IPCC B.Law 36e

CA - IPCC
COURSE MATERIAL
Quality Education
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BOOK NO 2A
BUSINESS LAWS_36e
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1
Index
BUSINESS LAWS
No. of No. of
Chapter
Chapter Name theory practical Page No.
No.
Questions Questions
Previous Questions Papers 6 10

10. The Payment of Gratuity Act, 1972 17 18 11 33
11. E.P.F.Act, 1952 24 9 34 57
12. Payment of Bonus Act, 1965 24 27 58 89
13. N.I. Act, 1881 45 42 90 145
14. Bailment and Pledge 13 10 146 159
15. Indemnity & Guarantee 10 13 160 173
16. Contract of Agency 15 8 174 188
Total 148 127
WE WILL PROVIDE SEPARATE MATERIAL FOR INDIAN CONTRACT ACT.STUDENT CAN DOWN LOAD SAME
FROM OUR WEB SITE WWW.MASTERMINDSINDIA.COM
HOURS ALLOTMENT FOR PREPARATION OF BUISINESS LAWS

1st 2nd 3rd 4th
Revision Revision Revision Revision
S.No. Chapter Name for for for on Day
Weekend Revision Pre Final Before
Exams Exams Exam Exam
The Payment of Gratuity
10. 3 to 4 6 to 8 1 to 2 30 Min
Act, 1972
11. E.P.F.Act, 1952 3 to 4 4 to 5 1 to 2 30 Min
Payment of Bonus Act,
12. 4 to 5 6 to 7 2 to 3 30 Min
1965
13. N.I. Act, 1881 8 to 10 12 to 14 4 to 5 1 to 2
14. Bailment and Pledge 2 to 3 3 to 5 30 Min 10 Min
15. Indemnity & Guarantee 2 to 3 4 to 6 30 Min 10 Min
16. Contract of Agency 2 to 3 4 to 6 1 15 Min
IN THIS BOOK, THE CONTENT GIVEN IN ITALICS IS FOR ACADEMIC INTEREST ONLY. STUDENTS NEED
NOT MEMORISE AND REPRODUCE THE SAME IN THE EXAMS.
2
CHAPTER WISE ANALYSIS OF PREVIOUS EXAMINATIONS
No. Chapter/Topic Name
90 01 01 11 11 21 21 31 31 41 41 51 51 61
- - - - - - - - - - - - - -
N M N M N M N M N M N M N M
10.
PAYMENT OF 5 5 8 8 4 4 4 4 4 4 4 4 4 4
GRATUITY ACT
EMPLOYEES
11. PROVIDENT FUND 5 5 4 4 4 4 4 4 4 4 4 4 4 4
ACT
12.
PAYMENT OF BONUS 5 6 8 8 4 4 4 4 4 4 4 4 4 4
ACT
13.
NEGOTIABLE 6 6 9 9 8 8 9 9 9 8 8 8 8 8
INSTRUMENTS ACT
14. BAILMENT & PLEDGE 1 - - 1 - - 8 8 8 8 5 - - -
15.
INDEMNITY & 1 - 1 - - - - - - - - - 5 -
GUARANTEE
16.
CONTRACT OF 1 2 1 1 - - - - - 5 - - - 4
AGENCY
3
HIGHLIGHTS OF THIS MATERIAL
1. QUESTION PAPERS OF RECENT 2 EXAMS: At the beginning of this material we have
included the question papers of recent 2 exams. This will help to analyse the previous
exam trends in a better manner and to assess whether our material is able to cater the
needs of the examinations or not.
2. EXAMINATION TRENDS: At the beginning of each chapter we have given a table called
QUESTION - WISE ANALYSIS OF PREVIOUS EXAMINATIONS. This analysis will help you to
judge the relative importance of each question in each chapter. Based on that analysis you
can easily pay more attention on relatively more important questions.
Similarly at the beginning of the material we have included a table called CHAPTER WISE
ANALYSIS OF PREVIOUS EXAMINATIONS. This analysis will help you to judge the relative
importance of each chapter and you can pay more attention on relatively more important
chapters.
3. ONE STOP SOLUTION: All Questions in SM, PM, latest RTPs and latest MTPs have been
covered in our material alongwith previous examination questions of IPCC. Our material is
like a one stop solution. In the public exam you can expect atleast 90% of the Questions to
come from our material.
For each question we have given the reference of Study Material (SM), Practice Manual
(PM), RTPs, MTPs & previous examinations of IPCC. This will help you to assess the relative
importance of each question from examination point of view.
4. RECENT AMENDMENTS: All the recent amendments are being highlighted with GREY
background and all such amendments are important from examination point of view. With
this students can pay more attention on such areas.
5. PURPOSE OF ABC ANALYSIS: All the questions are categorized into ABC which shows the
importance of the question from examination point of view. This analysis helps the
student to devote the time on the important areas at the time of exams. However, it is
advisable to read even C category questions atleast once. In other words, dont ignore C
category questions completely.
On the other hand, if you have enough time to prepare then it is recommended to
thoroughly read C category questions also. The decision to leave B category or C category
questions, is purely left to your discretion and it is advisable for you to take the decision
based on the availability of time and your caliber.
In simple words, if you have enough time and if you are capable enough then read all the
questions. Otherwise leave C category questions. If you are ready to take still more risk then
you can leave B category questions too. Everything depends upon availability of time, your
caliber and the amount of risk that you are ready to take.
6. APPROACH TO PRACTICAL QUESTIONS: First get a complete grip on theory conceptually
and then read practical questions, but simply dont mug up the practical questions. This is
to ensure that you feel comfortable at the examination. As the CA course is a professional
course you wont always get the same questions every time, therefore in order to clear
the exams you must be conceptually strong.
7. ANSWERING PRACTICAL QUESTIONS: Students are advised to answer the practical
questions in the same format as given in the material (Facts, Provision, Analysis,
Conclusion i.e. FPAC).
4
8. REFERENCE OF PRACTICAL QUESTIONS: At the end of each Theory question, we have
given the reference of practical question to be read correspondingly. Immediately after
completion of each theory question it is advisable to refer the corresponding Practical
Questions, as per the reference given by us.
9. SIGNIFICANCE OF TEXT GIVEN IN ITALICS IN SOME PLACES: The text given in italics
indicate that the matter need not be written, if that question is asked for lesser marks i.e.
as a short answer. However, if the question is asked for more number of marks then the
entire answer must be written. In simple words, in the examination, write the content
given in italics only if time and marks permit.
10. FEW QUESTIONS ARE TO BE PREPARED ON YOUR OWN: Few theory questions and
practical questions are marked as FOR STUDENTS SELF STUDY. Those questions will not
be discussed by the faculty in the classroom. Generally questions of very easy nature are
classified under this category. Students shall not get confused that all the questions given
under this category are unimportant. Some of the questions classified under this category
might be even important. We have done this to ensure that syllabus is completed in time.
11. PURPOSE OF SIMILAR QUESTIONS: At the end of each question there are some similar
questions and the purpose of giving similar questions is to make students understand the
different ways of asking the same question. For your convenience we have also given hints
for answering such similar questions in the exam.
12. TEST YOUR KNOWLEDGE QUESTIONS: You know that in CA examinations you cant get all
direct questions. Even if we prepare hundreds of questions there are some chances of
getting question in a new format. To face this challenge it is better for you to attempt
some new questions. We have given some new questions under the heading TEST YOUR
KNOWLEDGE to achieve this purpose.
13. QUESTIONS FOR ACADEMIC INTEREST ONLY: Questions classified under this heading are
not important from examination point of view and they are given only for your academic
knowledge and are not important from examination point of view. If time permits then it
is advisable to prepare those questions also. If time does not permit then students can
leave those questions as choice. So, it is upto you to decide based on your preparation
schedule.
Are you appearing for Group 1 alone or aiming for a rank in IPCC exams?: If you want to
attempt for Group 1 alone or aiming for a rank in IPCC exams then you shall not take risk.
So, for such kind of students it is advisable to read the full content of the material.
5
IPCC MAY 2016 QUESTION PAPER PAPER 2
BUSINESS LAWS, ETHICS AND COMMUNICATION
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
1.
a) Mr. Bean is a promoter who has taken a loan on behalf of company but he is neither a
director nor a person-in-charge of the company. He sent a cheque from the companys
account to discharge its legal liability. Subsequently, the cheque was dishonoured and a
complaint was lodged against him. Can he be held liable for an offence under Section 138
of the Negotiable Instrument Act, 1881? 5M
b) Rishi Pharmacy Ltd. decided to take up the business of food processing because of the
downward trend in pharmacy business. There is no provision in the object clause of the
Memorandum of Association to enable the company to carry on such business. State
whether its object clause can be amended? Mention briefly the procedure to be adopted for
change in the object clause. 5M
c) A nation or society should satisfy its requirements without jeopardizing of future
generations. Comment with reference to Sustainable Development. 5M
d) What is an indemnity bond? 5M
Mr. Ajay Sinha has not received a dividend warrant of Rs. 1500 for 150 shares of XYZ Ltd.
Draft an indemnity bond, to be given to the company, for seeking release of dividend.
2.
a) X agreed to become an assistant for 2 years to Y who was practicing chartered
accountant at Jodhpur. It was also agreed that during the term of agreement X will not
practice as a chartered accountant on his own account within 20 kms. of the office of Y at
Jodhpur. At the end of one year, X left the assistantship of Y and started practice on his
own account within the said area of 20 Kms. Referring to the provisions of the Indian
Contract Act, 1872, decide whether X could be restrained from doing so? 4M
b) Akshay is an employee in a company. The amount of bonus payable to him during the year
2014-15 is Rs. 1,25,000. The company deducted a sum of Rs. 25,000 against the Diwali
Bonus already paid to him during the said year and paid the remaining amount. Akshay
files a suit against the company for recovery of the deducted amount. Decide whether
Akshay would be given relief by the Court on adjustment of already paid interim bonus on
Diwali under the Payment of Bonus Act, 1956? 4M
c) Corporate governance is about stakeholders satisfaction. Comment. 4M
d) The Press Release should be written in a journalistic style. Comment on the statement
highlighting guidelines for drafting a Press Release. 4M
3.
a) Atuld Ltd. has passed a resolution in its general meeting regarding accepting deposits from
its members. Can this company accept deposits from its members under the Companies
Act, 2013? If yes, state the conditions to be fulfilled regarding this. 8M
b) Mr. A of Alwar engaged Mr. S as his agent to buy a house. Mr. S bought a house for Rs. 40
lakhs in the name of a nominee and then purchased it himself for Rs. 44 lakhs. He then
sold the same house to Mr. A for Rs. 46 lakhs. Mr. A later comes to know about the
mischief of Mr. S and tries to recover the excess amount paid to Mr. S. Is he entitled to
recover any amount from Mr. S? If so, how much? Explain. 4M
c) What do you mean by the Iron Law of Responsibility? Mention the resulting benefits
which may be acquired by achieving the long term objectives through the business
activities. 4M
4.
a) List out the points of difference between Fraud and Misrepresentation. 4M
6
b) Mr. Y was working in ABC Limited for the last seven years as an Accounts Executive. He
resigned from the services of the Company on 30th April, 2015. His resignation was not
accepted by the Company. However, after serving for the notice period, he stopped coming
to the Company. After some time he applied for his gratuity. The company refused on the
ground that his resignation was not accepted. Discuss the legal position about this in the
light of the Payment of Gratuity Act, 1972. 4M
c) Explain the concept of Dormant Company as envisaged in the Companies Act, 2013. 4M
d) What are the safeguards created by the profession, legislation or regulation about
accounting and finance which may eliminate or reduce the threats relating to unethical
behaviour? 4M
5.
a) State, giving reasons, whether the following statements are correct or incorrect: 6M
(i) In a Promissory Note, the promise to pay must be conditional.
(ii) A Bill of Exchange may not be in writing.
(iii) A Subsidiary Company cannot hold shares of its Holding Company.
(iv) Quorum for general meetings for a public company, where members are not more than
1000, is 5 members personally present.
b) State the documents and information for registration of One Person Company (OPC)
required to be filed with the Registrar of Companies. 6M
c) PQR Ltd. wants to hold its Annual General Meeting on 15th September, 2016. Draft a
notice for calling Annual General Meeting of its shareholders to discuss the matters relating
to ordinary business. 4M
6.
a) State in brief the guidelines for managing ethics and to prevent the need for whistle-
blowing in the work place. 4M
b) Swad Papad Udyog is a co-operative society registered under the Co-operative Societies
Act, 1912, employing 40 persons and working without the aid of power. With reference to
the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952,
state whether the provisions of this Act are applicable on it? 4M
c) Briefly explain the law relating to Resolutions requiring Special Notice under the Companies
Act, 2013. Mention the resolutions that require Special Notice under the Act. 4M
d) Explain the term Paralanguage relating to non-verbal communication. 4M
7. Answer any Four of the following:
a) Distinguish between a Wagering Contract and a Contingent Contract. 4M
b) P Ltd. issued and published its prospectus to invite the investors to purchase its shares.
The said prospectus contained a false statement. Mr. X purchased some partly paid shares
of the company in good faith from the Stock Exchange. Subsequently, the company was
wound up and the name of Mr. X was included in the list of contributories. Decide: 4M
(i) Whether Mr. X is liable to pay the unpaid amount?
(ii) Can Mr. X sue the directors of the company to recover damages?
c) Objectives of the Central Consumer Protection Council in India are to promote and protect
the rights of consumers. Elucidate the rights of consumers in relation to Competition Law in
India. 4M
d) What are the functions of inter-personal communication? 4M
e) Explain the factors that influence Ethical Communication. 4M
7
IPCC NOV 2015 QUESTION PAPER PAPER 2
BUSINESS LAWS, ETHICS AND COMMUNICATION
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
1.
a) Amit stands surety for Bikram for any amount which Chander may lend to Bikram from
time to time during the next three months subject to a maximum amount of Rs. 1,00,000
(one lack only). one month later Amit revokes the surety , when Chander had already lent
to Bikram Rs. 10,000(ten thousand). Referring to the provisions of the Indian contract act,
1872.Decide : 5M
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 Rs. 10,000?
b) MNO private Limited, a subsidiary of PQR Limited, decides to give a loan of Rs. 4,00,000
to the HR (Human Resource) Manager, who is not a key managerial personnel (KMP) of
MNO Private Limited, drawing salary of Rs. 30,000 per month, to buy 500 partly paid-up
Equity shares of Rs. 1000 each in MNO Private Limited. Examine the validity of companys
decision under the provisions of the companies act, 2013. 5M
c) State with reasons whether the following statements are correct or incorrect:
i) Business Ethics helps to promote public reputation. 3M
ii) In the long-run, those business entities which responds to society needs favorably will
survive. 2M
d) State reasons for selecting oral mode of communications instead of written mode of
communications. 5M
2.
a)
i) State with reasons whether the following persons are entitled to receive bonus
under the payment of Bonus Act, 1965 2 X 2 = 4M
A retrenched employee.
A dismissed employee reinstated with back wages.
ii) Mr. X was an employee of Green Sugar Limited. The whole of undertaking of Green
sugars Ltd. was taken over by a new company named Modern sugars Limited. The
services of Mr. X remained continuous in the new company. After serving for one year
Mr. X met with an accident and became permanently disabled. Mr. X applied to the
new company for the payment of gratuity. The new company refused to pay gratuity on
the ground that Mr. X has served only for a year in the company.
Examine the validity of a refusal the company in the light of the provisions of the
payment of Gratuity Act, 1872. 4M
b) Explain the pragmatic reasons for maintaining ethical behavior in maintaining ethical
behavior in marketing through marketing executives. 4M
c) Write short note on the following: 2 X 2 = 4M
proxemics
Haptics
3.
a)
i) Under what circumstances the original contract need not be performed as stated under
section 62 to 67 of the Indian contract act, 1872? 4M
8
ii) Mr. U offered to sell his house to Mr. X for Rs. 15, 00,000. Mr. X accepted the offer by
post. On the very next day Mr. X sent a telegram revoking the acceptance which
reached Mr. U before the letter of acceptance. Is the revocation of acceptance valid?
Would it make any difference if both the letter of acceptance and telegram of
revocation of acceptance reach Mr.U at the same time? 4M
b)
i) Explain any four sources of ethical standard. 4M
ii) List out the characteristics of group personality under group Dynamics. 4M
4.
a)
i) Explain the concept of Deemed prospectus under the companies Act, 2013. Under
what circumstances such prospectus need not be issued? 4M
ii) Diminution of share capital does not constitute a reduction within the meaning of
companies Act, 2013. State in what respects they differ from each other. 4M
b) What is meant by critical thinking? Suggest the measures to develop critical thinking.
4M
c) Prepare a check list for organizing the messages in a business firm as a job of composing
business messages being assigned to you. 4M
5.
a) i) 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?
4M
ii) Explain the concept and different forms of Restrictive and Qualified endorsement. 4M
b) Examine the validity of the following referring to the provisions of the companies Act, 2013
and/or Rules:
The Articles of Association of X Ltd. contained a provision that upto 4% of issue price of
the shares may be paid as underwriting commission to the underwriters. The Board of
Directors of X Ltd. decided to pay 5% underwriting commission. 4M
c) Discuss different environmental phenomena of ethical concern? 4M
6.
a) What is the importance of registered office of a company? State the procedure for shifting
of a registered office of the company from one state to another state under the provisions
of the companies Act, 2013. 8M
b) Draft a notice for conveying the Board of Directors Meeting of M/s. Grow more limited
where the agenda is to consider buyback of companys equity share capital to an extent of
5% of its issued share capital and also where Mr. Anand Is to be co- opted as an additional
director. 4M
c) State whether the following statements are correct or incorrect: 1 X 4 = 4M
i) A limited company becomes a partner in a partnership firm.
ii) A special resolution is one to pass, requires the votes cast in favour be twice the votes
cast against it.
iii) A cheque marked Not negotiable is not transferrable.
iv) A promissory note duly executed in favour of a minor, is valid.
9
7. Answer any four of the following:
a) State the provisions of the Employees Provident Funds and Miscellaneous Provisions act,
1952 regulating the quantum of contribution to be made by the employer and employee to
the provident Fund. Is it possible for an employee to increase the amount of his
contribution to the provident fund more than the minimum contribution as statutorily
prescribed? 4M
b) A company refuses to register transfer of shares made by Mr. X to Mr. Y. the company
does not even send a notice of refusal to Mr. X or Mr. Y respectively within the prescribed
period. Has the aggrieved party any right(s) against the company for such refusal? Advise
as per the provisions of the companies Act, 2013. 4M
c) When is an allotment of shares treated as an irregular allotment? Briefly state the effects of
an irregular allotment. 4M
d) Explain the practices widely recognized as discriminatory in employment. 4M
e) What are the basic principles of inter-personal communication? 4M
THE END
10
No.1 for CA/CWA & MEC/CEC MASTER MINDS
10. PAYMENT OF GRATUITY ACT, 1972

QUESTION - WISE ANALYSIS OF PREVIOUS EXAMINATIONS
No. ABC M-09 N-09 M-10 N-10 M-11 N-11 M-12 N-12 M-13 N-13 M-14 N-14 M-15 N-15 M-16
1. A - - - - - - - - - - - - - - -
2. B - - - - - - - - - - - - - - -
3. A - - - - - - 4 - - 4 - - - 4 4
4. A - - - - - - - 4 - - - - - - -
5. A - - 5 - - - - - 4 - - - 4 - -
6. C - - - - - - - - - - - - - - -
7. C - - - - - - - - - - - - - - -
8. B - - - - - - - - - - - 4 - - -
9. A - 6 - - - - - - - - 4 - - - -
10. A - - - - - - - - - - - - - - -
11. A - - - - - - - - - - - - - - -
12. B - - - - - - - - - - - - - - -
13. A - - - - - - - - - - - - - - -
14. A - - - - - - - - - - - - - - -
15. C - - - - - - - - - - - - - - -
16. C - - - - - - - - - - - - - - -
17. C - - - - - - - - - - - - - - -
INTRODUCTION:
Payment of Gratuity Act, 1972 extends to whole of India.
If it is a plantation or a port then the Act shall not be applicable to the state of Jammu &
Kashmir.
The Act came into force with effect from 16-09-1972.
Gratuity is a word derived from a Latin word Gratuitas which simply means a Gift.
Gratuity will be paid at the time of retirement or superannuation or when he leaves the
establishment. (Superannuation is defined in the last question).
Gratuity shall not be liable to attachment, by an order of any court (Sec.13).
Q.No.1. Establishments covered under the Payment of Gratuity Act?

RTP (CMA10-2M)
ESTABLISHMENTS COVERED UNDER THE ACT:
Initial Applicability Continued Applicability

The Act applies to:
a. Every Factory, Mine, Oilfield, Plantation, Port and Railway A Shop or Establishment
Company, shall continue to be
b. Every Shop or Establishment, in which 10 or more employees governed by this Act,
are/were employed, on any day of the preceding 12 months. even though the number
of employees falls below
c. Such Other or Class of Establishments, in which 10 or more
10 [Sec 1(3A)].
employees are/were employed, on any day of the preceding 12
months, as notified by Central Government [Note]
Note: The Central Government has notified the following establishments and made gratuity
Act applicable to them:
- Motor Transport Undertakings,
Copyrights Reserved
- Clubs,
To MASTER MINDS, Guntur
- Chambers of Commerce & Industry,
IPCC _36e_Business Laws _ Payment of Gratuity Act, 1972________________11
Ph: 98851 25025/26 www.mastermindsindia.com
- Inland Water Transport Establishments,
- Solicitors Officers,
- Local Bodies, and
- Circus Industry, in which 10 or more persons are/were employed on any day of the
preceding 12 months.
The provisions of the Act shall be applicable to Municipal Board also. (Municipal Board Vs.
Union of India)
Application of the Act to an employee depends on:
1. He should be employed in an establishment to which the Act applies, and
2. He should be an Employee u/s 2(e).
Q.No.2. the Appropriate Government is empowered to exempt establishments and / or

employees from the Payment of Gratuity Act. Explain. [Sec.5]
The Appropriate Government may,

- by notification, And subject to specified conditions,
- Exempt any establishment and /or employees
- From the applicability of this Act,
As under:
Exemption granted to Condition
1. Any Establishment, Factory, Mine, Oilfield, If the Appropriate Government is of
Plantation, Port, Railway Company or Shop to the opinion that the employee or class
which this Act applies. (Employer) of employees are in receipt of gratuity
2. Any Employee or class of Employees employed in benefits which are more favourable
any Establishment, Factory, Mine, Oilfield, etc. to than the benefits conferred under the
which this Act applies. (Employee) Act.
Such notification may be issued retrospectively, subject to the following conditions:

a) Cant be issued from a date earlier than the date of commencement of this Act &
b) Shall not be issued against any ones interest.
Q.NO.3. Eligibility and payment of Gratuity [Sec.4 (1)] (Or) When is Gratuity payable? To
whom it is payable? By whom it is payable.MTP N15 (M 12, N 13,M16 - 4M) (CMAJ 10,D 09)
Eligibility / When it is Payable: Gratuity shall be payable to an employee

a) On the termination of his employment after he has rendered continuous service for not
less than 5 years:
b) On his retirement or
c) On his superannuation or resignation or
d) On his death or disablement due to accident or disease
Note:
1. The condition of the completion of 5 years continuous service is not essential in case of
the termination of the employment of any employee due to death or disablement.
2. An employee who is re-employed without any break in service (re-instated employee) & a
retrenched employee will be eligible for Gratuity.
PAYEE / TO WHOM IT IS PAYABLE: Gratuity is payable to the
a) Employee himself.
b) However, it is payable to the following persons in the situations given below:
Situation Gratuity Payable to
Death of employee & nomination was made Nominee (s).
Death of employee & no nomination was made Legal Heir (s).
Where Nominee (s)/Legal Heir(s) is a Minor Deposited with Controlling Authority, who
shall invest the same for the benefit of
such Minor in Term deposit with SBI or its
subsidiaries or any Nationalized bank until
such minor attains majority.
BY WHOM IT IS PAYABLE: Employer.
Note:
1. The payability of Gratuity to the employee is his right as well as obligation of the employer.
2. It is a statutory right given to the employees [Balbir kaur v.SAIL].
3. It becomes payable to an employee on the date of termination of his employment.
[Rashtriya Mill Mazdoor Sangh vs. NTC].
4. By the change of ownership,
a) The relationship of employer and employees subsist and
b) The new employer cannot escape from the liability of payment of gratuity to the
employees.
c) It was held in the case of Pattathurila K. Damodaran Vs M.Kassim Kanju.
5. An employee resigning from service is also entitled to gratuity; (Texmaco Ltd. Vs Sri Ram Dhan)
6. And non acceptance of the resignation is no hurdle in the way of an employee to claim
gratuity. (Mathur Spinning Mills Vs. Deputy Commissioner of Labour)
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 1, 2, 3 & 4)
Similar Question: Where an employees resignation has not been accepted then that
employee is not eligible to claim gratuity. (True / False) RTP M14, M - 16 4M
Ans: This statement is false as it was held that non acceptance of the resignation is no hurdle
in the way of an employee to claim Gratuity. In other words he can claim Gratuity. An
employee resigning from service is also entitled to gratuity; (Texmaco Ltd. Vs Sri Ram Dhan)
and non acceptance of the resignation is no hurdle in the way of an employee to claim
gratuity. (Mettur Spinning Mills vs. Deputy Commissioner of Labour)
Q.No.4. Write about the computation of Gratuity amount payable. (Or) Explain the
manner in which the gratuity is payable to employees in a seasonal as well as other
establishments as is calculated under the payment of Gratuity Act, 1972. Also state the
maximum amount of Gratuity payable under the Act. [Sec.4 (2)]
(M 08 - 5M, N 12 4M, N 05 -5M, RTP M15 ,N 13) (PM)(MTP 4M)
Establishment Computation of Gratuity Amount

In case of monthly rated employees: 15/26 X Last Drawn Salary X
No. of completed years of service or part thereof in excess of 6 months.
Est. other than
seasonal Est. O.T. Wages shall not be included.
(General case) In case of Piece Rate Employee, wage shall be computed on the
average of the total wages of the 3 months preceding the termination
of employment.
Worked throughout the year:15/26 rule as above
Seasonal
Establishment Worked only during the season: 7 days wages shall be paid as
gratuity for each season.
E.g.: Thus, if the last drawn wage of an employee who has served for 30 years is Rs.2,000
p.m. then his gratuity shall be:
2,000 15 30
= Rs.34,615
26
Maximum: It shall not exceed Rs.10,00,000 [As per Sec.4(3)]
Disabled Employee: [As per Sec.4(4)] When an employee becomes disabled due to any
accident or disease and is not in a position to do the same work and re-employed on reduced
wages on some other job, the gratuity will be calculated in 2 parts:
a) For the period preceding the disablement - on the basis of original wages at the time of
disablement.
b) For the period subsequent to the disablement - on the basis of the reduced wages last
drawn by the employee at the time of termination of service.
Better Terms:
1. Sec.4 shall not affect the right of an employee to receive better gratuity [Bharat Commerce
and Industries Vs Ram Prasad].
2. However, the maximum statutory limit u/s 4(3) cannot be reduced by mutual agreement.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 5 & 6)
Similar Question: When an employee becomes disabled due to any accident or disease and
is unable to do the same work and re-employed on some reduced wages, how the gratuity of
such employee shall be computed under the provisions of the Act? RTP N15,MTP M15
Ans: Payment to Disabled Employee - Refer above.
Q.No.5. Explain the word Continuous service U/S 2A of the Payment of Gratuity Act
(M13 - 4M, M15 - 4M)
Sec.2 (c) Continuous Service means as defined in Sec.2A

Sec.2 (b) Completed year of Service means Continuous Service for one year
Sec.2(c) defines Continuous service to mean continuous service as defined in Sec.2A.
Meaning - Sec.2A(1) Permissible Interruptions
An Employee shall be said to Sickness,

be in continuous service for a
period if he has, for that period, Accident,
been in uninterrupted service Leave,
or service with permissible
interruptions. Absence from duty without leave (not being an
absence in respect of which an order treating the
(Whether such service was absence as break in service was passed),
rendered before or after
commencement of the Act). Lay-off (as per agreement or standing order),
Strike or Lock-out not due to any fault of the employee.

Deemed Continuous Service [(Sec.2A(2)]: Where an employee is not in continuous service
as defined above, he shall be deemed to be in continuous service for 1 year, if the employee
has ,during immediately preceding 12 calendar months, preceding the date with reference to
which calculation is to be made, actually worked under the employer, for not less than
Seasonal
Other than Seasonal Establishments
Establishments
Not less than 75% For 6 months
For 1 year period
of the number of period
days on which the
establishment was 190 days, in the case of 95 days &
in operation during any employee employed below the ground
such period. in mine or
in an establishment which works for less
120 days.
than 6 days in a week, and
240 days, in any other case.
Inclusion of Certain days:
1. For the purposes of Sec.2A(2), the number of days on which an employee has actually
worked under an employer shall include the days on which:
2. He has been laid-off under an agreement or by an order made under the Industrial
Employment (Standing Orders) Act, 1946, or under the Industrial Disputes Act, 1947,
3. He has been on leave with full wages earned in the previous year,
4. He has been absent due to temporary disablement caused by accident arising out of and
in the course of his employment, and
5. In the case of a female, she has been on maternity leave (not exceeding 12 weeks).
LEGAL DECISIONS
An employee who is re-employed without any break in Jeevan Lal (1929) Ltd. Vs
service will be eligible for gratuity and he can not be denied controlling authority
to get the gratuity simply on the ground of the change in
employment.
A retrenched employee is also entitled for gratuity. State of

Punjab Vs Labour Court
Wherever a partnership is converted into a registered Bommidala Bros. v.

company, there the employees are entitled to gratuity on the Authority, the Payment of
basis of length of service under both the establishments Gratuity Act(1989)
taken together.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 7, 8 & 9)

Similar Question: State whether Gratuity is payable to an employee for the period during
which he does not actually work in the organization. Explain the manner in which gratuity is
calculated for regular employees. (MTP M16)(M 08 - 5M)
Ans: Inclusion of Certain days though employee does not actually work Refer above question.
Manner of calculation of gratuity for regular employees Refer Q.No:5 above.
Copyrights Reserved

Q.No.6. Define the terms Employee, Employer & Wages.
Employee [Sec.2(e)] Employer [Sec. 2(f)]

Means: Means in relation to any establishment,
Any person (other than an apprentice),who is factory, mine, oilfield, plantation, port,
railway company or shop: RTP N14
Employed for wages, Whether the terms of
such employment are express or implied, Belonging to, or under the control of
CG / SG, any person or authority
Employed in any kind of work, manual or
appointed by the Appropriate
otherwise,
Government for the control of
Employed in or in connection with the work of a employees, or where no person is so
factory, mine, oilfield, plantation, port, railway appointed, the head of the
company or shop or other establishment to Ministry/Dept. concerned,
which this Act applies
Employee does not include- Belonging to, or under the control of
Any such person any Local Authority, the person
who holds a post under the Central appointed by such authority for the
Government or a State Government control or where no one is appointed,
And is governed by any other Act or by any the C.E.O. of L.A.,
rules In any other case, the
Providing for payment of gratuity. person/authority, who/which has the
[Note: This is the new definition, amended by the ultimate control over the affairs of it,
Payment of Gratuity (Amendment) Act, 2009, and where the said affairs are
w.e.f 3-4-1997.[Section 2(e)], This amendment in delegated to any other person called
the definition made teachers entitled to gratuity as Manager/MD/any other name,
vide Notification SO1080, dated 3-4-1997 by such person.
Ministry of Labour and Employment]
LEGAL DECISIONS
A company director not having a ultimate control over the affairs Monitron Securities
of management of the company will be considered as an (p) Ltd. v. Mukundlal
employee under the Act Khushalchand
WAGES [ Sec.2(s) ]
Means Includes Excludes
All emoluments, earned by an employee, while
Bonus, Commission, HRA,
on duty or on leave in accordance with the Dearness
Overtime Wages and any
terms and conditions of his employment, and Allowance
other allowances.
which are paid or are payable to him in cash.
Q.NO.7. Explain the provisions as to application for payment of gratuity [Sec.7 Read
with Rule 7 of The Payment of Gratuity (Central) Rules, 1972]. (CMA J 07-2M)(P.M)
THE FOLLOWING ARE THE CONDITIONS AND PROCEDURES TO BE FOLLOWED FOR

PAYMENT OF GRATUITY DUE TO AN EMPLOYEE:
1. Time of Application:
a) An employee
i) who is eligible for receipt of gratuity or
ii) Any person authorized in writing to Act on his behalf,
- Shall apply, ordinarily within 30 days from the date gratuity became payable,
- In Form I to the employer.
b) If the date of retirement or superannuation is known earlier, then
- The employee may apply before 30 days of the date of retirement or
superannuation.
c) A Nominee of an employee who is eligible for receipt of gratuity in case of death of the
employee,
- Shall apply to the employer ordinarily within 30 days from the date of gratuity
becomes payable to him, in Form J.
d) If an employee dies without making a nomination, his legal heir, who is eligible for the
receipt of gratuity,
- Shall apply to the employer, ordinarily within 1 year from the date of gratuity
became payable to him, in Form K.
e) The application shall be presented to the employer either by person or by RPAD.
2. Relaxation of Conditions:
a) An application on plain paper with relevant particulars shall also be accepted. The
employer may obtain such other particulars as may be deemed necessary by him.
b) An application even after the prescribed period shall be accepted by the employer, if
the sufficient cause for delay has been mentioned in the application. Any dispute in this
regard shall be referred to the Controlling Authority (CA) for his decision.
c) The claim for gratuity cannot be made invalid just because of the non filling of
application with in the given time.
Q.No.8. Discuss briefly the duties of employer regarding the payment of gratuity.
THE FOLLOWING ARE THE DUTIES OF EMPLOYERS REGARDING THE PAYMENT OF

GRATUITY:
1. Determination & Intimation [Sec 7(2)]:
a) Immediately after the gratuity becomes payable, the employer shall,
b) Determine the amount of gratuity and
c) Give notice in writing to the
d) Recipient and also to the Controlling Authority,
e) Specifying the amount of gratuity so determined (Irrespective of the fact whether an
application for payment of gratuity has been made or not).
f) The employer shall arrange to pay the amount of gratuity within 30 days from the date
of its becoming due/payable to the person to whom it is payable.[Section 7(3)]
2. Notice for Payment of Gratuity:
a) The employer shall issue a notice (either by person or by RPAD),
- to the applicant (employee, nominee or legal heir),
- with a copy endorsed to the Controlling Authority,
- within 15 days of the receipt of application for payment of Gratuity
b) If the claim is found admissible on verification - in Form L,
- Specifying the gratuity amount payable and
- Fixing a date,
- Not beyond 30 days after the date of the application, for payment thereof.
c) If the claim is not found admissible - in Form M, Specifying the reasons for the same.
d) If the claimant for gratuity is a Nominee or a Legal Heir:
i) The employer may ask any evidence for establishing his identity.
ii) The time limit for issuance of notices shall be calculated from the date such
evidence is made available.
3. Payment of Gratuity:
a) The Employer shall arrange to pay the amount of gratuity within 30 days from the date
of its becoming payable (Sec 7(3)).
b) If it is not paid so, the employer shall pay simple interest at the notified rate from due
date to the actual date of payment (These interest rates are notified by the Central
Government from time to time at par with the rates applicable to repayment of Long
Term Deposits)(Sec 7(3A)).
c) Interest shall not be payable if the delay is due to the fault of the employee and the
employer has obtained permission from the Controlling Authority for delayed payment
on this ground (Proviso to Sec 7(3A)).
Q.NO.9. Write a short note on the following:

a) Mode of Payment of Gratuity
b) Recovery of Gratuity in case of default in payment RTP M15, (CMA J - 09 4M)
C) Protection of Gratuity (CMA J 12 - 4M, D 05 - 2M, J 10 - 2M)
1. MODE OF PAYMENT OF GRATUITY [RULE 9]:

a) The gratuity shall be paid either Copyrights Reserved
- in cash or To MASTER MINDS, Guntur

