptor:
(a) Drawee
(b) If there are more than one drawee, all or some of them
(c) Drawee in case of need, if his name is mentioned in Bill and original drawee refuses to accept
(d) Acceptor for honour
Acceptance by several drawees not partners [Section 34]: Where there are several drawees of a bill of exchange
who are not partners, each of them can accept it for himself, but none of them can accept it for another without
his authority.
If the drawees are partners, any partner can accept on behalf of all other partners.
Question 46] Write a short note on Liability of endorser
Ans.: Liability of endorser [Section 35]: Every endorser of a negotiable instrument, who has endorsed before
maturity and delivered it, is liable to subsequent holder, unless he specifically limit his own liability e.g. by writing
'without recourse' or writing 'limited to ` 5,000' etc. He is liable if drawee, acceptor or maker of instrument fails to
honour the bill and notice of dishonour is given to him or received by him.
The endorser is not liable to prior parties to the Bill.
Liability of prior parties to holder in due course [Section 36]: Every prior party to a negotiable instrument is liable
to a holder in due course until the instrument is duly satisfied.
Prior party a principal in respect of each subsequent party [Section 38]: In case of endorsees who are sureties to
principle debtor, each prior party is liable thereon as a principal debtor in respect of each subsequent party.
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Example: A draws a bill payable to his own order on B, who accepts. A afterwards endorses the bill to C, C to D, and
D to E.
As between E and B, B is the principal debtor, and A, C and D are his sureties.
As between E and A, A is the principal debtor, and C and D are his sureties.
As between E and C, C is the principal debtor and D is his surety.
Question 47] A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a
holder-in-due course. From whom E can recover the amount? Examining the right of E.
Ans.: As per Section 36 of the Negotiable Instruments Act, 1881, every prior party to a negotiable instrument is
liable to a holder in due course until the instrument is duly satisfied.
The holder in due course (E) can hold all the prior parties liable jointly and severally. Prior parties include the maker
or drawer, the acceptor and endorsers. Accordingly in the given problem, E, a holder in due course can recover the
amount from all the prior parties i.e., D & C (the endorsers), B (an acceptor) and A (the drawer).
Question 48] If a holder accepted instrument discharges acceptor other parties also get discharged. Comment.
Ans.: Suretyship [Section 39]: As per Section 134 of the Contract Act, 1872, if Principle Debtor is discharged, the
surety gets discharged.
As per Section 135, if creditor gives more time to Principle Debtor, the surety is discharged.
However, Section 39 of the Negotiable Instruments Act, 1881 provides that if a holder accepted instrument
discharged acceptor, he can expressly reserve the right to charge other parties. In such case even if holder
discharges acceptor of Bill, other parties (who are sureties) will not get discharged. However, other parties can hold
the acceptor liable.
Question 49] 'X' is the holder of a bill of exchange made payable to the order of 'B', which contains the following
endorsements in blank -
First endorsement, 'B'
Second endorsement, 'C'
Third endorsement, 'D'
Fourth endorsement 'E'
'X' strike out, without 'E' consent, the endorsement by 'C' and 'D'.
Decide with reason, whether 'X' is entitled to recover anything from 'E'.
CA (Inter) - May 1999 (8 Marks), CA (IPCC) - Nov 2009 (4 Marks)
Ans.: Discharge of endorser's liability [Section 40]: Every endorser is entitled to recover amount of Bill from prior
endorsers. Hence, if a holder of a negotiable instrument destroys or impairs the endorser's remedy against prior
party (without consent of endorser), the endorser is discharged from liability to the holder as if the instrument had
been paid at maturity.
Example: X is the holder of a bill of exchange made payable to the order of B, which contains the following
endorsements in blank -
First endorsement, "B".
Second endorsement, "C".
Third endorsement, "D"
Fourth endorsement "E".
This bill X puts in suit against E and strikes out, without E's consent, the endorsements by C and D. X is not entitled
to recover anything from E.
Question 50] In case of endorsement of bill of exchange before it is accepted by the drawee and drawee is aware
of the fact that endorsement is forged then can he deny his liability?
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Ans.: Acceptor bound, although endorsement forged [Section 41]: Sometime a Bill may be already endorsed before
it is presented to drawee for acceptance. In such case, if an acceptor of a Bill already knew or had reason to believe
that the endorsement is forged, he will be liable even if endorsement is forged. If acceptor had no knowledge of
forgery of signature of endorser, he can deny his liability.
Question 51] Write a short note on: Bill drawn in fictitious name
Ans.: Acceptance of bill drawn in fictitious name [Section 42]: A person can draw a Bill with fictitious name of
drawer or payee. He will get it accepted by acceptor and then endorse it. In such case, if the signature of maker and
endorser as appearing on instrument tallies, acceptor will be liable even if it is found that payee of the instrument
is fictitious.
Thus, acceptor of Bill is liable even if payee is fictitious if signature of drawer and endorser as appearing in the Bill
tally. This provision has been made to ensure negotiability of the instrument.
'Fictitious' means a person who is not in existence or not in contemplation.
Question 52] X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The
bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment
of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881.
Ans.: The problem is based on the provision of Section 42 of the Negotiable Instruments Act, 1881.
A person can draw a Bill with fictitious name of drawer or payee. He will get it accepted by acceptor and then
endorse it. In such case, if the signature of maker and endorser as appearing on instrument tallies, acceptor will be
liable even if it is found that payee of instrument is fictitious. Accordingly, in the instant case, Y cannot avoid
payment by raising the plea that the drawer (i) is fictitious. The only condition is that the signature of Z as drawer
and as endorser must be in the same handwriting.
Question 53] Write a short note on: Accommodation Bill
Ans.: Accommodation Bill: All bills are not genuine trade bills, as they are often drawn for accommodating a party.
It is possible to issue bill of exchange without any consideration to help one party to get finance from the banker.
These are termed as accommodation bill.
Example 1: X is in need of ` 25,000 for 1 month. He approached to his friend Y for the help. Y wants to help but also
do not have money. Y allows his friend X to draw a bill ` 25,000 for 1 month and X discounts it with bank and gets
the money. On maturity X will pay the amount of ` 25,000 to Y and Y will pay the same to the banker. Here, X is
accommodated party and Y is accommodating party.
However, if on due date X does not give back money to Y, Y is still liable to pay the amount to the banker.
Issue of such Bills is not prohibited under the Negotiable Instrument Act, 1881 but as per RBI guidelines bankers
are not permitted to discount such Accommodation Bills.
Following are the special provisions relating to Accommodation Bill:
Negotiable instrument made without consideration [Section 43]: A negotiable instrument made, drawn, accepted,
endorsed or transferred without consideration, or where consideration fails, creates no obligation of payment
between immediate parties to the transaction.
However, holder who has obtained bill for consideration can recover the consideration paid by him. The section
applies to immediate parties to transaction and not other parties.
Example 2: Ram is holder in due course. He endorses it to Shyam without consideration and Shyam transfer it to
Laxman for consideration. Laxman transfers to Dinesh without consideration. In this case, Dinesh cannot recover
anything from Laxman as there is no consideration and Laxman is immediate party. However, Dinesh can sue Ram
and Shyam.
Accommodated party cannot recover from other parties: If the accommodated party pays the amount of
instrument, he cannot recover such amount from any party to the Bill who had signed the bill for his
accommodation. Thus, in Example 1, X cannot recover anything from Y.
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Partial absence or failure of money-consideration [Section 44]: If a person has signed a promissory note, bill of
exchange or cheque consisting of partly for consideration and partly for without consideration, then he is liable to
the extent of consideration involved in such instrument to the immediate party.
Example 3: Gopal draws a bill on Rohan for ` 5,000 payable to the order of Gopal, Rohan accepts the bill, but
subsequently dishonours, it by non-payment. Gopal sues Rohan on the bill, Rohan proves that it was accepted for
value as to ` 4,000, and as an accommodation to the plaintiff as to the residue. A can only recover ^ 4,000. This
section also applies to immediate parties. Thus, in aforesaid example, if Gopal had endorsed it to Zahir for value,
Zahir can recover full amount of ` 5,000 from Gopal or Rohan.
Question 54] P, the holder of bill of exchange, transfers it to Q without consideration. Q also transfers it to R
without consideration. R transfers it to X for consideration. X transfers it to Y without consideration. State giving
reason whether Y can recover the amount on such instrument from X or P. CA (Inter) - May 1998 (6 Marks)
Ans.: As per Section 43 of the Negotiable Instrument Act, 1881, a negotiable instrument made, drawn, accepted,
between immediate the parties to the transaction.
Thus, Y cannot recover the amount from X (which is immediate party) but can recover from P, Q & R.
Question 55] A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without
consideration. C transferred it to D for value. Decide -
(i) Whether D can sue the prior parties of the bill, and
(«) Whether the prior parties other than D have any right of action inter se?
Give your answer in reference to provisions of the Negotiable Instruments Act, 1881.
Ans.: As per Section 43 of the Negotiable Instruments Act, 1881, a negotiable instrument made, drawn, accepted,
Applying the above provisions, answer to given problem is as follows:
(i) D has obtained instrument for a consideration hence he can sue all prior parties to the bill i.e. A, B &C.
(ii) Prior parties other D cannot take any action due provisions of Section 43, as they all have received bill without
consideration.
Question 56] P draws a bill on Q for ` 10,000. Q accepts the bill. On maturity the bill was dishonoured by non-
payment. P files a suit against Q for payment of ` 10,000. Q proved that the bill was accepted for value of ` 7,000
and as an accommodation to the plaintiff for the balance amount i.e.
` 3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in
recovering the whole amount of the bill? CA (IPCC) - Nov 2010 (8 Marks)
Ans.: As per Section 44 of the Negotiable Instruments Act, 1881, if a person has signed a promissory note, bill of
the extent of consideration involved in such instrument to the immediate party. Thus P would not succeed in
recovering the whole amount of the bill. He will be able recover only ` 7,000.
Question 57] A owes a certain sum of money to B. A does not know the exact amount and hence he makes out a
blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due, payable by him. B
fills up fraudulently the amount larger than the amount due, payable by A and endorses the cheque to C in full
payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act,
1881, discuss the rights of B and C.
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Ans.: As per Section 44 of the Negotiable Instruments Act, 1881, if a person has signed a promissory note, bill of
the extent of consideration involved in such instrument to the immediate party.
Thus, B who is a party in immediate relation with the drawer of the cheque is entitled to recover from A only the
exact amount due from A and not the amount entered in the cheque. However, the right of C, who is a holder for
value, is not adversely affected and he can claim the full amount of the cheque from B.
Question 58] Distinction between: Accommodation Bill & Trade Bill Ans.: Following are the main points of
difference between accommodation bill & trade bill:
Points Accommodation Bill Trade Bill
Meaning A bill which is drawn, for mutual finance is Bill drawn and accepted for a genuine
called an accommodation bill. trade transaction is termed as a trade bill.
Consideration It is drawn without any consideration. It is drawn for a consideration.
Evidence This bill is for mutual financial help. This bill is evidence of debt.
Acknowledgement These bills are not acknowledgement of These bills are acknowledgement of debts.
of debts debts.
Discounting with These bills are always discounted with These bills may or may not be discounted
banks. banks. with banks.
Loss by way of The loss by way of discounting the bill has to The loss by way of discounting the bill has
discounting be shared by drawer and drawee in the ratio to be borne by drawer.
in which they share the proceeds.
Legal action. Legal action cannot be taken up by drawer in Legal action can be taken up by drawer in
case of dishonour of bill. case of dishonour of bill.
NEGOTIATION
Question 59] "Delivery of negotiable instrument may actual delivery or constructive delivery". Discuss with
reference to provisions of the Negotiable Instruments Act, 1881.
Ans.: Delivery [Section 46]: The making, acceptance or endorsement of a promissory note, bill of exchange or
cheque is completed by delivery, actual or constructive.
Example of actual delivery: A, the holder of a negotiable instrument payable to bearer, delivers it to B's agent to
keep for B. The instrument has been negotiated.
Example of constructive delivery: A, the holder of a negotiable instrument payable to bearer, which is in the hands
of A's banker, who is also the banker of B. A directs the banker to transfer the instrument to B's credit in account of
B. The banker does so, and accordingly now banker possesses the instrument as B's agent. The instrument has been
negotiated, and B has become the holder of it.
Delivery to made by party or his authorized agent: As between parties standing in immediate relation, delivery to
be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorized
by him in that behalf.
Conditional delivery to parties in immediate relation: As between parties in immediate relation, delivery may be
made conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property in
the instrument. Such conditional delivery is binding on immediate parties and holder (who is not holder in due
course). However, such conditional delivery is not binding on 'holder in due course'. The holder in due course is
entitled to get full value as shown in the Bill.
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Negotiation by delivery [Section 47]: A promissory note, bill of exchange or cheque payable to bearer is negotiable
by delivery thereof. However, a promissory note, bill of exchange or cheque delivered on condition that it is not to
take effect except in a certain event is not negotiable unless such event happens.
Negotiation by endorsement [Section 48]: A promissory note, bill of exchange or cheque is negotiable by the holder
by endorsement and delivery thereof.
Question 60] Write a short note: Assignment of an instrument
Ans.: Assignment means transfer of interest to another. An instrument or right can be assigned e.g.
(a) Insurance policy can be assigned.
(b) Copyright, patent or trademark can be assigned.
(c) Debt can be assigned etc.
Where a person transfers his right to receive payment of debt, it is termed as 'assignment of debt'.
Assignment is required to be made in writing. Person who is transferring interest is assignor and person to whom
interest is transferred is assignee.
Technically, a negotiable instrument can be assigned to another person. However, it is not 'negotiation'. Negotiation
is much simpler and better way to transfer a negotiable instrument.
Question 61] Distinguish between: Negotiation & Assignment
CA (Inter) - May 2002 (7 Marks) CA (PE-II) - Nov 2003 (4 Marks), May 2013 (4 Marks)
Ans.: Following are the main points of difference between negotiation & assignment:
Points Negotiation Assignment
Meaning Negotiation means transfer of a negotiable Assignment means transfer of interest to

instrument to another person, so that such another.
another person is entitled to possession of
the instrument and receive amount of
instrument on due date.
Title Holder in due course after negotiation can get Assignee cannot get title better than the
better title than transferor. assignor.
Notice of Notice of endorsement is not necessary in Notice of assignment is required to be given to

endorsement negotiation. debtor in case of assignment of debt.
Form Negotiation of bearer instrument can be Assignment must be in writing as per Section
simply by delivery. 130 of the Transfer of Property Act, 1872.
Consideration Consideration is presumed in negotiation. Consideration is not presumed in assignment.
Further A negotiable instrument can be further An assignee can further assign only if such
Endorsement endorsed without permission or even without right is specifically conferred on him by
& negotiation knowledge of transferor. assignment deed.
Stamp duty Once original instrument is stamped, further Each assignment will require fresh stamp
negotiation does not require payment of duty.
stamp duty.
Question 62] Write a short note on: Effect of endorsement
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Ans.: Effect of endorsement [Section 50]: A negotiable instrument can be endorsed any number of time before
maturity. If a document is transferred by endorsement and delivery, he gets the property in the instrument with
further right of negotiation. However, the endorsement may, by express words restrict or exclude right of endorsee
to further endorse. Alternatively, he may merely constitute the endorsee an agent -
(i) To endorse the instrument or
(ii) To receive its contents for endorser or
(iii) For some other specified person.
Example:
(i) Pay the contents to C only.
(if) Pay C for my use.
(iii) Pay C or order for the account of B.
(iv) Within must be credited to C.
These endorsements exclude the right of further negotiation by C. These are 'restrictive endorsement'.
(v) Pay C.
(vi) Pay C value in account with the Oriental Bank.
(vii) Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the
endorser and others.
These endorsements do not exclude the right of further negotiation by C.
Question 63] Who can negotiate the instrument?
Ans.: Who may negotiate [Section 51]: If the negotiability of instrument has not been restricted or excluded, every
sole maker, drawer, payee or endorsee, or all of several joint makers, drawers, payees or endorsees, of a negotiable
instrument can negotiate the instrument.
Example: A bill is drawn payable to X or order. X endorses it to Y, the endorsement not containing the words "or
order" or any equivalent words. Y may negotiate the instrument.
Legal representative cannot by delivery only negotiate instrument endorsed by deceased [Section 57]:
The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange
or cheque to order and endorsed by the deceased but not delivered. It is to be noted that making, acceptance or
endorsement is complete not by mere signature, but by delivery of instrument. Mere endorsing a negotiable
instrument is not sufficient.
Thus, if X endorses the instrument but dies before it is delivered, the endorsement is not complete. Section 57
clarifies that if X had not delivered instrument before his death, his legal representative cannot negotiate by
delivering the instrument.
Question 64] What is the position of the 'holder' who derives title from 'holder in due course'?
Ans.: Holder deriving title from holder in due course [Section 53]: A holder of a negotiable instrument who derives
title from a holder in due course has the rights thereon of that holder in due course.
Question 65] Explain the various types of endorsement.
What is 'partial endorsement' CS (Foundation) - June 1999 (2 Marks)
Explain the concept and different forms of Restrictive and Qualified endorsement.
Ans.: Various types of endorsement are as follows:
(a) Blank or General Endorsement [Section 54]: An endorsement is to be blank or general where the endorser
merely writes his signature on the back of the instrument, and the instrument so endorsed becomes payable to
bearer, even though originally it was payable to order. Thus, where bill is payable to "Mohan or order", and he
writes on its back "Mohan", it is an endorsement in blank by Mohan and the property in the bill can pass by mere
delivery, as long as the endorsement continues to be a blank. But Section 49 provides that a holder of an instrument
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endorsed in blank may convert the endorsement in blank into an endorsement in full, by writing above the
endorser's signature, a direction to pay the instrument to another person or his order. This is subject to provision
of crossed cheque.
(b) Special or Full Endorsement [Section 55]: If the endorser signs his name and adds a direction to pay the
amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be special
or in full. A bill made payable to Mohan or Mohan or order, and endorsed "pay to the order of Sohan" would be
specially endorsed and Sohan endorses it further. A blank endorsement can be turned into a special one by the
addition of an order making the bill payable to the transferee.
(c) Restrictive Endorsement [Section 50]: An endorsement is restrictive which prohibits or restricts the further
negotiation of an instrument. Examples of restrictive endorsement: "Pay C only" or "Pay C for my use" or "Pay C on
account of B" or "Pay C or order for collection".
(d) Partial Endorsement [Section 56]: An endorsement partial is one which purports to transfer to the endorsee
a part only of the amount payable on the instrument. A partial endorsement does not operate as negotiation of the
instrument. A holds a bill for ` 1,000 and endorses it as "Pay B or order ` 500". The endorsement is partial and invalid.
(e) Conditional or Qualified Endorsement [Section 52]: An endorsement is conditional or qualified which limits
or negatives the liability of the endorser. An endorser may limit his liability in any of the following ways:
(i) Sans recourse endorsement, i.e. by making it clear that he does not incur the liability of an endorser to the
endorsee or subsequent holders and they should not look to him in case of dishonour of instrument. The endorser
excludes his liability by adding the words "sans recourse" or "without recourse", e.g. "pay A or order sans recourse".
(ii) By making his liability depending upon happening of a specified event which may never happen, e.g. the holder
of a bill may endorse it thus: "Pay A or order on his marrying B". In such a case, the endorser will not be liable until
A marries B.
Question 66] What is meant by 'Sans Recourse Endorsement' of a bill of exchange? How does it differ from 'Sans
Frais Endorsement'? CA (IPCC) - May 2015 (4 Marks)
Ans.: Sans Recourse: By adding the words 'Sans Recourse' after the endorsement the endorser declines to accept
any liability on the instrument of any subsequent party. Sometimes, when an endorser who so excludes his liability
as an endorser afterwards becomes the holder of the same instrument. In such a case, all intermediate endorsers
are liable to him.
Sans Frais: These words when added at the end of the endorsement, indicating that no expenses should be incurred
on account of the bill.
Difference: Any endorser can exclude personal liability by endorsing "sans recourse" i.e. without recourse. However,
"Sans Frais" endorsement, indicate that no expenses should be incurred on account of the bill.
Question 67] What is meant by 'negotiation back'?
Ans.: An instrument is said to have been negotiated back when a person who has been a party to the negotiable
instrument takes it again.
Example: A draws a Bill on B making it payable to C. Once the Bill is accepted by B, he becomes primarily liable. If C
endorses to D, D to E & E to F, the 'D' is liable to E and F while previous parties, i.e. A, B and C are liable to D. All
parties i.e. A to E are liable to F, but F is liable to no one.
Now, let us assume that F endorses the Bill to D. Thus, D who was an endorsee becomes a holder. This is termed as
'Negotiation Bank'. In such case, D cannot hold prior endorsee i.e. E and F liable. The reason is that even if he holds
so, the liability will come back to him, as E and F will in turn hold D liable as he was prior endorsee. Thus, liability
will move in an endless circle. Hence, if a document is negotiated back, the holder cannot sue intermediate parties.
This is an exception to the rule that a holder can sue all parties prior to the transactions. Of course, D can sue A, B
and C.
However, if D had made first endorsement as a conditional endorsement i.e. 'San recourse' (i.e. without liability),
he can sue E and F and the liability will not come back to him as circle cannot be completed due to the conditional
endorsement of 'san recourse'.
Question 68] What is a 'Sans Recourse' endorsement?
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A bill of exchange is drawn payable to X or order. X endorses it to Y, Y to Z, Z to A, A to B and B to X. state with
reasons whether X can recover the amount of the bill from Y, A and B, if he has originally endorsed the bill to Y
by adding the words 'Sans Recourses'. CA (Inter) - Nov 2001 (5 Marks)
Ans.: The endorser of a negotiable instrument may, be express words in the endorsement, exclude his own liability
thereon. If the endorser writes the words 'sans recourse' he excludes his liability on the instrument. Where an
endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers
are liable to him. If endorser excludes his liability, further negotiation is not prohibited. It only excludes liability of
endorsee.
In the example given, normally, X cannot hold Y, Z, A and B, as if X holds them responsible, the responsibility will
come back to him by circuitry of action. However, in this case, X had endorsed 'Sans Recourses'. Hence, Y, Z, A & B
cannot hold X liable and hence circle does not get complete. On the other hand, X is holder after Y, Z, A and B and
can hold them liable.
Question 69] What is the effect of instrument obtained by unlawful means or for unlawful consideration? If such
instrument goes in the hands of holder in due course can he recover the amount?
CA (Inter) - Nov 1998 (3.5 Marks)
Ans.: Instrument obtained by unlawful means or for unlawful consideration [Section 58]:
♦ When a negotiable instrument has been lost, or
♦ When a negotiable instrument has been obtained from any maker, acceptor or holder by means of -
- An offence or
- Fraud or
- For an unlawful consideration
the possessor is not entitled to get any amount from such maker, acceptor or holder, or from any party prior to such
holder. Similarly, endorsee who claims through such possessor is also not entitled to receive the amount due on
instrument. Exception is that if the endorsee is 'holder in due course' i.e. he has obtained instrument in good faith
and for consideration, he is entitled to recover amount of bill from any prior party to instrument including maker,
acceptor and prior holders.
In simple words, if an instrument is obtained by offence, fraud or unlawful consideration, possessor or endorsee is
not entitled to get any amount thereon. However, if the instrument goes in the hands of 'holder in due course',
subsequent possessor or endorsee is entitled to recover, as he derives title from the 'holder in due course'. (This is
because Section 53 provides that a holder of a negotiable instrument who derives title from a holder in due course
has the rights thereon of that holder in due course.)
Question 70] B obtains A's acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due
course. C endorses the bill to D who knows of the fraud. Referring to the provisions of the Negotiable Instruments
Act, 1882, decide whether D can recover the money from A in the given case.
Ans.: As per Section 58 of the Negotiable Instruments Act, 1881, if an instrument is obtained by offence, fraud or
unlawful consideration, possessor or endorsee is not entitled to get any amount thereon. However, if the
instrument goes in the hands of 'holder in due course', subsequent possessor or endorsee is entitled to recover, as
he derives title from the 'holder in due course'. This is because Section 53 provides that a holder of a negotiable
instrument who derives title from a holder in due course has the rights thereon of that holder in due course.
Thus, D can recover the money from A.
Question 71] On a bill of exchange for ` 10,000 Sumit's acceptance to the bill is forged. Amit takes the bill from
his customer in good faith and for consideration before the bill becomes payable. State with reasons whether
Amit can receive the amount of the bill from Sumit.
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Aslam is the payee of an order cheque. Bahadur steals the cheque and forges Aslam's signature and endorses the
cheque in his (Bahadur's) favour. Bahadur then endorses it to Champak who takes it in good faith and for valuable
consideration. Is Champak a holder in due course? Give reasons.
Write a short note on: Forged endorsement CS (Foundation) - Dec 1997 (5 Marks)
Ans.: The Negotiable Instruments Act, 1881 makes no specific provision in respect of forgery. Hence, common law
provisions apply. As per common law, a forgery is nullity of law and it passes no title to holder. It is not a mere defect
in title but complete absence of title, which cannot be cured.
Section 58 of the Act does not give protection against forgery, though it gives protection against offence or fraud.
Hence, a person does not get good title even if he obtains Bill bona fide and for value, if the signature was forged.
Hence, Amit is not holder in due course, and cannot get amount from Sumit.
Question 72] Write a short note on: Finder of lost negotiable instrument
CA (Inter) - Nov 1998 (3.5 Marks)
Ans.: Finder of lost negotiable instrument does not get any title as there was no 'delivery'. However, endorsee of
such instrument will get title only if he obtains instrument in good faith and for consideration.
If finder endorses it to third person for consideration before maturity and if such third person takes in good faith
without the knowledge of lack of title, he gets a good title.
Duty of finder of lost instrument is in the nature of bailee under the Indian Contract Act, 1872. He should make
efforts in finding true owner and deliver the Bill to him. He can claim expenses for his efforts, but cannot encash Bill
as it was never 'delivered' to him.
Question 73] If a person acquires an instrument after due date or after he has notice that instrument is
dishonoured, can he treated as 'holder in due course'?
Ans.: Instrument acquired after dishonour or when overdue [Section 59]: The instrument ceases to be negotiable
after it is dishonoured due to non-acceptance or non-payment. Such instrument is transferable but not 'negotiable'.
Thus, a person who acquires an instrument after due date or after he has notice that instrument is dishonoured, he
gets rights only those which transferor has. Such person does not become 'holder in due course', even if he has
obtained instrument for consideration.
Example: The acceptor of a bill of exchange, when he accepted it, deposited with the drawer certain goods as a
collateral security for the payment of the bill, with power to the drawer to sell the goods and apply the proceeds in
discharge of the bill if it were not paid at maturity. The bill not having been paid at maturity, the drawer sold the
goods and retained the proceeds, but indorsed the bill to A. A's title is subject to the same objection as the drawer's
title. This is because the Bill was endorsed after maturity and hence A is not 'holder in due course'.
Accommodation note or bill: Any person who, in good faith and for consideration, becomes the holder, after
maturity, of a promissory note or bill of exchange made, drawn or accepted without consideration, for the purpose
of enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior
party.
Instrument negotiable till payment or satisfaction [Section 60]: A person acquiring negotiable instrument after
due date does not become 'holder in due course', but that does not mean that instrument cannot
be transferred after due date. A negotiable instrument can be negotiated even after due date, subject to following
conditions:
- The maker, drawee or acceptor cannot transfer after due date.
- Negotiation is permissible until payment or satisfaction of the instrument by the maker.
Question 74] 'A' draws a bill of exchange payable to himself on 'X'. Who accepts the bill without consideration
just to accommodate 'A'.'A' transfers the bill to 'P' for good consideration. State the rights of 'A' and 'P\
Would your answer be different if 'A' transferred the bill to 'P' after maturity?
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Ans.: As per Section 43 of the Negotiable Instrument Act, 1881, a negotiable instrument made, drawn, accepted,
indorsed or transferred without consideration, or where consideration fails, creates no obligation of payment
Thus, A cannot recover anything from X but P being holder in due course can recover the amount from A or X.
If 'A' transferred the bill to 'P' after maturity: As per Section 59, any person who, in good faith and for consideration,
becomes the holder, after maturity, of a promissory note or bill of exchange made, drawn or accepted without
consideration, for the purpose of enabling some party thereto to raise money thereon, may recover the amount of
the note or bill from any prior party. Thus, P can recover the amount from A or X.
PRESENTMENT
The negotiable instrument is required to be presented for payment to the person who is liable to pay. In case of bill
of exchange payable after sight, it has to be presented for acceptance. 'Acceptance' means that drawee agrees to
pay the amount as shown in the Bill. This is required as the maker of bill (drawer) is asking drawee to pay certain
amount to payee. The drawee may refuse the payment if he has not signed and has not accepted liability on Bill.
In case of promissory note, no acceptance is required as it is signed by the maker himself taking liability to pay the
amount.
If the instrument uses the expression "on demand", "at sight" or "on presentment", the amount is payable on
demand. In such case presentment for acceptance is not required.
Question 75] State the requirements of 'presentment for acceptance' of bill of exchange and promissory note
under the Negotiable Instruments Act, 1881.
Ans.: Presentment for acceptance [Section 61]: If no time or place is specified for presentment, a bill of exchange
payable after sight must be presented to the drawee for acceptance. The requirements are -
(a) Presentment should be made by the person entitled to demand acceptance.
(b) Presentment should be made within a reasonable time after it is drawn.
(c) Presentment should be in business hours on a business day i.e. not a public holiday.
Presentment by post: Where authorized by agreement or usage, a presentment through the post office by means
of a registered letter is sufficient.
Bill deemed to be dishonoured if drawee cannot be found: If no time or place is specified for presentment and
drawee cannot be found after reasonable search, the bill is said to be dishonoured.
Presentment of promissory note for sight [Section 62]: A promissory note, payable at a certain period after sight,