- in demand draft or
- bank cheque to the claimant.
b) If the claimant desires and the amount of gratuity payable is less than one thousand
rupees then
i) Payment may be made by postal money order after deducting the commission due
to such postal money order from the amount payable.
ii) The intimation about the details of payment shall be given to the controlling
authority by the employer.
c) In case of the nominee or a legal heir, who is minor,
- The controlling authority shall invest the gratuity amount deposited by him for the
benefit of such minor in term deposit with the State Bank of India or any of its
subsidiaries or any Nationalized Bank.
2. RECOVERY OF GRATUITY IN CASE OF DEFAULT IN PAYMENT (SEC.8) ( N11 4M)
a) Where an employer fails to pay the gratuity or in accordance with the notice by the
Controlling Authority,
b) The employee/nominee/legal heir, may apply to the Controlling Authority in Form T for
the recovery of gratuity.
c) On an application made by the aggrieved person,
i) The Controlling Authority issue a certificate for the amount to the Collector to
recover the same along with compound interest, as arrears of land revenue, and
pay the same to the person entitled thereto.
ii) The rate of interest will be notified by the Central Government from the date of
expiry of the prescribed time.
iii) Before issuing such certificate, the Controlling Authority shall give the employer an
opportunity of being heard.
iv) Interest payable U/s 8 shall not exceed the amount of gratuity payable under the Act.
3. PROTECTION OF GRATUITY (SEC.13): Gratuity shall not be liable to attachment, by an
order of any court.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 10&11)
Q.No.10. Write a short notes on reduction and forfeiture of gratuity [Sec. 4(6)].
(M 07 - 5M) (CMA D 12-4M, 04) (PM)
1. Forfeiture to the extent of the damage/ loss: If the services of an employee have been
terminated for-
a) Any act,
b) Willful omission, or
c) Negligence
Causing any damage or loss to, or destruction of, property belonging to the employer-
there the gratuity shall be forfeited to the extent of the damage or loss so caused;
2. Wholly or partially forfeiture of gratuity:
a) Where if the services of such employee have been terminated for his riotous or
disorderly conduct or any other act of violence on his part, or
b) If the services of such employee have been terminated for any act which constitutes an
offence involving moral turpitude.
Provided that such offence is committed by him in the course of his employment, there the
gratuity payable to the employee may be wholly or partially forfeited.
LEGAL DECISIONS ON FORFEITURE (Imp. for Practical Questions)
Right of the Employer to forfeit the amount of earned gratuity of an Parmali Wallance
employee whose services were terminated for any Act, willful Limited Vs State
omission or negligence causing any damage to the employer, is of M.P.
limited to the extent of the damage, and the proof of such damage.
Withholding of Gratuity is not permissible under any circumstances K.C.Mathew vs
other than those enumerated u/s 4(6) of the Act and the right to Plantation Corpn
gratuity is a statutory right and no one can be deprived from such right. of Kerala Ltd
Any type of charge payable to the Employer by the Employee (e.g
rent for housing quarters occupied by employee) not paid during the Wazir Chand vs
course of his service, can be adjusted from the gratuity of the Union of India
employee. Only the net amount may be paid to the Employee.
Refusal of Employee to surrender land belonging to the Employer is Travancore
not a sufficient ground to withhold the gratuity. Plywood
Industries Ltd
When an offence of theft involves moral turpitude, gratuity stands Bharat Gold
wholly forfeited in view of Sec.4(6) Mines Ltd
An employee, who has been given the benefit of probation u/s 3 of S.N. Sunderson
the probation of offenders Act, 1958, cannot be disqualified to (Minerals) Ltd.
receive the amount of his Gratuity.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 12 , 13 ,14, 15,16&17)
Q.No.11. Describe the legal provisions as to compulsory insurance U/s 4A of the

payment of gratuity Act, 1972. (RTP- N 12)
1. Compulsory Insurance [Sec.4A(1)]:

a) Every employer shall obtain an insurance for his liability for payment of Gratuity,
i) From (a) LIC, or (b) any other prescribed Insurer.
ii) However, the following categories of employers need not obtain such insurance
cover:
Employer of an establishment belonging to or under the control of Central
Government / State Government.
Any other Employer, who has established an Approved Gratuity Fund u/s 4A (2).
2. Approved Gratuity Fund [Sec.4A (2)]: The Appropriate Government may exempt:
a) Employers who have already established an Approved Gratuity Fund in respect of his
employees and who desires to continue with such arrangement, and
b) Employers having 500 or more persons, and who establishes an Approved Gratuity
Fund in the prescribed manner.
3. Registration: Every employer shall get his establishment registered with the Controlling
Authority. Only those employers who have taken an insurance u/s 4A(1) or have
established an Approved Gratuity Fund u/s 4A(2), shall be registered.
4. Rules: For the proper implementation of Sec.4A,
The Appropriate Government may make Rules in relation to:
a) Composition of Board of Trustees of the Approved Gratuity Fund, and
b) Recovery by the Controlling Authority of the amount of gratuity payable to employee, from
LIC or any other Insurer or from the Board of Trustees of the Approved Gratuity Fund.
5. Default:
a) If the employer fails to pay the premium to the Insurer or to contribute to a Gratuity Fund,
b) He shall be liable to pay the amount of gratuity including interest, to the Controlling
Authority. Contravention thereof is punishable with fine upto Rs.10,000 and
c) In case of continuing offence with a further fine of upto Rs.1,000 per day of default.
Q.No.12. Explain the provisions as to nomination for gratuity. [Sec.6 Read with Rule 6
of The Payment of Gratuity (Central) Rules, 1972] RTP M 16 ,MTP M15, (CMA J 11-2M)
PURPOSE:
1. In case of termination of service due to death of employee,
2. The gratuity should be paid to his Successors / Legal Heirs. In order to avoid
controversies, the employee shall make a nomination.
THE PROVISIONS RELATING TO NOMINATION ARE:

1. Nomination: Each employee, who has completed 1 year of service, shall make a
nomination for the purpose of Sec.4(1) (i.e payment of gratuity to nominees).
2. It shall be made in Form F, in duplicate, within 30 days of completion of 1 year of service.
3. If it is filled belatedly, for a reasonable ground, it shall be accepted by the employer (In
case of an employee who is already in employment for 1 year or more on the date of
commencement of these rules within 90 days after commencement).
4. Multiple Nominees: An Employee may, in his nomination, distribute the amount of gratuity
payable to him, among > 1 nominee.
5. Family: If an employee has a family at the time of making a nomination, the nomination
shall be made in favour of members (s) of his family (*). Any nomination made by such
employee in favour of a non family member is void.
6. Acquiring a Family:
a) If the employee has no family and made a nomination in favour of a non family
member, the same will become invalid on his acquiring family and
b) Shall make a fresh nomination in favour of a family member, in Form G, in duplicate,
within 90 days of acquiring a family.
7. Modification: It can be modified at any time, after giving a written notice to the employer.
This is to be made in Form H and be in duplicate.
8. Death of Nominee: If a nominee pre-deceases the employee, the interest of the nominee
shall revert back to employee, who shall file a fresh nomination (Form H and in duplicate).
9. Nomination duly signed by the employee: A nomination or a fresh nomination or a
notice of modification of nomination shall be duly signed by the employee and if he is
illiterate, shall bear the thumb impression of the employee in presence of two witnesses.
10. Custody: Every nomination/fresh nomination/modified nomination shall be given by the
employee to his employer, who shall keep the same in his safe custody.
11. Effective Date of nomination: Nomination comes into operation from the date of receipt
of the same by the Employer.
(*) Meaning of Family u/s 2(h):
1. For Male Employee: Himself, his wife, his children whether married or unmarried, his
dependent parents and the dependent parents of his wife, the widow and children of his
pre-deceased son.
2. For Female Employee: Herself, her husband, her children whether married or unmarried,
her dependent parents & the dependent parents of her husband, the widow and children of
her predeceased son.
3. Effect of Adoption: Where the personal law of an employee permits the adoption by him
of a child, any child lawfully adopted by him shall be deemed to be included in his/ her
family. Where a child of an employee has been adopted by another person and such
adoption is, under the personal law of the person making such adoption, lawful, such child
shall be deemed to be excluded from the family of the employee.
Q.No.13. Explain the provisions in respect of disputes as to gratuity. [Sec.7(4) - 7(7)]

(Or) State the nature of dispute as to gratuity that may be decided by the Controlling
Authority? What action can be taken by the Controlling Authority on receipt of it? (Or)
Explain how disputes are resolved under the Payment of Gratuity Act, 1972.
(CMA J 14-3M) (RTP -M 13)
1. Application to Controlling Authority: In case of any dispute,

a) the employer, or
b) employee or
c) any other person raising the dispute, may make an application to the Controlling
Authority, for deciding the dispute.
Subject Matter of Dispute Duty of the Employer

a. Amount of gratuity payable to an employee. The employer shall deposit, such
b. Admissibility of any claim of or in relation to, amount as he admits to be payable
an employee for payment of gratuity. by him as gratuity, to the
c. Person entitled to receive the gratuity. Controlling Authority.
2. Inquiry & Decision on Dispute:

a) The Controlling Authority shall, after due inquiry and after giving a reasonable
opportunity of being heard to the parties to the dispute, determine the matter (s) in
dispute.
b) After such inquiry if any amount is found to be payable to the employee then the
Controlling Authority shall direct the employer to pay such amount or the difference of
amount so determined to the Controlling Authority.
c) As soon as the employer makes the said deposit, the Controlling Authority shall pay the
amount:
i) To the applicant where he is the employee, or
ii) Where the applicant is not the employee, to the Nominee/Guardian of
Nominee/Legal Heir of the employee, if he is satisfied that there is no dispute as to
the right of the applicant to receive the amount of gratuity.
3. Powers of Controlling Authority:
a) Inquiry u/s 7 by the Controlling Authority will be a Judicial Proceeding.
b) For conducting inquiry, the Controlling Authority shall have the same powers as are
vested in the Court (like enforcing attendance, production of documents, receiving
evidences on affidavits, and issuing commission for the examination of witnesses).
4. Appeals [Sec 7(7)]:
a) A person aggrieved by an order of the Controlling Authority may, within 60 days from
the date of receipt of the order, make an appeal to the Appellate Authority (AA). The
time limit may be extended by another 60 days.
b) The Employers appeal shall not be admitted unless the amount of gratuity is deposited
either with the Controlling Authority or Appellate Authority.
c) The Appellate Authority may confirm, modify or reverse the decision of the Controlling
Authority.
d) The Appellate Authority shall give reasonable opportunity of being heard to the parties
concerned.
Note: All Assistant Labour Commissioners (Central) have been appointed as Controlling
Authorities and all the Regional Labour Commissioners (Central) as Appellate Authorities.
Q.No.14. Describe the powers of inspectors under the Payment of Gratuity Act.
THE FOLLOWING ARE THE PROVISIONS RELATING TO APPOINTMENT AND POWERS

OF INSPECTORS:
1. Appointment [Sec 7A]: Will be appointed by the appropriate government through a
notification in the official gazette. More than one inspector may be appointed and in such a
case, the appropriate government will define the distribution of work among them.
2. Every Inspector shall be deemed to be a Public Servant.
3. Powers of Inspectors [Sec 7B]: An Inspector may exercise all or any of the following
powers, for the purpose of deciding the compliance of this law:
a) Require an employer to furnish such information as he may require.
b) Enter and inspect, at all reasonable hours, any premises of or place in any Factory,
Mine etc., for the purpose of examining any register, record or notice or other
documents required to be kept or exhibited under this Act or Rules.
c) Examine the employer or any person whom he finds in such place and having a
reasonable cause to believe, is an employee.
d) Make copies of, or take extracts from, any register, record etc., as he may consider
relevant
e) Where he believes that any offence under this Act has been committed by an employer,
search and seize such records etc.
f) Exercise such other powers as may be prescribed.
Q.NO.15. Give the various definitions under the Payment of Gratuity Act.
Term Definition
Central Government in the case of an establishment Any other case -
Belonging to, or under the control of the Central State
Appropriate Government, Government.
Government Having branches in more than one State,
[Sec.2(a)] Factory belonging to/under the control of Central
Government,
Major Port, Mine, Oilfield or Railway Company.
Sec.2(r): Superannuation, in relation to an employee, means the
Superannuation attainment by the employee of such age as is fixed in the contract of
& Retirement service, as the age of the retirement.
(CMA J 11 -4M) Sec.2 (q): Retirement means termination of the employment
otherwise than on superannuation.
QUESTIONS FOR ACADEMIC INTEREST ONLY
Q.No.16. Miscellaneous provisions under the Payment of Gratuity Act.
CERTAIN DUTIES OF EMPLOYER UNDER THE PAYMENT OF GRATUITY (CENTRAL)

RULES, 1972 ARE:
1. Notice as to Authorised Officer: The Employer shall display a notice at or near the main
entrance of the establishment in bold letters, in English and in the language understood by
the majority of the employees, specifying the name of the Officer with designation,
authorised by the employer to receive on his behalf notices under this Act.
2. Display of abstract of the Act & Rules: The employer shall display an abstract of the
Payment of Gratuity Act and the Rules made there under in English and in other language
understood by the majority of the employees at the important place at or near the main
entrance of the establishment, in Form U.
3. Notice of Change or Closure: A notice shall be submitted by the Employer to the
Controlling Authority of the area, within 30 days of any change in name, address, employer
or nature of business. Where an employer intends to close down the business, he shall
submit a notice to the Controlling Authority at least 60 days before the intended closure.
Q.NO.17. Give the various definitions under the Payment of Gratuity Act.
Term Definition
Controlling Authority means an authority appointed by AG u/s 3
[Sec.2(d)]
Controlling
The Appropriate Government may, by notification, appoint any Officer to
Authority
be a Controlling Authority, who shall be responsible for the
[Sec.2(d) and 3]
administration of this Act. Different authorities may be appointed for
different areas.
Factory factory has the meaning assigned to it in clause (m) of Section 2 of the
[Section 2 (g)] Factories Act, 1948 (63 of 1948)
Notification Means a Notification published in the Official Gazette.
[Sec.2(k)]
The Appropriate Government may by Notification, make Rules for the
purpose of carrying the provisions of the Act. [Sec.15]
Prescribed
Means prescribed by Rules made under this Act.
[Se.2(o)]
PRACTICAL QUESTIONS
Q.No.1. Sukumar joined M/s. Reputed Manufacturing Ltd., on 25-12-1998 and superannuated
on 31-5-2003. Determine Gratuity if his last salary was Rs. 7,000.00 per month. Comment.
(For student self study)
Gratuity is to be calculated on the basis of completed years of service or part thereof in excess
of six months @ 15 days wages based on wages last drawn. However as Sukumar has not
completed the minimum period of 5 years service, he is not qualified to receive gratuity.
Q.No.2. Gratuity is payable to an employee only on superannuation and within 3 months of its
becoming due. Comment. (For student self study)
No. Gratuity shall be payable to an employee on the termination of his employment after he
has rendered continuous service for not less than 5 years:
a) On his retirement or b) On his superannuation or
c) On his death or disablement. [5years of continuous service is not applicable].
Q.No.3. E was an employee of Tea Estate Ltd. The whole of the undertaking of Tea Estate Ltd.
was taken over by a new company - Asia Tea Estate Ltd. The service of E remained continuous in
new company. After serving for one year E met with an accident and became permanently
disabled. E applied to the new company for the payment of gratuity. The company refused to pay
gratuity on the ground that E has served only for a year in the company.
Examine the validity of the refusal of the directors in the light of the provisions of the Payment
of Gratuity Act, 1972. (CMA D 13) (N 08 - 5M, RTP - N 13,15) (PM) (Similar N15 4M)
Facts of the case: E an employee of Tea Estate Ltd, which was taken over by Asia Tea Estate
Ltd, was met with an accident and became permanently disabled. The new company refused to
pay gratuity.
Provisions of Law: Sec 4(1) playability of gratuity.

Analysis: Accordingly to Sec 4(1) of the payment of Gratuity Act, 1972, gratuity shall be
payable to an employee on the termination of his employment after he has rendered
continuous service for not less than five years on his superannuation, or, on his retirement or
resignation or on his death or disablement due to accident or disease.
The condition of the completion of five years of continuous service is not essential in case of the
termination of the employment of an employee due to death or disablement for the purpose of this
section. Disablement means such disablement as incapacitates an employee for the work which
he was capable of performing before the accident or disease resulting in such disablement.
The given problem fulfills all its above requirements as stated. Therefore, E is entitled to
recover gratuity after becoming permanently disabled and continuous service of five years is
not required in this case.
Conclusion: The Company cannot refuse to pay gratuity on the ground that he has served
only for a year.
Note: By the change of ownership, the relationship of Employer and Employees subsists and
the new employer cant escape from the liability of payment of gratuity to the employees
(Pattathurila K. Damodaran vs. M.Kassim Kanju)
Q.No.4. XYZ Ltd was amalgamated with ABC Corporation in the year 2014. Mr.ST who had
rendered continuous service from the year 1993, first in XYZ and later in the amalgamated
company, retire in 2015.ABC Corporation (the amalgamated company) declined to pat gratuity
claiming that Mr.ST has worked for only one year in their company. Examine their contention
with reference to the payment of gratuity Act, 1972. (RTP)
Facts of the case: Mr.ST an employee of XYZ Ltd, which was taken over by ABC Corporation Ltd,
Mr.ST who had rendered continuous service from the year 1993, first in XYZ and later in the
amalgamated company, retire in 2015. The new company refused to pay gratuity.
Provisions of Law: Sec 4(1) playability of gratuity.
Analysis: Accordingly to Sec 4(1) of the payment of Gratuity Act, 1972, gratuity shall be
payable to an employee on the termination of his employment after he has rendered
continuous service for not less than five years on his superannuation, or, on his retirement or
resignation or on his death or disablement due to accident or disease.
The given problem fulfills all its above requirements as stated. Therefore, Mr.ST is entitled to
recover gratuity after his retirement.
Conclusion: The Company cannot escape from the liability of payment of gratuity to Mr.ST, in
this case. on the ground that he has served only for a year.
Note: By the change of ownership, the relationship of Employer and Employees subsists and
the new employer cant escape from the liability of payment of gratuity to the employees
(Pattathurila K. Damodaran Vs. M.Kassim Kanju)
Q.No.5. Mr.Ram joined Bells Assam Ltd. on 26-11-1980 and superannuated on 31-5-2006. On
the date of retirement, his monthly salary was Rs. 24,000/-. He also received overtime of
Rs.2,000. Calculate the amount of Gratuity. (CMA J 06-4M, D 08,D 13)
Facts of the case: Mr. Ram joined Bells Assam Ltd. on 26-11-1980 and superannuated on
31-05-06. On the date of retirement, his salary was Rs.24,000/- and overtime was Rs.2000/-.
Provisions of Law: Sec 2(4) calculation of gratuity amount payable.
Analysis: In the establishment other than seasonal establishment the employer shall pay the
gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by
the employee concerned for every completed year of Service or part there of in excess of 6
months. For this purpose, the wages paid for any overtime work shall not be taken into account.
In the given case,
Ram worked from 26-11-1980 to 31-5-06
= 25 years 6 months 6 days = 26 years
Since he has worked for more than 6 months, it is counted as 1 year.
Amount payable to him = 15/26 x 26 years x 24000
= 3,60,000
Conclusion: Amount of gratuity has not exceeded maximum limit of Rs.10,00,000/- . So the
amount payable is Rs. 3,60,000.
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Q.No.6. Comment. It is illegal to pay gratuity in excess of the limits prescribed in the Gratuity
Act. (For student self study)
False. The payment of Gratuity Act specifies the minimum amount of gratuity payable but the
right of an employee to receive better terms of gratuity under any award, or agreement or
contract with the employer is protected.
Q.No.7. An employee is employed in a seasonal establishment. The establishment was in

operation for four months only during the accounting year 1994. The employee is not in a
continuous service during this period. However, he has worked only for eighty days. Giving
reasons for your answer, decide:
i. Whether the employee is entitled to gratuity payable under the Payment of Gratuity Act, 1972?
ii. Would your answer be different, incase the employee worked for 100 days
(M 10 5M) (PM) (CMA D 12-2M)
(Similar question) N is employed in ABC limited, a seasonal establishment. The factory was in
operation from 1st March to 30th June during the financial year 2014-15. Though, N was not in
continuous service during this period, he had worked for 95 days. Referring to the provisions of the
payment of Gratuity Act, 1972, decide whether N is entitled to gratuity. (M 15 4M)
Facts of the case: A seasonal establishment was in operation for 4 months in an accounting
year. An employee of the establishment had worked only for 80 days.
Provisions of Law: Sec 2A Continuous service.
Analysis: Sec 2A (3) of the Payment of Gratuity Act, 1972, provides that where an employee
employed in a seasonal establishment is not in a continuous service for a period of one year
or six months he shall be deemed to be in continuous service under the employer for such
period if he has actually worked for not less than 75% of the number of days on which the
establishment was in operation during such period.
Considering the above provision, it may be understood that the employee should have worked
for 75% of the number of days on which the establishment was in operation during that period
for becoming entitled to get gratuity.
In the given problem,
Establishment was in operation for 4months = 120 days
75% of 120 days = 90 days
a) If employee worked for 80 days < 90 days
The employee worked for 80 days which is less than 75% of the number of days on which
the establishment was in operation during the period.
b) If employee worked for 100 days > 90 days.
The employee worked for 100 days which is more than 75% of the number of days on
which the establishment was in operation during the period.
Conclusion:
Copyrights Reserved
a) The employee is not entitled to gratuity.
b) The employee is entitled to gratuity.
S.Q) Conclusion: The factory was in operation for 4 months. 75% of total operational days =
75%x120 days = 90 days.
Actual no. of days worked = 95 days
N is eligible for gratuity as he worked for more than 90 days.

Q.No.8. S is employed in Golden ice-cream factory, a seasonal establishment. The factory

was in operation for four months only during the financial year 2009-10. S was not in
continuous service during this period. However, he has worked only for sixty days. Referring to
the provisions of the Payment of Gratuity Act, 1972 decide whether S is entitled to gratuity
payable under the Act. Would your answer be the same in case S works for 100 days? (M-10)
Facts of the case: A seasonal establishment was in operation for 4 months in an accounting
year. An employee of the establishment had worked only for 60 days.
Provisions of Law: Sec 2A Continuous service.
Analysis: Sub section 3 of Section 2 A of the Payment of Gratuity Act, 1972 provides that where
an employee, employed in a seasonal establishment, is not in continuous service within the
meaning of clause (1), for any period of one year or six months, he shall be deemed to be in
continuous service under the employer for such period if he has actually worked for not less Than
75% of the number of days on which the establishment was in operation during such period.
Conclusion: In the given problem, as per above provision, S has worked only for sixty days
that are less than 75% of number of days therefore, he shall not be eligible for getting any
gratuity in first case.
In the second case, since the S has worked for 100 days that are more than 75% of no. of
days therefore, he is entitled for gratuity.
Q.No.9. K is an employee of RST Limited, a software company which works five days in a week. K
was not in continuous service during the financial year 2009-10. However, she worked only for 150
days because she was on maternity leave with full pay for 50 days. Referring to the provisions of
the Payment of Gratuity Act, 1972 decide, whether K is entitled to gratuity payable under the Act?
Will your answer remain same if RST Limited works six days in a week? (N10 8M)
Facts of the case: K was not in continuous service. However, she worked only for 150 days
because she was on maternity leave with full pay for 50 days.
Provisions of Law: Section 2 A- Continuous service
Analysis:
1. As per Section 2A of the Payment of Gratuity Act, 1972 an employee shall be said to be in
continuous service for a period if he has, for that period, been in uninterrupted service,
including service which may be interrupted on account of sickness, accident, leave, lay-off,
strike or lockout or cessation of work not due to any fault of an employee.
2. Where any employee (not being an employee employed in a seasonal establishment) is
not in continuous service for any period of one year he shall be deemed to be in
continuous service under the employer for the said period of one year, if the employee
during the period of 12 calendar months preceding the date with reference to which
calculation is to be made, has actually worked under the employer for not less than
a) One hundred and ninety days, in the case of any employee employed below the ground
in a mine or in an establishment which works for less than six days in a week, and
b) Two hundred and forty days, in any other case. For the purposes of calculating the
number of days on which an employee has actually worked under an employer shall
include the days on which in the case of a female, she has been on maternity leave, so,
however, that the total period of such maternity leave does not exceed twelve weeks.
Conclusion: Thus, as per the above provisions:
1. Case-I: K is entitled for gratuity because she was in continuous service for 200 days (150
+ 50) i.e. more than prescribed limit of 190 days in 2009-10.
2. Case-II: She (K) is not entitled for gratuity because RST Limited works for 6 days in a
week and she worked only for 200 days i.e. less than prescribed limit of 240 days.
Q.No.10. Mr. X was an employee of Mutual Developers Limited. He retired from the company
after completing 30 years of continuous service. He applied to the company for the payment of
gratuity within the prescribed time. The company refused to pay the gratuity and contended
that due to stringent financial condition the company is unable to pay the gratuity. Mr. X
applied to the appropriate authority for the recovery of the amount of gratuity.
Examine the validity of the contention of the company and also state the provisions of law to
recover the gratuity under the Payment of Gratuity Act, 1972.
MTP N15 , (N 09 - 6 M, M 14 4M) (PM) (For student self study)
a) Gratuity shall be payable to an employee on the termination of his employment after he has
rendered continuous service for not less than five years on his superannuation or on his
retirement or resignation or on his death or disablement due to accident or disease under
Section 4 (1) of the Payment of Gratuity Act, 1972. Further, as soon as gratuity becomes
payable, the employer shall whether the application for the payment of gratuity has been given
or not by the employee, determine the amount of gratuity and give notice in writing to the
person to whom the gratuity is payable under intimation to the controlling officer [Section 7 (2)].
The employer shall arrange to pay the amount of gratuity within 30 days for the date of its
becoming due/payable to the person to whom it is payable [Section 7 (3)], along with simple
interest if it is not paid within the period specified except where the delay in the payment is
due to the fault of the employee and the employer has obtained permission thereon from the
controlling Authority [Section 7(3A)].
b) If the gratuity payable under the Act is not paid by the employer within the prescribed time to
the person entitled thereto, the controlling Authority shall issue a certificate for the amount to
the Collector to recover the same along with compound interest at such rate as prescribed
by the Central Government from the date of expiry of the prescribed time as land revenue
arrears, to enable the person entitled to get the amount, after receiving the application from
the aggrieved person (Section 8).
Before issuing the certificate for such recovery the Controlling Authority shall give the
employer a reasonable opportunity of showing cause against the issue of such certificate.
The amount of interest payable under the Section shall not exceed the amount of gratuity
payable under this Act in no case (Section 8).
In the given case the facts are commensurate with provisions of law as stated above under
Sections 7 and 8 of the Payment of Gratuity Act, 1972. Therefore, Mr. X is entitled to
recover gratuity as he has completed the service of 30 years. The company cannot take
the plea of stringent financial conditions for not paying the gratuity to Mr. X. On the refusal
by the company, Mr. X. can apply to the appropriate authority and the company will be
liable to pay the gratuity along with interest as decided by such authority.
Q.No.11. Aswani who was an employee of Sun Televisions Limited, retired on 1st January
2013 after 30 years of continuous service. The company did not pay the amount of gratuity to
Aswani till the end of December 2013. Now, Aswani claims the amount of gratuity along with
interest. Decide, under the Payment of Gratuity Act, 1972, whether Aswani will succeed in his
claim? (M14 4M) (For student self study)
Provisions of law :As per the provisions of section 4(1) of the Payment of Gratuity Act, 1972,
gratuity shall be payable to an employee (defined in section 2(e) of the Act) on the termination of
his employment after he has rendered continuous service for not less than five years
a) On his superannuation or
b) On his retirement or resignation or
c) On his death or disablement due to accident or disease;
Further, as per the provisions of section 7(3), the employer shall arrange to pay the amount of
gratuity within thirty days from the date it becomes payable to the person as gratuity, whether
the application for the payment of gratuity has been given or not by the employee.
Analysis: Section 8 of the Act deals with Recovery of gratuity If the amount of gratuity
payable under this Act is not paid by the employer, within the prescribed time, to the person
entitled thereto, the controlling authority shall, on an application made to it in this behalf by the
aggrieved person, issue a certificate for that amount to the Collector, who shall recover the
same, together with compound interest thereon at such rate as the Central Government may,
by notification, specify, from the date of expiry of the prescribed time, as arrears of land
revenue and pay the same to the person entitled thereto provided that the controlling authority
shall, before issuing a certificate under this section, give the employer a reasonable
opportunity of showing cause against the issue of such certificate provided further that the
amount of interest payable under this section shall, in no case exceed the amount of gratuity
payable under this Act.
Conclusion: Applying the above provisions of law to the question, Mr. Aswani will succeed
and the company M/s. Sun Television Ltd., is required to pay gratuity along with interest as per
the application of section 8 of the Act.
Q.No.12. Ramesh was occupying service quarters of a company at the time of retirement. He
did not vacate the house after retirement. The company withheld the payment of gratuity to the
retired employee on this ground. Can Ramesh claim the payment of gratuity and succeed
against the employer? (CMA D 06 - 2M, D 09) (For student self study)
Sec. 4(6) of payment of Gratuity Act says that Any type of charge payable to the Employer by
the Employee (e.g rent for housing quarters occupied by employee) not paid during the course
of his service, can be adjusted from the gratuity of the employee. Only the net amount may be
paid to the Employee. (Wazir Chand Vs Union of India). Yes, can claim the amount, after
adjusting the rent due.
Q.No.13. Can the whole gratuity be forfeited if the services of an employee are terminated for
any Act of willful omission causing any damage to or destruction property belonging to the
employer? (CMA D 11-2M)
No, As per Sec.4(6), The gratuity of an employee whose services have been terminated for
any Act, willful omission or negligence causing any damage or loss to, or destruction of the
property belonging to the employer shall be forfeited to the extent of the damage or loss so
caused. Therefore the company cannot forfeit the whole gratuity payable to the employee.
Q.No.14. National Steels Limited decided to forfeit the amount of gratuity of its employees A,B
and C on account of disorderly conduct and other acts which caused loss to the property
belonging to the company, A,B and C committed the following acts:
a. A refused to surrender the occupied land belonging to the company. (P.M)
b. B committed theft under law involving offence of moral turpitude
c. C after superannuation continued to occupy the quarter of the company for six months.
Against the decision of the company, A,B and C applied to the appropriate authorities for
relief. The company contented that the right to gratuity is not a statutory right and the
forfeiture of the amount of gratuity was within the law.
Examine the contention of the company and the decision taken by the company to forfeit the
amount of gratuity in the light of the Payment of Gratuity Act, 1972.
(M-09) (N14 -4M)(RTP M16 ,N14,N 13)
Facts of the case: A National Steels Ltd. decided to forfeit the amount of gratuity to its
employees A, B and C due to non surrendering of Land, Committing a theft and occupation
of quarters even after superannuation respectively.
Provision of Law: Sec 4(6) Forfeiture of gratuity. Relevant case laws
a) K.C.Mathew Vs plantation corporation of Kerala Ltd. 2001 LLR (2) 9ker.
b) Travancore plywood industries Ltd. Vs. Regional Joint Labour Commissioner (1966).
c) Bharat Gold Mines Ltd Vs. Regional Labour Commissioners (1987).
d) Wazir chand Vs. Union of India, 2001.
Analysis and Conclusion: In accordance with the provisions of Sec 4(6) of the Payment of
Gratuity Act, 1972. If the services of any employee have been terminated for any Act, willful
omission or negligence causing any damage or loss to or destruction of, property belonging to the
employer, the gratuity shall be forfeited to the extent of the damage or loss so caused and if the
services of such an employee have been terminated for any Act which constitutes an offence
involving moral turpitude, provided that such offence is committed by him in the course of his
employment, the gratuity payable to the employee may be wholly or partially forfeited.
According to Sec 4(1) of the Payment of Gratuity Act, 1972, gratuity shall be paid to the
employee when he completes 5 years of continuous or resignation or on his death or
disablement due to accident or disease. The condition of the completion of 5 years continuous
services is not essential in case of the termination of the employment of any employee due to
death or disablement.
Looking to the provisions of Sec 4(1) it is clear that withholding of gratuity is not permissible
under any circumstances, except under those circumstance covered by Sec 4(6). The same
was held in above mentioned 1st case.
Therefore the contention of National Steel Ltd. is wrong to that extent.
The correctness of the decision taken by National Steels Ltd. regarding forfeiture of the
gratuity amount of its employees A, B and C may be tested in the light of Sec 4(6) of the
Payment of Gratuity Act, 1972 as referred above.
a) The refusal of an employee to surrender the occupied land belonging to the company is
not sufficient ground to withhold gratuity under sec 4(6) of the Payment of gratuity Act,
1972. The same was held in the above referred case (a).
Hence, As gratuity cannot be withheld.
b) The offence of theft committed by B, under law involves moral turpitude and his gratuity stands
wholly forfeited in view of Sec 4(6) of the Act the same has been held in above case(b)
c) If the employee has to be paid any amount regarding any type of charge by the employee
and if he has not paid for the same during the course of his service, then the employer can
adjust the amount from the gratuity of the employee. In the instant case C after
superannuation continued to occupy the quarters of the company for 6 months therefore,
the company is entitled to charge the rent from him and after adjusting other dues the
remaining amount of gratuity may be paid. The same has been held in above case(c).
Q.No.15. Bhushan, who had put in 10 years of continuous service, was dismissed on the
ground of misconduct and the amount of gratuity payable to him under the Payment of
Gratuity Act, 1972 was forfeited in full. He was not given an opportunity of being heard and no
show cause notice was served on him. He wants to institute a suit against the management.
Will he succeed?
Facts of the case: Bhushan was dismissed without giving an opportunity of being heard and
not serving any show cause notice, on the ground of misconduct and forfeited the gratuity
payable to him.
Provisions of Law: Sec 4(6) Forfeiture of gratuity.
Analysis: Under Sec 4(6) of the payment of gratuity Act, 1972, it has been provided that.
a) The gratuity of an employee whose services have been terminated for any Act, willful omission
or negligence causing any damage or loss to, or destruction of the property belonging to the
employees shall be forfeited to the extent of the damage or loss so caused.
b) The gratuity to an employee may be wholly or partially forfeited:
i) If the services of such employee have been terminated for his riotous or disorderly
conduct or any other Act violence on his part or
ii) If the services of such employee have been terminated for any Act which constitutes
an offence involving moral turpitude, provided that such offence is committed by him in
the course of his employment.
It has been held that any decision to forfeit the gratuity under Sec 4(6)(b) can be taken
only after affording an opportunity to the employee concerned. (Bharath Gold Mines Ltd Vs
labour Commissioner)
In the given problem neither notice was given to Bhushan nor, he was not given an
opportunity of being heard as well.
Conclusion: Bhushan can institute a suit against the management.
Q.No.16. Rajiv, an employee of the stores department of a factory, had been in employment
for six years. Two years back, he was suspended for one day due to misbehaviour with his
supervisor. Subsequently, he was also alleged to have attempted to steal a few items of
stores. On an enquiry, he was found guilty and his services were terminated. Is he entitled to
the gratuity due to him?
Facts of the case: Rajiv, an employee was suspended for one day due to be misbehavior and
subsequently, attempted to steal items in stores and was terminated from service.
Provisions of Law: Sec 4(6) - Forfeiture of gratuity relevant case Law Bharat Gold Mines
Ltd. Vs Regional Labour Commissioner
Analysis: Under Sec 4(6) of the payment of gratuity Act, 1972, it has been provided that.
a) The gratuity of an employee whose services have been terminated for any Act, willful omission
or negligence causing any damage or loss to, or destruction of the property belonging to the
employees shall be forfeited to the extent of the damage or loss so caused
b) The gratuity to an employee may be wholly or partially forfeited:
i) If the services of such employee have been terminated for his riotous or disorderly
conduct or any other Act violence on his part or
ii) If the services of such employee have been terminated for any Act which constitutes
an offence involving moral turpitude, provided that such offence is committed by him in
the course of his employment.
In the given case, Rajiv was suspended for misbehavior and later attempted to steal few items
in stores. Thus there is an offence of theft involving moral turpitude.
Conclusion: The entire amount of gratuity can be forfeited by employer.
Q.No.17. Wazir Chand happens to be a retired Railway servant who occupies the Government
quarter, and even after superannuation continued to occupy the Government quarter. For such
continuance, the Government, in accordance with Rules, has charged penal rent from the
retired Wazir Chand and after adjusting the dues of the Government, the balance amount of
the gratuity, which was payable, has been offered to be paid. Examine the contention of the
Government and the decision taken by Government to adjust the amount of gratuity in the
lights of the provision of the Payment of Gratuity Act, 1972. (N14 4M)
Provisions of law :Payment of Gratuity- According to Section 4(6) of the Payment of Gratuity
Act, 1972, if the services of an employee have been terminated for;
a) any act
b) willful omission or
c) negligence
Causing any damage or loss to, destruction of property belonging to the employer, then the
gratuity shall be forfeited to the extent of damage or loss so caused.
Analysis: Wazir Chand even after superannuation continued to occupy the quarter and the
Government in accordance with the rules, charged the penal rent from him and after adjusting
other dues, the balance gratuity amount was offered to be paid to him.
Conclusion: In the case of Wazir Chand Vs Union of India, the Court has decided that Wazir
Chand having un-authorisedly occupied the Government quarter, was liable to pay the penal
rent in accordance with rules and therefore, there is no illegality in those dues being adjusted
against the death-cum-retirement dues of the ex-employee.
Q.No.18. State whether the following statements are true or false and give reasons therefor
with reference to the Payment of Gratuity Act, 1972. PM
a) The Payment of Gratuity Act, 1972 is largely based on Kerala Industrial Employees
Payment of Gratuity Act, 1972.
b) A retrenched employee is also eligible for gratuity.
c) Where an employees resignation has not been accepted, then that employee is not
eligible to claim gratuity.
d) Where the negligence of employee causes loss to the employer, then the gratuity shall be
wholly forfeited.
e) An appeal against the Controlling Authoritys order must generally be made within 60 days.
a) This statement is false because the Payment of Gratuity Act, 1972 is largely based on
West Bengal Employees Payment of Compulsory Gratuity Act, 1971.
b) This statement is true because in the case of State of Punjab Vs. Labour Court, it was held
that a retrenched employee is also eligible for gratuity.
c) This statement is false as it was held in Mettur Spinning Mills Vs. Deputy Commissioner of
Labour, that non acceptance of the resignation is no hurdle in the way of an employee to
claim gratuity.
d) This statement is false because when loss is caused by the negligence of employee, there
gratuity shall be forfeited to the extent of the damage or loss so caused.
e) This statement is true as an appeal against the Controlling Authoritys order must generally
be made within 60 days (Section 7 of the Payment of Gratuity Act, 1972).
TEST YOUR KNOWLEDGE
1. For calculation of gratuity under the Payment of Gratuity Act, 1972 the number of days in a
month is to be taken as
a) Actual number of days on employment b) 26 days
c) 15 days d) 30 days
2. Forfeiture of Gratuity is possible under certain circumstances.
a) True b) False
3. The ceiling on the Gratuity amount is rupees_______________.
4. Gratuity can be attached in execution of any degree or order of any civil, revenue or
criminal court
a) True b) False