must be presented to the maker for sight (if he can after reasonable search be found). The requirements are -
(a) Presentment should be made by the person entitled to demand payment.
(b) Presentment should be made within a reasonable time after promissory note is made.
(c) Presentment should be in business hours on a business day i.e. not a public holiday.
Drawees time for deliberation [Section 63]: Drawee can take time of 48 hours (exclusive of public holidays) to
consider whether he will accept the bill of exchange or not.
Question 76] State the requirements of 'presentment for payment' of bill of exchange and promissory note under
the Negotiable Instruments Act, 1881.
Ans.: Presentment for payment [Section 64]: The negotiable instrument is required to be presented for payment,
on due date, to maker (in case promissory note), acceptor (in case of bill of exchange) and drawee (in case of
cheque). The presentment is to be made by holder of the instrument.
Effect of default in presentment for payment: If there is default in presentment of instrument for payment, the
other parties are not liable to holder of the instrument. Hence, if the negotiable instrument is not presented for
payment on due date to maker, acceptor and drawee then other parties get discharged. Thus, maker, acceptor and
drawee continue to be liable even if instrument is not presented for payment on due date.
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Presentment through post: Where authorized by agreement or usage, a presentment through the post office by
means of a registered letter is sufficient.
Presentment during business hour [Section 65]: Presentment for payment must be made during the business hour
and to banker within banking hours.
Presentment for payment of instrument payable after date or sight [Section 66]: A promissory note or bill of
exchange, made payable at a specified period after date or sight, must be presented for payment at maturity.
Presentment for payment of promissory note payable by instalments [Section 67]: A promissory note payable by
instalments must be presented for payment on the third day after the date fixed for payment of each instalment;
and non-payment on such presentment has the same effect as non-payment of a note at maturity. Thus, if a
promissory note is payable instalment, presentment is necessary for each instalment. Non-payment of any
instalment means the promissory note is dishonoured. The provisions of instalment payment are only in respect of
promissory note and not in case of bill of exchange.
Presentment for payment of instrument payable at specified place and not elsewhere [Section 68]: A
promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and not
elsewhere must, in order to charge any party thereto, be presented for payment at that place. Thus, if instrument
specifies that it must bepresented at specified place and no other place, it cannot be presented at other place.
Presentment at usual place of business or residence where no exclusive place specified [Section 70]: A
promissory note or bill of exchange, not made payable at specified place, must be presented for payment at the
place of business, or at the usual residence, of the maker, drawee or acceptor thereof.
Presentment when maker etc. has no known place of business or residence [Section 71]: If the maker, drawee or
acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in
the instrument for presentment for acceptance or payment, such presentment may be made to him in person
wherever he can be found.
Presentment of cheque to charge drawer [Section 72]: In order to charge the drawer a cheque must be presented
at the bank upon which it is drawn.
Presentment of cheque to charge any other person [Section 73]: In order to charge the drawer a cheque must be
presented within a reasonable time after the endorsee gets the endorsed cheque in his hand.
Presentment of instrument payable on demand [Section 74]: A negotiable instrument payable on demand must
be presented for payment within a reasonable time after it is received by the holder.
Question 77] Promissory note dated 1st February, 2019 payable two months after the date was presented to the
maker for payment to 10 days after maturity. What is the date of maturity? Explain with reference to relevant
provisions of the Negotiable Instruments Act, 1881 whether the endorser and the maker will be discharged by
reason of such delay? CA (Inter) - May 2001 (7 Marks)
Ans.: When period of bill is stated in months, calculation will be in months ignoring the days in months. Thus, if
promissory note made on 1st February, 2019 then its maturity date after adding 3 grace days will be 4th April, 2019.
As per Section 64 of the Negotiable Instruments Act, 1881, if there is default in presentment of instrument for
payment, the other parties are not liable to holder of the instrument. Hence, if the negotiable instrument is not
presented for payment on due date to maker, acceptor and drawee then other parties get discharged. Thus, maker,
acceptor and drawee continue to be liable even if instrument is not presented for payment on due date.
Thus, in view of above provisions, the endorser will get discharged but maker of the promissory note being primary
party is still liable to the holder.
Question 78] When presentment of an instrument is not necessary under the Negotiable Instruments Act, 1881?
CA (Inter) - May 2002 (6 Marks)
What is meant by 'Presentment' of a bill of exchange under the Negotiable Instruments Act, 1881? When is such
a bill of exchange presented for payment? State when is the presentment not necessary.
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Ans.: When presentment unnecessary [Section 76(a)]: In following cases, presentment for payment is not
necessary and the instrument is deemed to be dishonoured by non-payment on due date -
(a) Intentional prevention in presentment: If the maker, drawee or acceptor intentionally prevents the
presentment of the instrument
(b) Business place is closed in business hours: If the instrument is payable at place of business of maker, drawee
or acceptor and he closes such place on a business day during the usual business hours.
(c) Person not found at specified place: If the instrument being payable at some other specified place and
neither maker, drawee or acceptor nor any person authorized to pay it attends at such place during the usual
business hours
(d) Person not found after due search: If the instrument not being payable at any specified place, maker, drawee
or acceptor cannot be found after due search.
In following cases, party is not discharged even if instrument is not presented for payment. (However, bill is
dishonoured).
Party agreeing to pay without presentation [Section 76(b)]: If a party has agreed to pay notwithstanding non-
presentment, he is not discharged for non-presentment of instrument for payment.
Party making part payment or promise to pay whole or part amount [Section 76(c)]: If a party even after knowing
that the instrument has not been presented -
(i) Makes a part payment on account of amount due on instrument or (ii) Promises to pay the amount due therein
whole or in part.
Drawer not discharged if he is not suffering any damage [Section 76(d)]: If the drawer could not suffer damages
to due to non-presentment, he is not discharged for non-presentment of instrument. For example, in case of
accommodation bill, drawer does not suffer any damage if presentation is not made as the bill was not for
consideration, but only for accommodation of drawer.
Question 79] What is the responsibility of the banker when cheque is presented for payment and bank deals with
the cheque negligently?
Ans.: Liability of banker for negligently dealing with bill presented for payment [Section 77]: When a bill of
exchange (cheque is bill of exchange) is accepted to be payable at a specified bank, has been duly presented for
payment and dishonoured, the banker will be liable if such bank deals with Bill so negligently in such way as to cause
loss to the holder.
Loss will be caused to banker if -
(a) Bank negligently or improperly keeps the Bill and does not return the dishonoured Bill to payee/ collecting
bank.
(b) Bank deals with bill improperly.
(c) Bank delivers back the Bill to drawer.
PAYMENT & INTEREST
Question 80] To whom the payment of negotiable instrument must be made as per provisions of the Negotiable
Instrument Act, 1881?
Ans.: To whom payment should be made [Section 78]: Payment of the amount due on a promissory note, bill of
exchange or cheque must be made to the holder of the instrument. Such payment will discharge the maker or
acceptor.
In case of instrument payable "to order", maker or acceptor gets discharge only if the payment is made to 'holder'.
In case of instrument payable to "bearer", payment by any party to instrument to bearer of instrument will discharge
all the parties to the instrument.
Question 81] Examining the provisions of the N egotiable Instruments Act, 1881, answer the following:
(i) Whether any interest is payable on dishonour of negotiable instrument? If yes, at what rate? (ii) At what
rate interest is payable if rate of interest is not specified in the instrument?
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Ans.: Provisions relating to payment of interest is on negotiable instruments are follows:
Interest rate is specified [Section 79] Interest rate is not specified [Section 80]
When interest at a specified rate is expressly made When no rate of interest is specified in the instrument,
payable on a promissory note or bill of exchange, interest on the amount due thereon shall be
interest shall be calculated at the rate specified in the calculated at the rate of 18% p.a., from the date at
instrument. which the same ought to have been paid by the party
Interest is calculated on principle amount due from charged till the realization of the amount due thereon.
the date of the instrument till date of realization of Such interest at 18% p.a. is still payable even if there
amount. is separate agreement between parties to instrument
If the interest rate is excessive and unreasonable, the specifying different rate.
Court may not allow, if -
(a) Interest rate is the nature of penalty u/s 74 of
the Contract Act, 1872.
(b) Instrument has been obtained by undue
influence as defined u/s 16 of the Contract Act, 1872.
Question 82] Whether a person making payment of negotiable instrument is entitled to have possession of the
instrument after making the payment? Can he is liable to pay if the instrument is lost or cannot be produced to
him?
Ans.: Delivery of instrument on payment, or indemnity in case of loss [Section 81(1)]:
♦ Before payment of negotiable instrument, the person liable to pay and called upon to pay is entitled to see
the instrument.
♦ After payment, he is entitled to get the delivery (possession) of the instrument.
♦ If the instrument is lost or cannot be produced to him, he still liable to pay the amount on instrument, but if
any further claim comes against him, he is entitled to be indemnified.
Exception in case of truncated cheque [Section 81(2) & (3)]: Where the cheque is an electronic image of a truncated
cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated
cheque.
A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who
paid the instrument, shall be prima facie proof of such payment.
Question 83] When must the banker refuse payment of a cheque?
State grounds on the basis of which a cheque may be dishonoured by a banker, inspite of the fact that there is
sufficient amount in the account of the drawer.
Ans.: When bank may refuse to honour the cheque:
(1) When balance in the account of drawer is insufficient.
(2) When cheque is mutilated i.e. torn
(3) When cheque is materially altered.
(4) Cheque is undated.
(5) Signature of drawee does not tally with his specimen signature.
(6) Cheque presented after 6 months.
(7) Cheques signed by one authorized signatory where two are required.
(8) If cheque is presented at other branch of bank where drawer does not have account.
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(9) Cheque is appears to be of doubtful.
(10) If bank has lien over the funds.
In all aforesaid cases, banker may honour cheque, but at bank's own risk.
When banker must refuse to honour the cheque:
(1) If drawer has becomes insolvent and banker has notice of the same.
(2) If customers issues 'stop payment' instructions.
(3) When cheque is post dated and presented before the date mentioned on the cheque.
(4) Banker receives notice of death or insanity of the drawer.
(5) When order for attachment of account has been issued by Court.
(6) If drawer informs loss of cheque to banker.
(7) If cheque is issued on a closed bank account.
(8) When banker knows that title of holder is defective.
(9) If customer has assigned his credit balance and notice given to bank.
(10) If such payment will violation of any law e.g. FEMA etc.
DISCHARGE FROM LIABILITY ON NOTES, BILLS & CHEQUES
Question 84] Describe the different modes of discharge of liability of parties with regard to negotiable instrument.
Ans.: Discharge from liability [Section 82]: The maker, acceptor or endorser respectively of a negotiable instrument
is discharged from liability thereon -
(a) Discharge by cancellation: If a holder of the instrument cancels such acceptor's or endorser's name with
intent to discharge him then all the parties get discharged.
(b) Discharge by release: If a holder discharges maker, acceptor or endorser by any mode other than
cancellation (e.g. novation or rescission of contract), maker, acceptor or endorser and all parties deriving title under
such holder get discharged. Notice to such parties is necessary.
(c) Discharge by payment: If the instrument is payable to bearer or has been endorsed in blank, payment to
bearer of the instrument discharge maker, acceptor or endorser from all the parties to the instrument.
Discharge by allowing drawee more than 48 hours to accept [Section 83]: If the holder of a bill of exchange allows
the drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same, all
previous parties get discharged from liability to such holder, unless they consent to give more time.
Discharge by operation of law: Besides mode of discharge specified above, parties can get discharged by operation
of law in following cases -
(a) By order of Court discharging insolvent.
(b) Suit becomes time barred under the Limitation Act, 1963.
Question 85] If drawer suffers damages due non presentation of cheque in reasonable time then whether he is
discharged? Can holder of cheque still recover the amount of cheque from the bank?
Ans.: When cheque not duly presented and drawer damaged thereby [Section 84]: The cheque should be
presented to bank within reasonable time. If cheque is not presented within reasonable time and drawer suffers
actual damages, then drawer gets discharged to the extent of actual damages. In determining what is a reasonable
time, following facts may be taken into consideration -
(a) The nature of the instrument
(b) The usage of trade and banker
(c) The facts of that particular case.
Though drawer gets discharged, the holder of cheque is treated as creditor of the bank in place of drawer and can
recover the amount from the bank.
Examples:
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(i) A draws a cheque for ` 10,000 and has funds at the bank to meet it (when the cheque ought to be presented).
The bank fails (i.e. became bankrupt) before the cheque is presented and pays 25 paise in the rupee. The drawer is
discharged to the extent of ` 7,500.
(ii) A draws a cheque at Delhi on a bank in Calcutta. The bank fails before the cheque could be presented in
ordinary course. A is not discharged, as he has not suffered actual damage through any delay in presenting the
cheque.
Question 86] 'A' draws a cheque for ` 50,000. When the cheque ought to be presented to the drawee bank, the
drawer has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The
payee demands payment from the drawer. What is the liability of the drawer?
CA (PE-II) - May 2003 (6 Marks), May 2005 (6 marks) CA (IPCC) - May 2014 (4 Marks)
Ans.: As per Section 84 of the Negotiable Instruments Act, 1881, the cheque should be presented to bank within
reasonable time. If cheque is not presented within reasonable time and drawer suffers actual damages, then drawer
gets discharged to the extent of actual damages.
Applying the above provisions to the given problem, since the payee has not presented the cheque to the drawer's
bank within a reasonable time when the drawer had funds to pay the cheque, and the drawer has suffered actual
damage, the drawer is discharged from the liability.
Question 87] To whom the bank should make the payment against the cheque in order to get valid discharge?
Ans.: Cheque payable to order [Section 85]: Where a cheque payable to payee or his order, the drawee (bank) is
discharged if it makes the payment in due course to the person who presented the cheque. This provision is made
to protect the banker, as Bank is not expected to be conversant with signature of the payee.
Where a cheque is originally expressed to be payable to bearer, the drawee (bank) is discharged by payment in due
course to the bearer.
Drafts drawn by one branch of a bank on another payable to order [Section 85A]: Where any draft, that is, an
order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable
to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in
due course.
Question 88] A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C's
endorsement and collected proceeds to the cheque through his Bankers. B the drawer wants to recover the
amount from C's Bankers. Decide in the light of the provisions of Negotiable Instruments Act, 1881 -
(i) Whether B the drawer, can recover the amount of the cheque from C's Bankers?
(ii) Whether C is the Fictitious Payee?
(iii) Would your answer be still the same in case C is a fictitious person?
Ans.:
(i) As per Section 85 of the Negotiable Instruments Act, 1881, where a cheque payable to payee or his order,
the drawee (bank) is discharged if it makes the payment in due course to the person who presented the cheque.
Hence, B cannot recover the amount of the cheque from C's banker.
(ii) C has account with bank. B intended to make the payment to C and was known to B; hence C is not fictitious
payee.
(iii) If C is a fictitious person result would be different. It means bank was negligent in opening account in the
name of C and hence bank will not be discharged. Hence, B can't recover the amount of the cheque from C's bankers.
Question 89] Write a short note on: Material Alteration
Under the provisions of the Negotiable Instruments Act, 1881 state as to when shall an alteration made in
negotiable instrument be called 'material alteration'. What alterations in such instrument are permitted under
the Act? What is the effect of such alteration?
CA (Inter) - Nov 2001 (7 Marks), May 2002 (6 Marks) CA (PE-II) - May 2006 (5 Marks)
478
Ans.: An alteration is material which in any way alters the operation of the instrument and the liabilities of the
parties thereto. Material alteration to an instrument makes the instrument void against previous parties.
The alteration is void only if it is material. Following are material alteration:
♦ Alteration of date
♦ Alteration of amount
♦ Alteration of time of payment
♦ Alteration of place of payment
♦ Alteration of name of the parties
♦ Alteration of rate of interest
♦ Putting a stamp on insufficiently stamped instrument [Adapa Baby Sarojini v. Ravulapati Chandrashek- har]
Alterations which are not material alteration:
(a) Putting a date in an undated cheque subsequent to issue, when there is no dispute regarding signature,
amount and the name, is not material alteration. [Bhaskaran Chandrashekharan v. Radhakrishanan, 1998 1 KLT 881
Ker. HC DB]
(b) Filling banks of inchoate instrument up to value covered by stamp paper. [Section 20]
(c) Conversion of blank instrument into full endorsement. [Section 49]
(d) Acceptor making qualified acceptance, if consented by all previous parties. [Section 86]
(e) Alteration made to carry out the common intention of all original parties to the instrument. [Section 87]
(f) Crossing a cheque generally or specially, or crossing a cheque specially which was crossed generally. [Section
125]
Effect of material alteration [Section 87]: Any material alteration of a negotiable instrument renders the same void
as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless
it was made in order to carry out the common intention of the original parties
Acceptor or endorser bound notwithstanding previous alteration [Section 88]: An acceptor or endorser of a
negotiable instrument is bound by his acceptance or endorsement notwithstanding any previous alteration of the
instrument.
Thus, accepting instrument knowing material alteration, the acceptor is liable. Similarly, endorsing the instrument
knowing material alteration makes the endorser liable.
Payment of instrument on which alteration is not apparent [Section 89]: If material alteration is not apparent,
payment in due course as per apparent tenor of instrument will discharge the person who makes payment in good
faith.
Question 90] What do you understand by "Material alteration under the Negotiable Instruments Act, 1881? State
whether the following alterations are material alterations under the Negotiable Instruments Act, 1881?
(i) D in possession of an inchoate instrument where the amount has not been written on the instrument, write
the amount.
(ii) K, in possession of uncrossed cheque received from A, writes 'Payee's Account Only' on the face of the
instrument. CA (Inter) - May 1998 (8 Marks)
(i) Writing amount on the instrument if it is not written earlier is not material alteration as per Section
20.
(ii) Crossing of uncrossed cheque generally or specially, or crossing a cheque specially which was crossed
generally is permitted u/s Section 125 and hence does not amount to material alteration.
Question 91] What do you understand by "Material alteration under the Negotiable Instruments Act, 1881? State
whether the following alterations are material alterations under the Negotiable Instruments Act, 1881?
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(i) The holder of the bill inserts the word "or order" in the bill.
(ii) The holder of the bearer cheque converts it into account payee cheque.
(iii) A bill payable to X is converted into a bill payable to X and Y.
(i) Conversion of instrument payable to bearer into order is not material alteration.
(ii) If the holder of the bearer cheque converts it into account payee cheque then it does not amounts to material
alteration. Crossing of uncrossed cheque generally or specially, or crossing a cheque specially which was crossed
generally is permitted u/s 125.
(iii) If a bill payable to X is converted into a bill payable to X and Y then it amounts to material alteration.
NOTICE OF DISHONOUR
Question 92] When a bill of exchange may be dishonoured by 'non-acceptance' and 'non-payment' under the
provisions of Negotiable Instruments Act, 1881? CA (PE-II) - Nov 2002 (6 Marks) * (i) 2 3
Ans.: If the negotiable instrument is not accepted (in case of Bill) or not paid, it is said to be dishonoured. Dishonour
by non-acceptance [Section 91]: A bill of exchange is said to be dishonoured by non-acceptance -
(a) when the drawee, or one of several drawees not being partners, makes default in acceptance upon being
duly required to accept the bill, or
(b) where presentment is excused and the bill is not accepted.
Presentment is excused if -
(i) If the maker or drawee intentionally prevents presentment.
(ii) Drawee cannot be found after due search.
(iii) Drawee is fictitious person.
Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured.
Dishonour by non-payment [Section 92]: A promissory note, bill of exchange or cheque is said to be dishonoured
by non-payment when the maker of the note, acceptor of the bill or drawee (bank) of the cheque makes default in
payment upon being duly required to pay the same.
When presentment is not necessary and instrument is treated as dishonoured [Section 76(a)]: In following cases,
Bill is dishonoured by non-payment even if not presented for payment -
(1) Maker, drawee or acceptor intentionally prevented presentation.
(2) Place of business is closed.
(3) Person not found even after due search.
Question 93] Referring to the provisions of the Negotiable Instruments Act, 1881, answer the following: (i) By
whom notice of dishonour of negotiable instrument is required to be given?
(ii) To whom such should be given?
When notice of dishonour is not necessary under the Negotiable Instruments Act, 1881?
CA (Inter) - May 1999 (6 Marks), CA (PE-II) - May 2004 (6 Marks)
Ans.: By and to whom notice should be given [Section 93]: When a promissory note, bill of exchange or cheque is
dishonoured by non-acceptance or non-payment notice of dishonour is required to be given. Such notice may be
given by holder of the instrument or some party to instrument who remains liable thereon.
The notice of dishonour is to be given to all parties to whom the holder seeks to make severally liable thereon. If
the parties are jointly liable, notice to one of several parties jointly liable is sufficient.
'All parties' means parties other than maker, drawee or acceptor as notice of dishonour is not required to be given
to them.
Mode in which notice may be given [Section 94]: Notice of dishonour may be given to -
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(a) A duly authorized agent of the person to whom it is required to be given or
(b) Legal representative of person to whom notice is required to be given or
(c) Assignee of insolvent person to whom notice is required to be given.
Notice may be oral or written. Notice can also be sent by post. If the notice is duly directed and sent by post and
miscarries, such miscarriage does not render the notice invalid.
Party receiving must give notice to prior parties [Section 95]: Any party receiving notice of dishonour must give
notice of dishonour to prior parties to whom he wants to hold liable.
Notice of dishonour to Agent [Section 96]: When the notice is given to agent, he should give notice to his principle
in reasonable time. The principle should also give notice of dishonour to prior parties in reasonable time.
When party to whom notice given is dead [Section 97]: When the party to whom notice of dishonour is dispatched
is dead, but the party dispatching the notice is ignorant of his death, the notice is sufficient.
When notice of dishonour is unnecessary [Section 98]: Notice of dishonour is not necessary in following cases:
(i) When right to receive notice is dispensed with by the party either by expressly or by implication.
(ii) When drawer has countermanded payment. (Countermanded means revoked or cancelled)
(iii) When the party charged could not suffer damage for want of notice. (In case of accommodation bill,
accommodated party will not suffer any damage even if notice of dishonour is not given)
(iv) When the party entitled to notice cannot after due search be found.
(v) Where it not possible to give notice for no fault of person giving notice, (e.g. unavoidable circumstance like
death, serious illness, accident etc.)
(vi) If acceptor is drawer, it is not necessary to give notice to him, as he himself had dishonoured the instrument.
(vii) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on
the instrument.
Question 94] Examining the provisions of the Negotiable Instruments Act, 1881, state whether notice of
dishonour is necessary in the following cases:
(i) X having a balance of ` 1,000 with his bankers and having no authority to over draw, drew a cheque for ` 5,000.
The cheque was dishonoured when duly presented for repayment.
(ii) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured on the presentment for
payment.
Ans.: When negotiable instrument is dishonoured, notice is required to be given. However, Section 98 of the
Negotiable Instruments Act, 1881 enumerate the circumstance when notice of dishonoured is not required to be
given. Thus, considering the provisions of Section 98, answer to given problem is as follows:
(i) Since X is aware of the fact that his account in bank has only balance of ` 1,000, no notice of dishonoured of
cheque of ` 5,000 is required to be given to him.
(ii) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured which shows that X is aware
of the fact of dishonour of instrument and hence no notice of dishonour is required to be given to him.
NOTING & PROTEST
Question 95] What do you understand by 'noting & protest'?
Distinguish between: Noting & Protesting
Ans.: When negotiable instrument is dishonoured, it is noted and protested.
In noting, the notary public simply makes a note of dishonour as per information given to him by the holder of the
instrument.
In case of protest, the notary public is required to certify the dishonour of instrument. In such case he is required
to make demand for payment from the person who is liable to pay on such instrument.
Noting is optional in case of inland instrument. Protest is required in case of dishonour of foreign instrument if it
required by law of other country.
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Question 96] When noting & protest for a negotiable instrument is required? When noting is equivalent to
protest?
Write a short note on: Protest for better security
Ans.: Noting [Section 99]: When a promissory note or bill of exchange has been dishonoured by non- acceptance
or non-payment, the holder may cause such dishonour to be noted by a notary public. Such noting may be done on
the instrument or upon a paper attached thereto (allonage) or partly upon instrument or partly upon allonage.
Such noting must be made within a reasonable time after dishonour, and must specify the date of dishonour, the
reason assigned for dishonour and the notary's charges.
Protest [Section 100]: When a promissory note or bill of exchange has been dishonoured by non-acceptance or
non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary
public. Such certificate is called a protest.
Protest for better security: When the acceptor of a bill of exchange has become insolvent, or his credit has been
publicly impeached then before the maturity of the bill, the holder through notary public may demand better
security from the acceptor. If acceptor refuses to give better security within reasonable time, the notary will note
and certify the fact. Such certificate is called a protest for better security.
Contents of protest [Section 101]: A protest u/s 100 must contain -
(a) either the instrument itself, or a literal transcript of the instrument and of everything written or printed
thereupon;
(b) the name of the person for whom and against whom the instrument has been protested;
(c) a statement that payment or acceptance, or better security, as the case may be, has been demanded of such
person by the notary public; the terms of his answer, if any, or a statement that he gave no answer or that he could
not be found;
(id) when the note or bill has been dishonoured, the place and time of dishonour, and, when better security has
been refused, the place and time of refusal;
(e) the subscription of the notary public making the protest;
(f) in the event of an acceptance for honour or of a payment for honour, the name of the person by whom, of the
person for whom, and the manner in which, such acceptance or payment was offered and effected.
Demand may be made by notary public or his clerk: A notary public may make the demand either in person or by
his clerk. He can also make demand by registered letter where authorized by agreement or usage.
Notice of protest [Section 102]: When a promissory note or bill of exchange is required by law to be protested,
notice of such protest must be given instead of notice of dishonour, in the same manner and subject to the same
conditions; but the notice may be given by the notary public who makes the protest.
Protest for non-payment after dishonour by non-acceptance [Section 103]: All bills of exchange drawn payable at
some other place than the place mentioned as the residence of the drawee, and which are dishonoured by non-
acceptance, may, without further presentment to the drawee, be protested for nonpayment in the place specified
for payment, unless paid before or at maturity.
Protest of foreign bills [Section 104]: Foreign bills of exchange must be protested for dishonour when such protest
is required by the law of the place where they are drawn.
When noting equivalent to protest [Section 104A]: Where a bill or note is required to be protested within a
specified time or before some further proceeding is taken, it is sufficient that the bill has been noted for protest
before the expiration of the specified time or the taking of the proceedings. Thus, where foreign law requires protest
within specified time, it is sufficient if it is noted within that time. Then formal protest can be made even after the
prescribed time.
REASONABLE TIME
Question 97] What are the provisions contained in Negotiable Instruments Act, 1881 relating to 'reasonable
time'?
482
Ans.: Reasonable time [Section 105]: In determining what is a reasonable time for presentment for acceptance or
payment, for giving notice of dishonour and for noting, regard shall be had to:
(a) the nature of the instrument and
(b) the usual course of dealing with respect to similar instruments.
In calculating such time, public holidays shall be excluded.
Reasonable time of giving notice of dishonour [Section 106]: If the holder and the party to whom notice of
dishonour is given carry on business or live in different places, such notice is given within a reasonable time if it is
dispatched by the next post or on the day next after the day of dishonour.
If the said parties carry on business or live in the same place, such notice is given within a reasonable time if it is
dispatched in time to reach its destination on the day next after the day of dishonour.
Reasonable time for transmitting such notice [Section 107]: A party receiving notice of dishonour, who seeks to
enforce his right against a prior party, transmits the notice within a reasonable time if he transmits it within the
same time after its receipt as he would have had to give notice if he had been the holder.
ACCEPTANCE, PAYMENT FOR HONOUR & REFERENCE IN CASE OF NEED
Question 98] Explain: Acceptance for honour CA (IPCC) - Nov 2014 (2 Marks)
Ans.: Acceptance for honour [Section 108]: If a bill is dishonoured by non-acceptance, another person who was not
party to the bill, can accept the same for honour of drawer after bill is noted or protested which is known as
acceptance for honour. This is done to protect the credit of party liable on the bill and to prevent legal proceedings
being taken against him.
How acceptance for honour must be made [Section 109]: A person desiring to accept for honour must, by writing
on the bill under his hand, declare that he accepts under protest the protested bill for the honour. Acceptance by
honour is made by writing 'Accepted for honour of Mr. B'. He should accept full amount of the bill.
Acceptance not specifying for whose honour it is made [Section 110]: Where the acceptance does not express for
whose honour it is made, it shall be deemed to be made for the honour of the drawer.
Liability of acceptor for honour [Section 111]: The party for whose honour he accepted the Bill and all
prior parties are liable in their respective capacities to compensate the acceptor for honour for all the loss or
damages sustained by him in consequences of such acceptance.
The bill should be presented to drawee on due date even if he had not accepted it. If he refuses to make payment,
the bill should be presented or forwarded to acceptor for honour within one day after maturity.
When acceptor for honour may be charged [Section 112]: An acceptor for honour can be charged only on fulfilling
following conditions:
(a) The Bill should be presented to drawee for payment on the date of maturity (even if he has refused to accept
the bill.
(b) After the bill is dishonoured by him for payment, it should be noted or protested for such dishonour.
Question 99] Write a short note on: Payment for honour
Ans.: Payment for honour [Section 113]: When payment is made by any person for the honour of any party liable
to pay is known as payment for honour.
Any person can make payment for honour after complying following conditions
(a) A bill of exchange has been noted or protested for non-payment.
(b) The person paying for honour or his agent makes a declaration before a notary public the name of the party
in whose honour he is paying.
(c) Such declaration has been recorded by notary public.
Right of payer for honour [Section 114]: Person paying the Bill gets all the rights of holder of the Bill after payment.
He can recover interest and expenses from party in whose honour he made payment.
Question 100] Distinguish between: Acceptance for honour & Payment for honour Ans.: Following are the main
points of distinction between acceptance for honour & payment for honour:
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Points Acceptance for honour Payment for honour
Meaning If a bill is dishonoured by non-acceptance, When payment is made by any person for the
another person who was not party to the bill, can honour of any party liable to pay is known as
accept the same for honour of drawer after bill payment for honour.
is noted or protested which is known as
acceptance for honour.
When Acceptance for honour is given before Bill is due. Payment for honour is only after Bill is due.
Consent Consent of holder of Bill is necessary in case of Consent of holder of Bill is not necessary in case
of holder acceptance for honour. of acceptance for honour.
Rights Acceptor for honour is enti tied to get Person paying the Bill gets all the rights of holder
compensation for all loss and damages sustained of the Bill after payment. He can recover interest
by him. and expenses from party in whose honour he
made payment.
Question 101] Write a short note on: Drawee in case of need