5. Mr. X was the owner of a factory to which the Payment of Gratuity Act, 1972 was
applicable. Mr. X had appointed Ms. D as the Labour Officer for the Factory and given his
specific instructions for deducting the employees contribution as provided by the law. But
Ms. D had manipulated the records and cheated the employees by making excessive
deductions and pocketing the excess. The Inspector identified the irregularities and sent
notice to Mr. X. Does he have a defense?
6. The ceiling on the gratuity amount is __________________.
7. The Payment of Gratuity Act came into force on____________.
8. For calculation of gratuity under the payment of Gratuity Act, 1972 the number of days in a
month is to be taken as________________.
9. An appeal to an order related to payment of gratuity shall be made to the Appropriate
government within____________.
10. Completed year of service means___________.
SYMBOLS OF SELF CONFIDENCE

Out of those, who achieved great wonders had neither strong financial nor physical
background. But, all that they had was, enough self confidence.
1. William Shakespeare had failed fifth class for two times. But, he became a great poet.
2. George Bernard Shaw was so bad at English spellings. But, he became a great writer.
3. Benjamin Franklin always used to fail in Maths. But, he turned into a great scientist.
4. Albert Einstein could not speak properly till his 10th year. But, he became a popular speaker
5. Winston Churchill was rejected to be a solider. But, later he became the General for the
British army.
6. Bill Gates was a school-dropout. But, he became world richest.
What do all of them have in them? That is, THE STRONG CONFIDENCE.
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Verified By: K. Venkanna Sir, Sudheer sir,
To MASTER MINDS, Guntur Pavan Sir, Adithya Kiran Sir
Executed By: Sai Ram Sir
THE END

11. THE EMPLOYEES PROVIDENT FUND & MISCELLANEOUS PROVISIONS ACT, 1952
1. A - - - - - - - - - - - - - - -
2. B - - - - - - - - - 4 - - - - 4
3. A - - - - - - 4 - - - - - - - -
4. A - - - - - - - - - - - - - 4 -
5. C - - - - - - - - - - - - - - -
6. A - - - - - 4 - 4 - - - - - -
7. A - - - - 4 - - - - - - - - - -
8. B - 5 - - - - - - - - - - - - -
9. A - - - - - - - - - - - 4 - - -
10. C - - - - - - - - - - - - - - -
11. B - - - 4 - - - - - - - - - - -
12. A - - - - - - - - - - - - - - -
13. A 5 - - - - - - 4 - - - - - - -
14. A - - - - - - - - - - - - - - -
15. B - - - - - - - - - - 4 - - - -
16. A - - - - - - - - - - - - - - -
17. B - - - - - - - - - - - - 4 - -
18. B - - 5 - - - - - - - - - - - -
19. C - - - - - - - - - - - - - - -
20. C - - - - - - - - - - - - - - -
21. B - - - - - - - - - - - - - - -
22. B - - - - - - - - - - - - - - -
23. B - - - - - - - - - - - - - - -
24. A - - - - - - - - - - - - - - -
INTRODUCTION:
1. The following 3 schemes have been framed under the Act: (a) The Employees Provident
Fund Scheme, 1952 (b) The Employees Pension Scheme, 1995 (c) The Employees Deposit
Linked Insurance Scheme, 1976 [EDLI].
2. The Act is administered by Central Provident Fund Commissioner.
3. The Act is applicable to whole of India except the state of Jammu & Kashmir.
Q.No.1. What are the entities to which EPF Act is applicable? (N 05 - 4M, N-08) (PM)
APPLICABILITY: Subject to exceptions contained in Sec.16, this act applies to

1. Every establishment which is a factory
a) Engaged in any industry specified in Schedule I and
b) In which 20 or more persons are employed on any single day, and
2. Any other establishment or class of such establishments
Employing 20 or more persons, which the Central Government may specify by a
notification in the official gazette (even to an establishment which is not a factory)
3. Central Government may extend this Act to any establishment employing less than 20
persons. For this purpose, it has to give at least 2 months notice, by a notification in the
Official Gazette.
4. Where the employer and employees having agreed that this Act shall be made applicable
to their establishment also and made a request to the Central Provident Fund
Commissioner, he may apply this Act to that establishment.
IPCC _36e_Business Laws _ E.P.F Act, 1952___________________________ 34
5. The Ministry of Labour & Employment through Notification No. S.O. 30 (E),dated 8th January,
2011 specifies that the Employees Provident Funds and Miscellaneous Provisions Act, 1952
shall also apply to Municipal Councils and Municipal Corporations constituted under sub-
clauses (b) & (c) of clause (1) of Article 243Q of the Constitution of India.
NOTE POINTS
1. While calculating limit of 20 persons, even employees drawing salary above Rs 15,000
p.m. will have to be included. For the purpose of counting 20 persons casual employees
are not taken into account but temporary employees as a part of regular feature of
employment are taken into account.
2. Once covered always covered: An establishment, in which 20 or more persons were
employed on any day during the year, will continue to be governed by this Act, though the
number falls below 20.
3. Establishment to include All Departments and Branches: Sec.2A provides that where
an establishment consists of
i) Different departments or has branches,
ii) All such departments or branches whether situated in the same place or in different places,
iii) Shall be treated as part of the same establishment.
In Gangadharan Vaidyan Vs. P.F. Commissioner manufacturing process was being
carried only at head office employing 7 persons. But the total number exceeded 20. Act
was held to be applicable.
4. Composite Factories: Composite Factories means factories engaged in more than one
industry.
i) If the dominant / primary industry falls under schedule 1 and other subsidiary industries
of the establishment do not fall under Schedule 1, Supreme Court held that the
provisions of the Act will apply to all the employees working in the primary industry &
subsidiary industry.
Similar Question: During 2001-02, the number of employees were 50 and subsequently
reduced to 10 during 2009-10. Employer discontinued deduction as EPF not applicable due
to reduction of employees. (CMA J 10 2M)
Ans: Refer Once covered always covered - point above.
Q.No.2. State the classes of establishments to which this Act is not applicable. (Or) State
the establishments which are exempted from the operations of Employees Provident
Funds and Miscellaneous Provisions Act, 1952. (N 03, N 13 - 4M) M-16 4M (PM)
THE ACT IS NOT APPLICABLE TO THE FOLLOWING ESTABLISHMENTS - SEC.16:

1. Any establishment registered under the Co-operative Societies Act, 1912, employing less
than 50 persons, and working without the aid of power.
2. Any other establishment belonging to the Central Government or a State Government and
whose employees are entitled to the benefit of contributory provident fund or old age
pension in accordance with any scheme of the Central Government or State Government.
3. Any other establishment set up under any Central or State Act and whose employees are
entitled to the benefits of contributory provident fund or old age pension in accordance with
any scheme framed under that Act.
4. Power of the Central Government to exempt certain establishments: If the Central
Government is of the opinion that it is necessary to exempt certain class of establishments,
by way of notification in the Official Gazette, having regard to
a) The financial position or
b) Other circumstances, it may do so subject to the conditions as specified, either
prospectively or retrospectively (Sec.16(2)).
Q.No.3. Explain the meaning of the following terms as used in the EPF Act. (PM)
1. Basic Wages: According to Sec.2 (b), Basic wages means

- All emoluments which are earned by an employee
- While on duty or on leave with wages or
- On holidays with wages, In accordance with the terms & conditions of the employment
contract and
- Which are paid or payable in cash to him.
(CMA J 14 3M) (M 01 - 5 M, M 04 - 6M, M 05, 12 - 4M)
a) However, it does not include the following:
i) The cash value of any food concessions,
ii) Dearness allowance, Copyrights Reserved
iii) House-rent allowance, To MASTER MINDS, Guntur
iv) Overtime allowance,
v) Bonus,
vi) Commission,
vii) Any other similar allowance payable to the employee in respect of his employment
or of work done in such employment.
viii) Any presents made by the employer.
It has been held that both the time wages and piece wages will form part of the basic wages.
LEGAL DECISIONS
Production Bonus and Incentives wage is not part of the Bridge & Roof Company
basic wage. Vs. UOI
Emoluments which are paid to all the employees of a
Burmah Shell Oil Storage
concern while on duty shall constitute basic wages,
&Distributing
whereas such emoluments which are paid to some of the
Co. of India Ltd. V.
employees of a concern, they do not form part of the basic
R.P.F.Commr.
wages.
Adhoc payments are like presents made by the employer,
it cannot be included in basic wages but where adhoc
Shree Changdeo Sugar
payments are paid under a settlement for period during
Mills Vs.UoI
which employees were deemed to be on duty, there it will
form the part of basic wages
Amal Kumar Ghatak Vs Provident Fund Commissioner:
Facts of the case: The pluckers in the tea garden who pluck more than the standard
quantity were paid extra wages, the question is whether such wages paid was to be included
in the term wages.
Judgment: Held that, the payment made will form part of wages as it was not in the nature of
overtime but was the payment for work done during the normal working hours. Further the
employer had to pay PF contribution on such amount also as it forms part of wages.
2. Employer: [Sec.2(e)] (M 07- 5M)
a) In relation to an establishment which is a factory, means
i) The owner or occupier of the factory, including
ii) The agent of such owner or occupier, the legal representative of a deceased owner
or occupier and,
iii) Where a person has been named as a manager of the factory the person so
named.
b) In relation to any other establishment, the employer means the person who has the
ultimate control over the affairs of the establishment.
i) In case the said affairs are entrusted to a manager or a managing director or a
managing agent then such manager or managing director or managing agent shall
be treated as Employer.
3. Employee: [Sec.2(f)]
a) Employee is defined to mean
i) any person who is employed for wages in any kind of work(manual or other wise),
ii) in or in connection with the work of an establishment, and
iii) who gets his wages directly or indirectly from the employer.
iv) It also includes any person:
b) Employed by or through a contractor in or in connection with the work of the
establishment. (Employer can recover amount from contractor i.e. if a person is
employed through contractor, the principal employer is liable to contribute P.F.)
c) Engaged as an apprentice (Means a learner who is paid an allowance during the
period of his training), other than the apprentice engaged under the Apprentice Act.
The definition of employee includes a part-time employee who is regularly engaged in any
work in the establishment like a sweeper working twice or thrice in a week, a gardener
working for 10 days in a month etc.
Note: It was held that only those persons employed in normal course of business to be
considered as employees employed under the Act, therefore: (a) persons employed for
short duration or (b) persons employed on account of urgent necessary and casual
employees are not to be considered as employees.
LEGAL DECISIONS
Whether a person is an employee or not, it rest on the Mysore State

relationship of master and servant. Coop.Printing Works
v. R.P.F.Commr.
A partner is not considered as an employee of the firm as the
-
partner cannot be an employer and employee at the same time.
4. Appropriate Government means: [Sec.2(a)] (N 01- 5M)
a) In relation to an establishment belonging to or under the control of Central Government or
b) in relation to an establishment connected with a railway company, a major port, a mine
or an oil-filed, or
c) in relation to an establishment having departments or branches in more than one State
Appropriate government is Central Government.
d) In relation to any other establishment - the State Government.
5. Factory: [Sec.2(g)] Means (RTP)
a) any premises, including the precincts (Surroundings) thereof, in any part of which
manufacturing process is being carried on,
b) With or with out the aid of power.
Printing press is also a factory although it is run by a large organisation carrying on other
activities outside the PF Act. [Andhra University Vs. RPFC]
6. Manufacture or manufacturing process: Manufacture or manufacturing process means
a) Any process for making, b) Altering,
c) Repairing, i) Cleaning,
d) Ornamenting, j) Breaking up,
e) Finishing, k) Demolishing or
f) Packing, l) Otherwise treating or adapting any
article or substance
g) Oiling,
with a view to its use, sale, transport,
h) Washing,
delivery or disposal.
7. Occupier of a factory: means
a) The person who has ultimate control over the affairs of the factory and
b) Where the said affairs are entrusted to a managing agent, such agent shall be deemed
to be the occupier of the factory.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.1)
Similar Questions:
Q: Basic wages include cash value of food concessions. (True or False)
Ans: This statement is false because the expression Basic wages does not include the cash
value of food concessions.
Q.No.4. Explain the provisions of the EPF Act relating to Employees Provident Fund
Scheme and its salient features. (OR) State the provisions regarding the quantum of
contribution by the Employees as well as employer under the Employees Provident
Funds and Miscellaneous Provisions Act. Can the amount of contribution be increased
by the employee? RTP M 16, N15 ,M14 (M 05 - 6M,M-06) (PM) (N15- 4M)
EMPLOYEES PROVIDENT FUND SCHEME - SEC.5:

a) The Central Government may, by notification in the Official Gazette, frame a scheme to be
called Employees Provident Funds Scheme, 1952 for the employees or class of
employees of establishments to which the Act applies.
b) It may also specify the establishments or class of establishments to which the said scheme
is to apply. The Scheme may provide for all or any of the matters specified in Schedule II
of the EPF Act, 1952.
c) Immediately after framing of the Scheme, a Fund shall be established.
d) The fund and scheme shall be administered by the Central Board of Trustees.
THE SALIENT FEATURES OF THE SCHEME ARE AS FOLLOWS:
1. Employees: Every employee to whom this Scheme applies other than an excluded
employee is required to become a member of the Fund from the date of joining the
establishment.
2. Contributions: (M 03 - 6M, M 06- 5M, M 07- 5M, N 07- 5M, N 08 - 5M)
a) As per Sec.6 of the Act, the contribution to be made by the employer shall be 10% of the
i) Basic wages and
ii) The dearness allowance (include cash value of food concession) and
iii) Retaining allowance, if any.
The Central Government may however raise the aforesaid percentage from 10% to
12% in respect of any establishments or class of establishments.
Retaining Allowance means the sum paid for retaining the service, when the factory is
not working.
b) In addition employees shall make a matching contribution but not less than that of
employers contribution.
c) The above rule will prevail irrespective of whether the employer employs the person
either directly or through a contractor.
Wage ceiling for the purpose of contribution is Rs.15000 pm (w.e.f 1.09.2014). if the wage
exceeds Rs 15000 pm, voluntary contributions can be made.
For instance, such employee is getting 20,000/-per month his share towards Provident
Fund Contribution will be Rs. 2400 at the rate of 12%
a) Employees may contribute more:
i) if they desire to make contribution in excess of the prescribed rate of 10% or 12%
ii) But there is no obligation on the part of employer to contribute more than prescribed
amount.
b) Payment of Contribution: The employer shall, in the first instance, pay both the
contributions payable by himself and on behalf of the employee.
c) Quantum of benefits in the nature of old age pension, gratuity fund to which the
employee is entitled under the terms of his employment.
d) Employees contribution shall be recoverable by means of deduction from wages /
salaries.
e) The Provident Fund Scheme is mandatory not only for the employer but also for the
employees and they cant avoid this mandatory liability.
f) In addition, employer has to pay administration charges at 1.10% of wages. In case of
exempted establishments, the employer has to pay 0.18% of wages as inspection
charges.
3. Nomination: Employees can nominate a person to receive the amount credited to his
provident fund account in the event of his death.
4. Advances and withdrawals up to certain limits are allowed for certain specified purposes only.
5. If the amount of any contribution involves fraction of a rupee, the Scheme may provide for
rounding off such fraction to the nearest rupee, half of a rupee or a quarter of rupee.
Q.No.5. Explain the salient features of Pension Scheme 1995.

(RTP M14) (M 06 - 5M)(CMA D 10 - 4M)
ELIGIBILITY TO JOIN SCHEME:

Compulsory for (a) members of the previous Family Pension Scheme, 1971 and (b) those
who become subscribers of Provident Fund Scheme from 16.11.1995 onwards.
Contribution [Sec.6]
a) From the Employer Contribution of PF, a par equal to 8.33% of the Employees Pay shall
be remitted to the Employees Pension Fund.
b) The remittance shall be made within 15 days of the close of every month.
c) Cost of remittance shall be borne by the Employer.
d) The Central Government shall also contribute at the rate of 1.16% of the Employees Pay
and credit it to the Fund. For the purpose of calculating the contribution by employer and
Central Government, the Employees pay shall be limited to an amount of Rs.15,000 only.
(w.e.f 1.9.2014)..
e) Minimum monthly pension of Rs.1000 w.e.f 1.9.2014 Copyrights Reserved
MASTER MINDS, Guntur

To

Q.No.6. Write about the Employees Deposit-linked Insurance Scheme (OR) In what
way is the EDLI scheme regulated under EPF ACT, 1952?
(N 02 - 6M, M 03, N11, M13 4M)(RTP,MTP M15) (PM)
EMPLOYEES DEPOSIT-LINKED INSURANCE SCHEME - SEC.6C: (W.E.F. 01-08-1976)

Framing of Insurance Scheme: - Sec.6C empowers CG to frame a Scheme to be called the
Employees Deposit Linked Insurance Scheme. The Scheme framed by CG shall be CG in the
Official Gazette.
ESTABLISHMENT OF INSURANCE FUND: -
a) After the Scheme is framed by CG, a Deposit linked Insurance Fund shall be
established.
b) There shall be paid by the employer, from time to time, in respect of every such employee
in relation to whom he is the employer, such amount, not being more than 1% of the
aggregate of the basic wages, dearness allowance and retaining allowance (if any) of the
time being payable in relation to such employee as CG may, by notification in the Official
Gazette, specify.
c) Explanation: The expressions dearness allowance and retaining allowance have the
same meanings as in section 6.
d) The employer shall pay in to the Insurance Fund such further sums of money, not
exceeding 1/4th of the contribution which he is required to make, as CG may, from time to
time, determine. The payment is towards all the expenses in connection with
administration of the Insurance Scheme other than the expenses towards the cost of any
benefits provided by or under that Scheme.
Administration of Insurance Fund: The Insurance Fund shall vest in and be
administered by the Central Board in such manner as may be specified in the Insurance
Scheme.
Benefits under the Insurance Scheme: The Scheme provides for life insurance benefits
to the employees of any establishment or class of establishments to which this Act applies
Provisions of the Insurance Scheme:
The Insurance Scheme may provide for all or any of the matters specified in Schedule IV.
The benefits under the Employees Deposit Linked Insurance Scheme, 1976 as amended
by the Employees Deposit Linked Insurance (Amendment) Scheme, 2014 are briefly
stated as under:
If at the time of death of employee, he was a member, his nominee shall be entitled to
receive one-time lump sum amount as insurance benefit.
Such amount shall be calculated as follows:
a) Average monthly wages drawn (subject to a maximum of Rs.15,000) during the 12
months preceding the month in which the member died, shall be multiplied by 20.(i.e20
months of average salary)
b) An amount, equal to the average balance in the account of the deceased in the
provident Fund during
i) Preceding 12 months or Copyrights Reserved
ii) During the period of his membership, To MASTER MINDS, Guntur

Whichever is less,
However, if the average balance exceeds Rs.50,000, the amount shall be restricted to
Rs.50,000 plus 40% of the amount in excess of Rs.50,000, subject to a maximum of
Rs.1,00,000.
c) Higher of (a) and (b) above shall be calculated.
d) The higher amount, as calculated in (c) above shall be increased by 20%.
e) The amount calculated as per (d) above shall be the final amount payable as insurance
amount.
Q.No.7. What do you know about the constitution, rights and duties of the X, with
regard to EPF Act? (OR) State the composition and functions of the Central Board as
provided under the provisions of EPF Act. (M 99 - 6M, N - 09, M11 4M) (PM)
The Central Government is empowered to constitute Board of Trustees called Central Board
1. For administering the Employees Provident Fund.
2. This is to be exercised through a Gazette Notification (Sec.5A).
Constitution: It shall consist of the following persons as members:
1. A Chairman and a Vice-Chairman to be appointed by the Central Government.
2. The Central Provident Fund Commissioner as ex-officio member.
3. Not more than 5 persons appointed by the Central Government from amongst its officials.
4. Not more than 15 persons representing Governments of such states as the Central
Government may specify in this behalf, appointed by the Central Government.
5. 10 persons representing employers of the establishments to which the scheme applies,
appointed by the Central Government.
6. 10 persons representing employees in the establishment to which the Scheme applies,
appointed by the Central Government.
Apex body to administer provident fund is Central Board of Trustees. It consists of about 43
members. It can delegate its powers to Executive Committee.
Executive committee: The Central Government may, by notification in the Official Gazette,
constitute an Executive Committee to assist the Central Board.
RIGHTS OF CENTRAL BOARD OF TRUSTEES:
1. Right to administer the fund, in such a manner as specified in the scheme.
2. Right to perform other functions: The Central Board shall have the right to perform such
other functions as may be required under any provisions of the Provident fund Scheme,
Family Pension Scheme and the Insurance Scheme.
3. Right to appoint officers: The Central Board shall have the right to appoint Additional,
Deputy, Regional or Assistant Provident Fund Commissioners and other staff for efficient
administration of the Scheme.
4. Right to delegate functions: The Central Board shall have the right to delegate its
powers and functions to any of its officers for the efficient administration of the Scheme.
DUTIES OF CENTRAL BOARD OF TRUSTEES:
1. Maintenance of proper Accounts: It shall maintain proper accounts of its income &
expenditure relating to the fund.
2. Audit:
a) The accounts of the Central Board shall be audited by the Comptroller and Auditor-
General of India (Here in after referred as C&AG)
b) Audit fees shall be paid by the Central Board.
c) The C&AG and any person appointed for audit purpose, shall have the right to inspect
books, vouchers, documents etc. and inspect any of the offices of the Central Board.

3. Duty to forward audit report to the Central Govt.:
a) The accounts as certified by the C&AG together with the audit report will be handed
over to the Central Board.
b) Central Board shall forward the same to the Central Government.
4. Duty to submit annual report: It is the duty of the Central Board to submit an annual
report of its activities to the Central Government.
5. Laid before Parliament: The Central Government shall place a copy of the Annual Report,
Audited accounts, Audit report & the comments of the Central Board thereon before each
House of Parliament.
Q.No.8. Write a short note on the Executive Committee under the EPF Act. (Or) Discuss
the Power of CG to set up an Executive Committee under the EPF Act. (Or) State the
composition of Executive Committee. (N 99 - 5M, N 05 - 6M, N 09 - 5M) (PM)
EXECUTIVE COMMITTEE: The Central Government may, by notification in the Official

Gazette, constitute an Executive Committee to assist the Central Board.
MEMBERS OF THE EXECUTIVE COMMITTEE: [Notification No.S.O.1045 (E), dated 13th
May, 2011 by the Ministry of Labour and Employment]
The Executive committee shall consist of the following persons as members, namely:
1. The secretary to the Government of India from the Ministry of Labour and Employment will
be appointed by the Central Government as the Chairperson.
2. 2 persons, Additional secretary to the Government of India and the Financial Advisor from
the Ministry of Labour and Employment will be appointed by the Central Government.
3. 3 persons representing the governments of the states will be appointed by the Central
Government. (Presently are the Representative of the Government of Assam, Rajasthan
and Tamilnadu)
4. 3 persons representing the employers of establishments to which the scheme applies will
be appointed by the Central Government.
5. 3 persons representing the Employees in the establishments to which the scheme applies
will be appointed by the Central Government.
6. The Central Provident Fund Commissioner of Employees Provident Fund Organisation.
Similar Question: State whether true or false - The chairman of the Executive Committee is
appointed by the Central Board.
Ans: This statement is false because the Chairman of the Executive Committee is appointed
by the Central Government and not the Central Board.
Q.No.9. Explain the powers of the Commissioner to determine money due from
employers under the EPF Act. (OR) Who determines the money due from an employer
under the EPF Act? State the factors considered by the authorities at the time of
determining the amount. RTP (N-14) (PM)
SEC.7A CONTAINS THE POWERS OF THE COMMISSIONER TO DETERMINE MONEY

DUE FROM EMPLOYERS UNDER THE EPF ACT. IT PROVIDES AS FOLLOWS:
1. Who is empowered to determine disputes & Nature of Disputes:
a) The Central Provident Fund Commissioner or
b) Additional Central Provident Fund Commissioner or
c) Deputy Provident Fund Commissioner or
d) Regional Provident Fund Commissioner or

e) An Assistant Provident Fund Commissioner may, by order:
i) In a case where a dispute arises regarding the applicability of this Act to an
establishment, decide such dispute; and
ii) Determine the amount due from any employer under any provisions of the
Provident Fund Scheme or the Pension Scheme or the Insurance Scheme.
2. Powers of Officers:
a) He shall maintain principles of natural justice.
b) Further, the officer may conduct the necessary enquiry as deem necessary. The officer
conducting such enquiry shall have the same powers as are vested in a Court, such
as:
i) Enforcing the attendance of any person or examining him on oath,
ii) Requiring the discovery and production of documents,
iii) Receiving evidence on affidavit,
iv) Issuing Commissions for the examination of witnesses.
Any such enquiry shall be deemed to be judicial proceeding.

3. However, no order shall be passed unless the employer is given an opportunity of being heard
4. Where the employer or any other person required to attend the inquiry
a) Fails to attend or to produce any document,
b) Without showing any valid reason,
c) The officer conducting the inquiry may decide the
d) Applicability of the Act or determine the amount due from any employer, on the basis of
the evidence collected during such enquiry. (Ex-parte order)
5. Request for set aside/cancellation:
a) Where an ex-parte order is passed,
i) The employer may, within 3 months from the date of communication of such order,
ii) Apply to the officer for setting aside / cancel such order.
b) Such order cant be cancelled, unless notice thereof has been served on the opposite
party (Usually departmental officer presenting the case will be the opposite party).
6. Continue the enquiry:
Further, if the employer satisfies the officer that
a) The show cause notice was not duly served on him or
b) He was prevented by a sufficient cause from appearing when the enquiry was held,
c) The officer shall cancel ex-parte order and
d) Shall proceed with the enquiry.
7. Where an appeal has been filed against the ex-parte order and Such appeal has been
disposed of, no application shall be accepted requesting for setting aside the ex- parte order.
REVIEW OF ORDER PASSED U/S 7A (SEC.7B) MTP N15, (N-14)

1. Meaning and scope: Any person aggrieved with the order may prefer to the same officer
for review
2. Conditions for review:
a) If new and important evidence is discovered which could not be produced earlier as it
was not within his knowledge even after due diligence
IPCC _ 36e_Business Laws _ E.P.F Act, 1952___________________________ 43

b) There is some mistake or error apparent on the records or
c) Any other sufficient reason.
d) No appeal is filed against 7A.
e) Officer must be satisfied to review.
f) Notice must be sent to all the previous parties and to be heard for review.
g) Application for review should be made within 45 days in form 9.
3. Suo-moto review [Sec.7B (1)]: Such officer may also on his motion review his own order
if he is satisfied that it is necessary so to do on any such ground.
4. Reject for review [Sec.7B(4)]:
a) When officer fails to identify sufficient reason for review, application for review may be rejected.
b) No appeal shall lie against the order of the officer rejecting an application for review.
However appeal can be made if a fresh order is passed under review.
Q.No.10. What is the time limit for settlement of claims for Provident Fund by the
Commissioner and what are the consequence for delay in settlement? (PM)
(For students self study)
1. The Provident Fund claims complete in all respects submitted along with the requisite
documents shall be settled and the benefit amount paid to the beneficiaries within 30 days
from the date of its receipt by the Commissioner.
2. If there is any deficiency in the claim, the same shall be recorded in writing and
communicated to the applicant within 30 days from the date of receipt of such application.
3. In case the Commissioner fails without sufficient cause to settle a claim complete in all
respects within 30 days, the Commissioner shall be liable for the delay beyond the said period.
4. Penal interest at the rate of 12% per annum may be charged on the benefit amount and
the same may be deducted from the salary of the Commissioner.
Q.No.11. What is the liability of an Employer for delay in payment of claims due from him?
RATE, LIMIT AND PERIOD OF PAYMENT OF INTEREST: As per Section 7Q of the

Employees Provident Funds and Miscellaneous Provisions Act, 1952
1. The employer shall be liable to pay simple interest
a) at the rate of 12 % per annum or
b) at such higher rate as may be specified in the Scheme on any amount due from him
under this Act.
2. Although the limit of interest rate is not given in the Act, but it is clearly given that the
higher rate of interest specified in the Scheme cannot exceed the lending rate of interest of
any scheduled bank.
3. The period for which the employer is liable to pay the interest is from the date on which the
amount has become so due till the date of its actual payment.
Similar Question: X, an employee of a Tata company filed a claim for provident fund
settlement with the Provident Fund Commissioner. One year past after the filing of the claim
but he did not get any settlement from the authority. State in the light of the EPF & MP Act,
1952, what course of action an authority should have taken in this respect.
(MTP N15) [RTP N 13]
Ans: Refer above question
(IMMEDIATELY REFER PRACTICAL QUESTION NO.2, 3 & 4)
Q.No.12. State the provisions of the EPF Act, 1952 with regard to recovery of money
due from the Employer. (OR) State the action that can be taken by the Recovery officer
for recovery of the amount due from the employer, who is in arrear in respect of his
contribution to the Provident Fund under the scheme. MTP M16 (N 98 - 6M) (PM)
RECOVERY OF MONEY DUE FROM EMPLOYER, ISSUE OF CERTIFICATE TO RECOVERY

OFFICER (SEC.8B):
1. Where any amount is in arrear from an employer, the authorised officer may issue to the
recovery officer, a certificate under his signature specifying the amount of arrears.
2. The recovery officer shall then proceed to recover the amount specified in the certificate from
the establishment or the employer by one or more of the modes/ways mentioned below:
a) Attachment or sale of the movable or immovable property of the establishment or the
employer,
b) Arrest of the employer and his detention in prison,
c) Appointing a receiver for the management of the movable or immovable properties of
the establishment or the employer.
3. The attachment and sale of any property be first effected against the properties of the
establishment and if it is insufficient for recovering the whole of the arrears, the recovery officer
may take such proceedings against the property of the employer for recovery of the balance.
4. Where an establishment or the employer has property within the jurisdiction of more than
one recovery officer & the recovery officer to whom a certificate is sent:
a) Is not able to recover the entire amount or
b) For the purpose of speedy recovery of the amount,
i) He may send the certificate in the prescribed manner and
ii) Specify the amount to be recovered by the other recovery officer within whose
jurisdiction the establishment or the employer has property.
5. The authorised officer may issue a certificate under section 8B(1) not withstanding that
proceedings for recovery of the arrears by any other mode have been taken [Section 8B(2)].
6. Notwithstanding that a certificate has been issued to the Recovery Officer for the recovery
of the amount, the authorised officer may grant time for the payment of the amount and
thereupon the recovery officer shall stay the proceedings until the expiry of the time so
granted [Section 8E].
Note: It may be noted that definition of employer includes a Manager, occupier of factory etc.
Hence, their personal property can be attached and sold for PF dues.
Q.No.13. Explain the provisions of the EPF Act with regard to the protection against
attachment of Provident Fund. (Or) Is the amount standing to the credit of a member of
the Provident Fund attachable in the execution of decree or order of the Court?
(N 00 - 5M, N06 5M, M 09 - 5M, N 12 - 4M)(RTP M15) (PM)
PROTECTION AGAINST ATTACHMENT - SEC.10:

1. The amount standing to the credit of any member in the Fund shall not be charged.
2. Also, the amount shall not be liable to attachment under any order of the court in respect
of any debt or liability incurred by the member / exempted employee.
3. Further, neither the official assignee appointed under the Presidency Town Insolvency Act,
1909, nor any official receiver appointed under the Provincial Town Insolvency Act, 1920
shall be entitled to have any claim on any such amount.
4. The protection applies to provident fund, pension and insurance amount receivable by
employee under the scheme.
5. Further, any amount standing to the credit of a member in the Fund, at the time of his death,
shall be payable to his nominee subject to any deduction authorised by the said Scheme.
6. Any amount so vested in the nominee shall be free from any debt or other liability incurred
by the deceased before the death of the member / exempted employee. It shall also not be
liable to attachment under any decree or order of Court.
7. The protection is only to the balance in the PF account and not to PF money which is in
hands of employee.
Similar Question: 1.State the law with respect to protection of the amount standing to the
credit of an employee in provident fund under the Employees Provident Funds and
Miscellaneous Provisions Act, 1952? (MTP 4M)
X, an employee in ABC Ltd (covered by the EPF and MP Act, 1952) died in an accident. State
to whom the amount standing in his account to be payable under the provisions of the Act.
Ans: Refer above question. RTP M 16
Q.No.14. Explain the provisions of the EPF Act with regard to transfer of accounts of an
employee in case of his leaving the employment and taking up employment in another
establishment. (OR) An employee leaves the establishment in which he was employed
and gets re-employment in another establishment. He desires that his Provident Fund
Account be transferred to the establishment wherein he has been employed. Explain
the procedure. (M 99 - 5M, RTP, N-07, M 08 - 5M) (PM)
1. Sec.17A provides for the transfer of accounts of an employee in case of his leaving the
employment and taking up employment in another establishment.
2. If an employee who is member of PF leaves an establishment & obtains reemployment in
another establishment, the amount to his credit may be transferred to the account in
establishment where he is re-employed, if the new establishment is also covered under PF
provisions.
3. However, if he is re-employed in an establishment to which the Act does not apply, but has
a provident fund of its own (not under provisions of PF Act), the amount to the credit of
employee shall be transferred to such fund within 3 months, at the request of employee.
4. Similarly, if an employee who was employed in an establishment which was not covered
under the Act but had its own provident funds scheme is re-employed in an establishment
which is covered under PF Act, the balance to his credit may be transferred at request of
employee to his new account.
Q.No.15. Explain the liabilities of a person who acquires an establishment from an employer
and the employer who sells the establishment under the EPF Act, 1952. (N 06 - 5M)
1. Where an employer transfers an establishment in whole or in part by way of sale, gift etc.,
2. The employer and the person to whom the establishment is so transferred shall jointly and
severally be liable to pay the contribution and other sums due from the employer under any
of the provisions of this Act or the Scheme or the Family Pension Scheme in respect of the
period up to the date of such transfer.
3. It is provided that the liability of the transferee shall be limited to the value of the assets
obtained by him by such transfer.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.5, 6)
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MASTER MINDS, Guntur

To

Q.No.16. State briefly the provisions of the EPF Act, 1952 regarding nomination?
NOMINATION:
1. Every member of the Fund is required to nominate a person to receive the amount
standing to the credit of his provident fund in the event of his death.
2. More than 1 nominee may be appointed and the amount distributed among them in
proportion.
3. Nomination must be made in favour of a family member only.
4. Nomination in favour of a person other than a family member shall be invalid. But, where a
member does not have a family, nomination may be made in favour of any person but the
same shall become invalid on his acquiring a family.
Similar Question: State the validity of the following nominations made under the Employees
Provident Funds and Miscellaneous Provisions Act, 1952: (RTP N 13)
1. A nominated B (his wife) and K (his friend) as nominee.
2. R, who is a single with no family, nominated S( relative) as a nominee.
Ans:
1. The nomination of B by A is valid being a family member but the nomination of the friend
(K) is not valid being a friend.
2. (The nomination of S by R is valid because he does not have a family.
Q.No.17. Explain briefly the appointment of inspectors and their powers under the Act.
(For students self study) (N 03 - 4M, M15-4M)
1. Appointment: The appropriate government, by notification in the Official Gazette, may

appoint Inspectors for the purpose of this Act and Scheme, specifying their duties and
jurisdiction. An Inspector so appointed shall be deemed to be a Public Servant.
2. Purposes for which powers may be exercised:
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a) Inquiring into the correctness of information.
b) Ascertaining compliance with provisions.
c) Ascertaining applicability of the Act to a particular establishment.
d) Determining the compliance of conditions for granting exemption.
3. Powers:
a) Information: To require an Employer or Contractor to furnish necessary information.
b) Entry and Search: To enter and search any Establishment or Premises connected
therewith at any reasonable time (with such assistance).
c) Production of books: To require any person in charge to produce any account, books,
registers and other documents relating to the employment of persons or payment of
wages in any Establishment.
d) Examination of persons: To examine (with respect to any matter relevant to any of
the above purposes) the Employer / Contractor / their Servant / Agent / other person
found in charge of the Establishment or Premises / any person whom the Inspector
believes to be or have been an Employee of the Establishment.
e) Copies: Make copies of, or take extracts from, any book, register or other document.
f) Seizure: Seize such book, register, or other document where he has reason to believe
that any offence has been committed by the Employer.
g) Others: Exercise such other powers as the Scheme may provide.
Q.No.18. What are the orders that can be passed by Employees Provident Fund
Appellate Tribunal on appeals against the orders passed by officers? (Or) Examine the
appellate jurisdiction and the procedures relating thereto under the Employees
Provident Funds and Miscellaneous Provisions Act, 1952. (MTP M15), (RTP) (PM)
FORMATION AND JURISDICTION:

1. The Central Government may, by notification in the Official Gazette, constitute Appellate
Tribunals to be known as the Employees Provident Funds Appellate Tribunal.
2. The Tribunal is headed by a Presiding Officer who is or has been qualified to be the judge
of a High Court or a District Judge.
3. The tribunal has been set up at New Delhi.
4. The presiding officer holds office for 5 years or until he attains the age of 62 years,
whichever is earlier.
5. Section 7F (1) provides that the Presiding Officer of the Employees Provident Funds
Appellate Tribunal may by notice in writing under his hand addressed to the Central
Government, resign his office. However, the Presiding Officer shall continue in his office:
a) unless he is permitted by the Central Government to relinquish his office sooner; or
b) until the expiry of three months from the date of receipt of such notice or
c) until a person duly appointed as his successor enters upon his office;
d) or until the expiry of his term of office,
Whichever is the earliest.
6. The Tribunal has all India jurisdiction.
PROCEDURE FOR PASSING ORDERS:
1. The Appellate Tribunal may pass such orders as it think fit like
a) Confirming, modifying or cancelling the orders appealed against or
b) May refer the case back to the authority which passed such order with such directions
as it may think fit for a fresh passing of order.
2. This can be done only after giving the parties to the appeal, an opportunity of being heard.
3. The tribunal may within 5 years from the date of its order, may amend any order passed by
it previously, with a view to rectify any mistake apparent from the record if the mistake is
brought to the notice by the parties to the appeal.
4. However, an amendment which has the effect of enhancing the amount due from the
employer can be passed only after giving a notice to him of its intention to do so and has
given a reasonable opportunity of being heard.
5. The tribunal shall send a copy of every order passed to the parties to the appeal.
6. Any order passed by a tribunal disposing of an appeal shall not be questioned in any court.
7. Deposit of amount due on filing an appeal (Section 7-O):
a) No appeal by the employer shall be entertained by a Tribunal unless he has deposited with
it 75% of the amount due from him as determined by an officer referred to in Section 7A.
b) The Tribunal may, however, for reasons to be recorded in writing, waive or reduce the
amount to be deposited under this section.
8. Transfer of certain applications to Tribunals (Section 7-P):
All applications which are pending before the Central Government under Section 19A,
before its repeal shall stand transferred to a Tribunal exercising jurisdiction in respect of
establishments in relation to which such applications had been made as if such applications
were appeals preferred to the Tribunal.
Similar Question: State whether true or false - Employee Provident Fund Appellate Tribunal
shall consist of three judges.
Ans: This statement is false as the Employees Provident Funds Appellate Tribunal shall
consist of one judge.
Similar Question: What are the orders that can be passed by Employees Provident Funds
Appellate Tribunal on appeals against the orders passed by the Central Government or
authorized officers? (RTP)
Ans: Refer above - Procedure for passing orders.
Q.No.19. Explain the provisions of the EPF Act, authorising certain employers to
maintain a provident fund account? (PM)
1. Normally accounts of individual employees are maintained in the provident fund office.
a) However, in case of large establishments employing at least 100 employees,
b) The accounts can be maintained by the employer.
c) It may be noted that even if accounts are maintained by employer, the PF money has
to be deposited with PF authorities.
2. As per Sec.16A, Central Government may,
a) On an application made to it by the employer and
b) The majority of employees in relation to an establishment employing 100 persons,
Authorise the employer to maintain a provident fund account in relation to the establishment.
3. Such permission will be given subject to terms & conditions.
4. If the employer of such establishment had
a) Committed any default in the payment of provident fund contribution or
b) Had committed any other offence under this Act during the 3 years immediately
preceding the date of making the application,
c) No permission will be given.
5. Where an establishment is authorised to maintain a provident fund account, the employer
in relation to such establishment shall maintain such accounts, submit such returns &
deposit the contribution in prescribed manner.
6. Further such establishment shall pay inspection charges to meet the expenses for the
inspection done by the inspectors.
7. Any permission given under this section may be cancelled by the Central Government if
the employer fails to comply with any of the terms and conditions of the authorisation or
where he commits any offence under any provisions of this Act.
8. Before cancellation, the Central Government shall give the employer an opportunity of
being heard.
9. The order of cancellation shall be in writing.
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Q.No.20. Explain the provisions of EPF Act with regard to determination of escaped
amount after an officer has passed an order concerning determination of amount due
from an employer under the Act. (N 00 - 6M) (PM)
1. DETERMINATION OF ESCAPED AMOUNT [SECTION 7C]: In certain cases, previously

passed orders determining the amount due from an employer may need to be re-opened.
The officer, who had passed such orders, may re-open, if he has the reason to believe that
previously the amount was underdetermined (Escaped amount) due to:
a) Omission of any information or failure to disclose all material facts, by the employer,
necessary for determining the correct amount due or
b) In consequence of the information available in the hands of the officer, though there
has been no omission or failure to disclose information on part of the employer.
In such cases, the officer can pass appropriate orders re-determining the amount due.
2. Such re-opening can be done within a period of 5 years from the date of communication of
the original order.
3. Before passing such order, employer must be given an opportunity of being heard.
Q.No.21. State briefly the provisions of the EPF Act, 1952 regarding withdrawal and
payment of the fund.
WITHDRAWAL:
1. A member can withdraw credit balance to his provident fund for certain purposes and
subject to certain limits and conditions.
2. Different percentages are allowed depending upon the purpose. For example, for
purchase of a car, 75% shall be allowed but for construction of house 100% can be
allowed.
3. A member can withdraw full amount to his credit:
a) On retirement from service or on reaching the age of superannuation, or on account of
permanent and total disablement duly certified by a medical officer.
b) Immediately before migration from India for permanent settlement abroad.
c) On termination of services in the case of retrenchment.
d) When permitted by PF authorities, a member may withdraw his PF (a) if he is a foreign
national and is leaving India at least for a year, or (b) if he has not been employed in
any establishment to which the Act applies for a continuous period of not less than six
months immediately preceding the date on which he makes an application for
withdrawal.
PAYMENT:
1. The Commissioner should arrange to make prompt payment of PF amount, about which
there is no dispute, to the member immediately after it has fallen due for payment.
2. In case where the claimant happens to be a minor or lunatic, payment should be made to
the guardian or, in his absence, to the proper person fit by the PF authorities.
3. Payment can be claimed by the member or his nominee in the event of the death of the
member, or his family members in equal shares where no valid nomination is in existence.
4. However, if any other member of the family is alive, no share shall be payable to the major
sons, major sons of a deceased son, married daughters whose husbands are alive,
married daughters of a deceased son whose husbands are alive.
Similar Question: State the validity of the following nominations made under the Employees
Provident Funds and Miscellaneous Provisions Act, 1952: (RTP N 13)
3. A nominated B (his wife) and K (his friend) as nominee.
4. R, who is a single with no family, nominated S( relative) as a nominee.
Ans:
3. The nomination of B by A is valid being a family member but the nomination of the friend
4. (The nomination of S by R is valid because he does not have a family.
Q.No.22. Explain the circumstances under which the Central Government may grant
exemption from the applicability of Provident Fund Scheme / Pension Scheme/
Insurance Scheme under the EPF Act.
1. The Appropriate Government / Central Provident Fund Commissioner may grant exemption
to any establishment from the operation of all or any of the provisions of the Insurance
Scheme prospectively or retrospectively.
2. The exemption can be given only by way of a notification in the Official Gazette.
3. Terms of exemption: The exemption shall be subject to such conditions as may be
specified in the notification.
4. Conditions for giving exemption:
a) Provident Fund Scheme:
i) The exemption shall be given by Appropriate Government only if Appropriate
Government is of the opinion that the rules of provident fund with respect to the
rates of contribution are not less favourable than those specified in the scheme
ii) Before giving the exemption, Appropriate Government shall consult the Central
Board. The Central Board shall forward its views within such time limit as may be
specified in the scheme.
b) Pension Scheme: The exemption shall be given by Appropriate Government only if
Appropriate Government is of the opinion that the pensionary benefits available to the
employees of the establishment are at par or more favourable than the pension
scheme framed under the Act.
c) Insurance Scheme:
i) If it is requested to do so by the employer and
ii) If it is satisfied that the employees of such establishments are, in enjoyment of
benefits in the nature of life insurance and those are more favourable to such
employees than the benefits available under the Insurance Scheme.
5. In the case of exempted establishments, the employer has to pay inspection charges.
6. Exemption from operation of pension and Insurance schemes on employees:
a) By appropriate Government
b) To any person or class of persons employed in any establishment to which these
Schemes apply
Pension scheme: If benefits enjoyed are not less favorable and majority given their
consent.
Insurance scheme: If benefits enjoyed are not less favorable.
7. Cancellation of exemption: The exemption granted under this Section can be cancelled
in case of failure on the part of an employer to comply with the terms and conditions
imposed on which exemptions were granted.
Q.No.23. An employer want to deduct gratuity amount from the salary of employee. Can
he do so?
EMPLOYER NOT TO REDUCE WAGE ETC. (Section 12): No employer in relation to any
establishment to which any Scheme applies shall by reason only of his liability for the payment of
any contribution to the Funds or any charge under this Act or the Scheme, reduce directly or
indirectly the wages of any employee or the total quantum of benefits in the nature of old age
pension, gratuity fund to which the employee is entitled under the term of his employment express
or implied
Q.No.24. What are the modes of recovery of the amount due from the employer by the
Central Provident Fund Commissioner or any officer authorised by the Central Board
U/s 8F of the EPF Act, 1952.
MODES OF RECOVERY (Section 8F): Notwithstanding the issue of a certificate to the Recovery
Officer under Section 8B, the Central Provident Fund Commissioner or any officer authorised by
the Central Board may recover the amount by any one or more of the modes provided in this
section.
1. If any amount is due from any person to any employer who is in arrears, the Central
Provident Fund Commissioner or any other person authorised by the Central Board in this
behalf may require such person to deduct from the said amount the arrears due from such
employer under this Act, and such person shall comply with any such requisition and shall
pay the sum so deducted to the credit of the Central Provident Fund Commissioner or the
officer so authorised, as the case may be :
This sub-section will not apply to any part of the amount which is exempted from
attachment in execution of a decree of a Civil Court under Section 60 of the Code of Civil
Procedure, 1908 (5 of 1908).
2. The Central Provident Fund Commissioner or any other authorized officer may, at any time
or from time to time, by notice in writing, require any person from whom money is due or
may become due to the employer/the establishment or any person who holds or may
subsequently hold money for or on account of the employer / the establishment, to pay to
the Central Provident Fund Commissioner.
There the officer may be required to pay the amount either forthwith upon the money
becoming due or being held or at or within the time specified in the notice ,so much of the
money as is sufficient to pay the amount due from the employer in respect of arrears or the
whole of the money when it is equal to or less than that amount.
If he fails to make payment in pursuance thereof, further proceedings may be taken
against him for the realization of the amount as if it were an arrear due from him in the
manner provided in Sections 8B to 8E.
3. The Central Provident Fund Commissioner or the officer authorised by the Central Board
in this behalf may apply to the Court in whose custody there is money belonging to the
employer for payment to him of the entire amount of such money, or if it is more than the
amount due, an amount sufficient to discharge the amount due.
VERY IMP. - STUDENT PRACTICE EXERCISE

Distinguish the following in respect of Bonus Act, Gratuity Act and PF Act
a) Employer b) Employee c) Exempted establishment/employer
d) Exempted employee e) Disqualified employee f) Wages/Salary
g) Scheme of the Act

PRACTICAL QUESTIONS
Q.No.1. Vimal is an employee in a Company. The following payments were made to him
during the previous year: (P.M)
i. Piece rate wages ii. Productivity bonus
iii. Additional dearness allowance iv. Value of Puja gift.
Examine as to which of the above payments form part of Basic Wage of Vimal under the
Employees Provident Fund and Miscellaneous Provisions Act, 1952.
Fact of the case: A company made the following payments to Vimal piece rate wage,
productivity bonus, additional dearness allowance and value of puja gift.
Provisions of Law: Sec 2(b) Basic Wages.
Analysis: As per section 2(b) of the Employees Provident Fund and Miscellaneous Provision
Act, 1952, the Basic Wages means all emoluments which are earned by an employee while
on duty or on leave or on holidays in accordance with the terms of the contract of employment
and which are paid or payable in cash to him, but does not include:
a) The cash value of any food concessions.
b) Any Dearness Allowance (that is to say all cash payments, by whatever name called, paid
to an employee on account of rise in the cost of living), house rent allowance, overtime
allowance, bonus, commission or any other similar allowance payable to the employee in
respect of his employment or of work done in such employment or.
c) Any presents made by the employer.
By applying the above provisions of the Act to the given problem, basic wages of X excludes
the productivity bonus, additional dearness allowance and the value of puja gift.
Conclusion: Basic wage of X will include only piece rate wages.
Q.No.2. S retired from the services of PQR Limited, on 31st March, 2009. He had a sum of
Rs.5 lakhs in his Provident Fund Account. It has become due for payment to S on 30th April,
2009 but the company made the payment of the said amount after one year. S claimed for the
payment of interest on due amount at the rate of 15 percent per annum for one year. Decide,
whether the claim of S is tenable under the provisions of the Employees Provident Funds and
Miscellaneous Provisions Act, 1952. (RTP N15) (PM, N10 4M)
Facts of the case: S retired from the services but the company made the payment of the
Provident Fund amount after one year. S claimed for the payment of interest on due amount at
the rate of 15% P.a.
Provisions of law: Section 7Q - Interest
Analysis:
1. According Section 7Q of the Employees' Provident Funds and Miscellaneous Provisions Act,
1952 the employer shall be liable to pay simple interest @ of 12% per annum or at such higher
rate as may be specified in the Scheme on any amount due from him under this Act from the
date on which the amount has become so due till the date of its actual payment:
2. Provided that higher rate of interest specified in the Scheme shall not exceed the lending
rate of interest charged by any scheduled bank.
3. As per the above provision, S can claim for the payment of interest on due amount @ 12%
p.a. or at the rate specified in the Scheme, whichever is higher, for one year.
Conclusion: Here in the absence of specified rate he(S) can claim only 12% interest p.a. on
the due amount. Hence claim of S for interest rate of 15% is not tenable.
Q.No.3. An employee of limited company filed a claim for Provident Fund settlement with the
Provident Fund commissioner. However, he did not get any settlement from the authority even
after six months. Referring to the EPF & MP Act, 1952 what course of action an authority
should have taken in this respect.
Facts of the case: An employee did not get any settlement of provident fund from the
authority even six month's after claiming with Provident Fund Commissioner
Provisions of law: Section 72 - The Employees Provident Fund Scheme, 1952.
Analysis:
1. As per Section 72 of Employees Provident Fund Scheme, the claims, complete in all
respects submitted along with the requisite documents shall be settled and benefit amount
paid to the beneficiaries within 30 days from the date of its receipt by the Commissioner.
2. If there is any deficiency in the claim, the same shall be recorded in writing and
communicated to the applicant within 30 days from the date of receipt of such application.
3. In case the Commissioner fails without sufficient cause to settle a claim complete in all
respects within 30 days, the Commissioner shall be liable for the delay beyond the said
period and penal interest at the rate of 12% per annum may be charged on the benefit
amount and the same may be deducted from the salary of the Commissioner.
Conclusion: As per above analysis the Commissioner shall be liable for the delay and penal
interest at the rate of 12% per annum may be charged on the benefit amount and the same
may be deducted from the salary of the Commissioner.
Q.NO.4.Explain the provisions of the Employees Provident Funds and Miscellaneous

Provisions Act,1952 regarding the following:
a) Rate of interest on amount due from the employer under the Act.
b) Maximum limit of interest rate
c) The period for which the employer is liable to pay the said interest.
Rate, limit and period of payment of interest:

As per Section 7Q of the Employees Provident Funds and Miscellaneous Provisions Act,
1952
a) The employer shall be liable to pay simple interest at the rate of 12 per cent per annum or
at such higher rate as may be specified in the Scheme only if he has delayed in the
payment of any amount due from him under this Act. The interest shall be payable from
the due date till the date of payment.
b) Although the upper limit of interest rate is not given in the Act, it is clearly mentioned that
the higher rate of interest specified in the Scheme cannot exceed the lending rate of
interest charged by any scheduled bank.
c) The period for which the employer is liable to pay the interest is from the date on which the
amount has become so due till the date of its actual payment.
Q.No.5. Manorama Group of Industries sold its textiles unit to the Giant Group of Industries.
Manorama Group contributed 25% of total contribution of the Pension Scheme which was due
before sale under the Act. The transferee company refused to bear the remaining 75%
contribution in the pension scheme. Decide under EPF Act who will be liable to pay for the
remaining contribution in case of transfer of Establishment and up to what extent
(N 04 - 4M, M 14 4M) (PM) (For students self study)
Facts of the case: The transferee company before transferring its business made a
contribution of 25% of total contribution which was due before sale. Now the transferee
company refused to bear the remaining contribution.
Provisions of law: Sec 17B Liability in case of transfer of establishment.
Analysis: According to Sec 17B of EPF and MP Act, 1952, where an employer in relation to an
establishment, transfers that establishment in whole or in part by sale, gift, lease or license or in
any other manner what so ever, the employer and the person to whom the establishment is
transferred shall be jointly and severally liable to pay the contribution and other sums due from the
employer under the provision of this Act, of the scheme or pension scheme, as the case may be,
in respect of the period upto the date of such transfer. It is provided that the liability of the
transferee shall be limited to the value of the assets obtained by him from such transferor.
By applying the above provisions in the given case, the transferor i.e. Manorama Group of
Industries has paid only 25% of the total liability as contribution in pension scheme before sale
of the establishment. With regard to the remaining 75% liability, both the transferor and the
transferee companies are jointly and severally liable to contribute. If the transferor refuses to
contribute then the transferee will be liable.
The liability is limited for contributions of period upto the date of transfer and upto remaining
amsount. Further, the liability of transferee i.e. Giant Group of Industries is limited to the extent
of assets obtained by it from the transferor of the establishment.
Conclusion: If the transferor company refuses to pay then the transferee company will be
held liable subject to the value of assets obtained by the company by such transferor.
Q.No.6.Solar Industries Limited sold its unit to Mars Industries Limited and contributed 30%
contribution in the Pension Scheme. The transferee company refused to bear the balance
70% contribution in the Pension Scheme. Decide, under the employees provident Fund and
Miscellaneous Provisions Act, 1952, the liability of remaining contribution. (M14 4M)
Provisions of law: The problem asked in the question is based on the provisions of section 17B
of the Employees Provident Funds and Miscellaneous Provisions Act, 1952. Accordingly, where
an employer in relation to an establishment, transfers that establishment in whole or in part by
sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to
whom the establishment is so transferred shall be jointly or severally liable to pay the contribution
and other sums due from the employer under the provisions of this Act of the scheme or pension
scheme, as the case may be, in respect of the period upto the date of such transfer.
Analysis: It is provided that the liability of the transferee shall be limited to the value of the
assets obtained upto the date of transfer. It would thus be evident from the aforesaid
provisions that section 17B deals with the liability of transferor and transferee in regard to the
money due under the Act, scheme or the Pension scheme. In the case of transfer of
establishment brought in by sale, gift, lease etc., the liability of the transferor and the
transferee is joint and several, but it is limited to the period upto the date of the transfer.
Conclusion: Therefore, applying the above provision of law, Solar Industries Ltd., has paid
only 30% of the total liability as contribution in Pension Scheme before sale of the
establishment. With regard to the remaining 70% liability both the transferor and the transferee
companies are jointly and severally liable to contribute. In case, the transferor refuses to
contribute, the transferee is liable but the liability of the transferee (Mars Industries Limited) is
limited to the extent of assets obtained by it from the transfer of the establishment.
Q.NO.7.State the validity of the following nominations made under the Employees Provident
Funds and Miscellaneous Provisions Act,1952:
a) A nominated B (his wife) and K ( his friend) as nominee.
b) R, who is a single with no family, nominated S( relative) as a nominee. (RTP NOV-13)
a) The nomination of B by A is valid being a family member but the nomination of the friend
b) The nomination of S by R is valid because he does not have a family.

Q.No.8. An Inspector appointed under the Employees Provident Fund and Miscellaneous
Provisions Act, 1952 makes an inspection at 10 p.m. (five hours after factory timings) and
seeks to take copies of the Shareholders Register. How far under the Act is his action
reasonable? (CMA D 13 - 3M) (PM)
An Inspector appointed under the Employees Provident Fund and Miscellaneous Provisions Act,
1952 makes an inspection at 8 a.m. (an hour and seeks to take copies of the Income Tax
Returns. How far under the Act is his action reasonable? (M 15 - 4M)
Facts of the case: An Inspector made an inspection at 10 P.M. and seeks to take copies of
the shareholders register.
Provisions of law: Sec 13 Inspector
Analysis: According to Sec 13(2) of the Employees Provident Fund and Miscellaneous Act,
1952, an Inspector can inspect and make copies of, or take extract from any books, register or
other documents maintained in relation to the establishment and where he has reason to
believe that any offence under this Act has been committed by an employer, seize with such
assistance as he may think fit, such books, register or other document or portions there of as
he may consider relevant in respect of that offence.
Conclusion: In the present case, the inspector had sought to take copies of the shareholders
register which is irrelevant document for the purpose of EPF and MP Act, 1952. Moreover he
has visited the office after the working hours which are not reasonable.
Q.No.9. R, a 57 years old district judge was appointed by the Central Government as
Presiding Officer of the Employees Provident Funds Appellate Tribunal for a period of five
years. After three years, he (R) resigns from his office and ceases to work with immediate
effect without handing over the charge to his successor, who was not appointed by the
Government till that date. Examine the validity of Rs action to cease work under the
provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952.
RTP N14 (M 10 - 5M) (PM)
Facts of the case: R, a presiding officer of EPF Appellate Tribunal, resigned from his office
and ceases to work with immediate effect without handing over the charge to his successor.
Provisions of law: Sec 7F of EPF and Miscellaneous Provisions Act.
Analysis: Sec 7F provides that the presiding officer of Employees Provident Funds Appellate
Tribunal may by notice in writing under his hand addressed to the Central Government, resign
his office provided that the presiding officer shall, unless he is permitted by the Central
Government to relinquish his office sooner, continue to hold office
a) until the expiry of three months from the date of receipt of such notice or
b) until a person duly appointed as his successor enters upon his office or
c) until the expiry of his term of office,
whichever is earlier.
In the given case, R resigned his office with immediate effect without handing over the charge
to his successor, who was not appointed by the Government till that date.
Conclusion: Rs action is invalid. He should obtain permission from the Central Government to
do so.
Copyrights Reserved
TEST YOUR KNOWLEDGE
1. Kumar & Sons company sold its manufacturing unit to X & Co. Kumar & Sons contributed
30 % of total contribution in pension scheme which was due before the sale under the
EPF& MP Act, 1952. X & Co. refused to bear remaining 70% of the contribution in the
pension scheme. Decide who will be liable to pay the remaining contribution?
2. State whether the following statement is correct/incorrect.
a) The maximum contribution that an employee can make to his provident fund account is
10%.
b) The amount of the provident fund of an employee is not attachable even after it is has
been received by the employee.
3. Generally the Employees Provident funds and Miscellaneous Provisions Act, 1952 applies
to entities employing more than
a) 10 persons b) 20 persons c) 100 persons d) 1000 persons
4. The Central Government may apply the provisions of this act even if it employs less than
required persons.
a) True b) False
5. The liability for employer to contribute under the Employees Provident Funds etc. Act,
1952 is 10% of the employees emoluments.
a) True b) False
6. The maximum contribution that an employee can make to his provident fund account is
10%.
a) True b) False
7. How is EPF Appellate Tribunal constituted?
8. What is its composition?
9. What are its powers?
10. State the priority of payment of PF contribution over other debts.
11. Can employer reduce wages etc of an employee by reason only of his liability for the
payment of any contribution to the fund.
12. State whether the following statement is true or false and give reason there for with
reference to the Employees Provident Funds and Miscellaneous Provisions Act, 1952.
Employee Provident Fund Appellate Tribunal shall consist of three judges.
Ans:-This statement is false as the Employees Provident Funds Appellate Tribunal shall
consist of one judge in terms of section 7D (2).
13. A charitable or religious trust of old temples are covered by the provident Funds Act.
Ans:-Incorrect, as per the section 1 of the Employees Provident Funds and Miscellaneous
Provisions Act, 1952.
14. Employees Provident Funds and Miscellaneous Provisions Act, 1952 applies to
Municipal Councils and Municipal Corporations.
15. The Funds under the Employees Provident Funds Scheme, 1952 is vested and
administered by Central Government.

Pavan Sir, Adithya Kiran Sir
THE END

12. PAYMENT OF BONUS ACT, 1965
1. B - - - - - - - - - - - - - - -
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13. B - - - - - - - - 5 - - - - - -
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15. B - - 1 - - - - - - - - - - - -
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24. A - - - - - - - - - - - - - - -
INTRODUCTION:
1. This is an Act intended to provide for the payment of Bonus to persons employed in certain
establishments on the basis of profits or on the basis of production or productivity and
matters connected there with.
2. This Act came into force from Sep 25th, 1965 and extends of whole of India.
Q.No.1. Discuss the applicability of the Payment of the Bonus Act, 1965. (RTP) (PM)
THIS ACT IS APPLICABLE TO:

1. Every Factory ; and
2. Every other establishment in which 20 or more persons are employed on any day during
an accounting year (For counting purpose, even casual workers and workers drawing a
salary of > 10,000 shall also be considered).
Note-1: A part time employee is also an employee for the purpose of calculating the
number of employees i.e. 20 or more. [Automobile Karamchari Sangh Vs. Industrial
Tribunal]
Note -2: Once covered always covered: An establishment, in which 20 or more persons
were employed on any day during an accounting year, will continue to be governed by this
Act, though the number of employees fall below 20.
3. Even for 10 to 19: But the Appropriate Government may apply the provisions of the Act
with effect from such accounting year as may be notified in the Gazette to every other
establishment or class of establishments, employing persons between 10 and 19 in
number, by giving two months notice to such establishment.
4. The provision of this Act shall also apply to certain public sector establishments [Section
20(1)].
IPCC _36e_Business Laws _ Payment of Bonus Act, 1965_________________58
Note:
1. Factory "Factory" shall have the same meaning as in clause (m) of section 2 of the
Factories Act, 1948 (63 of 1948)
2. Establishment - The word Establishment is wider than factory. It covers offices or fixed
places where business is carried out.
Q.No.2. Who are the employees excluded from the Payment of Bonus Act? RTP (PM)
According to Sec.32 of The payment of Bonus Act, 1965, the Act is not applicable to the
following types of employees:
1. Employees of LIC.
2. Employees of RBI.
3. Seamen as defined in the Merchant Shipping Act, 1958.
4. Employees registered / covered under the Dock Workers (Regulation of Employment) Act
and employed by the registered or listed employers.
5. Employees of:
a) Indian Red Cross Society or any other institution of like nature(Including its branches).
b) Universities and other educational institutions.
c) Institutions (including hospitals, chambers of commerce and social welfare institutions)
established not for the purpose of profit. (E.g. ICAI)
6. Employees of:
a) The IFCI (Industrial Finance Corporation of India).
b) Any Financial Corporation established under State Financial Corporation Act.
c) The DIC (Deposit Insurance Corporation).
d) The National Housing Bank Copyrights Reserved
e) The UTI (Unit Trust of India). To MASTER MINDS, Guntur

f) The IDBI (Industrial Development Bank of India).
g) The NABARD (National Bank for Agriculture and Rural Development)
h) The Small Industrial Development Bank of India of SIDBI Act 1989.
i) Any other financial institution (other than Banking company) being an establishment in
public sector which the Central Government may by notification specify.
7. Employees of an establishment run by or under the authority of any department of Central
Government or State Government or a Local Authority (Including UDA).
8. Employees employed by Inland water transport establishments operating on routes
passing through any other country.
9. Besides the above,
If the appropriate government is of the opinion that
a) It will be in the public interest,
b) Having regard to the financial position and
c) Other relevant circumstances of any establishment or class of establishments, It may,
by notification in the official gazette, exempt for such periods as may be specified there
in and
d) Subject to such conditions as it may think fit to impose, such establishments or class of
establishments from all or any of the provisions of this Act.
Q.No.3. Who is entitled and who is not entitled to claim Bonus under the Payment of
Bonus Act? (CMA D 08 4M) (N 99, M 02 - 7M (PM))
ELIGIBILITY: Every employee of an establishment covered under the Act

1. Is entitled to bonus
2. From his employer in an accounting year
3. Provided he has worked in that establishment for not less than 30 working days in the year
4. On a salary less than or equal to Rs.10,000 per month [Section 2(13) read with Section 8].
DISQUALIFICATIONS - SEC.9:
However, there are certain disqualifications of an employee to claim bonus in an accounting year.
1. An employee who has been dismissed from service for reasons of
a) Fraud Or
b) Riotous / Violent behaviour while in the premises of the establishment Or
c) Theft, misappropriation or damage of any property of the establishment is not entitled
for any bonus.
2. But a dismissed employee reinstated with back wages is entitled to bonus. (Gammon India
Ltd. Vs. Niranjan Das)
IN THE FOLLOWING CASES AN EMPLOYEE IS ENTITLED TO BONUS:
1. A Temporary workman is entitled to bonus on the basis of total number of days worked.
2. An employee of a seasonal factory is entitled to proportionate bonus and not the minimum
bonus as prescribed under Sec.10 of the Act.
3. A Part time employee as a sweeper engaged on a regular basis is entitled to bonus.
(Automobile Karamchari Sangh Vs. Industrial Tribunal)
4. A Retrenched employee is eligible to get bonus provided he has worked for a minimum
qualifying period i.e. he has worked in the establishment for not less than 30 working days
in an accounting year as required under Sec.8. (East Asiatic Company Pvt. Ltd. Vs.
Industrial Tribunal)
5. A Probationer is an employee and as such is entitled to bonus. (Bank of Madurai Ltd. Vs.
Employees Union)
6. A Piece-rated worker is entitled to bonus. (Mathuradas Kanji Vs. L.A. Tribunal)
7. Employee employed through contractors on building operations.
8. If the employee is prevented from working and subsequently reinstated in service,
employers statutory liability for bonus cant be said to have been lost. [ONGC Vs. Shyam
Kumar Sahegal].
EMPLOYEES NOT ENTITLED TO BONUS:
1. An apprentice is NOT entitled to bonus. (Wheel & RIM Co. Vs. Govt. of Tamilnadu)
2. Disqualification of Bonus (Section 9) An employee who has been dismissed from service for :
a) Fraud; or
b) Riotous or violent behaviour while on the premises of the establishment [V.G Textiles
Private Ltd vs Assistant Commissioner of Labour, 2010 (3) LLN405 (Mad.)]; or
c) Theft, misappropriation or sabotage of any property of the establishment is not entitled
for bonus.
Employee dismissed from service for misconduct is disqualified from any bonus and not
merely for the bonus of accounting year in which he is dismissed. (Pandian Roadways
Corp. Ltd. Vs. Presiding Officer)
3. Employees of certain establishments specified in Sec.32.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 3, 4, 5, 6, 7, 8, 9, 10 & 15)
Q.No.4. Examine the bonus entitlement to the following persons:

a) A Probationer. (N 98 - 6M, M 04, N 12 - 4M, N 06, 07 - 5M, N14 4M) (PM) (N15 4M)
b) An employee who committed a fraud Or A Dismissed Employee.
c) An employee who is found guilty of misconduct causing financial loss to employer.
d) An Apprentice. RTP M16
e) A Retrenched Employee.
f) An employee employed through contractors on building operations.
g) A University teacher
h) An employee of the 'NABARD'
i) A reinstated employee without wages for the period of dismissal.
j) A retrenched employee who worked for 45 days in a year on a salary of Rs.4,000 per
month.
k) D, an employee employed by an establishment engaged in an industry carried on by
a department of the Central Government
l) J, who is working in a social welfare organization.
a) A Probationer is an employee and as such is entitled to bonus provided he has worked for
not less than 30 days in the year on a salary less than or equal to Rs.10,000 per month.
b) Sec.9 (Refer above).
c) Refer to Sec.18.
d) As the apprentice is specifically excluded from the definition of the term 'employee', he
cannot be an employee who is entitled to receive bonus under the Act.
e) A Retrenched employee is eligible to get bonus provided he has worked for a minimum
qualifying period i.e. he has worked in the establishment for not less than 30 working days
in an accounting year as required under Sec.8.
f) A University teacher is not entitled for bonus because the employees of Universities and
other educational institutions are excluded from the operations of the Act as per Section 32
of the Payment of Bonus Act, 1965.
g) Employees of the NABARD are not entitled for bonus because employees of the
Agricultural Refinance Corporation are excluded from the operation of the Act as per
Section 32 of the Payment of Bonus Act, 1965.
h) A reinstated employee, without wages for the period of dismissal, is not entitled for bonus
because only a dismissed employee reinstated with back wages is entitled to bonus.
i) A retrenched employee who worked for 45 days in a year on a salary of Rs.4,000 per
month is entitled for bonus.
j) As per the provisions contained in Section 32 (v) (c) of the Payment of Bonus Act, 1965, J
is not entitled to any bonus as the said Act is not applicable to social welfare organization.
k) The Payment of Bonus Act, 1965 is not applicable to the employees engaged in an
industry carried on by a department of the Central Government vide Section 32 (iv) of the
Payment of Bonus Act,1965.
Q.No.5. What does available surplus mean under the Payment of Bonus Act?
(CMA D10-2M) (PM)
It means the available surplus as computed under Sec.5. Accordingly, it means:

Gross Profit (As per Sec.4) XXX
Less: Prior charges (Sec.6) XXX
Add: Tax savings on account of bonus in respect of previous accounting year. (*) XXX
Available surplus XXX
* It is obvious that an employer can claim the amount of bonus payable as deductible expense
for the purpose of his tax assessments. Such savings must also be added to the amount of
gross profits for the purpose of calculation of available surplus.
Q.No.6. How to compute Gross Profit U/S 4 & Deductions as prior charges U/S 6? (or)
You are to compute Gross Profit for the purpose of bonus payable to employees of a
Non-Banking company. What deductions you shall make from the Gross Profit as per
Schedule II under the Provisions of the Act? (M - 98, N 03 - 4M) (PM)
Sec.4: The gross profit of an employer is required to be calculated in the manner specified in:
1. The 1st Schedule - In the case of a banking company &
2. 2nd Schedule - In any other case.
PRIOR CHARGES (Sec.6): Having calculated Gross Profit, the following must be deducted as
prior charges:
1. Any amount by way of depreciation admissible under Sec.32(1) of the Income Tax Act or
under the provisions of the agriculture income tax law, as the case may be.
2. Any amount by way of development rebate or development allowance, investment
allowance which the employer is entitled to deduct from his income under the I.Tax Act.
3. Any direct tax payable for the accounting year (As calculated under Sec.7 of Bonus Act).
4. Such further sums as are specified in the 3rd Schedule. (As per this some minimum return
on capital employed is allowed as deduction)
Q.No.7.Distinguish Available surplus and Allocable surplus.

(N 99, 01 - 5M, N 02 - 4M) (PM)(CMA J 07-4M,D 10)
AVAILABLE SURPLUS: Refer to previous questions.

ALLOCABLE SURPLUS [Sec.2(4)]: This expression means:
1. 67% of the available surplus in an accounting year, in relation to an employer, being a
company, other than banking company, which has not made the arrangements prescribed
under the Income Tax Act 1961, for the declaration and payment within India of the dividends
payable out of its profits in accordance with the provisions of Sec.194 of Income Tax Act .
2. In any other case of employer, allocable surplus means 60% of such available surplus.
This is to be distributed as bonus in proportion to the salary actually earned by each employee
during the year. However, this is subject to minimum of 8.33% and maximum of 20% of salary.
Q.No.8. Write the provisions relating to minimum & maximum bonus?