Ans.: The Bill is drawn as an order to drawee to pay certain amount to payee. If drawee refuses to honour the Bill,
another person may be named in the Bill in case of need. Such person is known as 'drawee in case of need'. If drawee
dishonours or does not accept the bill, it should be presented to drawee in need.
Drawee in case of need [Section 115]: Where a drawee in case of need is named in a bill of exchange, or in any
endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.
Acceptance and payment without protest [Section 116]: A drawee in case of need may accept and pay the bill of
exchange without previous protest.
SPECIAL RULE OF EVIDENCE
Question 102] A negotiable instrument is subject to certain presumptions. Explain.
Ans.: Presumptions as to negotiable instruments [Sections 118 & 119]: A negotiable instrument is subject to certain
presumptions. These have been recognized by the Sections 118 and 119 with a view to facilitate the business
transactions. These are described below:
It shall be presumed that:
(1) Every negotiable instrument was made or drawn for consideration irrespective of the consideration
mentioned in the instrument or not.
(2) Every negotiable instrument having a date was made on such date.
(3) Every accepted bill of exchange was accepted within a reasonable time before its maturity.
(4) Every negotiable instrument was transferred before its maturity.
(5) The instruments were endorsed in the order in which they appear on it.
(6) A lost or destroyed instrument was duly signed and stamped.
(7) The holder of the instrument is a holder in due course.
(8) In a suit upon an instrument which has been dishonoured, the Court shall presume the fact of dishonour, or
proof of the protest.
However these legal presumptions are rebuttable by evidence to the contrary. The burden to prove to the contrary
lies upon the defendant to the suit and not upon the plaintiff.
SPECIAL PROVISIONS AS TO CHEQUES
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Question 103] What is 'crossing of a cheque'? Explain in brief the various methods of crossing of a cheque.
State the significance of 'crossing of a cheque'. What is the effect of 'account payee' crossing?
Write a short note on: Special crossing CS (Foundation) - Dec 1996 (5 Marks)
Write a short note on: Account payee crossing CS (Foundation) - Dec 2004 (5 Marks)
What do you understand by "Crossing of cheques"? What is the object of crossing? State the implications of the
following crossings:
(i) Restrictive crossing
(ii) Not-negotiable crossing CA (PE-II) - Nov 2003 (6 Marks)
Ans.: Purposes of crossing a cheque is to provide security to system of cheque payment. Tracing payee is easy if
amount is deposited in his account as the banker is expected to check details of person before opening an account.
If cheque payable to bearer goes in wrong hand, the finder can encash it and it will be impossible to find the person
and recover the amount. Provisions of crossing a cheque are only in respect of cheques and not in respect of bill of
exchange or promissory notes.
Cheque crossed generally [Section 123]: Cheque crossed generally means a cheque which bears across its face an
addition of the words '& Company' or any abbreviation thereof, between two parallel transverse lines, or of two
parallel transverse lines simply, either with or without the words 'Not Negotiable'.
Cheque crossed specially [Section 124]: Cheque crossed specially means a cheque which bears across its face an
addition of the name of a banker, either with or without the words 'Not Negotiable'.
Restrictive crossing: A cheque with just two cross lines across its face is simple crossing. Such cheque is freely
negotiable. The only restriction that payment will be through banker of payee. Addition of words like, 'Not
negotiable', 'Account Payee', 'Axis Bank', restrict its negotiability. Such crossings are 'restrictive crossings'.
Not-negotiable crossing [Section 130]: If a crossed cheque bears the words 'Not Negotiable', person taking a cheque
cannot get better title than transferor. Thus, mere writing words, 'Not Negotiable' does not means that the cheque
is not transferable. It is still transferable, but the effect is that transferee cannot get title better than what transferor
had. If there is defect in title of transferor, the same defect will apply to title of transferee also. If a non-negotiable
cheque is presented to bank, it should credit to payee's account only. Otherwise, bank will be held liable for
negligence and will have to pay compensation.
Account Payee Crossing: There is no provision in Negotiable Instruments Act, 1881 regarding 'Account Payee
Crossing'. This is commercially followed practice.
If 'Account Payee' marking appears on cheque, it doesn't mean that is not negotiable. Such 'account payee cheque'
still remains transferrable. [National Bank v. Silke, 18911 QB 435]
485
Thus, cheque marked as 'Account Payee' or 'Not Negotiable' can be transferred. Such 'Account Payee' cheque can
be credited in some other account, as Act makes no provisions for account payee crossing. However, this is
prohibited as per RBI Guideline.
Crossing after issue [Section 125]: Where a cheque is uncrossed, the holder may cross it generally or specially.
Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally, or
specially, the holder may add the words 'Not Negotiable'. Where a cheque is crossed specially, the banker to whom
it is crossed may again cross it specially to another banker (who is his agent) only for collection.
Payment of cheque crossed generally [Section 126]: Where a cheque is crossed generally, the banker on whom it
is drawn shall pay it only to another banker.
Payment of cheque crossed specially: Where a cheque is crossed specially, the banker on whom it is drawn shall
not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.
Payment of cheque crossed specially more than once [Section 127]: Where a cheque is crossed specially to more
than one banker, the banker on whom it is drawn shall refuse payment thereof. Thus, special crossing shall be only
to one banker.
Payment in due course of crossed cheque discharge banker & drawer [Section 128]: Where the banker on whom
a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and the drawer are
discharged as if the cheque has been paid to true owner.
Payment of crossed cheque out of due course [Section 129]: If a banker paying a cheque crossed generally to a
person other than collecting banker, the banker shall be liable to the true owner of the cheque for any loss he may
sustain owing to the cheque having been so paid.
Application of provisions of crossing to drafts [Section 131 A]: The provisions crossing shall apply to any draft, as
if the draft were a cheque. Thus, crossed demand draft gets same protection as crossed cheque.
Question 104] Explain as to why shall the combination of 'not negotiable' with 'Account payee' crossing be
considered as the safest form of crossing a cheque. CA (PCC) - Nov 2007 (5 Marks)
Ans.: The addition of the words 'not negotiable' in a crossed cheque does not restrict the transferability of the
instrument, but the cheque is deprived of its special feature of negotiability. If a crossed cheque bears the words
'Not Negotiable', person taking a cheque cannot get a titled better than transferor. Thus, mere writing words, 'Not
Negotiable' does not means that the cheque is not transferable. It is still transferable, but the effect is that
transferee cannot get better title than what transferor had.
Account payee crossing directs the collecting banker to collect it for the payee only and warns that if the amount is
collected for someone else, he may be held liable for damages.
In view of the advantages explained above, the continuation of 'not negotiable' and 'A/c payee' crossing can be
considered as the safest form of crossing.
Question 105] Bank receiving payment of crossed cheque is protected from legal action on account of defective
title of payee. Elaborate.
Ans.: Non-liability of banker receiving payment of cheque [Section 131]: If a banker receives payment for a
customer in good faith and without negligence for a generally or specially crossed cheque then banker shall not be
liable to true owner of cheque just because bank has received payment for customer, even if title of the person
depositing the cheque is defective.
Protection is available to collecting banker only if -
(a) Cheque is crossed generally or specially.
(b) Collection is in good faith and without negligence.
Thus, once a cheque a is collected by collecting banker to proper account then bank is not liable to true owner even
though there is defect in title of payee. The provision has been made with a view to protect the collecting banker
against the legal action for dispute over real ownership i.e. title of the cheque.
This provision is applicable for crossed cheque and not for bearer cheque as such bearer cheque can be collected at
the counter of the bank without depositing a cheque in the account of payee.
486
Question 106] A cheque payable to bearer is crossed generally and marked "not negotiable". The cheque is lost
or stolen and comes into possession of B who takes it in good faith and gives value for it. B deposits the cheque
into his own bank and his banker presents it and obtains payment for his customer from the bank upon which it
is drawn. The true owner of the cheque claims refund of the amount of the cheque from B.
Ans.: The cheque in the given case was crossed generally and marked 'Not Negotiable'. Thereafter, the cheque was
lost or stolen and came into the possession of B, who takes it in good faith and gives value for it.
As per Section 130 of the Negotiable Instruments Act, 1881, if a crossed cheque bears the words 'Not Negotiable',
person taking a cheque cannot get a title better than transferor. Thus, mere writing words, 'Not Negotiable' does
not means that the cheque is not transferable. It is still transferable, but the effect is that transferee cannot get title
better than what transferor had. If there is defect in title of transferor, the same defect will apply to title of
transferee also.
In view of these provisions, B, even though was a holder in due course, did not acquire any title to the cheque as
against its true owner. The addition of the words 'not negotiable' entirely takes away the main feature of
negotiability, which is, that a holder with a defective title can give a good title to a subsequent holder in due course.
B did not obtain any better title than his immediate transferor, who had either stolen or found the cheque and was
not the true owner of the cheque. Therefore, as regards the true owner, B was in no better position than the
transferor. B is also liable to repay the amount of the cheque to the true owner. He can, however, proceed against
the person from whom he took the cheque.
Both the collecting banker and the paying bankers are also not liable. Since the collecting banker, in good faith and
without negligence, had received payment for B, who was its customer, the banker would not be liable, in case the
title proved to be defective, to the true owner by reason only of having received the payment of the cheque.
[Section 131]
Since the paying banker on whom the crossed cheque was drawn, had paid the same in due course, the banker
would also not be liable to the true owner. [Section 128]
Question 107] Write a short note on: Stale Cheques
The validity period of cheque is 3 months. Comment. CA (IPCC) - Nov 2012 (1 Mark)
Ans.: A cheque is overdue or becomes statute-barred after 3 years from its due date of issue. A holder cannot sue
on the cheque after that time. Apart from this provision, the holder of a cheque is required to present it for payment
within a reasonable time, as a cheque is not meant for indefinite circulation.
In India, a cheque, which has been in circulation for more than 6 months, is regarded by bankers as stale. If, as a
result of any delay in presenting a cheque, the drawer suffers any loss, as by the failure of the bank, the drawer is
discharged from liability to the holder to the extent of the damage.
BILLS IN SETS
Question 108] Write a short note on: Bill in sets
Ans.: Set of bills [Section 132]: Bills of exchange may be drawn in parts, each part being numbered and containing
a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a
set; but the whole set constitutes only one bill, and is extinguished when one of the parts, if a separate bill, would
be extinguished.
Exception: When a person accepts or endorses different parts of the bill in favour of different persons, he and the
subsequent endorsers of each part are liable on such part as if it were a separate bill.
Holder of first acquired part entitled to all [Section 133]: As between holders in due course of different parts of
the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the
bill.
PENALTIES
Question 109] Dishonour of cheque for want of funds is an offence under the Negotiable Instruments , Act, 1881.
Do you agree with statement? CS (Foundation) - June 2000 (3 Marks)
487
What are the consequences of dishonour of cheque? CS (Foundation) - June 2002 (6 Marks)
What are the penalties prescribed in the Negotiable Instruments Act, 1881 for dishonour of cheque for
insufficiency of funds in the account of the person issuing cheque? What steps payee should take for making the
drawer liable for this offence? CA (Inter) - May 1998 (7 Marks)
State the circumstances under which the drawer of a cheque will be liable for an offence relating to dishonour of
the cheque under the Negotiable Instruments Act, 1881.
Ans.: Dishonour of cheque [Section 138]: A person deemed to have committed offence of dishonour of cheque if -
(i) The drawer has issued cheque to another person from his account with bank.
(ii) The cheque is issued for discharge of any debt or other liability.
(ii) The drawee has presented the cheque to the bank within 6 months from the date on which it is drawn.
(iv) The cheque is returned by drawer's bank as unpaid.
(v) The cheque is return due to insufficient funds in drawer's bank account.
(vi) The payee makes a demand for the payment 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.
(vii) The drawer of cheque fails to make the payment to the payee within 15 days of the receipt of the notice.
Penalty for dishonour of cheque: The person dishonouring the cheque shall be punished -
- with imprisonment for a term which may be extended to 2 years or
- with fine which may extend to twice the amount of the cheque or
- with both.
Question 110] Write a short note on: Offences by companies under the Negotiable Instruments Act, 1881
Ans.: Offences by companies [Section 141]: If the person committing an offence under section 138 is a company,
every person who, at the time the offence was committed, was in charge of, and was responsible to, the company
for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly.
However, a person shall not be liable to punishment if he proves that -
(a) the offence was committed without his knowledge, or
(b) that he had exercised all due diligence to prevent the commission of such offence.
Where any offence under the Act has been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
(a) 'Company7 means anybody corporate and includes a firm or other association of individuals.
(b) 'Director', in relation to a firm, means a partner in the firm.
Question 111] Examine, whether there is an offence under the Negotiable Instruments Act, 1881, if a Drawer of
a cheque after having issued the cheque, informs the Drawee not to present the cheque as well as informs the
Bank to stop the payment.
CA (Inter) - May 2000 (6 Marks), CA (PCC) - May 2007 (2 Marks)
Bholanath drew a cheque in favour of Surender. After having issued the cheque, Bholanath requested Surender
not to present the cheque for payment and gave a stop payment request to the bank in respect of the cheque
issued to Surender. Decide under the provisions of the Negotiable Instrument Act, 1881 whether the said acts of
Bholanath constitutes an offence? CA (Inter) - May 2018 (4 Marks)
488
Ans.: The Supreme Court held in Modi Cements Ltd. v. Kuchil Kumar Nandi held that once a cheque is issued by the
drawer, a presumption that the cheque has been issued for the discharge of any debt or other liability follows and
merely because the drawer issued a notice thereafter to the drawee as to the bank for stoppage of payment, it will
not preclude an action u/s 138 of the Negotiable Instrument Act, 1881. Hence, the drawer of the cheque will be
liable for the offence u/s 138 for dishonour of cheque.
Question 112] Whether offences under the Negotiable Instruments Act, 1881 are compoundable?
Ans.: Offences to be compoundable [Section 147]: Notwithstanding anything contained in the Code of Criminal
Procedure, 1973, every offence punishable under the Act shall be compoundable.
HUNDIS
Question 113] What is hundi? Describe some of the important hundis.
CS (Foundation) - June 2006 (6 Marks) * 1
Ans.: Hundis are negotiable instruments written in an oriental language. They are sometimes bills of exchange and
sometimes promissory notes, and are not covered under the Negotiable Instruments Act, 1881. Generally, they are
governed by the customs and usages in the locality but if custom is silent on the point in dispute before the Court,
this Act applies to the hundis. The term "hundi" was formerly applicable to native bills of exchange. The promissory
notes were then called "teap". The hundis were in circulation in India even before the present Negotiable
Instrument Act, 1881 came into operation. The usages attached to these hundis varied with the locality in which
they were in circulation.
Generally understood, the term "hundi" includes all indigenous negotiable instruments whether they are bills of
exchange or promissory notes. An instrument in order to be a hundi must be capable of being sued by the holder in
his own name, and must by the custom of trade be transferred like cash by delivery. Obviously the customs relating
to hundis were many. In certain parts of the country even oral acceptance was in vague.
The following types of hundis are worth mentioning:
(1) Shah Jog Hundi: "Shah" means a respectable and responsible person or a man of worth in the bazar. Shah
Jog Hundi means a hundi which is payable only to a respectable holder as opposed to a hundi payable to bearer. In
other words the drawee before paying the same has to satisfy himself that the payee is a 'SHAH'.
(2) Jokhmi Hundi: A "jokhmi" hundi is always drawn on or against goods shipped on the vessel mentioned in the
hundi. It implies a condition that money will be paid only in the event of arrival of the goods against which the hundi
is drawn. It is in the nature of policy of insurance. The dif-
ference, however, is that the money is paid before hand and is to be recovered if the ship arrives safely.
(3) Jawabee Hundi: According to Macpherson, "A person desirous of making a remittance writes to the payee
and delivers the letter to a banker, who either endorses it on to any of his correspondents near the payee's place
of residence, or negotiates its transfer. On the arrival, the letter is forwarded to the payee, who attends and gives
his receipt in the form of an answer to the letter which is forwarded by the same channel of the drawer or the
order." Therefore, this is a form of hundi which is used for remitting money from one place to another.
(4) Nam jog Hundi: It is a hundi payable to the party named in the bill or his order. The name of the payee is
specifically inserted in the hundi. It can also be negotiated like a bill of exchange. Its alteration into a Shah Jog hundi
is a material alteration and renders it void.
(5) Darshani Hundi: This is a hundi payable at sight. It is freely negotiable and the price is regulated by demand
and supply. They are payable on demand and must be presented for payment within a reasonable time after they
are received by the holder.
(6) Miadi Hundi: This is otherwise called muddati hundi, that is, a hundi payable after a specified period of time.
Usually money is advanced against these hundis by shroffs after deducting the advance for the period in advance.
There are other forms of hundis also like.
(7) Dhani Jog Hundi: A hundi which is payable to "dhani" i.e., the owner.
(8) Firman Jog Hundi: Which is payable to order if can be negotiated by endorsement and delivery.
489
SOLVED PAPER
CS - EXECUTIVES (NEW SYLLABUS)
DEC. - 2018
PARTI
Q. 1. (a) The object of the Foreign Contribution (Regulation) Act, 2010 is to legalise foreign donations and hospitality
to office bearers of political parties. Comment.
(b) Capital goods and spares that have become obsolete/surplus, may be exported, transferred to another
Special Economic Zone unit but law does not permit to dispose of in Domestic Tariff Area on payment of applicable
duties. Comment.
(c) Prior approval of RBI is not mandatory for transfer of Capital instruments from resident to non-residents by
way of sale. Comment.
(d) What are the functions of Reserve Bank of India ? (5 marks each)
Ans. 1(a)
The objects of the Foreign Contribution (Regulation) Act, 2010 are:
♦ To regulate the acceptance and utilization of foreign contribution or foreign hospitality and
♦ To ensure that parliamentary institution, political associations, academic and other voluntary organizations
as well as individuals working in the important areas of national life may function in a manner consistent with the
values of a sovereign democratic republic.
Thus, it is incorrect say that object of Act is to legalize foreign donations and hospitality to office bearers of political
parties.
(b) Capital goods and spares that have become obsolete/ surplus, may either be exported, transferred to
another EOU/EHTP/STP/BTP/SEZ unit or disposed of in DTA on payment of applicable duties.
Benefit of depreciation, as applicable, will be available in case of disposal in DTA only when the unit has achieved
positive NFE taking into consideration the depreciation allowed. No duty shall be payable in case capital goods, raw
material, consumables, spares, goods manufactured, processed or packaged, and scrap/ waste/ remnants/rejects
are destroyed within unit after intimation to Customs authorities or destroyed outside unit with permission of
Customs authorities. Destruction as stated above shall not apply to gold, silver, platinum, diamond, precious and
semi-precious stones.
Thus, it is incorrect to say that capital goods and spares that become obsolete/surplus cannot be disposed of in
Domestic Tariff Area.
(c) Transfer of capital instruments from resident to non-residents by way of sale requires prior approval of RBI
where:
(a) Transfer is at a price which falls outside the pricing guidelines specified by the Reserve Bank from time to
time.
(b) Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the amount of
consideration.
Further, in case approval is granted for a transaction, the same should be reported in Form FC-TRS, to an AD
Category-I bank for necessary due diligence, within 60 days from the date of receipt of the full and final amount of
consideration.
(d) Various functions of RBI under the RBI Act, 1934 are as follows:
♦ Banking Functions
♦ Issue bank notes
♦ Monetary Policy Functions
♦ Public Debt Functions
♦ Foreign Exchange Management
490
♦ Banking Regulation & Supervision
♦ Regulation and Supervision of NBFCs
♦ Regulation & Supervision of Co-operative banks
♦ Regulation of Derivatives and Money Market Instruments
♦ Payment and Settlement Functions
♦ Consumer Protection Functions
♦ Financial Inclusion and Development Functions
Attempt all parts of either Q. No. 2 or Q. No. 2A
Q. 2. (a) What is the object of service export from India Scheme and what are the eligibility conditions of obtaining
benefits of the same under Foreign Trade Policy 2015-20 ? (4 marks)
(b) What do you mean by Non-Banking Financial company ? Enumerate the powers of Reserve Bank of India
vested in the Reserve Bank of India Act for regulating and supervising the Non-Banking Financial companies.
(4 marks)
(c) Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulation, 2015 deals with
limits on possession and retention of foreign currency or foreign coins. What is the limit of possession or retention
of foreign currency or foreign coins under Regulation 3 ? (4 marks)
(id) What are the eligibility criterias for forming the trust under the Indian Trust Act, 1882 ? (4 marks)
(e) Section 34 of Special Economic Zones Act, 2005 cast upon the Authority a duty to undertake such measures
for the development, operation and management of Special Economic Zone. Explain. (4 marks)
Ans. 2 (a)
Served from India Scheme (SFIS) has been replaced with Service Exports from India Scheme (SEIS).
Objective: Objective of Service Exports from India Scheme is to encourage export of notified Services from India.
Eligibility:
(a) Service Providers of notified services, located in India, shall be rewarded under SEIS, subject to conditions as
may be notified.
(b) Such service provider should have minimum net free foreign exchange earnings of US$ 15,000 in preceding
financial year to be eligible for Duty Credit Scrip. For Individual Service Providers and sole proprietorship, such
minimum net free foreign exchange earnings criteria would be US$ 10,000 in preceding financial year.
(c) Net Foreign exchange earnings for the scheme are defined as under:
Net Foreign Exchange = Gross Earnings of Foreign Exchange minus Total expenses/payment/ remittances of foreign
exchange by the IEC holder, relating to service sector in the financial year.
(d) If the IEC holder is a manufacturer of goods as well as service provider, then the foreign exchange earnings and
Total expenses/payment/remittances shall be taken into account for service sector only.
(e) In order to claim reward under the scheme, Service provider shall have to have an active IEC at the time of
rendering such services for which rewards are claimed.
(b) Non-Banking Financial Company (NBFC) -
- is a company registered under the Companies Act, 1956/2013
- engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures and
securities issued by Government or local authority or other marketable securities of a like nature
- engaged in the business of leasing, hire-purchase, insurance business and chit business.
NBFC but does not include any institution whose principal business is that of -
♦ Agriculture activity,
♦ Industrial activity,
♦ Purchase or sale of any goods or providing any services and
♦ Sale/purchase/construction of immovable property.
491
Powers of RBI: The Reserve Bank has been given the powers under the RBI Act, 1934 to register, lay down policy,
issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of
principal business.
Power of RBI to take action: The RBI can penalize NBFCs for violating the provisions of the RBI Act, 1934 or the
directions or orders issued by RBI under the Act. The penal action can also result in RBI cancelling the Certificate of
Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a
winding-up petition.
Prudential Regulations applicable to NBFCs: The RBI has issued detailed directions on prudential norms. These
directions are as follows:
Directions, 2016.
Directions, 2016.
♦ Non-Banking Financial Company Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
♦ Core Investment Companies (Reserve Bank) Directions, 2016.
♦ Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017. These
directions inter alia, prescribe guidelines and covers the following:
- Income recognition
- Asset classification and provisioning requirements applicable to NBFCs
- Exposure norms
- Disclosures in the balance sheet
- Requirement of capital adequacy
- Restrictions on investments in land and building and unquoted shares
- Loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery
- Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.
(c) As per Section 4 of the Foreign Exchange Management Act, 1999, person resident in India can acquire, hold,
own, possess or transfer any foreign exchange only after compliance with the provisions of the Act, Rules and
Regulations. In this regard the RBI has framed FEM (Possession & Retention of Foreign Currency) Regulations,
2015.
Limits for possession and retention of foreign currency or foreign coins [Regulation 3]: The RBI specifies the
following limits for possession or retention of foreign currency or foreign coins:
(i) An authorized person acting within the scope of his authority may possess foreign currency and coins without
any limit.
(ii) Any person may possess foreign coins without any limit.
(iii) A person resident in India may possess foreign currency notes, bank notes and foreign currency travellers cheque
not exceeding US$ 2,000 provided that such foreign exchange -
(a) was acquired by him while on a visit to any place outside India by way of payment for services not arising
from any business in or anything done in India,
(b) was acquired by him, from any person not resident in India and who is on a visit to India as honorarium or
gift or for services rendered or in settlement of any lawful obligation,
(c) was acquired by him by way of honorarium or gift while on a visit to any place outside India,
(d) represents unspent amount of foreign exchange acquired by him from an authorized person for travel
abroad.
(d) Registered Trusts and Societies engaged in manufacturing/ educational/hospital sector are allowed to make
investment (or financial commitment) in the same sector(s) in a JV/WOS outside India, with the prior approval of
the RBI.
492
Eligibility Criteria for Trust:
(i) The Trust should be registered under the Indian Trust Act, 1882.
(ii) The Trust deed permits the proposed investment overseas.
(iii) The proposed investment should be approved by the trustee.
(iv) The AD Category -1 bank is satisfied that the Trust is KYC (Know Your Customer) compliant and is engaged in
a bona fide activity.
(v) The Trust has been in existence at least for a period of 3 years.
(vi) The Trust has not come under the adverse notice of any Regulatory/Enforcement agency like the Directorate
of Enforcement, Central Bureau of Investigation (CBI) etc.
(e) As per Section 34 of the Special Economic Zones Act, 2005, subject to the provisions of the Act, it shall be the
duty of each Authority to undertake such measures as it thinks fit for the development, operation and management
of the SEZ for which it is constituted.
In addition to above, the Authority shall discharge following functions:
(a) To develop infrastructure in the SEZ.
(b) To promote exports from the SEZ.
(c) To reviewing the functions and performance of the SEZ.
(d) To levy user or service charges or fees or rent for the use of properties belonging to the Authority.
(e) To perform other prescribed functions.
OR (Alternate question to Q. No. 2)
Q. 2A. (i) What are the obligations on Indian Party which has made direct investment outside India ? (4 marks)
(ii) Which are the organizations and persons who are specifically debarred from receiving foreign contributions
under Foreign Exchange Regulation Act, 2010 ? (4 marks)
(iii) Who is an authorized person under Foreign Exchange Management Act, 1999 and what are his obligations ? (4
marks)
(iv) Who can establish the Special Economic Zone ? Discuss. (4 marks)
(v) State to whom the provisions of Non-Banking Financial Company-Systemically Important Non-Deposit Taking
Company and Deposit Taking Company (Reserve Bank) Directions, 2016 shall apply ? (4 marks)
Ans. 2A (i)
An Indian Party which has made direct investment outside India is required to comply with the following:
♦ Receive share certificates or any other documentary evidence of investment in the foreign JV/ WOS as an
evidence of investment and submit the same to the designated AD within 6 months.
♦ Repatriate to India, all dues receivable from the foreign JV/ WOS, like dividend, royalty, technical fees etc.
♦ Submit to the RBI through the designated Authorized Dealer, every year, an Annual Performance Report in
Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party.
♦ Report the details of the decisions taken by a JV/WOS regarding diversification of its activities/ setting up of
step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by
the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also
to be included in the relevant Annual Performance Report.
♦ In case of disinvestment, sale proceeds of shares/ securities are to be repatriated to India immediately on
receipt thereof and in any case not later than 90 days from the date of sale of the shares/securities and documentary
evidence to this effect is to be submitted to the RBI through the designated Authorized Dealer.
♦ Submit an Annual Performance Report (APR) in Form ODI Part III to the RBI by 30th of June every year in
respect of each Joint Venture (JV)/Wholly Owned Subsidiary (WOS) outside India set up or acquired by the Indian
Party/Resident Individual.
493
(«) As per Section 3(1) of the Foreign Contribution (Regulation) Act, 2010, following person or organization cannot
accept foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body
controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & ML A)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audio visual news or
current affairs programmes through any electronic mode, or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).
(tit) Authorized Person [Section 2(c)]: Authorized person means an authorized dealer, money changer, off-shore
banking unit or any other person for the time being authorized u/ s 10 to deal in foreign exchange or foreign
securities.
Generally, all nationalized banks, leading non-nationalized banks and foreign banks are appointed as authorized
dealers to deal in foreign exchange.
(1) Authorization to act as Authorized Person [Section 10(1) & (2)]: The RBI may, on an application made to it,
authorize any person to be known as authorized person to deal in foreign exchange or securities. An authorization
shall be in writing and shall be subject to the prescribed conditions.
(2) Revocation of authorization [Section 10(3)]: An authorization granted may be revoked by the RBI
at any time if the RBI is satisfied that-
(a) It is in public interest so to do
(b) The authorized person has failed to comply with the condition or has contravened any of the provisions of
the Act or any rule, regulation, notification, direction or order made thereunder
However, a reasonable opportunity of making a representation in the matter should be given to authorized person
before revocation.
(3) Duties of Authorized Person [Section 10(4)]: An authorized person shall comply with general or special
directions or orders given by the RBI. An authorized person shall not engage in any transaction which is not in
conformity with the terms of his authorization without the previous permission of the RBI.
(4) Obtaining information & refusal to deal [Section 10(5)]: An authorized person shall before undertaking and
declaration from a person to satisfy himself that the transaction in is not violation of FEMA. If authorized person
has any doubt, he should refuse the transaction in writing. If the authorized person has reason to believe that
transaction is contemplated, he should the matter to the RBI.
(5) Effect of misuse [Section 10(6)]: A person who has foreign exchange shall be deemed to have committed
contravention of the provisions of the FEMA if such person -
- Does not use foreign exchange for purpose for which it was acquired or
- Does not surrender it to authorized person within the specified period or
- Uses the foreign exchange for any other purpose other than for which it was acquired.
(iv) Who can set-up SEZ and procedure for making proposal to establish SEZ [Section 3]:
(1) A SEZ may be established, either jointly or severally by the Central/State Government, or any person for
manufacture of goods or rendering services or for both or as a Free Trade and Warehousing Zone.
(2) Any person, who intends to set up SEZ may make a proposal to the State Government for the purpose of
setting up the SEZ after identifying the area.
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(3) A person who intends to set up SEZ, may make a proposal to the Board for the purpose of setting up the SEZ.
In case where a proposal is directly received from a person, the Board may grant approval and after receipt of such
approval, the person concerned shall obtain the concurrence of the State Government within the prescribed period.
(4) A State Government can also set up SEZ. It should identify the area for SEZ and forward the proposal to the
Board for the purpose of setting up the SEZ.
However, the Central Government may suo motu set up and notify the Special Economic Zone -
(a) After consulting the State Government concerned;
(b) Without referring the proposal for setting up the SEZ to the Board;
(c) After identifying the area.
(5) Every proposal shall be made in prescribed form and in prescribed manner.
(6) If the State Government receives the proposal for SEZ, it has to forward the same to the Board along with its
recommendations within prescribed period.
(7) The Board may approve the proposal subject to such terms and conditions as it may deem fit. The Board can
also modify or reject the proposal.
(8) The Central Government may prescribe the following requirement for establishment of a SEZ, namely:
(a) The minimum area of land and other terms and conditions subject to which the Board shall approve, modify
or reject any proposal.
(b) The terms and conditions, subject to which the Developer shall undertake the authorized operations and his
obligations and entitlements. However, different minimum area of land and other terms and conditions may be
prescribed by the Central Government for a class or classes of SEZs.
(9) If the Board approves the proposal without any modification, it shall communicate the same to the Central
Government.
If the Board approves the proposal with modifications, it shall communicate such modifications to the person or the
State Government concerned and if such modifications have been accepted by such person or the State
Government, the Board shall communicate the approval to the Central Government.
If the Board rejects the proposal, it shall record the reasons and communicate the rejection to the Central
Government which shall intimate to the State Government or the person concerned.
(10) The Central Government shall, on receipt of communication under clause (9), grant within prescribed time,
a letter of approval on such terms and conditions and obligations and entitlements as may be approved by the
Board. However, the Central Government may, on the basis of approval of the Board, approve more than one
Developer in SEZ in cases where one Developer does not have in his possession the minimum area of contiguous
land for setting up SEZ and in such cases, each Developer shall be considered as a Developer in respect of the land
in his possession.
(11) Any person who, or a State Government which, intends to provide any infrastructure facilities in the
identified area, or undertake any authorized operation may, after entering into an agreement with the Developer,
make a proposal for the same to the Board for its approval.
(12) Every person or a State Government, whose proposal has been approved by the Board and who, or which,
has been granted letter of approval by the Central Government, shall be considered as a Co-Developer of the SEZ.
(13) After receiving the letter of approval, the Developer may allocate space or built up area or provide
infrastructure services to the approved units in accordance with the agreement entered into by him with the
entrepreneurs of such units.
(v) The provisions of Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and
Deposit taking Company (Reserve Bank) Directions, 2016 shall apply to the following:
(1) Every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND- SI) registered
with the RBI under the provisions of RBI Act, 1934.
(2) Every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the RBI under the provisions
of RBI Act, 1934.
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(3) Every NBFC-Factor registered with the RBI u/s 3 of the Factoring Regulation Act, 2011 and having an asset
size of ` 500 crore and above.
(4) Every Infrastructure Debt Fund - Non-Banking Finance Company (IDF-NBFC) registered with the RBI under
the provisions of RBI Act, 1934.
(5) Every Non-Banking Finance Company - Micro Finance Institutions (NBFC-MFIs) registered with the RBI under
the provisions of RBI Act, 1934 and having an asset size of ` 500 Crore and above.
(6) Every Non-Banking Finance Company - Infrastructure Finance Company (NBFC-IFC) registered with the RBI
under the provisions of RBI Act, 1934 and having an asset size of ` 500 Crore and above.
PART II
Q. 3. (a) What do you mean by Cartel ? Explain it with reference to Competition Act, 2002.
(b) What agreements are anti competitive agreements under the Competition Act, 2002 ?
(c) What constitutes abuse of dominance under the Competition Act, 2002 ?
(d) What do you understand by the term "Combination" under the Competition Act, 2002 ?
(e) Who is "consumer" under the Competition Act, 2002 ? (3 marks each)
Ans. 3
(a) As per Section 2(c) of the Competition Act, 2002, Cartel includes an association of producers, sellers,
distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to
control the production, distribution, sale or price of, or, trade in goods or provision of services.
An agreement in the nature of cartel which limits or controls production, supply, market, technical development,
investments etc. need to be looked as being anti competitive with reference to relevant market.
Examples of Cartel:
(1) All tyre manufacture increasing prices uniformly and simultaneously by mutual agreement.
(2) Association of transporter fixing prices and prohibiting its members from quoting price below the price fixed
by association.
(3) Trade association asking their members not to sell below the rates announced by it with threat of expulsion
in the event of non-compliance.
All above agreements or arrangements are cartels; they are anti competitive and hence are void.
(b) Prohibition on anti-competitive agreements [Section 3(1)]: Any enterprise or association of enterprises or
person or association of persons shall not enter into any agreement of production, supply, distribution, storage,
acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse
effect on competition within India.
Effects of anti-competitive agreements [Section 3(2)]: Any agreement entered into in contravention of the above
provision shall be void.
Presumed/deemed anti-competitive agreements [Section 3(3)]: Following agreements shall be presumed to be
anti-competitive agreements:
♦ Agreement that directly or indirectly determines purchase or sale prices, (i.e. Resale price maintenance)
♦ Agreement that limits or controls production, supply, markets, technical development, investment or
♦ Agreement that shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the market or any other similar
way.
♦ Agreement that directly or indirectly results in bid rigging or collusive bidding.
However, any agreement entered into by way of joint ventures will not be presumed to anti competitive if such
agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or
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No presumption as to anti-competitive agreements [Section 3(4)]: Infollowing types of agreement burden is on
the complainant to prove that the agreement is adversely affecting the competition. Thus, there is no presumption
that the agreement is adversely affecting competition. Such agreements are:
♦ Tie-in arrangement
♦ Exclusive supply agreement
♦ Exclusive distribution agreement
♦ Refusal to deal
♦ Resale price maintenance
(c) Dominance refers to a position of strength which enables an enterprise to operate independently of
competitive forces or to affect its competitors or consumers or the market in its favour.
Abuse of dominant position impedes fair competition between firms, exploits consumers and makes it difficult for
the other players to compete with the dominant undertaking on merit.
Abuse of dominant position includes:
♦ Imposing unfair conditions or price.
♦ Predatory pricing.
♦ Limiting production or market or
♦ Limiting technical development.
♦ Creating barriers to entry.
♦ Applying dissimilar conditions to similar transactions.
♦ Denying market access.
♦ Using dominant position in one market to gain advantages in another market.
(d) Combination [Section 5]: The acquisition of one or more enterprises by one or more persons or merger or
amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises. If after
acquisition, the joint assets/turnover increases the following limits, it will be 'combination'.
(e) Consumer [Section 2(d)]: Consumer means any person who:
(i) Buys goods for a consideration and includes user of goods but does not include a person who obtains such
goods for resale or for any commercial purpose or
(ii) Hires or avails of services for a consideration and includes beneficiary of services.
Explanation: Commercial purpose does not include use by a consumer of goods bought and used by him and services
availed by him exclusively for the purpose of earning his livelihood, by means of self- employment.
Q. 4. (a) What factor have to be taken into consideration by Competition Commission of India for the purpose of
determining whether an enterprise enjoys dominant position or not ? Explain. (5 marks)
(b) What orders can be passed by Competition Commission of India under section 27 of the Competition Act, 2002
after any inquiry into agreement entered into by any enterprise or association of enterprises or person or
association of persons or an enquiry into abuse of dominant position ? Explain. (5 marks)
Ans. 4 (a)
Factors to be considered to determine whether any enterprise enjoys a dominant position [Section 19(4)]: The
Commission while inquiring whether an enterprise enjoys a dominant position or not under section 4 may consider
following factors:
♦ market share
♦ size and resources
♦ size and importance
♦ economic power
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♦ commercial advantages
♦ vertical integration of the enterprises or sale or service network of such enterprises
♦ dependence of consumers
♦ monopoly or dominant position
♦ entry barriers (including barriers such as regulatory barriers, financial risk, high capital cost of entry,
marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or services
for consumers)
♦ countervailing buying power
♦ market structure and size of market
♦ social obligations and social costs
♦ relative advantages
(b) Orders by Commission [Section 27]: If after inquiry the Commission finds that any agreement is in
contravention of Section 3 or Section 4, it may pass all or any of the following orders:
(a) Cease & Desist Order: Direct to discontinue and not to re-enter such agreement or discontinue such abuse
of dominant position (known as Cease & Desist Order)
(b) Penalty Order: The Commission may impose penalty not exceeding 10% of the average turnover of last 3
financial years, upon each parties to agreement.
In case any agreement has been entered by any cartel, the Commission may impose a penalty which may higher of
following two amounts:
♦ 3 times of its profits for each year of the continuance of such agreement or
♦ 10% of its turnover for each year of the continuance of such agreement
(c) Compensation Order: The Commission may award compensation to parties as per Section 34.
(d) Order to modify agreement: The Commission may direct that the agreements shall stand modified to the
extent and in the manner as specified in the order.
(e) Compliance Order: The Commission may direct the enterprises to comply with other orders and directions,
including payment of cost, if any, as it deems fit.
(f) Division of an enterprise abusing dominant position: The Commission may make recommendation to the Central
Government for the division of an enterprise abusing its dominant position
(y) Other Orders: The Commission may Pass such other order as it may deem fit.
PART III
Q. 5. (a) A contract for the sale of land has been entered into between A and B. The transferee has paid the price
entering into possession and is willing to carry out his contractual obligations. As registration has not been effected,
A the transferor, seeks to evict B from the land. Can he do so ? Explain. (4 marks)
(ib) The complainant booked a ticket from Delhi to New York by a KLM plane. The airport authorities in New Delhi
did not find any fault in his visa and other documents. However, at Amsterdam, the airport authorities instituted
proceedings of verification because of which the appellant missed his flight to New York. After reaching New York,
the airlines tendered apology to the appellant for the inconvenience and paid as a goodwill gesture a sum of ` 2,500.
The appellant made a complaint to the National Commission under the Consumer Protection Act, 1986. Whether
the complainant will succeed ? Give reasons with the help of decided case law. (4 marks)
(c) A contracts to sell B a piece of land consisting of 100 bighas. It turns out that 98 bighas of the land belongs
to A and the two remaining bighas to a stranger, who refuses to part with them. B files the suit for specific
performance against A. Decide with the help of the legal provisions, whether the specific performance suit is
maintainable. (4 marks)
(d) The ABZ company offered by an advertisement, a reward of ` 1,000 to anyone who contacted influenza
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after using smoke ball in the specified manner. Amita used the smoke ball in the specified manner, but was attacked
by influenza. She filed the suit against ABZ company and claimed the reward. Decide whether the suit is
maintainable. (4 marks)
(e) Mohit finds a ring of Shardha and sells it to a third person Prachi who purchases it for value and in good faith.
Whether Shardha can file a suit to recover the ring ? Advise with cogent reasons. (4 marks)
Ans. 5 (a)
Doctrine of part-performance is embodied in Section 53A of the Transfer of Property Act.
A Contract for the sale of land has been entered into between A and B. The transferee has paid the price entering
into possession and is willing to carry out his contractual obligation. As registration has not been effected A, the
transferor, seeks to evict B from the land. Can he do so?
No, B will not be allowed to suffer simply because the formality of registration has not been through. The legislature
grants some relief to such a transferee under Section 53A, which embodies the doctrine of part-performance.
(1) There must be a contract to transfer immovable property.
(2) It must be for consideration.
(3) The contract should be in writing and signed by the transferor.
(4) The terms must be ascertainable with reasonable certainty.
(5) The transferee should have taken the possession of the property. In case he is already in possession, he must
have continued in possession.
(6) The transferee must have fulfilled or ready to fulfil his part of the obligation.
If all the above mentioned conditions are satisfied, then, the transferor and the persons claiming under him are
debarred from exercising any right in relation to the property other than the right expressly provided by the terms
of the contract notwithstanding the fact that the instrument of transfer has not been registered or complete in the
manner prescribed therefore by the law for time being in force.
(b) In Ravneet Singh Bagga v. KLM Royal Dutch Fintimes, the Supreme Court held that the respondent could not
verification it cannot be called as deficiency in service. Hence, complainant will not succeed in his claim against
Airline Service provider for deficiency in service under the Consumer Protection Act, 1986.
(c) According to Section 12(2) of the Specific Relief Act, 1963, if the part which is left unperformed bears only a
small proportion of the whole in value and admits of compensation in money, the Court may at the suit of either
In given case part left unformed is small portion of whole i.e. 2 bighas of land, hence Court may at the suit of either
(d) The communication of the offer may be general or specific. Where an offer is made to a specific person it is
by fulfilling the condition laid down in the offer. The leading case on the subject is
Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of £100 to anyone who contacted
influenza after using their smoke ball in the specified manner. Mrs. Carlill did use smoke ball in the specified manner,
but was attacked by influenza. She claimed the reward and it was held that she could recover the reward as general
offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person can accept it and
can even claim the reward. But if the offer of reward is for seeking some information or seeking the restoration of
499
missing thing, then the offer can be accepted by one individual who does it first of all. The condition is that the
claimant must have prior knowledge of the reward before doing that act or providing that information.
(e) As per Section 71 of the Contract Act, 1872, a person who finds goods belonging to another and takes them
into his custody is subject to the same responsibility as a bailee. He is bound to take care of such goods as man of
ordinary prudence. He is treated as owner against whole world except true owner.
In given case sale by A to third person is not valid as A has no title. B can recover ring from third person and such
third person can recover damages from A for breach of "implied condition as to title" as per Sales of Goods Act,
1930.
Attempt all parts of either Q. No. 6 or Q. No. 6A Q. 6. Distinguish between the following :
(a) Mortgage and Charge
(b) Sale and agreement to sell
(c) Contract of Indemnity and Guarantee
(d) Negotiability and Assignability
(e) Bill of Exchange and Promissory Note. (3 marks each)
Ans. 6
(a) Following are main points of distinction between mortgage & charge:
Points Mortgage Charge
Meaning A mortgage is the transfer of an interest in Although in a charge, the property is made a
specific immovable property for the purpose of security for the payment of the loan, yet the
securing payment of money advanced. transaction does not amount to mortgage.
Transfer of In mortgage there is transfer of interest in the In charge there is no transfer of any interest in
interest property. the property.
Created A mortgage can only be created by act of A charge may be created by act of parties or by
parties. operation of law.
Registration A mortgage deed must be registered and A charge need not be made in writing, and if
attested by two witnesses. reduced to writing, it need not be attested or
registered.
Foreclosure In certain types of mortgage the mortgagee can The charge-holder cannot foreclose though he
foreclose the mortgaged property. can get the property sold as in a simple
mortgage.
Personal In a mortgage, there can be security as well as In a charge the remedy of the charge-holder is
liability personal liability. against the property only.
Meaning If the property in the goods is immediately If property in the goods is to take place at a
transferred from the seller to the buyer, it is future time or subject to fulfilment of some
called a sale. condition it is called an agreement to sell.
Type of It is executed contract. It is executory contract.