( MTP M16, M 04 - 6M, N 06 - 5M, N 11- 4M) RTP N15, M 16,(PM)
PAYMENT OF MINIMUM BONUS - SEC.10:

1. Every employer shall be
a) Bound to pay
b) To every employee
c) In respect of every accounting year,
d) Minimum bonus which shall be 8.33% of the salary or wage earned by the employee
during the accounting year or Rs. 100, whichever is higher ( )
2. This is payable whether or not the employer has any allocable surplus in the accounting year
i.e. even if the employer suffers losses during the accounting year he is bound to pay this.
3. But if the employee has not completed 15 years of age at the beginning of the accounting
year he will be entitled to a minimum bonus which shall be 8.33% of the salary or wage
earned during the accounting year or Rs.60, whichever is higher ( )
PAYMENT OF MAXIMUM BONUS - SEC.11:
1. Where, in respect of any accounting year, the allocable surplus
a) Exceeds the amount of minimum bonus payable (A.S. > Min. Bonus) to the employees
under that Sec.,
b) The employer shall, instead of such minimum bonus, is bound to pay to every
employee in respect of that accounting year a bonus upto a maximum of 20% of such
salary or wages.
2. In computing the allocable surplus mentioned in a point above, the amount Set on or Set
off under the Sec.15 shall be taken into account.
3. Further, where the salary or wage of an employee exceeds Rs. 3,500 p.m.,
a) The bonus payable to such employee under Sec.10/Sec.11, shall be calculated as if his
salary or wage is 3,500 p.m.
Q.No.9. Explain the provisions related "set on & set off" of allocable surplus (sec.15)
(CMA D 06-4M) (M 05 - 6M) (PM)
SET ON OF ALLOCABLE SURPLUS:

1. Where for any accounting year the allocable surplus exceeds the amount of maximum
bonus payable (A.S. > Max. bonus) to the employees,
2. Then the excess shall, subject to a limit of 20% of the total salary or wage of the
employees employed in the establishment in that accounting year,
3. Be carried forward for being set on in the succeeding Accounting year and so on upto and
inclusive of the 4th accounting year (In simple words, 4 accounting years).
4. This excess to be utilised for bonus, in the manner given in 4th schedule (See last page).
SET OFF OF ALLOCABLE SURPLUS:
1. There may be a case where there is no allocable surplus or where the allocable surplus is
less than the amount of minimum bonus payable (A.S = 0, A.S. Min. Bonus) to the
employees &
2. There is no amount or sufficient amount carried forward and set on which could be utilised
for paying minimum bonus.
3. In such a situation minimum amount or the deficiency as the case may be, shall be carried
forwardthfor being set off in the succeeding Accountingth year and so on upto and inclusive
of the 4 accounting year in the manner illustrated in 4 Schedule.
Note: In every year allocable surplus is calculated. To this amount, set on from previous year
is added. Similarly, set off, if any from previous year is deducted.
This gives amount which is available for distribution as bonus (i.e. the amount of set on or set
off carried forward from the earliest accounting year shall first be taken into account).
Copyrights Reserved

Q.No.10. Describe the procedure for computing number of working days? Can the
bonus thus calculated be reduced proportionately? If so, under which circumstances?
(CMA D11, J 05- 3M) (M 98- 7M, N 03 - 6M, M 06 - 5M, N 13 4M) (PM)
AS PER SEC.13:
1. Where an employee has not worked for all the working days in an accounting year and
2. If the minimum bonus of Rs. 100 or Rs. 60 is higher than 8.33% of his salary or wage for the
days he has worked in that accounting year, (These amounts fixed in 1965, appears
meaningless now)
3. The minimum bonus shall be proportionately reduced.
SEC.14 PROVIDES HOW TO COMPUTE THE NUMBER OF WORKING DAYS FOR
PURPOSES OF SEC 13 AS PER WHICH THE FOLLOWING DAYS SHALL BE DEEMED
TO HAVE WORKED FOR THE PURPOSE OF COMPUTATION OF BONUS PAYABLE TO
HIM:
1. When he has been laid off under an agreement or by a standing order under Industrial
Employment (standing orders) Act, 1946 or Industrial Disputes Act, 1947.
2. He has been on leave with salary or wage.
3. He has been absent due to temporary disablement caused by accident arising out of and in
the course of employment.
4. The employee has been on maternity leave with salary or wages during the accounting year.
Note: Where a factory works only seasonally, working days in any accounting year would
mean those days of the year during which the employee concerned is actually allowed to
work [Sakhkkar Mills Mazdoor Sangh V. Gwalior Sugar Co. Ltd].
Some clarifications:
1. If an employee on his own decision has not worked on all the working days in an
accounting year, then the formula prescribed in Sec.13 has to be applied.
2. But where an employee was ready and willing to work, but for reasons beyond his control
was unable to work gets the eligibility for bonus under Sec.8 of the Act.
3. Both Sections 13 and 14 do not cover a case where an employee was prevented from
working by reason of an illegal order of termination.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 13&14,27)
Similar Question: Examine with reference to Payment of Bonus Act if an employee drawing a
salary of Rs.5,000 and who joined duty on January 20th, 2008 and who availed maternity
leave for premature delivery from February 8th, 2008 till April 4, 2008, is eligible for bonus for
the year 2007-08. (PM)
Ans: Refer point d in Sec.14.
Similar Question: State which of the following statement is correct / incorrect with reasons:
Woman employee on maternity leave is not eligible for bonus. (RTP - N 13)
Ans: Incorrect: Sec 14 refer above
Q.No.11. Can an employer deduct any amount due from an employee from the bonus
payable to him? If so, when and what are the limitations of it.
(M 01 - 7M, N 05 - 6M) M- 16 4M (P.M)
ADJUSTMENT OF CUSTOMARY OR INTERIM BONUS AGAINST BONUS PAYABLE -

SEC.17:
1. If in any accounting year, an employer has paid any Puja bonus or other customary bonus
to any employee, then the employer shall be entitled to deduct the amount of bonus so
paid from the amount of bonus payable by him.
IPCC _ 36e_Business Laws _ Payment of Bonus Act, 1965_________________64
2. The employer can do the same thing even in a case where he has paid off the bonus
payable under this Act to an employee before the date on which such bonus payable
becomes payable (i.e. Advance payment of Bonus).
DEDUCTION FOR LOSS DUE TO MISCONDUCT OF EMPLOYEE - SEC.18:
1. If in any accounting year, an employee is found guilty of misconduct causing financial loss
to the employer then the employer can lawfully deduct the amount of loss from the amount
of bonus payable by him to the employee in respect of that accounting year only.
2. In this case, the employee shall get only the balance, if there is any.
Conditions:
a) The misconduct and related financial loss must be duly proved before it can be
deducted.
b) The employer must have proper notice of the misconduct and of financial loss caused.
c) There should be a finding of misconduct and resultant loss after proper enquiry.
d) This deduction shall be in addition to any punishment imposed on account of duly
proved misconduct.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 16, 17 & 18)
Q.No.12. What is the time limit for payment of bonus and what action can be taken by
an employee for the recovery of bonus due from his employer?
(M 99 - 6M, M 12 - 4M)(CMA J 09 2M)(M 15 - 4M), (MTP M15)
TIME LIMIT FOR PAYMENT OF BONUS:

Bonus shall be paid in cash by the employer:
1. Within a period of 8 months from the close of the accounting year.
2. This period of 8 months may be extended upto a maximum of 2 years by the appropriate
government, on an application being made by the employer.
3. In case of dispute: Where there is a dispute regarding payment of bonus pending before
any authority under Sec.22, within 1 month from the date on which the award / settlement
comes into operation. (To know the meaning of the word AWARD refer the question
DEFINITIONS.)
Interest: Interest at 9% p.a. will be awarded on the arrears of bonus from the date it became
due till the date of payment.
CERTIFICATION PROCEEDINGS FOR RECOVERY OF BONUS DUE FROM AN
EMPLOYER (SEC.21):
1. Sometimes the employer may not pay the bonus due to the employee.
2. In such cases the employee can make an application to the appropriate government.
3. When the employee is dead, the application can be made even by his assignee or heirs.
4. The application is to be made within 1 year from the date on which the bonus becomes
due. Late application may be accepted, if the appropriate government is satisfied that the
applicant was prevented from making the application with in 1 year.
5. The Appropriate Government is to be satisfied that the bonus is so due.
6. On such satisfaction, it must issue a certificate for that amount to the collector.
7. Thereupon, collector shall proceed to recover the same as an arrear of land revenue.
Explanation: Employee includes ex-employee also.

Q.No.13. Discuss the provisions of the Payment of Bonus Act relating to the appointment,
powers and functioning of inspectors appointed under the Act. (M 13- 5M) (PM)
1. Appointment [Sec 27]: The Appropriate Government by notification in the Official

Gazette, appoints inspectors for the purposes of the Payment of Bonus Act.
2. Powers: Such inspector has to ascertain whether the provisions of the Act has been
complied with or not. For this purpose he may:
a) Require an employer to furnish such information as he may consider necessary.
b) Enter any establishment or any premises connected therewith at any reasonable time
and with such assistance require any one who found in charge thereof to produce any
books, registers relating to the employees.
c) Examine the employer, his agent or servant or any other person.
d) Take extracts/copies from any books, register or other documents.
e) Exercise such other powers as may be prescribed by the Appropriate Government.
3. Is deemed to be a public servant under Indian Penal Code. (Thus obstructing in his work
or giving false information will be an offence)
4. Bound: Any person, whom, an inspector calls for to produce any accounts books,
registers or other documents, shall be bound to do so.
5. Banking Company: This Section do not empower an inspector to ask a banking company
to disclose any information, which a banking company cannot be compelled to disclose
under Sec.34A of the Banking Regulation Act, 1949.
Q.No.14. When the Payment of Bonus Act is applicable to the establishment in public
sector? (N 98, N 01 - 5M, M 04 - 4M) (PM)
As per Section 20(2) of The Payment of Bonus Act, nothing in this Act shall apply to the
employees employed by any establishment in the public sector. But there are certain
exceptions as stated below:
EXCEPTION:
1. If an establishment in public sector sells any goods manufactured by it or renders any
services in competition with an establishment in private sector.
2. If the income from such sale or service or both is not less than 20% of the gross income of
establishment in public sector then the provisions of the Bonus Act shall apply to it.
Meaning of establishment in public sector: It means an establishment owned, controlled or
managed by-
a) A Government company as defined in Section 2(45) of the Companies Act, 2013;
b) A corporation in which not less than 40% of its capital is held (whether singly or taken
together) by:
i) the Government; or
ii) the Reserve Bank of India; or
iii) A corporation owned by the Government or the Reserve Bank of India.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 21)
Copyrights Reserved

Q.No.15. In what way does the Payment of Bonus Act regulate the payment of bonus to
employees linked with productivity? What restrictions apply in such cases on payment
of bonus to an employee? (M 99 - 5M, M 01 - 6M)
1. Section 31A applies only if there is an agreement

a) By the employees with their employer
b) For payment of an annual bonus linked with production or productivity,
c) Instead of bonus based on profits as normally payable under the payment of Bonus
Act.
2. When such an agreement has been entered, the employees will be paid the bonus as per
the terms of the agreement, subject to the following conditions/restrictions imposed by
Sec.31A:
a) Any such agreement which results into the relinquishment of the employees right to
receive minimum bonus under Sec.10, shall be null and void.
b) If the bonus payable under such agreement exceeds 20% of the salary earned by the
employees, such employees are not entitled to the excess over 20% of salary/wages.
Q.No.16. Explain the provisions of the payment of bonus Act, regulating the payment of
bonus by new establishments? (Sec.16) (N 99 - 6M) (PM)
1. In case of new establishment, in the first 5 accounting years next to the accounting year in
which the employer sells the goods manufactured by him or renders services,
a) Bonus shall be payable only in the accounting year in which the employer derives
profits from such establishment.
b) Such bonus shall be calculated without applying the provisions of Sec.15.
2. When an employer is deemed to have derived profit:
a) After he has made provision for that year's depreciation as per Income Tax Act &
b) After the Unabsorbed depreciation & Unabsorbed losses for the previous accounting
years have been fully set off against his profits.
3. But in the 6th & 7th accounting years, Sec.15 shall apply subject to the following
modifications:
a) For the 6th accounting year, set on or set off shall be made, taking into account the
excess or deficiency of the allocable surplus set on or set off in respect of the 5th and
6th accounting years.
b) For the 7th accounting year, the same principle is to be followed but the excess or
deficiency of the allocable surplus set on or set off in respect of the 5th, 6th and 7th
accounting years has to be taken into account.
4. From the 8th accounting year, the provisions of Sec. 15, shall apply in relation to such
establishment as they apply in relation to any other establishment.
5. Period of Trial run is excluded:
a) Sale of goods produced or manufactured during trial running of any factory or of
prospecting stage of any mine or any oil field shall not be taken into consideration.
b) Where any question arises with regard to such production or manufacture, decision of
the Appropriate Government, made after giving a reasonable opportunity to the parties
for representing the case, shall be final and shall not be called into question by any
court or other authority.
Meaning of new establishment: It may be noted that an establishment shall not be deemed
to be newly set up merely by reason of a change in its location, management, name or
ownership.
Q.No.17. Explain the possibility of relying upon the B/S & P&L a/c in the case of a
dispute with its employees relating to bonus payable and the limitations, if any, in this
regard? (RTP M 14)
PROCEDURE FOR CONCLUDING THE PRESUMPTION AS TO THE ACCURACY OF

BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF CORPORATIONS AND
COMPANIES (SECTION 23):
Case I - Authority to presume audited accounts to be accurate:
1. Where on arising of a dispute between
a) An employer (being a corporation or a company other than a banking company) and
b) Its employees,
c) The case has been referred to the appropriate authority (Court, Tribunal or Arbitrator) and
d) During the course of such proceedings the Balance sheet and Profit and Loss account
of an employer may be produced.
2. If these statements of account are audited by the C&AG or by auditors duly qualified to act
as auditor Sec.141 of companies act 2013 then the above mentioned appropriate
authority may presume that those are accurate.
3. Steps to find out the accuracy: But if the authority is satisfied that those statements are
not accurate, it may take such steps as it thinks necessary to find out the accuracy thereof.
Case II - Clarification to union:
1. Situations may demand a clarification relating to any item in the balance sheet or the profit
and loss account.
2. In such a situation, the trade union/employees may apply to the above mentioned authority.
3. On receipt of such application, the appropriate authority if satisfied that there is such
necessity it may direct the employer to furnish to the trade union/employees, clarification
within given time.
AUDIT OF ACCOUNTS OF BANKING COMPANIES NOT TO BE QUESTIONED (SECTION 24):
1. Where any dispute of the nature specified in Section 22 between
a) An employer, being a banking company and
b) Its employees
c) Has been referred to the said authority under that Section and
d) During the course of proceedings the accounts of the banking company duly audited
are produced before it
e) Then the said authority shall not permit any trade union or employees to question the
correctness of such accounts.
2. But the trade union or the employees may be permitted
a) To obtain from the banking company such information as is necessary for verifying the
amount of bonus under this Act [Sub-section(1)],
b) But these provisions shall not enable the trade union or the employees to obtain any
information which the banking company is not compelled to furnish under Section 34A
of the Banking Regulation Act, 1949 [Sub-section (2)].
AUDIT OF ACCOUNTS OF EMPLOYERS NOT BEING CORPORATION OR COMPANIES
(SECTION 25):
1. Section 23 will also apply to employer who is not a corporation or company.
2. But if the aforementioned State finds that the accounts of the employer have not been
audited by an auditor duly qualified to Act as such under Section 141 of the Companies
Act 2013 then it can, if it think necessary to do so, ask the employer to get his accounts
audited within the stipulated time.
3. Thereupon, the employer must get his accounts audited within the stipulated time.
4. If the employer fails to do so, then the said State may get the accounts audited by such
auditor or auditors as it thinks fit. The accounts thus audited, whether by the employer or
on his default by the State, shall fall within the provisions of Section 23.
Similar Question: Enumerate the procedure concluding Presumption with respect to the
accuracy of balance sheet and profit and loss account of corporations and companies as per
the Payment of Bonus of Act, 1965. RTP M 14
Ans: Procedure for concluding the presumption as to the accuracy of balance sheet and profit
and loss account of corporations and companies (Section 23).
Q.No.18. State the circumstances under which an employer is exempted to pay the
minimum bonus? Who is empowered to exempt him?
(RTP) (N98 - 7M, N00 - 6M,N04 - 4M) (PM)
1. The Appropriate Government has powers under this section to exempt any establishment
or class of establishments:
a) Having regard to its financial position and other relevant circumstances &
b) It will not be in the public interest to apply the bonus Act
c) The expression financial position includes loss suffered by the establishment during
the accounting year.
d) The expression other relevant circumstances will include every consideration as to
whether the workmen had principally contributed to the financial loss of the company
during that accounting year.
2. Conditions for grant of exemption:
a) Employees must be given opportunity of being heard.
b) Exemption cant be given retrospectively.
c) Exemption to be granted through a notification in Official Gazette.
d) Exemption may be granted from all or any of the provisions of the Act.
e) Exemption will be granted for the limited period specified in notification.
f) Further, Appropriate Government may impose certain conditions as it may think fit.
3. Illustrative situations:
Government can grant exemption Government cannot grant exemptions

Even from mandatory provisions of law If incurring Losses or wiping out of Reserves
is the only reason & there is no other
If Employer proves that losses were justification.
being incurred continuously for several If the bonus liability is very negligible as
years and the entire Capital and the compared to the total loss.
assets were wiped out with proper If it is based on irrelevant or extraneous
justification. considerations rather than an objective one.
If in public interest it must do so.
Q.No.19. Define the following terms Accounting year, Wages, Employer, Employee,
Appropriate Government, Award, Establishment in Private sector, Establishment in
Public Sector. (M 98, 00, 01, 02 5M, M 03, N 05 - 4M) (PM)
ACCOUNTING YEAR: It means -

1. In relation to a corporation, the year ending on the day on which the books and accounts
of the corporation are to be closed and balanced.
2. In relation to a company, means the period in respect of which any profit and loss account
of the company laid before it in an AGM is made up, whether that period is a year or not.
3. In any other case:
a) The year commencing on the first day of April, or
b) If the accounts of an establishment maintained by the employer thereof are closed and
balanced on any day other than the 31st day of March, then at the option of the
employer, the year ending on the day on which its accounts are so closed and
balanced.
c) However, the said option is once exercised by the employer, it cannot be exercised
once again, except with the permission in writing of the prescribed authority.
SALARY OR WAGE [SECTION 2(21)]:
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1. It mean
a) All remuneration
b) Other than remuneration in respect of overtime work,
c) Capable of being expressed in terms of money,
d) Which would, if the terms of employment, express or implied, were fulfilled, be payable
to an employee in respect his employment or of work done in such employment.
e) It includes dearness allowance, i.e., all cash payments by whatever name called, paid
to an employee on account of a rise in the cost of living.
2. But the term excludes:
a) Any other allowance which the employee is for the time being entitled to;
b) The value of any house accommodation or of supply of light, water, medical
attendance or other amenities or of any service or of any concessional supply of food
grains or other articles;
c) Any travelling concession;
d) Any bonus (including incentive production & attendance bonus):
e) Any contribution paid or payable by the employer to any pension fund or for benefit of
the employee under any law for the time being in force;
f) Any retrenchment compensation or any gratuity or other retirement benefit payable to
the employee or any ex-gratia payment made to him; and
g) Any commission payable to the employee.
It may be noted that where an employee is given, in lieu of the whole or part of the salary or
wage payable to him,
1. Free food allowance or
2. Free food by his employer,
3. Such food allowance or the value of such food shall be deemed to form part of the salary or
wage for such employee.
Employer:
In relation to Employer includes -

a. Owner or Occupier of the Factory, including Agent of such Owner
or Occupier,
An Establishment
b. The Legal Representative of a deceased Owner or Occupier,
which is a Factory
c. Where a person has been named as a Manager of the Factory u/s
7 of the Factories Act, the person so named.
a. The Person, who, or the Authority which, has the ultimate control
over the affairs of the Establishment, and
Any other
Establishment b. Where the said affairs are entrusted to a Manager or Managing
Director or Managing Agent, then such Manager or Managing
Director or Managing Agent.
Employee: It means
- Any person other than an apprentice
- Employed on a salary or wage not exceeding Rs.10,000 per month in any industry,
- To do any skilled or unskilled, manual, supervisory, managerial, administrative,
technical or clerical work for hire or reward,
- Whether the terms of employment be express or implied.
Appropriate Government:
Situation Appropriate Government
An establishment in respect of which the Appropriate
Central Government
Government under the Industrial Disputes Act, 1947.
Government of the state in which
Any other establishment
the establishment is situated.
Award [Sec.2(7)]: It means an interim or final determination of any industrial dispute or of any
question relating thereto by any Labour Court, Industrial Tribunal or National Tribunal
constituted under the Industrial Disputes Act, 1947, or by any other authority constituted under
any corresponding law, relating to investigation and settlement of industrial dispute in force in
state and includes an arbitration award made under Section 10A of that Act or under that law.
Q.No.20. Circumstances under which different departments of a company can be

treated as a separate establishment for the payment of bonus. (RTP)
1. Where an establishment consists of different departments or undertakings or has

branches, all such departments or undertakings or branches are to be treated as parts of
the same establishment for the purpose of computation of bonus. (Establishment wise
calculation).
2. But, if for any accounting year, a separate balance sheet and profit & loss account are
prepared and maintained in respect of any such department etc., then such department,
undertaking or branch shall be treated as separate establishment for the purpose of
calculation of bonus for that year, unless such department etc., were immediately prior to the
commencement of that accounting year, treated as part of the establishment. (Unit wise).
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Establishment generally includes
Departments / undertakings / Branches wherever situated
If separate financial statements are prepared If consolidated financial statements are prepared
Each department / undertaking / Branch is Bonus is computed for the entire

treated as a separate establishment for establishment
calculation of Bonus
Q.No.21. What are the provisions relating to offences by Companies and also state the
penal provisions under the Payment of Bonus Act? (PM)
1. Offences by Companies [Section 29]: If a company commits the offence under this Act,
then every person who, at the time when the offence was committed was in charge of and
responsible to the company for the conduct of its business and also the company would be
deemed to be guilty of the offence and liable to be proceeded against and punished
accordingly.
2. But such person shall be excused from liabilities and incidental punishment, if he proves
that the offence was committed without his knowledge or that he exercised all due
diligence (Care fullness) to prevent the commission of such offence.
3. If it is proved that such offence has been committed by a Co. with the involvement of or is
attributable to any neglect on the part of, any director, manager, secretary, or other officer
of the Co., 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.
Note: Company means any Body Corporate and includes - A partnership firm or AOI and
Director - includes a partner in the firm.
Penal Provisions [Sec 28]:
Offence Punishment
Where a person is found guilty of Imprisonment upto 6 months, and / or
Contravention of any of the provisions of this Fine upto Rs.1,000
Act or any Rules made there under, or
Failure to comply with the direction given or
requisition made under this Act.
Q.No.22. State the nature of disputes arising between an employer and his employees
regarding the bonus payable under the Payment of Bonus Act, 1965. [Sec 22] (RTP- M12)
1. Meaning of Dispute: Disputes may arise between an employer and his employees either
regarding
a) Bonus payable under this Act or
b) Regarding the application of this Act to an establishment in public sector.
2. Nature of Dispute: Disputes arising between an employer and his employees regarding
bonus payable under this Act, shall be deemed to be an industrial dispute within the
meaning of the Industrial Disputes Act, 1947 or
3. Any corresponding law relating to investigation and settlement of Industrial disputes in
force in State and the provisions of that Act or as the case may be such law shall, save as
otherwise expressly provided, apply accordingly.
Q.No.23. State the provisions relating to cognizance of offences under the payment of
bonus Act, 1965.
COGNIZANCE OF OFFENCES (Section 30):

1. No Court shall take cognizance of any offence which means any Act or omission made
punishable by any law for the time being in force punishable under this Act, except on
complaint made by or under authority of the Appropriate Government or an officer of the
Government (not below the rank of A Regional Labour Commissioner in the case of an
officer of the Central Government and not below the rank of Labour Commissioner in the
case of an officer of the State Government) specially authorised in this behalf by that
Government.
2. No Court inferior to that of presidency magistrate or a magistrate of the first class try any
offence punishable under this Act.
3. Thus it is evident that Section 30 makes it obligatory, on every Court before it takes
cognizance of a complaint against any person for an offence under this Act that the
necessary sanction is obtained or complaint is made under the authority of the appropriate
Government or specified officer of the Central Government or the State Government.
PROTECTION OF AN ACTION TAKEN UNDER THE ACT (Section 31):
1. No suit, prosecution or other legal proceedings shall be taken against the Government or
any officer or the Government for anything which is in good faith done or intended to be
done in pursuance of this Act or any rule thereunder.
2. It may be noted that a thing shall be deemed to be done in good faith, where it is in fact
done honestly, whether it is done negligently or not.
Q.No.24. The employer is a banking company. Point out so as to what items are required
to be added to the Net Profit by the employer for calculating the Gross Profit in
accordance with the First Schedule of the Payment of Bonus Act, 1965. (PM)
While calculating Gross Profit in the case of banking company as per the first schedule of the
Payment of Bonus Act, 1965, the following are to be added to the Net Profit as shown in the
Profit and Loss Account after making usual and necessary provisions:
1. Provision for Bonus to employees, Depreciation, Development Rebate Reserve and any
other Reserve.
2. Bonus paid to employees in respect of previous year, amount debited in respect of
Gratuity paid or payable to employees in excess of the aggregate of:
a) The amount, if any, paid or provided for payment, to an approved Gratuity fund; and
b) The amount actually paid to employees on their retirement or on termination of their
employees for any reason.
3. Donation in excess of the amount admissible for Income tax.
4. Capital expenditure (other than capital expenditure on scientific research which is allowed
as deduction under any law for the time being in force relating to Direct taxes) and capital
losses other than losses on sale of capital assets on which depreciation has been allowed
for Income tax).
5. Any amount certified by RBI in terms of Section 34A(2) of the Banking Regulation Act, 1949.
6. Losses of or expenditure relating to any business situated outside India.
7. Also add income, profit or gains (if any) credited directly to Published or Disclosed
reserves other than:
a) Capital receipts and Capital profits (including profits on the sale of capital assets on
which depreciation has not been allowed for Income tax).
b) Profits of and receipts relating to any business situated outside India.
c) Income of foreign companies from investment outside India.
FOURTH SCHEDULE OF PAYMENT OF BONUS ACT

In this Schedule, total amount of bonus equal to 8.33 per cent of the annual salary or wage
payable to all the employees is assumed to be Rs.1,04,167. Accordingly, the maximum bonus
to which all the employees entitled to be paid (twenty per cent of the annual salary or wage of
all the employees) would be Rs. 2,50,000.
Set on or Set off
Allocable Amount payable Total Set on or Set off
Year of the year
surplus as bonus carried forward
carried forward
(1) (2) (3) (4) (5)
1 1,04,167 1,04,167 Nil Nil
2 6,35,000 2,50,000 Set on 2,50,000 Set on 2,50,000 (2)
2,50,000 (inclusive of
3 2,20,000 Nil Set on 2,20,000 (2)
30,000 from Year 2)
Set on 2,20,000 (2),
4 3,75,000 2,50,000 Set on 1,25,000
1,25,000 (4)
2,50,000 (inclusive of Set on 1,10,000 (2),
5 1,40,000 Nil
1,10,000 from year 2) 1,25,000(4)
Set on Nil (2) (@),
6 3,10,000 2,50,000 Set on 60,000
1,25,000 (4), 60,000 (6)
7 1,00,000 1,25,000 from year-4 & Nil Set on 35,000 (6)
25,000 of year-6)
8 Loss Set off 69,167 Set off 69,167 (8)
35,000 from year-6)
9 Set off 69,167 (8),
10,000 1,04,167 Set off 94,167
94,167 (9)
1,04,167 (after setting
10 2,15,000 off 69,167 from year 8 Nil Set off 52,501 (9)
and 41,666 of year 9)
@ Lapses, since time period of 4 years got completed.
PRACTICAL QUESTIONS
Q.No.1. Examine whether the Payment of Bonus Act, 1965 be applicable to the following cases:
a. J, who is working in a social welfare organization.
b. D, an employee employed by an establishment engaged in an industry carried on by a
Department of the Central Government. (M-07) (For students self study)

a. As per the provisions contained in Section 32 (v) (c) of the Payment of Bonus Act, 1965, J
is not entitled to any bonus as the said Act is not applicable to social welfare organization.
b. Similarly the said Act is not applicable to the employees engaged by a Department of the
Central Government vide Section 32 (iv) of the Payment of Bonus Act, 1965.
Q.No.2. PQR Limited, New Delhi refused to pay bonus to its employees on the ground that an
authorized controller appointed by the Delhi Government controls its management and as
such is exempt from the liability to pay bonus. Referring the provisions of the Payment of
Bonus Act, 1965, decide whether the plea of the company is tenable. (M-09 PE-II)
Facts of the case: PQR Ltd. refused to pay bonus to the employees on the ground that the
authorised controller, who controls the management, is appointed by the Central Government.
Provisions of law: Sec. 32 Act does not apply to certain class of employees
Relevant case law: RMS Vs the Model Mills (1984).
Analysis: Sec. 32(iv) of the Payment of Bonus Act, 1965 provides that the Act shall not apply
to employees employed by an establishment engaged in any industry carried on or under the
authority of any department of the Central Government or the State Government or a local
authority.
However in the above mentioned case, it was held by the Supreme Court that Sec. 32(iv) will
not extend to the case where the establishment was not under the direct authority of
Central/State Government or local authority.
By applying the above provisions in the given case, appointment of the controller in the
company by the Delhi government was temporary phenomenon. The PQR Ltd was therefore
held liable to pay bonus to its workmen.
Conclusion: The plea of PQR Ltd. is not tenable.
Q.No.3. S joins as a worker with Gokale Sugar Factory on 2nd February, 04. Will he be
eligible for Bonus for the financial year 2003- 04? (For students self study)
Sec.8 of the Payment of Bonus Act provides that an employee is entitled to bonus if he has
worked in the establishment for not less than 30 days. Since S has worked for more than 30
days in the accounting year, he would be eligible for Bonus for 2003-04.
Q.No.4. A builder employed a labour on the daily wages for 2 months for the construction of
the site on the payment of Rs 300 per day. Throw a light with respect to the Payment of Bonus
Act, 1965 whether a labour is entitled for the bonus in the given instance.
Facts of the case: builder employed a labour on the daily wages for 2 months for the
construction of the site on the payment of Rs 300 per day.
Provisions of law: Section 2(13) read with Section 8 Entitlement to bonus
Relevant case law: Himachal Pradesh State Electricity Board and Others Vs Krishan Dutt
Analysis: As per the Payment of Bonus Act, 1965, Every employee of an establishment
covered under the Act is entitled to bonus from his employer in an accounting year provided
he has worked in that establishment-(i) for not less than thirty working days in that year, (ii) on
a salary or wage not exceeding Rs 10,000 per mensem.
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The Act does not make any distinction as to whether an employee is daily wager, temporary,
permanent, weekly paid, monthly paid etc. the only precondition is that he should have worked
in the establishment for not less than 30 working days in an accounting year.
According to the given facts, labour who was on daily wages, have fulfilled the requirements of the
above stated provisions. He has worked for the 2 months i.e., more than 30 working days and on
the daily wages of Rs. 300 which amounts the wages(Rs. 300 x 30 days= Rs. 9000 p.m) not
exceeding Rs. 10,000 p.m.
Conclusion: Thus it can be concluded that labour is entitled for the payment of bonus.
Q. No.5. Answer the following situations.

a. A person has worked only for 35 days in an accounting year. Is he eligible or entitled to be
paid bonus by his employer for that year?
b. Examine the entitlement of the following persons to receive bonus under the Payment of
Bonus Act 1965: An employee who had been laid off for 20 days and had attended work for
only 22 days in an entire accounting year; (For students self study)
a. Provisions of law: Sec.8 of the Payment of Bonus Act provides that an employee is
entitled to bonus if he has worked in the establishment for not less than 30 days. Since in
the given case he worked for more than 30 days in the accounting year, he would be
eligible for Bonus.
Analysis & Conclusion: The employee in the given case Also as he has not worked for
all working days in an accounting year. Sec.13 provides for proportionate reduction of
bonus in such cases. The employees shall hence be entitled to bonus for 35 working days
only as a ratio of the bonus payable for the total working days.
b. Provisions of law: According to Section 14, when an employee had been laid off under
an agreement, those days on which he has been laid-off shall be deemed to be working
days for the employee and it shall be counted while calculating the total days on which he
has been on work for the purpose of payment of bonus.
Analysis & Conclusion: In the instance case, the employee had been laid off for 20 days
and had attended work for 22 days in the entire accounting year equaling to 42 total
working days. An employee is entitled to bonus when he has worked in the establishment
for not less than thirty working days in the year (Section 13). So, in this case, the
employee is entitled to get bonus.
Q.No.6. X, a temporary employee drawing a salary of Rs.3,000 per month, in an

establishment to which the Payment of Bonus Act, applies was prevented by the employers
from working in the establishment for two months during the financial year 2001-2002, pending
certain inquiry. Since there were no adverse findings X was re-instated in service. Later,
when the bonus was paid to other employees, the employers refuse to pay bonus to X, even
though he has worked for the remaining ten months in the year. Examine the validity of
employers refusal? RTP M15 (N 02 6M) (For students self study)
Facts of the case: An establishment refused to pay the bonus to X a temporary employee
who was prevented from working and later reinstated in service.
Provisions of law: Sec. 13-Applicability of proportionate reduction of bonus in certain cases.
Relevant case of law: ONGC Vs Sham Kumar Sahegal.
Analysis: Every employee of an establishment covered under the Act is entitled to bonus from
his employer in an accounting year provided he has worked in that establishment for not less
than 30 working days in the year on a salary less than Rs. 10,000 per month.

Sec. 13 provides for proportionate reduction of bonus in such cases. But Sec. 13 does not
cover a case where an employee was prevented from working by reason of an illegal order of
termination and employers statutory liability for bonus cannot be said to have been lost and
the employee concerned shall be entitled to the bonus.
Thus based on the above ruling and the provisions of the Act, X is entitled to get bonus in the
given case for the reasons given above in the provisions i.e. he has worked for more than 30
days in a year drawing salary of less than Rs. 10,000 and not disqualified for any other reason.
Conclusion: Employers refusal to pay bonus to X is not valid.
Q.No.7. Mr. E joined as supervisor on monthly salary of Rs.3,400 on 1.2.2007 and resigned
from his job on 28.2.2007. The company declared a bonus of 20% to all eligible employees
and paid it on time. Mr. E knowing the facts made a claim to HRD, which in turn rejected to
claim. Examine the validity in the light of the provisions of the payment of Bonus Act, 1965.
(CMA J 13 2M) (N 07- 5M, M 07, 08 - 5M) (PM)
Provisions of law: As per provision of Sec.2 (13) of the payment of Bonus Act 1965, an
employee means any person other than an apprentice employed on a salary or wage not
exceeding Rs. 10.000 per month.
Further Sec.8 provides that an employee to be entitled for bonus in the accounting year should
have worked in the establishment for not less than 30 days in that year.
Analysis & Conclusion: Thus in view of the above, Mr. E is not entitled for bonus as he had
not worked for 30 days in the accounting year.
Q.No.8. During the financial year 2010-2011 Mr. Ram was a temporary employee in Ayurved
Products Limited and drawing a salary of Rs 6000/- per month. On the basis of charge of
violent behavior within the premises of the company, he was prevented from working in the
company for 60 days pending inquiry. Since there was no adverse conclusion against him, he
was reinstated in the service with back salary. He worked for the remaining ten months in that
financial year and thereafter resigned from the service. Afterwards, when bonus was paid to
others employees, the company refused to pay bonus to Mr. Ram. Decide, whether Mr. Ram
will be entitled to bonus under the provisions of the Payments of Bonus Act, 1965?
MTP N15, (M11 8M)
Provisions of law: Payment of Bonus: As per Section 9 of the Payment of Bonus Act, 1965,
an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from
service for -
a) fraud; or
b) riotous or violent behavior while on the premises of the establishment; or
c) theft, misappropriation or sabotage of any property of the establishment.
If an employee is guilty of riotous and disorderly behavior he is disqualified for bonus but if
such employee because of riotous act, is being prevented from working in the company,
pending enquiry and later on he is reinstated as there is no adverse findings, with back wages,
will be entitled for bonus [Gammon India Ltd. Vs. Niranjan Das (1984)].
Analysis: In the given case Mr. Ram has worked as a temporary employee for 10 months
continuously, so he is qualified and entitled to bonus. Here, a temporary workman is also
entitled to bonus on the basis of total number of days which he has completed. After
completion of the required period of services for the entitlement to bonus if a workman resigns,
he will be entitled to bonus.
Conclusion: Therefore, refusal of company is not valid and Mr. Ram will be entitled to the
bonus from every angle according to Section 9 of the Payment of Bonus Act, 1965.
Q.No.9. An employee working in an establishment commits fraud during the accounting year
2009-2010, but continues to work during the subsequent accounting years 2010-2011 and
2011-2012, and has a clean record during the subsequent years. On the basis of the fraud
committed in 2009-2010, the employee is dismissed from service at the end of the accounting
year 2011-2012. In this case, does he lose the bonus for the accounting year of misconduct
i.e. 2009-2010 or for all 3 accounting years ending with 2011-2012?
Discuss in the light of the provisions of the Payment of Bonus Act, 1965. (PM)(RTP N14)
Facts of the case: An employee who committed fraud in 2009-10, is dismissed from service
at the end of 2011-12.
Provisions of Law: Sec. 9 Disqualifications of an employee
Relevant case law: Pandian Road ways corporation ltd Vs .Presiding officer.
Analysis: According to Sec.9, an employee who has been dismissed from service for (a)
fraud or (b) ritious or violent behaviour while on the premises of the establishment or (c) theft,
misappropriation or damage of any property of the establishment is not entitled for bonus.
An employee, who is dismissed from service on the ground of misconduct as mentioned in
Sec.9, is disqualified for any bonus and not merely for bonus of the accounting year in which he
is dismissed.
Conclusion: The employee loses the Bonus for all three accounting years.
Q.No.10. ABC Textiles Ltd. employed 20 full-time and 5 part-time employees who were
drawing salary less than Rs. 10,000 per month. After completing service of 28 days, in an
accounting year, 10 full-time employees submitted their resignations and left the service of the
company. The Board of directors of this company decided not to give the bonus to the
employees, who resigned, to the remaining full-time employees and to the part-time
employees. Against the decision, all the employees applied to the court for relief. Decide,
stating the provisions for the Payment of Bonus Act, 1965, whether the employees who
resigned, remaining full-time employees and part-time employees will get relief.
(N 09 - 5M, N 08 - 5M) (PM)(RTP - N14)(MTP 4M)
Facts of the Case: In an accounting year, a company employed 20 full time and 5 part time
employees out of which 10 full time employees resigned after completion of 28 days of
service. Now the company decided not to pay bonus to all the employees.
Provisions of law: Sec. 2(13) Definition of employee & Sec. 8.
Analysis and Conclusion: In accordance with the provisions of Sec. 2(13) of the payment of
Bonus Act 1965. Any person other than an apprentice employed on a salary or wage not
exceeding Rs.10,000 per month in any industry to do any skilled, or unskilled, manual,
supervisory, managerial administrative, technical or clerical work for hire or reward, whether
the terms of employment be express or implied is eligible for bonus.
Further, in accordance with the provisions of Sec.8 of the payment of Bonus Act, 1965, every
employee of an establishment covered under the Act is entitled to bonus from his employer in
an establishment for not less than 30 working days in the year on a salary less than Rs.10,000
per month.
The question asked is based on the above provisions of the Act and the answer may be given
as follows.
a) As regards the employees who resigned: The employees who have resigned have
given their services only for 28 days in an accounting year although they are drawing
salary less than Rs. 10,000 per month. So, they are not entitled to the bonus.
b) As regards full time remaining employees: Although the employees in the case have
been reduced to 10 once the Act is applicable it continues to apply even if number of
employees fall below 20.
So, these employees are entitled to get the bonus as they fulfill both the requirements of
Sec.2(13) and Sec.8 of the Act.
c) As regards part time employees: Even a part time employee is also entitled to bonus on
the basis of total number of days worked by him in an accounting year. The Payment of
Bonus Act, 1965, does not prohibit such employees as they fulfill all the requirements
stated above. [Automobile, karmchari sangh Vs. Industrial Tribunal (1971)]
Q.No.11. A Company in a particular accounting year suffered losses and hence was not able
to pay even the minimum bonus to its workmen. State in this connection, whether the
minimum bonus is payable irrespective of losses and any circumstances that the Company
may get exemption under the Payment of Bonus Act, 1965.
(CMA J 12 2M) (PM) (For students self study)
Facts of the case: A company in a particular accounting year suffered losses and hence was
not able to pay even the minimum bonus to its workmen.
Provisions of law: Sec. 10-Payment of minimum bonus
Sec. 36-Power of exemption
Analysis: As per the Act, minimum bonus is payable whether or not the employer has any
allocable surplus in the accounting year i.e. even if the employer suffers losses during the
accounting year, he is bound to pay the minimum bonus.
But as per Sec. 36, the Appropriate Government has powers under the section to exempt any
establishment or class of establishments From all or any of the provisions of the Act on
satisfying the following two conditions:
a) Having regard to its financial position and other relevant circumstances and.
b) It will not be in the public interest to apply the bonus Act.
Conclusion: A company must pay minimum bonus even if it suffers from losses. A company
on application to government shall be exempted from payment of bonus.
Q.No.12. In an accounting year, a company to which the payment of Bonus Act, applies,
suffered heavy losses. The Board of Directors of the said company decided not to give bonus
to the employees. The employees of the company move to the Court for relief. Decide in the
light of the provisions of the said Act whether the employees will get relief?
(M 03 - 6M, M 07- 5M)(P.M) (For students self study)
Facts of the case: A company decided not to pay bonus to the employee due to heavy losses
suffered in that accounting year. The employees moved to the court for relief.
Provisions of law: Sec. 10-Payment of minimum bonus.
Analysis: Sec. 10 of the Payment of Bonus Act 1965, provides that subject to the other
provisions of the Act, every employer shall be bound to pay the employee in respect of every
accounting year a minimum bonus which shall be 8.33% of the salary or wage earned by the
employee during the accounting year or Rs. 100 (Rs. 60 in case of employees below 15 years
of age) which is higher. The minimum bonus is payable whether or not employer has any
allocable surplus in the accounting year.
By applying the provision as contained in Sec.10 the employees are entitled to get minimum
bonus at rate 8.33% of the salary or wage earned during the accounting year or Rs. 100 ( Rs.
60 in case of employees below 15 years of age), whichever is higher.
Conclusion: The employees will be entitled to get relief.
Q.No.13. The amount of bonus payable to N, a probationer chemist in Global Chemical
Limited, is Rs,12,000 during the accounting year 2007-2008. A sum of Rs.10,000 was paid to
her and Rs. 2,000 was deducted by the company under the pretext of proportionate deduction
in bonus for two months maternity leave on full pay availed by her during the year. N files a
suit against the company for recovery of the deducted amount. Examine the validity of Ns
claim under the provisions of the Payment of Bonus Act, 1965.
Facts of the case: A company made proportionate deduction in bonus for two months
maternity leave availed by an employee, Mrs. N during the year.
Provision of law: Sec.14 - Procedure for calculation of working days.
Sec.13 - Proportionate reduction in bonus.
Analysis: As per Sec.8 of the payment of Bonus Act 1965, an employee shall be entitled to
get bonus (including minimum bonus) only if he has worked in the establishment for not less
than 30 working days in that year.
As per Sec.14 of the Act, an employee shall be deemed to have worked in an establishment in
any accounting year also on the day on which:
a) He has been laid off under an agreement or as permitted by standing orders under the
Industrial Employment (standing order) Act 1946, or under the industrial Disputes Act,
1947 or under any other law applicable to the establishment.
b) He has been on leave with salary or wage.
c) He has been absent due to temporary disablement caused by accident arising out of and
in course of his employment, and
d) The employee has been on maternity leave with salary or wages during the accounting year.
Where an employee has not worked for all the working days in an accounting year the
minimum bonus of Rs. 100 or as the case may be of Rs. 60 (in case of an employee who has
not completed 15 years of age) if such bonus is higher than 8.33% of his salary or wage of
the days he has worked in that accounting year, shall be proportionately reduced. (Sec.13).
In the given case Mrs. N was on maternity leave on full pay of two months which are the part
of total working days for payment of bonus as per Sec. 14 of the Act as stated above.
Conclusion: The claim made by Mrs. N is valid.
Q.No.14. Mr. Sharma is a supervisor in a factory drawing a salary of Rs.3,500 per month. In a
particular accounting year he was on one month leave with salary. His employer declared
minimum bonus as per the Payment of Bonus Act, to all eligible employees. State in this
connection:
a. What shall be the salary that shall be taken into account for the purpose of calculating
bonus payable to him?
b. What shall be the total bonus payable to him in that accounting year?
c. What would be your answer if the company suffers losses in that accounting year?
d. Is bonus payable to him if he was illegally terminated? ( N13 4M) (CMA J 14 4M)
Facts of the case: Mr. Sharma a supervisor is drawing salary of Rs.3,500 per month in an
accounting year. He was on one month leave with salary. His employer declared bonus to all
eligible employees.
Provisions of law: Sec.14 - Calculation of number of working days.

Sec.10 - Payment of minimum bonus
Sec.13 - Proportionate reduction of Bonus

Analysis:
a) Where the salary or wage of an employee exceeds Rs. 3,500 per month the bonus payable
to such employee shall be calculated as if his salary or wage were Rs. 3,500 per month.
In the instant case Mr. Sharma is drawing a salary of Rs. 3,500 per month.
b) According to Sec. 14, for the purpose of calculating the total working days leave with
salary or wages shall be deemed to be working day of an employee.
The total bonus payable to him in that accounting year = 3,500 x 12 x 8.33%
c) Sec. 10 of the payment of Bonus Act 1965, provides that subject to the other provisions of
the Act, every employer shall be bound to pay to employee in respect of the accounting
year, a minimum bonus which shall be 8.33% of the salary or wage earned by the
employee during the accounting year or Rs. 100 (Rs. 60 in case of employees below 15
years of age) whichever is higher. The minimum bonus is payable whether or not employer
has any allocable surplus in the accounting year.
d) Sec. 13 & 14 do not apply where an employee was prevented from working by reason of
an illegal order of termination.
Conclusion: Therefore, Mr. Sharma is eligible for bonus.
Q.No.15. A workshop is employing 50 workmen. A shop-supervisor is drawing monthly wages

of Rs.9,000. HRD paid annual bonus to all employees except the supervisor. The Supervisor
contends that he is also entitled to bonus. Referring to the provisions of the Payment of Bonus
Act, 1965 decide whether the HRDs action is correct. (P.M)(For students self study)
Problem: Quantum of Bonus (The Payment of Bonus Act, 1965)
The HRD view is not correct. The wage limit for payment of bonus was Rs.3,500 p.m. being
the wages as defined in the Payment of Bonus Act, 1965. This upper limit has been revised to
Rs.10,000 p.m. by way of notification dated 15th November 2007. Therefore, the contention of
supervisor is correct.
Q.No.16. An employer had been paying to his employees every year at the time of Deepawali
one months basic wages as Deepawali Bonus for the last 10 years, in addition to the bonus
payable under the Payment of Bonus Act. The bonus had been paid even in those years when
there were losses. The employer now wants to adjust Deepawali Bonus paid by him for the
current accounting year against the bonus payable by him under the Act, for the current
accounting year. State whether it is possible for the employer to make the above adjustments.
(CMA D 12 - 2M)(For students self study)
Facts of the case: An employer wants to adjust Deepawali bonus paid by him for the current
accounting year against the bonus payable by him under the Act.
Provisions of law: Sec.17-Adjustment of customary or interim bonus against bonus payable.
Relevant case law: Mumbai Kamgar Sabha, Bombay Vs.Abdul bhai faizullabhai.
Analysis: According to Sec. 17 of the Payment of Bonus Act, if the employee has paid in any
accounting year Deepawali, puja or any customary bonus to his employees, the employer is
within his right to deduct the amount of bonus so paid from the amount of bonus payable by
him under the Act in respect of that accounting year.
Conclusion: It is possible for the employer to make the adjustment of the customary or
interim bonus against bonus payable.

Q.No.17. spark Wooden Toys Limited was established at Kolkota in the year 2005 employing
100 workmen. Since then, the company suffered losses, but minimum bonus was paid in the
accounting years of 2006 and 2007. In the accounting year 2008 the company earned huge
profits. After mitigating the previous losses the company is having surplus profits and wants to
pay the bonus to its workmen. Skypark Wooden Toys Limited wants legal advice on the
following issues: (M 09 - 5M) (PM)
a. How much minimum and maximum bonus may be paid to the workmen?
b. Whether the company may adjust the puja bonus already paid to the workmen while
calculating the amount of bonus payable to workmen for that accounting year. (M 16 4M)
c. Company wants to give wooden toys as bonus instead of cash. Whether the company can do so?
Advise Skylark Wooden Toys Limited, stating the provisions of the Payment of Bonus Act, 1965.
Facts of the case: Sky Park Wooden Toys Ltd. after mitigating the previous year losses with
the current year huge profits wants to pay bonus to its workmen
Provisions of law: Sec.10-Payment of minimum bonus
Sec.11-Payment of maximum bonus
Sec.17- Adjustment of customary or interim bonus against bonus
payable under the Act.
Analysis and Conclusion:
a) As regards to minimum and maximum bonus: In accordance with the provisions of
Sec. 10 of the payment of Bonus Act 1965, every employer shall be bound to pay to every
employee in respect of any accounting year a minimum bonus which shall be 8.33% of the
salary or wage earned by the employee during the accounting year or Rs. 100, Rs. 60 (in
case of an employee who has not completed 15 years of age) whichever is higher,
whether or not the employer has any allocable surplus in the accounting year. Even in
case of losses, minimum bonus is to be paid.
Further in accordance with the provisions of Sec. 11(1) the maximum bonus payable to the
employee is 20% of the salary or wage earned by the employee during any accounting year.
The workmen of the Sky Park Wooden Toys Ltd. are entitled to get 8.33% of the salary or
wage earned during that particular accounting year. The maximum bonus payable is 20%
of the salary or wage earned during that particular accounting year.
b) As regards to adjustment of puja bonus: In accordance with the provisions of Sec.17 of
the payment of Bonus Act 1965, where in an accounting year an employer has paid any Puja
bonus or other customary bonus to an employee, the employer shall be entitled to deduct
(adjust) the amount of bonus so paid from the amount of bonus payable to the employee in
respect of that accounting year and the employee shall be entitled to receive only the balance.
Therefore Sky Park Wooden Toys Ltd. may adjust the puja bonus already paid from the
amount of bonus payable to the workmen and the workmen shall be entitled to receive
only the balance.
c) The amount payable to an employee by way of bonus under the payment of Bonus Act
1965, shall be paid only in cash by the employer.
Therefore Sky Park Wooden Toys Ltd. cannot distribute wooden toys as bonus instead of
cash. It is against the statutory provision.
Q.No.18. A is an employee of a company. The amount of the bonus payable to A during the
year 2006- 07 is Rs.10,000, but the company paid him Rs.7,000 only and a sum of Rs.3,000
was deducted from bonus against the loss suffered by the company due to misconduct of A
during the same accounting year. A filed a suit against the company for recovery of the
deducted amount. Decide whether A would be given any relief by the court under the
provisions of the Payment of Bonus Act, 1965? What will be your answer, if the losses are
related to the accounting year 2005-06?

Facts of the Case: Whether the losses suffered by the company due to misconduct of
employee A be deducted from bonus payable to him.
Provisions of Law: Section 18 - Deduction of certain amounts from bonus payable under the Act.
Analysis: As per the Payment of Bonus Act, 1965, in an any accounting year, if an employee
is found guilty of misconduct causing financial loss to the employer then the employer can
lawfully deduct the amount of loss from the amount of bonus payable by him to the employee
in respect of that accounting year only. In this case, the employee shall get only the balance, if
there be any (Section 18).
Conclusion:
a) After application of the above provision it is clear that 'A' will not get any relief from the court
because employer has the right to deduct the said losses from the bonus of employee.
b) In the second case, A will get relief from the Court because the losses are related to the
accounting year 2005-06. As per the provision, the employers are entitled to deduct the
losses incurred due to misconduct of the employee in the same accounting year. In this
problem bonus payable year and accounting year are different.
Q.No.19. A Company could not pay bonus to its employees even after the expiry of six months
from the close of its accounting year. Can the employees sue the employer for this reason?
All amounts payable to an employee by way of bonus shall be paid in cash by his employer,
within a period of 8 months from the close of the accounting year. This period of 8 months may
be extended upto a maximum of 2 years by the appropriate government, on an application
being made by the employer. Since the periods of 8 months have not expired, employees
cannot sue the employer.
Q.No.20. X was an employee of Universal Limited. He retired from the company on 31st
March, 2010 and died after few months. Y, the heir of X, applied within the prescribed time to
the company for payment of due bonus of X. The company refused to pay the bonus. Examine
the validity of the company's refusal and also state the procedure to recover the bonus under
the provisions of the Payment of Bonus Act, 1965.
RTP M15 (N10 8M)(PM) (For students self study)
Facts of the Case: X (employee) retired from the company and died after few months. Y, the
heir of X, applied within the prescribed time to the company for payment of due bonus of X but
company refused to pay the bonus.
Provisions of Law: Section 21 - Recovery of bonus due from an employer.
Analysis:
a) As per Section 21 of the Payment of Bonus Act, 1965 it may so happen that an amount of
bonus is due to an employee from his employer under a settlement or an award or
agreement and it is not paid.
b) In such a case, the employee is to make an application for the recovery of the amount to
the Appropriate Government.
c) Even his assignee or heirs can make this application when the employee is dead.
d) The application is to be made within one year from the date on which the bonus becomes
due but it may be entertained even after the expiry of the said period of one year, if the
Appropriate Government is satisfied that the applicant had sufficient cause for not making
the application within the said period.
Conclusion: In the given case, the Universal Limiteds action is not valid. Y is entitled for
payment of bonus as per the above provision. Y should apply for the payment of bonus to the
Appropriate Government within 1 year from the date on which bonus becomes due. On the
receipt of the aforesaid application for the recovery of the bonus amount, the Appropriate
Government or such authority as it may specify in this connection is to be satisfied that the
money is so due. On being thus satisfied, it must issue a certificate for that amount to the
Collector. There upon, Collector shall proceed to recover the same in the same manner as an
arrear of land revenue.
Q.No.21. In 2009, the Electronics Corporation, a Public Sector establishment under the
Department of Science and Technology, Government of Rajasthan starts to sell mobile sets
manufactured by it, in addition to T.V. sets, so as to compete with private sector
establishments of mobile sets in the market. The income from sale of mobile sets is 30 percent
of the gross income of the Corporation. The employees of the corporation went to strike for
demand of Bonus.
Decide, whether the demand of the employees is tenable under the provisions of the Payment
of Bonus Act; 1965. Would your answer be different if the income from sale of mobile sets is
only 10 percent of the gross income of the Corporation? (M 10 5M) (PM)
Facts of the case: An establishment in the public sector started selling of mobile phones and
TV Sets to compete a private sector establishment and the income from sale is 30% of the
gross income of the corporation.
Provision of law: Sec.20(1) Application of Act to the establishment in private sector in

certain cases.
Analysis: As per Sec.20(2) of the payment of Bonus Act, 1965. The Act does not apply to an
establishment in public sector. But section 20(1) of the Payment of Bonus Act, 1965, provides
that, in any accounting year an establishment in public sector may sell goods produced or
manufactured by it or it may render any services in competition with an establishment in
private sector. And if the income from such sale or service or both is not less than 20% of the
gross income of establishment in public sectors, then the provisions of the payment of Bonus
Act, 1965 shall apply in relation to establishment in public sectors also.
Conclusion: By applying the above provisions in the given case, the establishment is
competing with the private sector establishment in the sale of mobile phones and T.V. sets.
a) If the income from such sale is 30% of the gross income of corporation, then the demand
of employees is tenable.
b) If the income from such sale is 10% of the gross income of the corporation, then the
demand of employees is not tenable.
Q.No.22. On 1st January, Aryan Textiles Ltd agreed with its employees, for the payment of an
annual bonus linked with production or productivity instead of bonus based on profits subject
to the limit of 30% of Salary & Wages during the relevant accounting year. It was also agreed
by the employees that they will not claim Minimum Bonus stated U/s.10 of the payment of
Bonus Act, 1965. As per the agreement the employees of the company claimed the annual
bonus linked with production or productivity in the relevant accounting year. On refusal of the
Co., the employees of the Company moved to the Court for relief. Decide whether the
employees will get the relief. Inspite of the aforesaid agreement whether the employees are
still entitled to receive Minimum Bonus? (N 04 - 6M) (PM)
Facts of the case: Aryan Textile Ltd. made an agreement with employees to pay bonus,
linked with production subject to limit of 30% of salary or wage and not to claim minimum
bonus. However company finally refused to pay bonus.

Provisions of law: Sec.31A-Special Provision with respect to bonus, linked with production or
productivity.
Analysis: As per Sec.31A of the payment of Bonus Act 1965, there may be an agreement or
settlement by the employees with their employer for payment of an annual bonus linked with
production or productivity in lieu of bonus based on profits, as is payable under the Act.
Accordingly when such an agreement has been entered into, the employees are entitled to
receive bonus as per terms of the agreement / settlement subject to the following restrictions
imposed by Sec. 31A.
a) Any such agreement/ settlement where by the employees relinquish their right to receive
minimum bonus under Sec.10 shall be null and void as it purports to deprive the
employees of the right of receiving minimum bonus.
b) If the bonus payable under such agreement exceeds 20% of the salary / wages earned by
the employees during the relevant accounting year, such employees are not entitled to the
excess over 20% of salary / wages.
In the given case Aryan textile Ltd agreed with the employees for payment of an annual bonus
linked with production or productivity instead of bonus based on profits subject to the limit of
30% of their salary / wages during the relevant accounting year. According to Sec.31A the
maximum bonus under this provision can be given which should not exceed 20% of the salary
/ wages earned by the employee during the relevant accounting year. If the company agrees
to pay more than 20% then it will be against the provisions of the Payment of Bonus Act, 1965.
The employees of Aryan Textiles also agreed not to claim minimum bonus stated in Sec.10.
Such an agreement shall be null and void as it purports to deprive the employees of their right
to receive minimum bonus. Hence, the relief may be given by the court, as regards to the
payment of Bonus Act to the employees, based on the production or productivity if it is agreed,
subject to a maximum of 20%. The employees will also be entitled legally to claim bonus
which is minimum prescribed under Sec. 10 of the Act even though they have relinquished
such right as per the agreement.
Conclusion: Employees are still entitled to receive minimum bonus irrespective of the agreement.
Q.No.23. The management of Shakthi Mills Ltd. entered into an agreement with their
employees to pay them bonus based on production in lieu of Bonus based on profits, from the
accounting year 2007. The employees further agreed to forego their right to receive minimum
bonus and instead accept 25% of their salary / wage as bonus based on productivity. Is such
an agreement valid? Examine in the light of the provisions of the Payment of Bonus Act, 1965.
(For students self study)(PM)(MTP - 4M)
Facts of the case: Employees agreed to forego their right to receive minimum bonus and
instead accept 25% of their salary / wage as bonus based on productivity.
Provisions of Law: Section 31A - Agreement between employers and employees for
payment of bonus linked with productivity.
Analysis: Section 31A allows an agreement between employers and employees for payment
of bonus linked with productivity. But such payment is subject to two restrictions:
a) That such agreement whereby the employees relinquish their right to receive minimum
bonus under Sec.10, shall be null and void.
b) If the bonus payable under such agreement exceeds 20% of the salary / wages earned by
the employees during the relevant accounting year, such employees are not entitled to the
excess over 20% of the salary/wages.
Conclusion: Accordingly, in the given problem, the agreement to forego the right of receiving
minimum bonus is null and void. The employees shall not be entitled to receive the excess
over 20% of salary / wages in case of bonus payable linked with productivity.
Q.No.24. Standard Airways Limited was incorporated at Chennai in the year 2005, employing
125 workmen. Due to strike of workers, mismanagement in the company and accidental loss of
the assets, the company suffered heavy losses continuously since its incorporation, resulting in
a large part of the capital and assets getting wiped out. Consequently, the company moved an
application to the Government of Tamilnadu requesting to exempt the company fully from the
application of the provisions of the Payment of Bonus Act, 1965. Decide, whether the
Government of Tamilnadu may grant exemption to the Company. State the provisions of law in
this regard as stated under the Payment of Bonus Act, 1965. (N 09 - 6M) (PM)
Facts of the case: Standard Airways made an application to the government requesting it to
exempt the company from the application of provisions of Payment of Bonus Act due to heavy
losses incurred since its incorporation.
Provisions of law: Sec. 36 (power of exemption)
Relevant case law: Nav Bharat potteries Vs. state (1987)1LLN 117 (Bombay).
Analysis: An employer who is unable to comply with the provisions of the Payment of Bonus
Act due to paucity of funds or for other reasons, can make an application to the Appropriate
Government for exemption fully or partly from the provisions of Payment of Bonus Act, 1965.
If the Appropriate Government having regard to the financial position and other relevant
circumstances of any establishment or class of establishments is of the opinion that it will not
be in public interest to apply all or any of the provisions of the Act thereto, it may by
notification in Official Gazette, exempt for such period as may be specified there in and subject
to such conditions as it may think fit to impose, such establishment or class of establishments
from all or any other provisions of the Act.
Such relevant considerations for granting exemptions are industrial peace, law and order
situation, effect on production of consumer goods, difficulties of management etc.
Decisions under Sec.36 must be an objective one. If the employer establishes that, losses are
being incurred continuously and entire capital and assets have been wiped out, the Sate
Government cannot refuse to grant exemption under Sec. 36. However employees should be
heard before granting such exemption.
The facts of the problem meet the criteria specified in Sec. 36.
Conclusion: Standard Airways may be allowed exemption.
Q.No.25. Rajesh is working as a salesman in a company on salary basis. The following

payments were made to him by the company during the previous financial year (a) Overtime
Allowance, (b) Dearness Allowance, (c) Commission on Sales, (d) Employers Contribution
towards Pension Fund, and (e) Value of Free Food. Examine as to which of the above
payments form part of Salary of Rajesh, under the payment of Bonus Act.
RTP N15 (M 06 - 5M)
Facts of the case: Mr.Rajesh is working as a salesman in a company on salary basis.

Various payments were made to him by the company such as overtime allowance, dearness
allowance, commission on sales and value of food pension.
Provisions of law: Sec. 2(21)-Definition of salary or wages.
Analysis and Conclusion: According to Sec. 2(21) of the Payment of Bonus Act, 1965, salary
and wages means all emoluments other than remuneration in respect of overtime work,
capable of being expressed in terms of money which would if the terms of employment,
express or implied, were fulfilled, be payable to an employee in respect of his employment or
of work done in such employment. It includes dearness allowance i.e. all cash payments by
whatever name called paid to an employee on account of rise in the cost of living. But the term
excludes:
a) Any other allowance which the employee is for the time being entitled for.
b) The value of any house accommodation or of supply of light, water, medical attendance or
other amenities of any service or of any concessional supply of food grains or other articles.
c) Any travelling concession.
d) Any contribution paid or payable by the employer to any pension fund or for benefit of the
employee under any law for the time being in force.
e) Any retrenchment compensation or any gratuity or other retirement benefit payable to the
employee or any ex-graita payment made to him and.
f) Any commission payable to the employee.
It may be noted that where an employee is given in lieu of the whole or part of the salary or
wage payable to him, free food allowance or value of such food shall be deemed to form part
of the salary or wage for such employee.
In view of the provisions of Sec. 2(21) explained above, the payment of dearness allowance
and value of free food by the employer forms part of salary of Mr.Rajesh while remaining three
payments i.e. payment of overtime, commission on sales and employers contribution towards
pension food does not form part of the salary.
Q.No.26. T Ltd. carried on three business ventures viz., manufacturing sugar, cement and
heavy engineering machinery, locating them in three different places in North India. They
employed workmen on different terms in the different units. One of these units was financially
feeling ill. The workers of this unit demanded bonus on the basis of treating these three units
as one composite establishment. Can the workmen succeed in getting bonus?
(CMA D 13 - 3M)(M 14 4M) (P.M) (For students self study)
Facts of the case: A company is carrying on 3 business ventures at 3 different places. One of
these units was financially feeling ill. The workers of the unit demanded bonus on the bases of
treating the ventures as composite establishment.
Provisions of law: Section 3-Establishment to include departments, undertakings and branches.
Analysis: According to Sec.3, where an establishment consists of departments, or has
branches irrespective of whether they are situated in same place or in different places, all such
departments or undertakings or branches are to be treated as part of the same establishment
for the purpose of computation of bonus under this Act.
It has been provided that if, for any accounting year, a separate balance sheet and profit and
loss account are prepared and maintained in respect of any such departments, etc then such
department undertaking or branch shall be treated as separate establishment for the purpose
of calculation of bonus for that year, unless such department etc. was, immediately prior to the
commencement of that accounting year, treated as part of the establishment for the purpose
of computation of bonus.
By applying the above provision if nothing is specified in the question, it should be assumed
that no separates Balance sheet and profit and loss A/c are maintained for each unit. And so
all the units shall be treated as part of the same establishment.
Q.No.27. An employee was drawing a salary of Rs. 9000 per month .He joined his
service on January 22nd 2013 and remained absent from February 10th 2013 till April 7th
2013 due to temporary disablement caused by an accident arising out of and in due
course of his employment. Examine with reference to the payment of bonus act
1965.whether he is eligible for bonus for the year 2012-13
Calculation of working days: sec 14 of the payment of bonus act 1965 states the way of
calculating the number of working days for the reason of section 13 which in turn prescribes
the scale where by bonus can be proportionately reduced in certain cases .
As pre sec 14 the following days will be considered as working days of an employee and will
be counted while calculating the total working days on which who has been on work for the
purpose of bonus :
a) He has been laid off under an agreement or as permitted by standing orders under the
Industrial Employment (standing order) Act 1946, or under the industrial Disputes Act,
1947 or under any other law applicable to the establishment.
b) He has been on leave with salary or wage.
c) He has been absent due to temporary disablement caused by accident arising out of and
in course of his employment, and
d) The employee has been on maternity leave with salary or wages during the accounting year.
Where an employee has not worked for all the working days in an accounting year the
minimum bonus of Rs. 100 or as the case may be of Rs. 60 (in case of an employee who has
not completed 15 years of age) if such bonus is higher than 8.33% of his salary or wage of
the days he has worked in that accounting year, shall be proportionately reduced. (Sec.13).
In the present case salary is falling with in the limits ( i.e not exceeding Rs.10000 pm).
So the employee is eligible for bonus. The leave period is due to temporary disablement
caused by accident arising out of and in due course of employment and as such it will be
trated as working days .
Conclusion: The workmen can succeed in getting the bonus
TEST YOUR KNOWLEDGE
1. State whether the following establishment are entitled to payment of bonus under the
Payment of Bonus Act, 1965.
i. Defense canteen
ii. Institutions engaged in Social or welfare activities
iii. Delhi Development authority
2. A company was engaged in three separate ventures under three different units. Separate
accounts were prepared in each unit. One of the units was not doing well. Its employees
wanted to be paid bonus along with the employees of the other two units as part of one
single establishment. Decide.
3. The limit of salary of a worker entitled to get bonus is
a) 5000/- per month b) 3,500/- per month
c) 2,500/- per month d) None of the above.
4. Ordinarily, the Payment of Bonus Act, 1965 cannot apply on an establishment employing
less than 20 persons.
a) True b) False
5. Once the Bonus Act is applicable on an establishment, the Act will continue to apply even
if the number of employees comes below the required minimum.
a) True b) False
6. What is the time limit for filling return under the payment of Bonus Act?
7. Is the rule made under the Payment of Bonus Act required to be laid before both the
Houses of Parliament?
8. What is the effect of decision of Houses of Parliament on the rule made under the payment
of Bonus Act?
9. Shall the modification or annulment by the Houses of parliament effect any previously
done act under that rule under the Payment of Bonus Act?
10. Distinguish between Available Surplus and Allocable Surplus.
11. When is employer bound to pay maximum bonus
12. What is maximum limit of maximum bonus?
13. List the registers to be prepared and maintained by every employer under the Payment of
Bonus Act.
14. State the time limit for filling return under the Payment of Bonus Act.
15. When shall a person not be liable to punishment in case of offences by companies?
16. When shall director, managers, secretary of other officer be liable in case of offences by
companies?
17. The power to make/frame rules under the Payment of Bonus Act,1965 is vested with--------

THE END

13. NEGOTIABLE INSTRUMENTS ACT, 1881
1. C - 1 - - - - - - - - - - - -
2. B - - - - - - - - - - - - - 1 1.5
3. B - - - 1 - - - - - - - - - 1.5
8
4. A - - 5 8 8 - - - - - 4 - - -
5. B - - - - - - - - - - - - - - -
6. C - - - - - - - - - - - - - - -
7. C - - - - - - - - - - - - - - -
8. A - - - - - - - - - - - - - - -
9. A 5 - - - 1 - - - - - - - - 1 -
10. B - - - - - - - - - - - - - - -
11. A - - 1 - - - - - - - - - - 4 -
12. A 1 - - - - - - 8 - - - 4 - - -
13. B - - - - - - - - - - - - - - -
14. A - 5 - - - - - - - - - - 4 4 -
15. A 5 - - - - - - - 4 - - - - - -
16. C - - - - - - - - - - - - - - -
17. B - - - - - - - - - - - - - - -
18. C - - - - - - - - - - - - - - -
19. B - - - - - - - - - - - - - - -
20. A - - - - - - - - - - 4 - - - -
21. B - - - - - - - - - - - - - - -
22. B - - - - - - - - - - - - - - -
23. A - - - - - - - - - - - - 4 - -
24. C - - - - - - - - - - - - - - -
25. A - - - - - - - - - - - - - - -
26. B - - - - - - - - - - - - - - -
27. C - -
28. C - - - - - - - - - - - - - - -
29. A - - - - - 8 - - - 8 - - - - -
30. A - - - - - - - - - - 4 - - - -
31. B - - - - - - - - - - - - - - -
32. A - - - - - - - - - - - - - - -
33. B - - - - - - - - - - - - - - 5
34. A - - - - - - - - - - - - - - -
35. C - - - - - - - - - - - - - - -
36. B - - - - - - - - - - - - - - -
37. C - - - - - - - - - - - - - - -
38. A - - - - - - - - - - - - - - -
39. C - - - - - - - - - - - - - - -
40. C - - - - - - - - - - - - - - -
41. C - - - - - - - - - - - - - - -
42. B - - - - - - - - - - - - - - -
43. C - - - - - - - - - - - - - - -
44. B - - - - - - - - - - - - - - -
45. B - - - - - - - - - - - - - - -
IPCC _36e_Business Laws_NI Act__________________________________90

Q.No.1. Define the term Negotiable instrument? Write about Negotiable instruments Act, 1881.
(PM)(CMA J 10-2M)
NEGOTIABLE INSTRUMENT:
1. The word negotiable means Transferable from one person to another In return for
consideration and
2. Instrument means a written document by which a right is created in favour of some person.
3. Thus, a negotiable instrument is a document
4. Which entitles a person to a sum of money and
Copyrights Reserved
5. Which is freely transferable from one person to another To MASTER MINDS, Guntur
6. By mere delivery or
7. By endorsement and delivery.
Negotiable Instrument means an instrument, the property in which is acquired by any one who
takes it bonafide and for value, not with standing any defect in the title of the transferor.
(In other words, negotiable instrument means an instrument which confers upon a holder in due
course a valid title not with standing any defect in the title of any prior party.)
SCOPE & EXTENT OF NI ACT: The Act applies to the whole of India and to all persons resident in
India, whether foreigners or Indians.
APPLICABILITY OF THE ACT: The Negotiable Instruments Act specifies only 3 types of
instruments as negotiable Instruments i.e.
Bill of Exchange,
Promissory Note and
Cheque (payable either to order or bearer).
DOCUMENT OF TITLE TO GOODS: Document of title to goods has some characteristics of

negotiable instruments. However, these documents of title to goods are not negotiable
instruments.
Note (For Academic interest only): The Act does not apply to:
a) Indian Paper Currency Act, 1871.
b) The local usage relating to any instrument in an oriental language (for e.g. hundies). But where
no custom is established, the Act will apply to hundies also.
Q.No.2. State the characteristics of a negotiable instrument? (M 14 - RTP)
1) Written instrument with signature: A negotiable instrument is a written document and is

considered as complete and effective only when it is duly signed.
2) Negotiable Instrument made or drawn for consideration: It is presumed by law that every
negotiable instrument is made or drawn for a consideration. Consequently, there is no
necessity to state such a position..
3) Transfer/negotiation by endorsement/ delivery: A negotiable instrument can be transferred
from one person to another by endorsement and delivery if it is an instrument payable to order,
and by mere delivery, if it is a bearer instrument.
4) Bonafide and valuable consideration entitles good title to transferee: The transferee, who
takes the instrument bona fide and for valuable consideration, obtains a good title despite any
defects in the title of the transferor. To this extent, it constitutes an exception to the general rule
that no one can give a better title than he himself has.