contract
Type of goods In 'sale' goods are specific & ascertained. In 'agreement to sell' goods are future &
contingent.
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Rights Sale creates a right in rem. (right against whole Agreement to sell creates a right in personam.
word) (right against a specific person)
Risk In 'sale' property in goods transferred to In 'agreement to sell' property in the goods is
buyer, so buyer bears the risk of loss, even if. to take place at a future time or subject to
fulfilment of some condition, so seller
continues to bear the risk.
Example X agrees to sale 100 bags of wheat to Y which X, a farmer makes a contract with Y to sell all
are ready for delivery. This is contract of 'sale'. wheat produced in his field during a season.
This is contract of 'agreement to sell'.
Sales tax A 'sale' is liable to sales tax. An 'agreement to sell' is not liable to sales tax.
Rights of buyer In 'sale' if buyer has paid price, he can sue the In 'agreement to sell' if buyer has paid price, he
seller for non-delivery of goods. cannot sue the seller for non-delivery of goods.
Fie can sue for damages only.
Breach of In 'sale' if there is breach of contract by buyer, In 'agreement to sell' if there is breach of
contract by seller can: contract by buyer, seller can sue only for
buyer (a) Sue for price of goods even if goods are damages and not for price.
in his own possession
(b) Resell the goods
(c) Exercise right of lien
(id) Exercise right of stoppage in transit.
Breach of In 'sale' if there is breach of contract by seller, In 'agreement to sell' if there is breach of
contract by buyer can: contract by seller, buyer can sue only for
seller (a) File a suit for damages against seller. damages.
(b) File a suit for delivery of goods.
Insolvency of In a 'sale' if buyer become insolvent seller must In 'agreement to sell' if buyer becomes
buyer give the goods to Official Assignee/ Receiver. insolvent, seller is not under obligation to give
Seller can claim only rateable dividend for the the goods to Official Assignee/ Receiver.
price of goods.
Insolvency of In a 'sale' if seller become insolvent Buyer can In 'agreement to sell' if seller becomes
seller claim the goods from the Official Assignee / insolvent buyer can claim only a rateable
Receiver. dividend for price paid from the Official
Assignee / Receiver.
Points Contract of Indemnity Contract of Guarantee
Meaning A contract by which one party promises to save A contract of guarantee is a contract to
the other from loss caused to him by the perform the promise made or discharge
conduct of the promisor himself, or the liability incurred by a third person in case of his
conduct of any other person is called a default.
contract of indemnity. It is contingent
contract.
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Parties There are two parties to the contract of There are three parties to the contract of
indemnity viz. guarantee viz.
- Indemnifier - Principal debtor,
- Indemnity holder - Surety,
- Creditor
No. of There is only one contract in case of indemnity. There are three contracts in contract of
contracts guarantee.
Liability The liability of indemnifier is primary and The liability of surety is collateral or secondary.
independent. Primary liability is that of principal debtor.
Nature of The promise of the indemnifier is to save the The surety undertakes to discharge the liability
liability person indemnified from a contingent risk. of the principal debtor, which is not
contingent, but is subsisting.
Example A and B go into a shop. A says to the A and B go into a shop. A says to the
shopkeeper, "Let B have the goods, I will see shopkeeper, "Let B have the goods and if he
you paid". does not pay, I will."
(d) Following are the main points of difference between negotiation & assignment:
Points Negotiation Assignment
Meaning Negotiation means transfer of a negotiable Assignment means transfer of interest to

instrument to another person, so that such another.
another person is entitled to possession of
the instrument and receive amount of
instrument on due date.
Title FFolder in due course after negotiation can Assignee cannot get title better than the
get better title than transferor. assignor.
Notice of Notice of endorsement is not necessary in Notice of assignment is required to be given

endorsement negotiation. to debtor in case of assignment of debt.
Form Negotiation of bearer instrument can be Assignment must be in writing as per Section
simply by delivery. 130 of the Transfer of Property Act, 1872.
Consideration Consideration is presumed in negotiation. Consideration is not presumed in

assignment.
Further A negotiable instrument can be further An assignee can further assign only if such
Endorsement & endorsed without permission or even right is specifically conferred on him by
negotiation without knowledge of transferor. assignment deed.
Stamp duty Once original instrument is stamped, further Each assignment will require fresh stamp
negotiation does not require payment of duty.
stamp duty.
(e) Following are the main points of distinction between bill of exchange & promissory note:
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Point Bill of exchange Promissory note
Meaning A bill of exchange as an instrument in writing Promissory note is an instrument in writing

containing an unconditional order, signed by (not being a bank note or a currency note)
the maker, directing a certain person to pay a containing an unconditional undertaking,
certain sum of money only to or to the order of signed by the maker, to pay a certain sum of
a certain person, or to the bearer of the money only to or to the order of a certain
instrument. person or to the bearer of the instrument.
Liability of the The liability of the maker/drawer is secondary The liability of the maker / drawer is primary
maker & conditional upon nonpayment by the and absolute.
drawee.
Order/ It contains an unconditional order. It contains an unconditional promise.

Promise
Who draws It is drawn by the creditor. It is made by the debtor.
Acceptance Acceptance by the drawee is a must. Acceptance is not required.
Payee Drawer of the bill may be payee also. The maker of the note cannot be payee.
Parties There are three parties: drawer, drawee & There are two parties - maker & payee.
payee.
Or Alternate question No. 6

Q. 6A. (i) Explain the salient features of the Real Estate (Regulation and Development) Act, 2016.
(ii) Explain Adjudication of Benami Property under the Benami Transaction Act, 1988.
(tit) Explain Seizure and Confiscation under the Essential Commodities Act, 1955.
(iv) What do you understand by the term "Money laundering" under the Prevention of Money Laundering Act,
2002?
(v) What do you understand by "Holding out" under the Indian partnership Act, 1932 ? Enumerate the
circumstances under which the doctrine of "Holding out" in not applicable ? (3 marks each)
Ans. 6A (i)
Salient features of the Real Estate (Regulation & Development) Act, 2016 are given below -
(a) Establish the Real Estate Regulatory Authority for regulation and promotion of the real estate sector.
(b) Ensure sale of plot, apartment of building or sale of real estate projects, in an efficient and transparent manner.
(c) Protect the interest of consumers in the real estate sector.
(d) Establish an adjudicating mechanism for speedy dispute redressal.
(e) Regulates transactions between buyers and promoters of residential real estate projects.
(f) Establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs).
(g) Residential real estate projects, with some exceptions, need to be registered with RERAs.
(h) Promoters cannot book or offer projects for sale without registering them. Real estate agents dealing in
projects also need to register with RERAs.
(i) The promoter must upload details of the project on the website of the RERA.
(j) Amount collected from buyers for a project must be maintained in a separate bank account and must only
be used for construction of that project.
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(k) Right to legal representation on behalf of Client by Company Secretaries or Chartered Accountants or Cost
Accountants or Legal Practitioners.
(i) Imposes stringent penalty on promoter & real estate agent.
(ii) Provisions relating to adjudication of benami property are given below:
Notice by Adjudicating Authority to furnish documents, evidence etc. [Section 26(1)]: On receipt of a reference
u/s 24(5), the Adjudicating Authority shall issue notice, to furnish such documents, particulars or evidence as is
considered necessary on a date to be specified therein. Such notice has to be served on following persons:
(a) Benamidar,
(b) Beneficial owner,
(c) Any interested party, including a banking company,
(d) Any person who has made a claim in respect of the property.
The Adjudicating Authority shall issue notice within a period of 30 days from the date on which a reference has
been received.
Serving of notice where benami property is held jointly [Section 26(2)]: The notice should specify that person to
whom the notice is served is required to give necessary information within 30 days from the date of notice.
Where the property is held jointly by more than one person, the Adjudicating Authority shall make all endeavours
to serve notice to all persons holding the property.
Such notice can be send to any one of the joint holder and it is not required to send the notice to all joint holders.
Orders by Adjudicating Authority [Section 26(3)]:
(l) Adjudicating Authority may by passing an order hold the property not to be a benami property and revoke
the attachment order.
(2) Adjudicating Authority may by passing an order hold the property to be a benami property and confirm the
attachment order.
Before passing any of the above order the Adjudicating Authority is required to adopt the following procedure -
(a) He should consider the reply of notice issued u/s 25(1).
(b) He may conduct inquiries and may call such reports or evidence as he deems fit.
(c) He should take in to account all relevant materials relating to the case.
(d) He should provide an opportunity of being heard to benamidar, the Initiating Officer, and any other person
who claims to be the owner of the property.
Procedure to be adopted by Adjudicating Authority when only some part of the property is benami property
[Section 26(4)]: Where the Adjudicating Authority is satisfied that some part of the properties in respect of which
reference has been made to him is benami property, but is not able to specifically identify such part, he shall record
a finding to the best of his judgment as to which part of the properties is held benami.
Power of Adjudicating Authority to attach other property even though no reference has been made by Initiating
Officer [Section 26(5)]: If during the course of proceedings, the Adjudicating Authority
finds that some other property is also benami property but for such other property no reference has been made by
the Initiating Officer then he can provisionally attach such other benami property even though no reference has
been made by the Initiating Officer.
Power of Adjudicating Authority to remove a name or add the name of any person in relation case before him
[Section 26(6)]: The Adjudicating Authority may, at any stage of the proceedings, either on the application of any
party, or suo motu, strike out the name of any party improperly joined or add the name of any person whose
presence before the Adjudicating Authority may be necessary to enable him to adjudicate upon and settle all the
questions involved in the reference.
Time limit for passing order [Section 26(7)]: No order shall be passed after the expiry of 1 year from the end of the
month in which the reference was received by the Adjudicating Authority.
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Appearance before Adjudicating Authority [Section 26(8)]: The benamidar or any other person who claims to be
the owner of the property may either appear in person or take the assistance of an authorized representative of his
choice to present his case.
Explanation: Following persons may appear as Authorized representative —
(1) A person related to the benamidar.
(2) A person regularly employed by the benamidar.
(3) Officer of a scheduled bank with which the benamidar maintains an account.
(4) Legal practitioner.
(5) A person who has passed any accountancy examination recognized by the CBDT.
(6) A person who has acquired prescribed educational qualifications as may be specified by the CBDT. (iii) Following
are the main points of distinction between seizure & confiscation:
Points Seizure Confiscation
Meaning 'Seizure' means to take possession contrary to Confiscation means to take possession &
the wishes of the owner the property. ownership contrary to the wishes of the owner
the property.
Property in Property in goods remains with owner. Property in goods does not remain with owner.
goods
Disposal of Seized goods cannot be disposed of by the Confiscated goods can be disposed by the
goods Government. Government.
Section Commodity can be seized as per Section 3. Confiscation is as per circumstances mentioned
in Section 6A.
Distinction as per Essential Commodities Act, 1955: In the context of Essential Commodities Act, 1955, it could be
seen that an essential commodity which has been seized could be confiscated. Therefore, confiscation is an action
posterior to the seizer of the essential commodity. A commodity that cannot be seized cannot be confiscated.
(iv) Money and crime are related to each other. Crimes are done because lot of money involved in it. Money
created by crimes when converted into white money it is known as money laundering. In simple words, money
laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds.
Those who commit the underlying criminal activity may attempt to launder the money themselves, but increasingly
a new class of criminals provides laundering services to Organized Crime.
Criminals want their illegal funds laundered because they can then move their money through society freely,
without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from
being confiscated by the police.
(v) Partner by estoppels/Holding out [Section 28]: Anyone who by words spoken or written or by conduct represent
himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm
to anyone who has on the faith of any such representation given credit to the firm, whether the person representing
himself or represented to be a partner does or does not know that the representation has reached the person so
giving credit.
In other words, if the behaviour of a person arouses misunderstanding that he is a partner in a firm, when actually
he is not; such a person is stopped from later on denying the liabilities for the acts of the firm. Such a person is
called partner by estoppels and is liable to all third parties.
Holding out means to represent, a stranger, who represent himself to be partner in a firm and induces other to give
credit to the partnership are called as partner by holding out.
505
Example 1: Arun introduces Balu as a partner in his business to Chandan. Balu, in fact, was not a partner but he did
not deny the statement. Chandan advanced a loan to Arun. Arun could not repay the loan. Balu is responsible for
the repayment of loan because, Balu is a partner by estoppel.
Example 2: Where a partner retires, but does not give notice, he holds himself to be a partner. He can be held liable
by establishing the fact that he has held himself as partner and on faith of such representation a third party has lent
money to the firm.
Exceptions to doctrine of holding out: The doctrine of Holding Out is not applicable in the following cases:
1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable for the
torts of another simply because that other person held himself to be his partner.
2. It does not extend to bind the estate of a deceased partner, where after a partner's death the business of
the firm is continued in the old firm name.
3. It also does not apply where the Holding Out partner has been adjudicated insolvent.
506

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Contents

CHAPTER 1 Reserve Bank of India Act, 1934 2

CHAPTER 2 Foreign Exchange Management Act, 1999 16

CHAPTER 4 FEMA - Foreign Direct Investment in India 59

CHAPTER 5 FEMA - Direct Investment Outside India 74

CHAPTER 6 External Commercial Borrowings (ECB) 85

CHAPTER 7 Foreign Contribution (Regulation) Act, 2010 94

CHAPTER 8 Foreign Trade Policy & Procedure 108

CHAPTER 9 Non-Banking Finance Companies (NBFC) 128

CHAPTER 10 Special Economic Zones Act, 2005 145

CHAPTER 11 Competition Act, 2002 162

CHAPTER 12 Consumer Protection Act, 1986 192

CHAPTER 13 Essential Commodities Act, 1955 213

CHAPTER 14 Legal Metrology Act, 2009 221

CHAPTER 15 Transfer of Property Act, 1882 230

CHAPTER 16 Real Estate (Regulation & Development) Act, 2016 257

CHAPTER 17 Benami Transaction (Prohibition) Act, 1988 287

CHAPTER 18 Prevention of Money Laundering Act, 2002 298

CHAPTER 19 Contract Act, 1872 307

CHAPTER 20 Specific Relief Act, 1963 375

CHAPTER 21 Sale of Goods Act, 1932 392

CHAPTER 22 Partnership Act, 1932 422

CHAPTER 23 Negotiable Instruments Act, 1881 450

Solved Paper CS - Executives (New Syllabus) Dec. - 2018 493

Points Repo Rate Bank Rate

Current Current repo rate is 6.50%. Current bank rate is 6.75%.

Points Repo Rate Reverse Repo Rate

Points Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)

Points Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)

` 10 lakhs or below Assistant General Manager

More than X 100 lakhs Chief General Manager

Sum involved in contravention is Directorate that can compound the offence

` 5 lakhs or below Deputy Director of the Directorate of Enforcement

Points Current Account Transactions Capital Account Transactions

Meaning Current account transaction means a Capital account transaction means a

Points Automatic Route Government Route

Points Depository Receipt Foreign Currency Convertible Bonds

Question 28] Discuss conditions of Foreign Direct Investment in E-Commerce activities.

Loans including bank loans ✓

Foreign Currency Convertible Bonds (FCCBs) y y

Foreign Currency Exchangeable Bonds (FCEBs) X y

ECBs can be raised by following entities:

(1) Companies in manufacturing and software development sectors.

(2) Shipping and airlines companies.

(3) Small Industries Development Bank of India (SIDBI).

(4) Units in Special Economic Zones (SEZs).

Type of entity ECB it can avail

Companies in software development sector US$ 200 million

Entities engaged in micro finance activities US$ 100 million

Remaining entities US$ 500 million

Points Foreign Contribution Foreign Hospitality

1 Star Export House 3

2 Star Export House 25

3 Star Export House 100

4 Star Export House 500

5 Star Export House 2000

Valuation Addition = A-B/B x 100

Points Banks Non Banking Financial Companies

NBS-2 Quarterly return on Prudential Norms.