Q.No.3. What is a promissory note? State the essential features of a promissory note?
(N 98 - 6M, N 00 - 8M, N 01, 07 - 8M, M 04 - 6M, M 12 - 8M)(CMA J 06, J 12 -2M) (PM)
The term promissory note denotes that it is a note containing certain promise.
DEFINITION: Sec.4 of the Act reads - A promissory note is an instrument (not being a bank note
or currency note)
- In writing
- Containing an unconditional undertaking (M16 1.5M)
- Signed by the maker,
- To pay a certain sum of money
- Only to a certain person, or to the order of a certain person, or to the bearer of the instrument.
Thus a promissory note is a written and signed promise to pay a certain sum of money to some
person or to his order.
PARTIES TO A PROMISSORY NOTE:

a) Maker:
i) The person who makes the promissory note and
ii) Promises to pay the money stated therein is called maker of the instrument.
b) Payee: The person to whom the amount of promissory note is payable i.e. to whom the
promise of payment is made is called payee of the instrument.
Endorser & Endorsee:

a) In the course of negotiation, payee may endorse (i.e., transfer) the note to some other person
and that other may endorse the note to some other person and so on.
b) The party endorsing the instrument is known as endorser and
c) The party to whom the instrument has been endorsed is known as endorsee.
ESSENTIALS OF A VALID PROMISSORY NOTE:
1) It must be in writing:
a) This means that the engagement cannot be oral.
b) There is no prescribed form or language for this; even the word promise need not be
used.
c) What is necessary is that whatever language is used, it must clearly show that the maker is
unconditionally bound to pay the sum.
2) The promise to pay must be unconditional:
a) If a condition is attached to the promise to pay then the instrument will not be construed
as a promissory note.
Suppose, A signs an instrument made out as follows, I promise to pay B Rs. 500 on Ds death,
provided D leaves me enough to pay that sum. The instrument will not be a promissory note.
But if an instrument runs as: I acknowledge myself to be indebted to B of Rs. 500 to be paid on
demand, for value received. This instrument would be a promissory note.
b) It may be noted that a promise to pay will not be conditional under Section 4, where it
depends upon an event which is certain to happen but the time of its occurrence may be
uncertain.
For example, where a promissory note is in this form: I promise to pay B Rs. 2,000, 15
days after the death of C, it is not conditional as it is certain that C will die though the exact
time of his death is uncertain.
3) The amount promised must be certain and a definite sum of money:
a) Certainty is one of the essential characteristics of a promissory note. Certainty must be as
to the amount and also as to the person by whose order and to whom payment is to be
made.
For example, where an instrument contains: I promise to pay BRs. 350 and all other sums
which shall be due to him, it is not a valid promissory note as the sum is not certain within
the meaning of Section 4.
4) The instrument must be signed by the maker:
a) It is incomplete till it is so signed. Since the signature is intended to authenticate the
instrument it can be on any part of the instrument.
5) The person to whom the promise is made must be a definite person:
a) The payee must be a certain person. Where the name of the payee is not mentioned as a
party, the instrument becomes invalid.
b) Remember that a promissory note cannot be made payable to the maker himself.
Thus, a note which runs I promise to pay myself is not a promissory note and hence
invalid. However, it would become valid when it is endorsed by the maker. This is because
it then becomes payable to bearer, if endorsed in blank, or it becomes payable to the
endorsee or his order, if endorsed specially.
Other formalities:
a) It is usual and proper to state in a promissory note, the place where it is made and the date
on which it is made.
b) However, their omission does not render an instrument invalid.
For example, if an instrument is not dated, it is deemed to have been dated on the date of
delivery.
Note: (For Academic Interest only)
1. The words or to the bearer of the instrument have become inoperative in view of the provision
contained in Section 31(2) of the Reserve Bank of India Act, which provides that no person in
India other than Reserve Bank of India and The Central Government can make or issue
promissory note payable to the bearer of the instrument.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.1, 2,3)
Copyrights Reserved

Q.No.4. What is meant by bill of exchange? State its essential feature
(MTP N15, N 01, M 02, 11 - 8M, M 03 - 6M, N14 4M)(CMA D04, D05 4M)(PM)
Def: Sec.5 of the Negotiable Instruments Act reads as A bill of exchange is an instrument
- In writing Containing an unconditional order, (M16 1.5M)
- Signed by the maker,
- Directing a certain person to pay a certain sum of money,
- Only to a certain person, or to the order of a certain person or to the bearer of the
instrument.
PARTIES TO A BILL OF EXCHANGE: A bill of exchange is a 3 party instrument.
a) Drawer:
i) The person who creates an instrument and
ii) Orders the third party to pay is called drawer.
iii) In simple words, the person who draws the bill (i.e. the person who makes the bill) is called
as drawer.
b) Drawee:
i) The person on whom the bill is drawn i.e. the person who is directed to pay the amount
stated in the bill.
ii) When a drawee accepts the bill (i.e. he gives his consent to pay the amount due on the bill)
he is called acceptor.
iii) He becomes liable for the payment of the bill.
c) Payee: The person to whom the amount of a bill of exchange is payable is called payee.
Notes: Sometimes same person fills the position of two of these three parties:
i) Drawer and payee may be same person.
For example, when A signs a bill of exchange addressed to B - pay to me or my order, he
is directing B to make payment to himself.
ii) Drawer and drawee may be the same person.
For example, where a bill of exchange is issued by one branch of a firm on the other branch,
the firm is acting as both - drawer and drawee.
iii) Drawee and payee may be the same person.
For example, when a bill is subsequently endorsed to the drawee in the course of
negotiation, the drawee becomes the payee of the instrument.
d) Drawee in case of need: (N-14)
i) The law gives an option to the drawer of the bill to name an additional drawee in the bill,
who may accept it, in case it is not accepted by the original drawee.
ii) This additional drawee is called drawee in case of need.
iii) When the original drawee refuses to accept the bill, it has to be presented to drawee in
case of need.
iv) If he accepts it, it is a good bill and if he does not accept it, the holder may treat the bill
dishonoured because of non-acceptance.
e) Acceptor for honour:
i) When a drawee of a bill of exchange refuses to accept it, or he becomes insolvent,
ii) The holder of the instrument gets the bill noted or protested for non-acceptance or for
better security.
iii) Under these circumstances, if any person accepts the bill for honour of the drawer,
iv) Such person is called acceptor for honour.
ESSENTIALS OF A VALID BILL OF EXCHANGE:
1) In writing: The bill of exchange must be in writing and be drawn in any form complying with
the requirements of section 5.
2) Order to pay: There must be an order to pay. It is the essence of the bill that its drawer orders
the drawee to pay money to the payee. Order in this section does not mean a command, but a
direction for payment.
3) Unconditional: This order must be unconditional, as the bill is payable at all events. Thus, it
is absolutely necessary for the drawers order to the drawee to be unconditional. The order
must not make the payment of the bill dependent on a contingent event. A conditional bill of
exchange is invalid.
4) Sign: The drawer must sign the instrument. The instrument without the proper signature will be
inchoate and hence ineffective. It is permissible to add the signature at any time after the issue
of the bill. But if it is not so added, the instrument remains ineffectual.
5) Necessary Parties &certainty: The drawer, the drawee (acceptor) and the payee are the
necessary parties to a bill and are to be specified in the instrument with reasonable certainty.
You should remember that all these three parties may not necessarily be three different
persons. One can play the role of two. But there must be two distinct persons in any case.
6) The sum must be certain
7) In Money: The medium of payment must be money and money only. The distinctive order to
pay anything in kind will vitiate the bill. Thus, a bill must contain an order to pay in terms of
money only and should be definite amount of money.
8) Delivery: The bill must be delivered to the payee, otherwise the bill be inchoate and hence
ineffective.
a) Other formalities:
i) Like a promissory note, a bill should be dated and should mention the place where it is drawn.
ii) But mere absence of these things does not invalidate the bill.
iii) However, adequate stamping is must to maintain a suit upon a bill of exchange.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 4,5)
Q.No.5. Write about different types of bills of exchange? (CMA J11 4M)
DOCUMENTARY BILL AND CLEAN BILL:

1. When documents of title to goods and other documents, such as invoices, marine Insurance
policies, etc. are annexed to a bill, the bill is called documentary bill.
2. Such documents are delivered to the buyer only on acceptance or payment of the bill.
3. When no documents relating to goods represented by the bill are attached, it is called clean
bill.

ESCROW:
1. When a negotiable instrument is delivered conditionally or
- For a special purpose as a collateral security or
- For safe custody only, and
- Not for the purpose of transferring property therein, it is called an escrow.
2. The liability to pay in case of an escrow arises if the conditions agreed upon are not fulfilled, or
the purpose for which the instrument was delivered is not satisfied.
3. Although a conditional delivery is valid, the condition attaches exclusively to the delivery and
not to the making or drawing of an instrument. A bill must be drawn and a note made
unconditionally.
AMBIGUOUS INSTRUMENT [SEC 17]:
1. An instrument which is vague and cannot be clearly identified either as a bill of exchange or as
a promissory note is an Ambiguous instrument.
2. In that case, the holder of such a bill is at liberty to treat the instrument as bill or a promissory
note i.e. the nature of the instrument will be as determined by the holder.
3. In the following cases an instrument may be treated as an ambiguous instrument, where the
holder may treat the instrument either as a bill of exchange or as a promissory note:
a) Where the drawer and the drawee of a bill are the same person
b) Where the drawee of a bill is a fictitious person.
c) Where the drawee of a bill is a person not having capacity to contract.
E.g.: A bill is drawn by A an agent, acting within the scope of his authority, upon his principal P.
The holder may at his option, treat it as a note or bill because the drawer (A) and the drawee
(P) are the same person.
4. If the amount is stated differently in figures and in words, the amount stated in words is the
amount undertaken or ordered to be paid (Sec. 18).
INCHOATE INSTRUMENT (SEC.20):
1. An Inchoate instrument is an incomplete Instrument in some respect.
2. When a person signs and delivers blank or incomplete stamped paper to another, such other is
authorised to complete it for any amount not exceeding the amount covered by the stamp.
3. The person so signing is liable upon such instrument, to any holder in due course for any
amount.
4. But any other person cant claim more than the amount intended by the signer (Drawer,
Acceptor) of the instrument.
E.g.: A bill of exchange upto the value of Rs.1,000 requires stamps worth 50 paise. A bill with a
stamp of 50 paise on it is duly signed but the amount is not filled in. It is agreed that the
payee will not fill in more than Rs.500. Suppose, the payee fills in Rs.900, the person so
signing shall be liable to any holder in due course for the full amount of the bill i.e. Rs.900,
being the amount covered by the stamp. However, an ordinary holder cannot claim more
than Rs.500 the amount intended by the drawee.
E.g.: A person signed a blank acceptance and kept it in his drawer and some person stole it
and filled it up for Rs.2000 and negotiated it to an innocent person for value. It was held
that the signer to the blank acceptance was not liable to the holder in due course because
he never delivered the instrument intending it to be used as a negotiable instrument
(Baxendale vs Bennett).

UNDATED BILLS AND NOTES:
1. A negotiable instrument is not invalid by reason that it is undated.
2. If all legal requirements are fulfilled, the date of its execution can be proved by oral or other
evidence.
a) However, A holder in due course may, insert the true date of issue or acceptance and the
instrument shall be payable accordingly.
b) Such an insertion is not treated as material alteration.
FICTITIOUS BILL:
1. When the name of the drawer or the payee or both is fictitious in a bill, it is a fictitious bill.
2. The word fictitious denotes (i) non-existing person or (ii) pretended person.
Generally, a fictitious bill is issued when:
a) A dishonest employee deceives the employer (i.e. drawer of the bill) to sign an instrument,
payable to a party, who has no right to receive the payment or
b) The dishonest employee or agent has the authority to issue the instrument on behalf of the
drawer.
BILL IN SETS:
1. A bill of exchange drawn in parts is known as bill in sets.
2. When the drawer and drawee are at distant places, there is a possibility that a bill of exchange
send by post may be lost during the course of transmission.
3. In order to avoid inconvenience and delay and ensure safe transmission, law has provided an
option to draw bill in several parts.
4. All such parts together constitute one set and the whole set is considered as one bill.
5. Generally, each part is sent by separate post so that in case any part is lost in transit, at least
the other one can reach. When payment is made on one part, the whole bill gets satisfied.
Essentials of such bills are:

a) Each part must be numbered.
b) Each part must contain a reference to the others; otherwise each part will constitute a separate bill.
c) Each part must provide that it shall be payable only as long as the other parts remain unpaid.
ACCOMMODATION BILL:
1. A bill which is drawn, accepted or endorsed without any consideration is called an
Accommodation bill.
2. Such bills are not supported by genuine trade transactions and are generally created to
accommodate friends who are in immediate need of money.
3. The party who accommodates is termed as accommodating party and
4. The party who is accommodated is termed as accommodated party.
E.g.: A was in need of Rs.15,000. He approached his friend B for the purpose. But B was not
in a position to lend money. However, B suggested that A can draw a bill upon him which he
will accept and B being a person of good reputation, the bill can be discounted with Bs banker.
Thus A will be able to raise money. This is an accommodation bill where B is an
accommodating party & A is an accommodated party.
5. In general, accommodating parties are liable on the bill to the same extent as that of an ordinary
bill.
6. However, they are not liable to the accommodated party - the person for whose benefit they
signed the instrument.
7. An accommodation bill may also be drawn for accommodation of both drawer and acceptor. In
such a case both the parties share the proceeds of the accepted bill.
i) It is to be noted that issue of such bills is not prohibited under the Negotiable Instruments Act,
ii) But as per RBI instructions, Bankers are not permitted to discount such Accommodation Bills.
(Of course bogus invoices, bogus deliveries and bogus dispatches are made to get over the
restriction, but then technically and on the face of it, they will not be considered as
accommodation bills.
BANK DRAFT:
1. A bank draft is a bill of exchange
2. Drawn by one bank on another bank or on its own branch,
3. Instructing the latter to pay a specified sum of money to a specified person or his order.
4. It is a negotiable instrument and is very much like cheque.
5. It is also known as demand draft.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 6,7,8,9,10,17)
Q.No.6. Write about different types / classification of negotiable instruments?

(M 00 - 7M, M 01 - 6M)
BEARER INSTRUMENTS: A negotiable Instrument is payable to bearer when:

1. It is expressed to be so payable to bearer or
2. The only or last endorsement on the instrument is an endorsement in blank.
3. Any person who is in lawful possession of a bearer instrument can lawfully collect money due
on it.
4. In such a case, he is required to acknowledge receipt of money on the instrument by signing
on it.
5. This character of the instrument, however, can be altered subsequently (i.e. can be converted
to order instrument).
6. A promissory note or bill of exchange cant be made payable to bearer on demand due to
restrictions imposed by RBI. E.g.: Pay to R or bearer.
ORDER INSTRUMENTS: A negotiable Instrument is payable to order :
a) When it is expressed to be payable to order.
E.g., Pay to A or order or Pay to the order of A. In both the cases, the bill is payable to A or
his order at his option.
b) When it is expressed to be payable to a particular person or his order and
c) Does not contain any words
Copyrights Reserved
i) Prohibiting or
ii) Restricting its transfer.
E.g. Pay A one hundred rupees.
E.g: Pay to R or Order, pay to the order of R, Pay to R.
INLAND AND FOREIGN INSTRUMENT (SECTIONS 11 & 12):
A promissory note, bill of exchange or cheque drawn or made in India and made payable in, or
drawn upon any person resident in India shall be deemed to be an inland instrument.
Examples:
i) A promissory note made in Chennai and payable in Delhi.
ii) A bill drawn in Pune on a person resident in Jaipur (although it is stated to be payable in
London)
Any such instrument, not so drawn, made or payable shall be deemed to be a foreign instrument.
Examples:
i) A promissory note made in India but made payable in England .
ii) A bill drawn in England and payable in Paris although it may have been endorsed in India.
Thus, the foreign bills are:
Bills drawn outside India and made payable in or drawn upon any person resident in any
country outside India;
Bills drawn outside India and made payable in India, or drawn upon any person resident in
India;
Bills drawn in India made payable outside India or drawn upon any resident outside India,
but not made payable in India.
In the absence of a contract to the country, the liability of the maker or drawer of a foreign
promissory note or bill of exchange or cheque is regulated in all essential matters by the law of the
place where he made the instrument, and the respective liabilities of the acceptor and endorser by
the law of the place where the instrument is made payable (Section 134).
For example, a bill of exchange is drawn by A in California where the rate of interest is 25% and
accepted by B payable in Washington where the rate of interest is 6%. The bill is endorsed in India
and is dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at
the rate of 6% only. But if A is charged as drawer, he is liable to pay interest at 25%.
DEMAND INSTRUMENT:
a) Cheque is always payable on demand and it cannot be expressed to be payable otherwise
than on demand.
b) A promissory note or bill is payable on demand when
i) No time for payment is specified in it or
ii) When it is expressed to be payable on demand or at sight or on presentment.
c) The words on demand are usually used in a promissory note.
d) The words at sight are usually used in a bill.
e) In a promissory note or bill the expression at sight and on presentment mean on demand.
E.g.: I promise to pay B Rs.500.

I promise to pay B Rs.500 on demand.
Pay B Rs.500 at sight.
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Pay B Rs.500 on presentment.
TIME INSTRUMENTS: A bill or note which is payable:
a) After a fixed period or
b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to happen is known as time instrument.
Note:
a) If the event is such as is bound to happen, even though the actual time of its happening is
uncertain (for example, the death of a certain person) then the bill or note is valid.
b) But if the event is probable but not certain to happen, the instrument does not become valid.
c) Similarly an order to pay on or before a specified date is not a bill.
d) The expression after sight in a promissory note means after presentment for sight. This
means that payment cannot be demanded on a note till it has been shown to the maker.
e) The expression after sight in a bill of exchange means after acceptance.
E.g.: I Promise to pay B Rs.500 after 3 months.
I promise to pay Rs.500 on 1st June 2006.
I promise to pay B Rs.500 after sight.
I promise to pay B Rs.500 after Cs death.
Q.No.7. Write down the provisions relating to maturity and days of grace for negotiable
instruments? (M 00 - 8M, N 05 - 6M)
DATE OF MATURITY:
1. Date of maturity of a promissory note or bill of exchange is the date on which it falls due.
2. Every instrument payable otherwise than on demand is entitled to 3 grace days.
The instruments which are not entitled to days of grace are:
1. A cheque (as it is intended for immediate payment),
2. A bill or note payable at sight or on presentment or on demand and
3. A bill or note in which no time is mentioned.
The instruments which are entitled to days of grace are:
1. A bill or note payable on a specified day,
2. A bill or note payable after sight,
3. A bill or note payable at a certain period after date, and
4. A bill or note payable at a certain period after the happening of a certain event.
5. All those instruments which are entitled to grace days must be presented for payment on the
last day of grace.
6. Where an instrument is payable by installments, each installment is payable 3 days after the
day fixed for the payment of each installment.
RULES FOR FINDING OUT DATE OF MATURITY [SEC.23]:
a) If the instrument is payable after stated number of months after date or after sight or after
certain event,
- It becomes payable 3 days after the stated number of months.
E.g.: A bill of exchange, dated 30th August 1999, is made payable 3 months after date. The
instrument will mature on 3rd December 1999.
b) If the month in which the period would terminate has no corresponding day the period is held to
terminate on the last day of such month. Three days of grace is added.
E.g.: A bill, dated 30th January, 1991, is made payable one month after date. The date of
maturity falls on 3rd March, 1991.
E.g.: An instrument dated January 30, 1999 is payable one month after date. It falls due on 3rd
day after February 28, 1999 (the last day of month) i.e. on 3rd day of March 1999.
c) In the above cases, the day on which the instrument is drawn or presented for acceptance or
sight, or the day on which the event happens is to be excluded.
E.g.: A bill payable thirty days after sight is presented for sight on 1st March, 1991. It falls due
on 3rdApril, 1991.
E.g.: A bill of exchange dated 1st November is made payable 15 days after date. The period of
15 days will be counted from 2nd November and the bill will be at maturity on 19th November.
d) If the maturity date is a public holiday, the instrument is deemed to be due on the next
preceding business day [Sec.25].
e) The expression public holiday includes Sundays and any other day declared by the Central
Government, by notification in the official gazette to be public holiday.
E.g.: A bill, dated 11th January, 1991, is payable three months after date. It falls due on 14th
April, 1991, which happens to be a Sunday. As such it will fall due on 13th April, 1991 i.e. the
preceding business day.
f) However, if the instrument matures on a day which is declared as an emergency holiday, the
instrument shall be deemed to be due on the next succeeding business day.
E.g.: An instrument matures for payment on 24th December. The Government declares the day
as holiday on account of the death of a political leader. The instrument shall fall due for
payment on 26th December (25th December is Christmas day, being a public holiday)
Similar Question: State the law as to calculation of the maturity of negotiable instrument. What
will be the due dates in the following cases of the instruments:
i) A bill of exchange dated 20th November 2012, payable 4 months after date.
ii) A note is made payable 60 days after sight. The note is presented for sight on 15th April, 2013.
(RTP-N13)
Ans: Refer the above question - rules as to calculation of the maturity.
Thus, according to the above provisions, in the first case, where a bill of exchange dated 20th
November 2012, is payable on 4 months after date, there the instruments falls due for payment on
23rd March, 2013.
Whereas in the second case, promissory note presented for sight on 15th April, 2013 made payable
60 days after sight, there the due date of the instrument will fall on third day after 14th June, 2013
i.e. 17th June, 2013.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.11,12,13,)
Q.No.8. What is meant by cheque? State the essential features of a valid cheque? (Or) All
cheques are bills of exchanges but all bills of exchanges are not cheques. Explain.
(M 01, 11 - 8M, N 04 - 4M, RTP-N13) (PM)
DEFINITION: Section 6 of the negotiable instruments Act, as amended by the negotiable

instrument Act, 2002 (w.e.f. 06.02.2002) defines
1. A cheque as a bill of exchange
2. Drawn on a specified banker and
3. Not expressed to be payable otherwise than on demand.
4. Further, the expression includes the electronic image of a truncated cheque and cheque in the
electronic form.
PARTIES TO A CHEQUE:
1. Drawer:
a) The person who draws the cheque, i.e. the person who makes the cheque is called as
drawer.
b) His liability is primary and conditional.
2. Drawee:
a) The banker on whom cheque is drawn is called drawee.
b) He makes the payment of the cheque.
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c) In case of cheque, drawee is always banker.
3. Payee:
a) The person to whom money is to be paid (i.e., the person in whose favour cheque is
issued) is named in the cheque. He is called as payee.
b) The payee may be the
i) Drawer himself or
ii) A third party.
c) The person endorsing the cheque is endorser & the person to whom cheque is endorsed is
endorsee.
ESSENTIALS OF A VALID CHEQUE:

1. It must have all the essentials of a bill of exchange:
a) Since cheque is primarily a bill of exchange drawn on a banker,
b) It must fulfill all the essentials of a bill of exchange discussed earlier.
These may be summed up as follows:
a) It must be in writing.
b) It must contain an unconditional order to pay.
c) The order to pay must be in terms of money only.
d) The order to pay must mention a definite sum of money.
e) The parties must be certain.
f) It must be signed by the drawer.
g) A cheque does not require stamping or acceptance.
2. It must be drawn on a specified banker: A cheque has to be drawn on a banker only. Thus it
can be treated as a bill of exchange where the drawee must be a banker.
3. It must be payable on demand:
a) A cheque should always be payable on demand i.e.
b) It should be payable whenever the holder chooses to present it to the drawee (the banker).
Note: These two additional features distinguish a cheque from bill. That is why it is often said that
all cheques are bills while all bills are not cheques.
Q.No.9. What is meant by crossing of cheque? Write about different types of crossing
(N 03-6M, N 07-5M) (PM)
MEANING:
1. A cheque is said to be crossed when 2 parallel transverse lines, with or without any words, are drawn
2. Across the face of a cheque.
3. They can be drawn anywhere on the face of the cheque but usually they are drawn on the left
hand top corner of the cheque.
4. The purpose of crossing is to give a direction by the drawer of the cheque to the drawee bank,
5. Not to pay the cheque across the counter of the bank, but to pay it to a person who presents it
through a banker.
Purpose of crossing: Crossing makes it possible to trace the person to whom the payment has
been made. Thus, it makes the cheque safe.
TYPES OF CROSSING: Broadly, crossing can be categorized as follows:

General crossing:
1. General crossing with two parallel lines:
a) This is made by drawing 2 parallel transverse lines on the face of the
cheque.
b) The payee has to deposit it with his banker in order to get payment thereon.
c) He can also endorse it to any other person, who will get better title than that of endorser.
2. General crossing containing words & Co, within two parallel lines:
a) This requires writing of words & Co, between the two parallel lines.
b) The effect of this crossing is similar to that of crossing mentioned
above.
3. General crossing containing words not negotiable along with two parallel lines:
a) This requires writing of words not negotiable in
addition to the two parallel lines.
b) These words may be written inside or outside
these lines.
c) The only difference is that the endorsee does not
get a better title than that of the endorser.
4. General crossing containing the words not negotiable & Co. within two parallel lines:
a) This requires writing of words not negotiable & co.
between the two parallel lines.
b) The effect of this crossing is same as that of the not
negotiable crossing.
Special crossing:
1. Special crossing containing the name of a banker:
a) This requires writing the name of banker across the face
of the cheque.
b) Drawing 2 parallel lines is not compulsory. The special
effect of this crossing is that cheque is payable through that banker only whose name
appears on the face of the cheque.
For example, if the name of Canara Bank appears on the face of the cheque, it can be
deposited in the Canara bank only for the purpose of collection.
2. Special crossing containing the words not negotiable in addition
to the name of banker:
a) This requires writing of the words not negotiable in addition to the
name of the collecting banker.
b) The only difference from the above types of crossing is that
when a holder endorses this cheque,
c) The endorsee does not get a better title than that of
transferor.
d) A special crossing makes the cheque safer than general
crossing because a wrongful holder has to deposit it into the account
of a particular bank which is comparatively difficult task.
e) As per Sec.127 - Where a cheque is crossed specially to more than
one banker, the banker on whom it is drawn shall refuse the payment
thereon.
f) However, two crossings with the names of two branches of the same bank are allowed.
For example, if a cheque is double crossed with the names of two different banks, namely
The Bank of India, and Canara Bank, it is not payable. But if the two crossings are
Canara Bank, Gole Market branch, and Canara Bank, Karol Bag branch, the cheque
remains valid instrument and the payment can be obtained by depositing it into any of the
given branches.
g) But a Banker in whose favour a crossing is made can once again cross it in favour of his
agent for collection.
Not Negotiable Crossing: (N-07)
a) The word not negotiable has no statutory effect. They are used along with general crossing or
special crossing resulting into not negotiable crossing.
b) The effect of not negotiable is that it cant give to its transferee a better title than that of its
transferor.
c) Even when the transferee of a not negotiable cheque is a holder in due course, he cannot
acquire any better title than its transferor.
Restrictive crossing:
a) When the words A/C payee or A/C payee
only are added to a general or special crossing,
it is called restrictive crossing.
b) The effect of Account payee crossing is that
the banker is supposed to collect the cheque on behalf of that payee only whose name
appears on the face of the cheque.
c) If banker collects this cheque from an endorsee (i.e. person other than named payee), he can
be held responsible in case that endorsee turns out to be a wrongful holder of cheque.
d) Thus liability of a banker enhances to a great extent.
e) It does not mean that the payee cannot transfer such cheque to anybody else.
f) Legally a cheque with Account payee
crossing is negotiable like any other cheque
but practically the banker refuses to collect
such cheques on behalf of any person other
than the named payee of the cheque.
g) An Account payee crossing can be
combined with not negotiable crossing resulting into a Not negotiable A/C payee crossing.
Opening or cancellation of a crossing:
a) The crossing can be uncrossed by the drawer only.
b) He may do so either before the cheque is delivered to payee or at the request of the payee
after delivery.
c) The cheque is said to be opened by writing please pay cash within the cross lines, and
adding to it the signature of the drawer. This practice received sanction from the decision in the
case of Smith v. Union Bank of London.
d) In the same way, drawer may also cancel crossing on the cheque.
For example, he may convert special crossing into general crossing or he may strike out the words
not negotiable from the face of the cheque.
e) Opening or cancellation of crossing by any person other than the drawer is considered as a
material alteration of the cheque and the instrument gets discharged.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.15,16 )
Q.No.10. What is meant by payment in due course? (PM)
DEFINITION: It is defined in section 10 of the NI Act, 1881.Payment in due course means

1. Payment in accordance with the apparent tenor of the instrument,
2. In good faith and without negligence
3. To any person in possession thereof
4. Under circumstances which do not afford a reasonable ground for believing that he is not
entitled to receive payment of the amount mentioned therein.
Analysis of section 10 reveals that the following conditions must be satisfied before payment of a
negotiable instrument can be called as a payment in due course.
1. Payment must be in accordance with the apparent tenor of the instrument. Thus, a payment
before maturity is not payment in due course.
2. Payment must be in good faith and without negligence.
3. Payment must be made to the person in possession of the instrument i.e. a person entitled to
receive payment. For example, A thief is not said to be in possession of the instrument.
4. Payment must be made under circumstances which do not afford a reasonable ground for
belief that he is not entitled to receive payment of the amount mentioned therein.
5. Payment must be made in money only. Money includes bank notes or currency notes but does
not include cheque, bill of exchange, promissory note and goods.
Q.No.11. Who is a holder? State the conditions to be satisfied to become a holder? (PM)
Def: Sec.8 of the Act reads as

1. The holder of a promissory note, bill of exchange or cheque means any person, entitled in his
own name,
2. To the possession thereof and
3. To receive or recover the amount due thereon from the parties thereto.
THUS A PERSON IS A HOLDER WHEN HE SATISFIES TWO CONDITIONS:
1. He is entitled to possess the instrument in his own name. Such person may be-
a) Payee: The person to whose order the instrument is payable. If an instrument reads - pay
to the order of Ram, Ram is the holder when he is in possession of the instrument.
b) Endorsee: The person to whom the instrument has been endorsed. In the above example, if
Ram endorses the instrument to Sachin, then Sachin will become holder of the instrument.
c) Bearer: If the instrument is payable to Bearer then bearer of the instrument becomes holder.
d) The legal heir of a deceased holder (entitled by operation of law) is a holder although he is
not the payee or endorsee or bearer thereof.
Note: Sometimes, a negotiable instrument is lost or destroyed. In such cases, the holder is the
person who was entitled to the instrument, in his own name, at the time of such loss or destruction.
2. He is entitled to receive or recover the amount due thereon: The holder must have the
right to receive or recover the amount of the instrument and give a valid discharge to the payer.
Status of holder:
a) A holder has the legal power
i) To transfer the instrument to another person,
ii) To enforce the payment of the instrument, or
iii) To discharge the instrument, which means to release the maker or drawer from obligation
of paying the instrument.
Who is not a holder? Sometimes a person may be in possession of a negotiable instrument; still
the law does not consider him a holder.
Such instances are given below:

a) A person who finds or steals a bearer instrument or takes an instrument under forged
endorsement is not holder: The reason is that holder of a negotiable instrument must have right
to receive or recover the money thereon from the parties thereto.
b) A beneficial holder claiming through BENAMIDAR is not a holder:
E.g.: A advanced Rs.500 to B, B executed a promissory note in the name of C, a benamidar,
for the repayment of the same. On maturity, B failed to pay the amount due on the promissory
note. A brought an action against B for its recovery. Court held that A could not recover the
money because he was not a holder of the instrument.
c) An agent holding an instrument for his principal is not a holder: The reason being that, although
agent can receive payment of the instrument, he has no right to sue on the instrument in his
own name.
d) A payee prohibited by an order of court from receiving the amount of the instrument is not a
holder:
e) Thus holder means the bearer of the bearer instrument and the endorsee or payee of the order
instrument. He must be the owner thereof at law.
Note: Only a holder can bring a legal action to recover the amount due on the instrument.
Q.No.12. Who is a holder in due course? State the privileges available to a holder in due
course? MTP M15 (N 05 - 6M, N 08 - 5M, N 12 8M) (PM)
Def: Sec.9 of the Act reads as - Holder in due course means

1. Any person who, for consideration,
2. Became the possessor of a promissory note, bill of exchange or cheque, if payable to the
bearer, or the payee or endorsee thereof, if payable to the order,
3. Before the amount mentioned in it became payable, and
4. Without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title.
E.g.: A promissory note sent by general postage was robbed by robber. The next day the same note
was received by P. He received it for full and valuable consideration and in the usual course of his
business and without any notice that the note was robbed. Court held him to be holder in due course.
ESSENTIALS TO BECOME HOLDER IN DUE COURSE:
Most important Requirements:
a) The holder must have paid valuable consideration:
i) To become a holder in due course, a person must obtain a negotiable instrument by paying
valuable and lawful consideration for it.
ii) When given as a gift or has been inherited, the transferee cannot be a holder in due
course.
b) He must become holder before the amount of the instrument became payable: A holder
must acquire the instrument before its maturity in order to attain the status of holder in due course.
c) The holder must have obtained the instrument without sufficient cause to believe that
any defect existed in the title of the person from whom he has derived his title:
i) If a person has some suspicion about an instrument but has no actual knowledge of irregu-
larity, he must make an enquiry to confirm his suspicion.

ii) If he does not enquire and accepts a bad instrument, he cannot be granted the status of a
holder in due course.
OTHER REQUIREMENTS:
a) He must be holder.
b) The holder must be possessor in case of bearer instrument: The word possessor here
means a person is in actual possession of the instrument.
c) The holder must be payee or endorsee in case of order instrument: If a negotiable
instrument is payable to order, no person can become holder in due course of the same unless
he is a payee or endorsee of the same.
d) The instrument must be complete and regular on the face of it.
i) Here the term on the face includes back also.
ii) It is the duty of the person acquiring the instrument to examine its form and content
thoroughly.
iii) If it contains any material defect, he will not become holder in due course.
PRIVILEGES OF BEING A HOLDER IN DUE COURSE:
i) In case of Inchoate Instrument: A person signing and delivering to another a stamped but
otherwise inchoate instrument is debarred from asserting, as against a holder in due course,
that the instrument has not been filled in accordance with the authority given by him, the stamp
being sufficient to cover the amount (Section 20).
Example: A signs his name on a blank but stamped instrument which he gives to B with an
authority to fill up as a note for a sum of Rs.3 000 only. But B fills it for Rs.5,000. B than transfers it
to C for a consideration of 5000 who takes it in good faith. Here in the case, C is entitled to recover
the full amount of the instrument because he is a holder in due course whereas B, being a holder
cannot recover the amount because he filed in the amount in excess of his authority.
ii) In case of fictitious bill: In case a bill of exchange is drawn payable to the drawers order in
a fictitious name and is endorsed by the same hand as the drawers signature, it is not
permissible for acceptor to allege as against the holder in due course that such name is
fictitious (Section 42).
iii) In case of conditional instrument or escrow: In case a bill or note is negotiated to a
holder in due course, the other parties to the bill or note cannot avoid liability on the ground
that the delivery of the instrument was conditional or for a special purpose only (Sections 46
and 47).
iv) In case of instrument obtained by unlawful means or for unlawful consideration; The
person liable in a negotiable instrument cannot set up against the holder in due course the
defences that the instrument had been lost or obtained from the former by means of an offence
or fraud or for an unlawful consideration (Section 58).
v) In case original validity of the instrument is denied; No maker of a promissory note, and
no drawer of a bill or cheque and no acceptor of a bill for the honour of the drawer shall, in a
suit thereon by a holder in due course be permitted to deny the validity of the instrument as
originally made or drawn (Section 120).
vi) In case Payees capacity to indorse is denied: No maker of a promissory note and no
acceptor of a bill payable to order shall, in a suit thereon by a holder in due course, be
permitted to deny the payees capacity, at the date of the note or bill, to endorse the same
(Section 121). In short, a holder in due course gets a good title to the bill.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.19,20,21,22,23,24,25,26,27,28,29,30,31 )
Similar Question: A draws a cheque for Rs 100 and hands it over to B by way of gift. Is B a holder in
due course? Explain the nature of his title, interest and right to receive the proceeds of the cheque.
(MTP- 2M)
Ans: B is a holder but not a hlder in due course as he does not get the cheque for value and
consideration. His title is good and bonafide. As a holder he is entitled to receive Rs 100 from the bank
on whom the cheque is drawn.
Q.No.13. Write about different modes of transferring a negotiable instrument? (M 06 - 5M) (M-13)
One of the essential characteristics of a negotiable instrument is that it is freely transferable from
one person to another. This transfer may take place either by negotiation or by assignment.
1. Transfer by negotiation: When a promissory note, bill or cheque is transferred in such a way
that the transferee becomes holder thereof, the instrument is said to be negotiated (Sec.14).
There are two methods of transfer by negotiation, namely.
a) Negotiation by delivery: An Instrument payable to bearer is negotiable by delivery.
b) Negotiation by endorsement & delivery:
i) An Instrument payable to order is negotiable by endorsement and delivery thereof.
ii) To complete negotiation, delivery of the negotiable instrument is essential whether the
instrument is payable to bearer or order.
iii) The delivery must be voluntary.
E.g.: X was the holder of a cheque of Rs.10, 000 payables to bearer. He delivered this cheque
to Y to keep it in his (Y) safe custody. In this case there is no negotiation of cheque from X to Y
because the transfer of the cheque to Y makes him a bailee only and not the holder of the
cheque.
2. Transfer by assignment: An instrument is said to be assigned when a promissory note, bill of
exchange or cheque is transferred by means of a written and registered document under the
provisions of the Transfer of Property Act, 1882.
a) The person who transfers his right to recover the payment of debt is called assignor and
the person to whom such rights are transferred is called an assignee.
b) The assignee gets the rights of assignor only. He does not get the rights of a holder in due
course.
c) The Negotiable Instruments Act does not deal with transfer of negotiable instruments by
assignment.
Duration of Negotiability [Section 60]: A negotiable instrument may be negotiated:
a) By the maker, drawee or acceptor until maturity.
b) By person other than maker, drawee or acceptor until payment.
Q.No.14. Define the term endorsement? Write down the essential features of valid
endorsement? Write about different types of endorsement? (PM) (M15-4M) (N15-4M)
MEANING:
1. In ordinary language, the term endorsement means writing on an instrument.
2. But according to Negotiable Instruments Act it means writing of a persons name (otherwise
than as maker) on the face or back of a negotiable instrument or on a slip of paper (called
allonge) annexed thereto, for the purpose of negotiation (Sec.15).
3. The person who so signs are called endorser and the person to whom the instrument is
endorsed is called endorsee.
ESSENTIALS OF VALID ENDORSEMENT:

1. It must be on the instrument itself. If no space is left on the instrument, it must be on a separate
slip of paper attached to the instrument, called allonge.
2. It must be signed by the endorser for the purpose of negotiation. Signature of the endorser on
the instrument, without any additional words, is sufficient.

3. It may be made by simply signing his name on the instrument or he may additionally specify
the person to whom or to whose order the instrument is payable.
4. It must be completed by the delivery of the instrument. The delivery of the instrument with the
intention of passing the property in it to the endorsee is important.
5. The endorsement must be of the entire instrument.
6. Where there is more than one endorsement on a Negotiable Instruments, each endorsement is
deemed to have been made in the order in which it appears thereon, until contrary is proved.
Kinds of endorsement: Endorsement may be of the following kinds:
1. Blank or general endorsement: Endorsement is said to be blank or general
a) If the endorser signs his name only on the face or back of the instrument,
b) Without writing the name of the endorsee and the instrument becomes a bearer instrument.
2. Full or special endorsement: 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 in full. For example, Pay Ram or order or Pay to Ram.
Conversion of endorsement in blank into endorsement in full: If an instrument has been
endorsed in blank, any holder may,
a) Without signing his own name,
b) Write some persons name above the endorsers signature and so convert the
endorsement in blank into an endorsement in full.
c) Thus the holder does not incur the responsibility of endorser.
E.g.: A is the holder of a bill endorsed by B in blank. A writes over Bs signature, the word
Pay to C or order. A is not liable as an endorser but such writing operates as an
endorsement in full from B to C
3. Restrictive Endorsement:
a) An endorsement is said to be restrictive when it prohibits or restricts the further negotiability
of the Instrument.
b) It merely entitles the holder of the instrument to receive the amount on the instrument for a
specific purpose.
E.g.: Pay the contents to C only Or Pay C for my use
4. Partial endorsement:
a) Partial endorsement does not operate as negotiation of the instrument.
b) However, if the instrument has been paid in part, the fact of part payment may be endorsed
on the instrument and it may be further negotiated for that residue amount.
E.g.: A is the holder of a bill for Rs.1,000. He endorses it thus: Pay B or order Rs.500. This is
a partial endorsement and is Invalid for the purpose of negotiation.
E.g.: Pay B Rs.500, being the unpaid balance of the bill. This is a valid endorsement.
5. Conditional or qualified endorsement: Such an endorsement combines an order to pay with
condition. An endorser may endorse an instrument in such a way that his liability depends upon
the happening of a specified event which may or may not happen.
E.g.: Pay to A on safe receipt of goods. - V. Chopra
6. Sans recourse endorsement:
a) The holder of a bill may endorse it in such a way that he does not incur the liability of an
endorser to all subsequent endorsees.
b) He can do so by adding the words sans recourse (without recourse) to the endorsement.
Examples of such endorsement are Pay A or order without recourse to me or Pay A or order
sans recourse or Pay A or order at his own risk.
IPCC _ 36e_Business Laws_NI Act__________________________________109
Here if the instrument is dishonoured the subsequent holder or endorsee cant claim the
endorser for payment of the same.
7. Facultative endorsement: Where an endorser by express words abandons some right or
increases his liability under an instrument, the endorsement is called facultative endorsement.
E.g.: Pay A or order, notice of dishonour waived is a facultative endorsement.
8. Sanc Frais endorsement: An endorsement is said to be sans frais endorsement if the
endorser endorses the instrument in such a way that no expenses should be incurred on
account of the bill.
E.g.: Pay B or his order sans frais.
Cancellation of endorsement: Where the holder of a negotiable instrument, without the consent
of the endorser, destroys or impairs the endorsers remedy against a prior party, the endorser is
discharged from liability to the holder to the same extent as if the instrument had been paid at
maturity (Sec.40).
E.g.: A is the holder of a bill of exchange made payable to the order of B. which contains the
following endorsements in blank:
1st endorsement - B, 2nd endorsement - C, 3rd endorsement - D, 4th endorsement - E
A puts this bill in suit against C and strikes out, without Es consent, the endorsements by C and D.
A is not entitled to recover anything from E.
What is meant by Sans Recours Endorsement of a bill of exchange? How does it differ from Sans
Frais Endorsement? (M 15- 4M)
Ans: Refer above 6th and 9th point
Q.No.15. State the provisions relating to material alteration.

(M 98 8M, N 01 8M, M 02 6M, M 06 5M, M 13 4M) (PM)
MEANING OF MATERIAL ALTERATION:

1. An alteration can be called a material alteration if it
a) Alters or attempts to alter
b) The character or operation (i.e., the legal effect) of the instrument or
c) The rights and liabilities of any of the parties to a negotiable instrument and
d) Affects or is likely to affect the contract which the instrument contains or is evidence of.
e) Thus, it totally alters the business effect of the instrument.
Material Alteration (not authorized by act) Non-material alteration

1. Alteration of date of instrument (e.g. if a bill dated 1. Conversion of order instrument into
1st May, 1998 is changed to a bill dated 1st June, bearer instrument.
1998)
2. Alteration of time of payment (e.g., if a bill payable 2. Conversion of bearer instrument
three months after date is changed to a bill payable into order instrument.
four months after date).
3. Alteration of place of payment (e.g. if a bill payable 3. Elimination of the words or order
at Delhi is changed to bill payable at Bombay. from an endorsement.
4. Alteration of amount payable (e.g., if bill for 4. Addition of the words on demand
Rs.1000 is changed to a bill for Rs.2000). to a note in which no time or
payment is expressed.
5. Conversion of blank endorsement into special 5. Alteration made with consent of the
endorsement (Refer Note 2) parties.
6. Addition of a new party to an instrument.
7. Alteration of one of the clauses of the instrument
containing a penal action.
Material Alterations Authorized by Act [Section 20, 49, 125]: Following material alterations
have been authorised by the Act and do not require any authentication:
a) Filing blanks of inchoate instrument [Section 20]
b) Conversion of a blank endorsement into an endorsement in full [Section 49]
c) Crossing of cheques [Section 125]
d) Conversion of general crossing into special crossing or not negotiable crossing or A/C payee
crossing (but not vice- versa).
e) Conversion of a bearer instrument into an order instrument by deleting the word Bearer.
Note 1: principle of material alteration does not apply to mere accidents (i.e unintentionally)
Note 2: Material alterations authorised by act are valid.
Effect of Material Alteration [Section 87 and 88]: An instrument which is materially altered
becomes void against all persons who were parties to it at the time of alteration and did not
consent to it.
The effect of material alteration on liability of various parties is summarized below:
Person Effect
I. Person who were parties at the time Such persons are altogether discharged from liability
of alteration and did not consent to under that instrument. Such persons shall not be
alteration. liable even to a bonafide purchaser of the instrument
having no notice of alteration. [Section 87]
II. Persons who were parties at the time Such persons continue to be liable under the
of alteration and persons who instrument.[Section 88]
became parties to the instrument
subsequent to the alteration.
Q.No.16. Define the term presentment. State different types of presentment?

Presentment means showing an instrument to the drawee, acceptor or maker for acceptance, sight
or payment. Thus there will be 3 kinds of presentment:
1. Presentment of bills of exchange for acceptance,
2. Presentment of promissory notes for sight, Copyrights Reserved
3. Presentment of negotiable instruments for payment, To MASTER MINDS, Guntur
Q.No.17. Write down the legal provisions relating to presentment of a bill for acceptance?
(N 99 - 6M, M 02 - 6M, M 08 - 6M)
A bill is said to be accepted when drawee puts his signature on it signifying his assent to the order
of the drawer that he will pay the bill at the time when it is due. The liability of drawee does not
arise until he has accepted the bill.
THE ESSENTIALS OF A VALID ACCEPTANCE ARE AS FOLLOWS:

1. Acceptance must be written: The drawee may use any appropriate word to convey his
assent. It may be sufficient acceptance even if just signatures are put without additional words.
An oral acceptance is not valid in law.
2. Acceptance must be signed: A mere signature would be sufficient for the purpose.
Alternatively, the words accepted may be written across the face of the bill with a signature
underneath; if it is not so signed, it would not be an acceptance.

3. Acceptance must be on the bill: The acceptance should be on the face of the bill normally
but it is not necessary. An acceptance written on the back of a bill has been held to be
sufficient in law. What is essential is that must be written on the bill; else it creates no liability
as acceptor on the part of the person who signs it.
4. Acceptance must be completed by delivery: Acceptance would not be complete and the
drawee would not be bound until the drawee has either actually delivered the accepted bill to
the holder or tendered notice of such acceptance to the holder of the bill or some person on his
behalf.
5. Where a bill is drawn in sets, the acceptance should be put on one part only. Where the
drawee signs his acceptance on two or more parts, he may become liable on each of them
separately.
6. Acceptance may be either general or qualified: An acceptance is said to be general when the
drawee assents without qualification order of the drawer. The qualification may relate to an
event, amount, place, time etc. (Explanation to Section 86 of the Negotiable Instruments Act,
1881).
IN THE FOLLOWING CASES, A BILL MUST BE PRESENTED FOR ACCEPTANCE:
1. A bill payable some period after sight or after presentment (Sec.61) in order to fix its date of
maturity. It may, however, be negotiated before acceptance.
2. A bill in which there is an express stipulation that it shall be presented for acceptance before it
is presented for payment.
a) Even in cases where presentment is optional, it is always desirable to get a bill accepted as
soon as possible in order to obtain the additional security of the acceptors name on the
bill.
b) Presentment for acceptance must be made at a reasonable hour on a business day and
before the bill is overdue (Sec. 61).
MODES OF ACCEPTANCE:
a) General acceptance: An acceptance is general or absolute when the drawee does not attach
any condition or qualification to it. If the acceptance is not absolute, the holder may treat the bill
as dishonoured by non-acceptance.
b) Qualified acceptance:
i) An acceptance is qualified where it is given subject to some condition or qualification.
ii) In such a case the holder may refuse to take qualified acceptance and treat the bill as
dishonoured by non-acceptance.
iii) If he takes qualified acceptance, he does so at his own risk and discharges all the parties prior
to himself, unless he obtains prior consent to such acceptance.
According to the Explanation to Section 86 of the Act, an acceptance to be treated as
qualified.
1. Where it is conditional, declaring the payment to be dependent on the happening of an event
therein stated,
E.g.: accepted payable when in funds (Julian vs. Shobrooke ) accepted payable in giving up
bills of lading for 76 bags of cloves per ship A at the L&W Bank [Smith vs. Vertue] accepted
payable when a cargo consigned to me is sold (Smith vs. Abbot);
2. When it is partial i.e, when it undertakes to pay part only of the sum ordered to be paid by the
drawer,
E.g.: A bill drawn for 5,000 but accepted for 4,000 only.
3. When it is qualified as to locality, i.e, when it is to pay only at a particular place, or to pay at a
place different from the place mentioned in the instrument, and there only.
a) When no place of payment being specified on the order, if the acceptance makes the
money payable at a particular place, it is treated as a general acceptance;
b) But where. it expressly states that the bill will be paid at the place noted in the acceptance
and not otherwise or elsewhere, it amounts to a conditional acceptance.
For example, accepted payable at the Diwala Bank. This is general acceptance, whereas
acceptance payable at the Diwala Bank and not elsewhere is an instance of qualified
acceptance.
4. Where it undertakes the payment at a time other than that at which under the order it would be
legally due
E.g.: A bill drawn payable three months after date is accepted as accepted, payable six
months after date.
Presentment for acceptance to whom?: Presentment for acceptance may be made to:
a) The drawee or
b) All or some of several drawees or
c) Drawee in case of need or
d) All drawees, if there are several drawees, unless they are partners or agents of one another or
e) Duly authorised agent of the drawee or
f) If drawee has died, his legal representative or
g) His Official Receiver or Assignee, if drawee has been declared an insolvent.
When?:
a) If time for presentment of acceptance is specified in the bill, it must be presented within that
time and before its maturity.
b) Where presentment for acceptance is not obligatory, it may be presented at any time before
payment.
Where?:
a) The bill should be presented at the place which is specified for presentment.
b) If no place for presentment is specified, the bill should be presented at the drawees place of
business or residence.
c) The holder must allow the drawee 48 hours (exclusive of public holidays) to consider the
matter.
d) He cant extend this time period as these are specified by the Act.
Effect of non-presentment: When the holder of a bill fails to present it for acceptance where it is
obligatory, the drawer and all endorsers are discharged from liability to him.
When presentment for acceptance is excused: RTP M16
1. The drawee cannot, after reasonable search, be found,
2. Where the drawee is dead or insolvent. But in such a case the instrument may be presented
for acceptance to the legal representative of the deceased or the assignee of the insolvent,
3. The drawee is a fictitious person or one incapable of contracting.
Similar Questions: Referring to the provision of the Negotiable Instruments Act, 1881, examine
the validity of the following: A Bill of Exchange originally drawn by M for a sum of Rs. 10,000, but
accepted by R only for Rs. 7,000. (MTP 3M)
Ans: Refer Sec 86 of the above question.
Q.No.18. Write down the legal provisions relating to presentment for sight?
Purpose:
1. In case of promissory note, there is no question of acceptance because the maker himself is
the person primarily liable on it.
2. But in case of note payable at a certain period after sight, presentment to the maker is
compulsory in order to fix its maturity.
If the maker cannot be found after reasonable search, presentment is excused and the instrument
may be treated as dishonoured. The presentment should be made during business hours on
business day. In default of such presentment, no party thereto is liable thereon to the person
making such default (Sec. 62).
Q.No.19. Write down the legal provisions relating to presentment for payment?
1. Promissory notes, bills of exchange and cheques must be presented for payment to the maker,
acceptor or drawee thereof respectively, by or on behalf of the holder.
2. In default of such presentment, the other parties to the instrument (that is, parties other than
the parties primarily liable) are not liable to such holder.
PRESENTMENT FOR PAYMENT NOT NECESSARY:
1. The maker, drawee or acceptor intentionally prevents presentment of the instrument.
2. The instrument is payable at the place of business and such place is closed on due date during
usual business hours. In such a case the presumption is that person liable to pay wants to
avoid payment.
3. The instrument is payable at a specified place and neither the maker, acceptor or drawee, nor
any other person authorised to pay it, is present, during the usual business hours.
4. The instrument is not payable at a specified place, and the payer cannot be found even after
due search.
5. There is a promise to pay notwithstanding non-presentment.
6. Presentment for payment is waived either expressly or impliedly before or after maturity.
7. The drawer could not suffer damage for want of presentment.
8. The bill is dishonoured by non-acceptance.
9. The drawee is fictitious person or the one incompetent to contract. Eg.: Minor
10. The drawer and the drawee is the same person.
11. Presentment becomes impossible.
In all these cases, instrument is deemed to be dishonoured on the due date for presentment.
RULES REGARDING PRESENTMENT FOR PAYMENT:
1. Presentment must be made during usual hours of business and in case of cheque during
banking hours.
2. A promissory note or bill payable at a specified period after date or sight must be presented for
payment at maturity (Sec.66). Even little bit of delay discharges all prior parties other than
those primarily liable.
3. A note payable by installments must be presented for payment on the third day after the date
fixed for payment of each installment. If any installment is not paid on such presentment, it has
the same effect as non-payment of a note at maturity.
4. Presentment for payment must be made:
a) At the place of payment specified in the instrument,
b) If no place is specified, at the place of business (if any), or at the usual residence of the
maker, drawee or acceptor as the case may be.
c) In any other case (i.e., when the maker, drawee or acceptor has no known place of
business or fixed residence and no place is specified in the instrument) wherever the
maker, drawee or acceptor can be found.
5. Instrument may be presented to the duly authorised agent of the drawee, maker, or acceptor, as
the case may be. Where the drawee, maker or acceptor has died, instrument may be presented for
to his representative or where he has been declared as insolvent, to his assignee.
6. Delay in presentment for payment is excused if it is caused by circumstances beyond the
control of the holder
Q.No.20. Write down the legal rules regarding notice of dishonor? (CMA J 05 - 4M, D 13-2M)
1. When a negotiable instrument is dishonoured either

a) By non-acceptance or
b) By non-payment, then
c) The holder of the instrument must give a notice of dishonour to all prior parties whom he
wants to make liable on the instrument.
d) If he does not give this notice, except in cases when notice of dishonour may be excused,
e) All the prior parties liable thereon are discharged from their liability.
NOTICE BY WHOM?:
a) Notice by holder or any prior party: Notice of dishonour may be given by the holder or any of
the parties liable on the instrument.
b) Chain method of giving notice of dishonour: A party receiving notice of dishonour must, in
order to render any prior party liable to him, give notice of dishonour to such prior party within a
reasonable time, unless such party otherwise receives due notice (Sec. 95). But if the notice is
given by a stranger it is a nullity.
c) Notice by principal or agent: If an instrument is deposited with agent for presentment and it
is dishonoured, the notice of dishonour may be given either by the agent or by the principal
himself.
NOTICE TO WHOM?:
a) Notice of dishonour must be given to all the parties whom the holder wants to make liable.
Notice of dishonour need not be given to the acceptor of a bill of exchange or to the maker of a
promissory note or the drawee of a cheque (Sec.93), because they are the parties primarily
liable upon the Instrument.
b) Notice of dishonour may be given to the party liable or his duly authorised agent, or, where he
died, to his legal representative, or, where he has been declared insolvent, to his assignee.
Form of notice:
a) The notice of dishonour may be oral or written. If it is written, may be sent by post. If it is duly
directed and sent by post, it would be good notice even though it is miscarried.
b) It may be in any form but it must clearly indicate that the instrument has been dishonoured and
in what way and that the party to whom such notice is being given will be liable on the
instrument.
c) It must be given within a reasonable time at the place of business or in case such party has no
place of business at the residence of the party.
When notice of dishonour not necessary: In the following cases, notice of dishonour for
acceptance or payment is not necessary (Sec. 98)
a) When it is dispensed with by the party entitled thereto ( i.e. he waives his right either expressly
or by implication)
b) When drawer has countermanded payment, it is not necessary to send notice to drawer in
order to charge him, as he himself has countermanded payment (Countermand means
revoked or cancelled).
c) When the party charged could not suffer damage even if notice is not given (e.g. in case of
accommodation bill, accommodated party will not suffer even if notice of dishonour is not given).
d) When the party entitled to notice cannot be found even after due search; or it is not possible to
give notice because of unavoidable reasons (e.g. unavoidable circumstances like death,
serious illness, accident etc.)
e) If acceptor is drawer, it is not necessary to give notice to drawer to charge him, as he himself
had dishonoured the instrument.

f) When the party entitled to notice, knowing the facts, promises unconditionally to pay the
amount due on the instrument (Sec.98).
Similar Question: Is notice of dishonour necessary in the following cases (M14 - 4M) (PM)
a) X having a balance of Rs 1,000 with his bankers and having no authority to over draw, drew a
cheque for Rs 5,000/-. The cheque was dishonoured when duly presented for repayment.
b) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured on the
presentment for payment.
Ans: Notice of dishonour is not necessary in both the cases. [Section 98 of the Negotiable
Instruments Act, 1881].
(IMMEDIATELY REFER PRACTICAL QUESTION NO.42 )
Q.No.21. Define the terms noting and protesting? (CMA D 12 - 4M) (PM)
Noting means: noting is the process of recording the fact and reasons of dishonor of a NI by a notary
public.
Noting must contain the following particulars: Copyrights Reserved
a) The fact of dishonour. To MASTER MINDS, Guntur

b) The date of dishonour.
c) The reasons, If any, assigned for such dishonour or,
d) If the instrument has not been expressly dishonoured the reason why the holder treats it as
dishonoured; and
e) The Notarys charges (Sec. 99. Para 2).
Noting is not compulsory in case of Inland bill or note. Even if the instrument is not noted the holder
does not lose his rights.
Protest:
a) 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 protest.
b) The protest is the formal notarial certificate attesting the dishonour of a bill or note. It is based
upon noting.
Contents of Protest (Section 101): A protest under Section 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 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;
d) 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 acceptance for honour or of a payment for honour, the name of the person by
whom, of the person whom and the manner in which, such acceptance or payment was offered
and effected.
A Notary Public may make the demand mentioned in clause (c) under this section either in person
or by his clerk or, where authorized by agreement or usage, by registered letter.
Time: (Sec. 100) Protesting can be done only after noting is done. However protest need not be
on the same day as noting. It must be done with in a reasonable time.
Advantages of protest:
a) It gives an evidence of dishonour to the drawer and endorsers.
b) In a suit upon an instrument being dishonoured, the court shall, on proof of protest, presumes
to be dishonoured, unless and until such fact is disproved.
Similar Question: State with reasons whether the statement is correct/incorrect: Notary Public is a
government servant. (RTP - N 13)
Ans: The statement is correct. A Notary public is appointed by the Central or State Government.
His functions are to attest deeds, contracts and other instruments that are to be used abroad and
to give a certificate of due execution of such documents. He enjoys the confidence of the business
world and any certificate given by him is presumed to be true by a court of law.
Q.No.22. State some presumptions as to negotiable instruments?
1. Until the contrary is proved, the following aspects are presumed in respect of Negotiable Instruments.
a) Consideration:
i) Every negotiable instrument was made or drawn for consideration, and that every such
instrument has been accepted, endorsed, negotiated, or transferred for consideration.
ii) The person who challenges the instrument has to prove the absence of consideration.
b) Date: Every negotiable instrument bearing a date was made or drawn on such date.
c) Time of acceptance: Every bill of exchange was accepted within a reasonable time after its
date and before maturity. But there is no presumption as to the exact date of acceptance.
d) Time of transfer: Every transfer of negotiable instrument was made before its maturity.
But there is no presumption as to the exact date of negotiation.
e) Order of endorsement: The endorsements appearing upon a negotiable instrument were
in order in which they appear on it.
f) Stamp: That a lost promissory note or bill of exchange was duly stamped.
g) Every holder is a holder in due course: This is a very important presumption. Holder of a
negotiable instrument is presumed to be a holder in due course.
h) Protest: In a suit upon a dishonoured instrument, the Court shall, on the proof of protest,
presume the fact of dishonour, unless and until such fact is disproved.
Q.No.23. Discuss the Capacity and Authority of a person to be a party to a negotiable

instrument. (M15-4M)
MEANING OF CAPACITY:
1. Every person competent to contract has capacity to incur liability by making, drawing,
accepting, endorsing, delivering and negotiating an instrument.
2. A party having such capacity may himself put his signature or authorise some other person to do so.
Position of Minor [Sec.26]: A minor cannot make himself liable as drawer, acceptor or endorser,
but where the instrument is drawn or endorsed by him, the holder can receive payment from any
other party thereto.
Note: It is the estate of a minor (not the minor as person) which is liable for debts arising out of
necessaries supplied to minor.
Agents authority [Sec.27]:
1. Every person, capable of incurring liability, may bind himself or be bound by a duly authorised
agent acting in his name.

2. A general authority to transact business given to an agent does not empower him to accept or
endorse bills of exchange so as to bind the principal.
3. An agent may have authority to draw bills of exchange, but not endorse them. An authority to
draw does not, necessarily, imply an authority to endorse.
Liability of Agent [Sec 28]:

1. An agent, who signs his name on an instrument without indicating that he signs as agent, is
personally liable, but this rule does not apply where any one induces him to sign upon the
belief that principal only would be held liable.
2. The mere signature of an agent in his own name, with the word agent added, does not
exempt him from personal liability (Liverpool Bank Vs Walter).
Examples of agents signature:
When an agent is personally liable When an agent is not personally liable
RAM For and on behalf of Ram & Co
Partner Ram
Ram & Co Partner
Q.No.24. When does a negotiable instrument gets discharged?
The term discharge in relation to a negotiable instrument is used in two senses, viz.
a) Discharge of the instrument, and
b) Discharge of one or more of the parties from their liability on the instrument.
An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable.
DISCHARGE OF THE INSTRUMENT:
1. By payment in due course:
a) This is the most usual mode of discharge of an instrument and of the parties to it.
b) The instrument is discharged by payment made in due course by the party who is primarily
liable to pay.
2. Primarily liable becoming holder: If the maker of a note or the acceptor of a bill becomes its
holder at or after its maturity, the instrument gets discharged.
3. By express waiver:
a) When the holder of a negotiable instrument at or after its maturity absolutely and
unconditionally renounces in writing or gives up his rights against all the parties to the
instrument, the instrument is discharged.
b) The renunciation must be in writing.
4. By cancellation: Where an instrument is intentionally cancelled by the holder or his agent and
the cancellation is apparent thereon, the instrument is discharged.
5. By discharge as a simple contract: A negotiable instrument may be discharged in the same
way as any other contract for the payment of money. This includes, for example, discharge of
an instrument by novation or rescission or by expiry of period of limitation.
Q.No.25.When do the parties to a negotiable instrument get discharged?
A PARTY OR PARTIES TO A NEGOTIABLE INSTRUMENT IS/ARE DISCHARGED IN ANY

ONE OF THE FOLLOWING WAYS:
1. By payment: When payment on an instrument is made in due course, both the instrument and
the parties to it are discharged.
2. By cancellation: When the holder of a negotiable instrument or his agent cancels the name of
a party on the instrument with an intention to discharge him, such party and all subsequent
parties, who have a right of recourse against the party whose name is cancelled, are
discharged from liability to the holder.
3. By release: Where the holder of a negotiable instrument releases any party to the instrument by
any method other than cancellation, the party so released is discharged from liability.
4. By allowing drawee more than forty-eight hours: 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 not consenting to such allowance are discharged from
liability to such holder.
5. By non-presentment of cheque:
a) Where a cheque is not presented by the holder for payment within a reasonable time of its
issue and the drawer suffers actual damage through the delay because of the failure of the
bank,
b) He is discharged from liability to the extent of such damage.
6. Parties not consenting discharged by qualified acceptance: If the holder of a bill of
exchange acquiesces (assents) to a qualified acceptance, all the previous parties whose
consent is not obtained to such acceptance are discharged from liability (Sec.86).
7. By operation of law: This includes discharge:
a) By an order of Insolvency Court: Discharges the insolvent.
b) By merger: When a judgment is obtained against the acceptor, maker or endorser, the debt
under the bill is merged into the judgment debt.
c) By lapse of time: i.e., when the remedy becomes time-barred.
8. By material alteration: A material alteration of a negotiable instrument makes the instrument
void against all prior parties unless they have consented to such alteration.
Q.No.26. State the legal provisions regarding instruments obtained by unlawful means?
Following are the different ways of obtaining a negotiable instrument by unlawful means and legal
provisions regarding the same:
1. Stolen instruments:
a) A person, who obtains a negotiable instrument by theft, can neither enforce payment on it
against any party thereto nor can he retain it.
b) He acquires no title to the instrument. If he obtains payment on it, the true owner can
recover the amount due on the instrument from him.
2. Instruments obtained by coercion or fraud:
a) If the maker or acceptor proves that it was obtained from him by fraud, the person defrauding
cant recover anything.
b) But the defense of coercion or fraud cant be used against holder in due course or a holder
deriving title from such holder.
3. Instruments obtained for unlawful consideration:
a) A negotiable instrument given for illegal consideration, or opposed to public policy, or
immoral, or specially prohibited by statute, is void and creates no obligation between the
parties thereto.
b) But a holder in due course obtains a good title to an instrument.
4. Forged Instruments: Forgery is the fraudulent making or alteration of a writing to the
prejudice of another mans right.

The most common ways of forgery are:
a) Fraudulently writing the name of an existing person;
b) Signing the name of a fictitious or a non-existing person, with a fraudulent intention of
creating belief that the instrument was signed by a real person; or
c) Signing ones own name with the intention that the signature should pass for the signature
of another person of the same name.
d) If any of the signatures on a negotiable Instrument are forged, the signature in question is
wholly inoperative and no person, even if acting in good faith, can acquire any rights under
it.
The person claiming under the forged endorsement even if he is a purchaser for value and
in good faith, cannot acquires the rights of a purchaser for value and in good faith, can not
acquires the rights of a holder in due course. He acquires no title to the bill or
note.(Mercantile bank vs D silva)
RIGHTS AND OBLIGATIONS OF SUCH PERSON: (SEC 58):

a) A person who gets an instrument by unlawful means is not entitled to claim money there
on, as the consent of the party is not free.
b) If the instrument obtained through fraud is negotiated and the transferee is aware of the
fraud then the he will not be entitled to claim any payment.
i) However, it doesnt not apply against a holder in due course or
ii) A holder deriving a title from such holder in due course.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.35,36)
Q.No.27. State the liabilities of various parties under negotiable instruments act 1881?
For students self study
LIABILITIES OF PARTIES-
1) Legal representative : A legal representative of a deceased person is liable personally or
expressely limits his liability to the extent of the assets received by him.
2) Liability of drawer-The drawer is bound to pay the holder in case an instrument is
dishonoured
3) Liability of drawee of cheque i.e., banker Where the drawee of cheque or banker is in
default of payment though having a sufficient funds of the drawer in hands, is liable to the
drawer.
4) Liability of maker of note and acceptor of bill-The liability of maker of a note is primary and
Absolute and so liable to pay at its maturity according to apparent tenor of the note whereas
the acceptor of a bill is primarily liable to pay the amount thereof according to the apparent
tenor of his acceptance.
5) Liability of indorser- Every indorser who indorsed an instrument before its maturity is liable to
the parties that are subsequent to him. And his liability arises only if there is a default by the
party who is primarily liable to pay the instrument on maturity.
6) Liability of parties to holder in due course- Every party to an instrument is liable to a holder
in due course until the instrument is satisfied
7) Liability of maker, drawer and acceptor is as principals debtors and others as sureties
8) Nature of suretyship- the holderof an accepted bill may expressely reserve his right to charge
the other parties by entering into a contract with the acceptor.
9) Discharge of indorsers liability- indorser is discharged from liability where the holder of a
instrument destroys /impairs the indorsers remedy against a prior party
10) Effect of forged indorsement on acceptors liability- the acceptor cannot be relieved from
the liability knowing that indorsement is forged.
11) Liability of acceptor of a bill drawn in a fictitious name-Here the acceptor is liable on the
bill to a holder in due course
12) Liability on an instrument made drawn etc. without consideration- Such a instruments
creates no obligation of payment between the parties to the transaction. RTP M16
Q.No.28. What is a stale cheque?
1. A cheque does not remain valid for an indefinite period of time.

2. In India, payment on a cheque can be claimed within a period of 3 months from the date it bears.
3. If the payment is not claimed within the above specified period, it becomes a stale cheque.
Q.No.29. State the circumstances under which the banker refuses payment on his
customers cheques? (N 11 - 8 M, N 13 8M) (PM)
CASES IN WHICH A BANKER JUSTIFIED OR BOUND TO DISHONOUR A CUSTOMERS

CHEQUE:
A banker will be justified or bound to dishonour a cheque in the following cases:
1) Un dated : If a cheque is undated
2) In case of stale : If it is stale, that is if it has not been presented within reasonable period,
which is three months (or a lesser period as prescribed by the drawer) after its issue.
3) Inchoate instrument : If the instrument is inchoate or not free from reasonable doubt.
4) Post dated : If the cheque is post-dated and presented for payment before its ostensible date.
5) Improper application of customer funds: If the customers funds in the bankers hands are
not properly applicable to the payment of cheque drawn by the former. Thus, should the
funds in the bankers hands be subject to a lien or should the banker be entitled to a set-off in
respect of them, the funds cannot be said to be properly applicable to the payment of the
customers cheque, and the banker would be justified in refusing payment.
6) If the customer has credit with one branch of a bank and he draws a cheque upon another
branch of the same bank in which either he has account or his account is overdrawn .
7) Insolvency : If the bankers receive notice of customers insolvency .
8) If the customer countermands the payment of cheque for the bankers duty and authority to
pay on a cheque ceases. The instructions in case of stop payment of cheque should be
honoured only if it is properly authorized.
9) If a garnishee or other legal order from the Court attaching or otherwise dealing with the
money in the hand of the banker, is served on the banker.
10) If the authority of the banker to honour a cheque of his customer is undermined by the notice
of the latters death. However, any payment made prior to the receipt of the notice of death is
valid.
11) If notice in respect of closure of the account is served by either party on the other
12) If it contains material alterations, irregular signature or irregular endorsement.
Q.No.30. State the liability of a banker for wrongful dishonour of a cheque? (N 03 - 6M)
1. Sometimes it may happen that a banker declines payment of a cheque without having valid
grounds for doing so,
For example, refusing payment for insufficient funds while there are sufficient funds in the
customers account.
2. In such cases, the banker is liable for the wrongful dishonour of the cheque.

Liability towards the drawer of the cheque:
1. When a banker wrongfully dishonours a cheque, he is in breach of contract with its customer,
and is liable to pay damages to him.
2. The drawer of a cheque may suffer from loss of reputation because of dishonour of his cheque.
3. In such a case, even if the drawer does not suffer any monetary loss, loss of reputation can be
measured as a great damage. The principle is - smaller the amount of the cheque
dishonoured, greater is the loss suffered by the drawer.
Liability towards the payee (or holder) of the cheque:
1. In the usual course, the banker is liable to the drawer of the cheque (drawer being his
customer), and not to the payee in case of wrongful dishonour, since there is no privity of
contract between the banker and the holder.
2. But there are two cases when a holder can take action against the banker. These are:
a) Where a banker pays a generally crossed cheque over the counter of the bank, or a
specially crossed cheque otherwise than to the banker to whom it is crossed (that is, a
payment out of due course).
b) Where the holder does not present the cheque with the banker within a reasonable time,
and
i) The bank fails in the meantime,
ii) The holder of the cheque can directly prove his debt against the banker in its
insolvency proceedings.
iii) Here the drawer stands discharged as against the holder.
Q.No.31. Enumerate the obligations of the drawer of a cheque? (PM)

When a person draws a cheque, he owes some duty towards the banker and the payee of the
cheque. These are discussed below:
1. He must take usual and reasonable precautions to prevent the forgery or alteration of the cheque.
2. If he has knowledge of forgery or alteration, or any wrongful holding of the cheque, he must
inform the banker within a reasonable time.
3. When a drawer gives any information to the banker, he must check its genuineness.
4. The customer has a general obligation to keep sufficient funds in his account to permit the
banker to honour all cheques drawn on the account.
Q.No.32. What are the penalties prescribed under the negotiable instrument Act in case of
dishonour of a cheque for insufficiency of funds in the account of the person issuing the
cheque? (or) Bouncing of cheques. (M 98, 07 - 7M) (PM)(CMA J 06 6M, D 08 3M)
When an offence under Sec.138 is constituted: To constitute an offence under Sec.138,

following conditions must be satisfied:
1. The cheque should have been issued by the drawer to the payee in the discharge of (wholly or
partly) any legally enforceable debt or other liability.
2. The cheque should have been presented by the payee to the banker within the period of its validity.
Usually the validity period is 3 months from the date of issue of a cheque, but if some validity
period (less than 3 months) is specified on the cheque, that period is considered as validity period.
3. The cheque should have been returned by the bank unpaid, because the amount of money
standing to the credit of the account is insufficient.
Penalty:
a) If a cheque is dishonoured, even when presented before expiry of 3 months, the payee or
holder in due course is required to give notice to drawer of cheque within 30 days from
receiving information from bank.
b) The drawer should make payment within 15 days of receipt of notice. If he does not pay within
15 days, the payee can file a suit against drawer within 1 month from the last day on which
drawer should have paid the amount.
c) The penalty can be upto 2 years imprisonment or fine upto twice the amount of cheque or both.
Notice can be sent to drawer by speed post or courier.
d) It must be noted that even if penalty is imposed on drawer, he is still liable to make payment of
the cheque which was dishonoured.
Return of cheque should be for insufficiency of funds:
a) The offence takes place only when cheque is dishonoured for insufficiency of funds or where
the amount exceeds the arrangement.
b) If the remark indicates refer to drawer, it also means that funds are insufficient.
c) If the remark is signature does not tally, the complaint may not be maintainable.
d) Stop payment instructions cannot stop prosecution: Drawee can give instructions to bank
to stop payment of a cheque. This is termed as countermanding of payment. The drawer will
be liable even if he issues stop payment instructions after issue of cheque.
e) Meaning of refer to drawer: It also amounts to dishonour within the meaning of Sec.138. Refer
to drawer is only a courteous way of saying that there is no sufficient balance in the bank.
f) Offense even if account closed: If cheque is returned with remark account closed, it would
be offence u/s 138.
Notice to drawer: Notice to drawer within 30 days from receipt of information about dishonour is
mandatory.
a) Cheque cannot be presented again after issue of notice:
i) A cheque can be presented any number of times during its validity period by the payee.
ii) At each presentation and its dishonour, a fresh right accrues in favour of the person to
whom cheque is issued.
iii) However, once he gives notice to the drawer, he forfeits his right to present cheque again.
iv) Holder /payee of a cheque cannot initiate prosecution for an offence u/s 138 for its
dishonor for the second time, if he had not initiated such prosecution on the earlier case of
action
b) Notice may include other demand also: Notice will not be invalid even if it includes demand
of other amounts like damages, interest etc., if it also includes and specifies demand of
dishonoured cheque amount.
c) Notice by fax:
i) Notice can be sent by fax.
ii) Giving of notice of dishonor itself does not constitute receipt of notice for constituting
offence u/s 138 of NI Act, 1881.
d) Presumption if notice sent by registered post: There is presumption of notice if notice is
sent by registered post and returned unclaimed.
NOTE: According to Section 138 of the Negotiable Instruments Act, 1881 where any cheque drawn
by a person on an account maintained by him with a banker for payment of any amount of money
to another person from/out of that account for discharging any debt or liability, and if it is
dishonored by banker on sufficient grounds, such person shall be deemed to have committed an
offence and shall be liable.
Q.No.33. What is the extent of liability of the company and the person(s) incharge of the
company in respect of an offence for dishonour of cheques? (M16 5M)(PM)
As per Section 141, it is apparent that in case where a company committed an offence under
Section 138, then
1. Not only the company, but also every person who at the time when the offence was committed,
was in charge of and was responsible to the company, shall be deemed to be guilty of the
offence and
2. Liable to be proceeded against under those provisions, only if that person was in charge of and
was responsible to the company for the conduct of its business.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 40, 41)
Q.No.34. What is meant by dishonour by non-acceptance & dishonour by non-payment?

(N 02 - 6M) (PM)
Dishonour by non-acceptance: A bill of exchange is dishonoured by non-acceptance in any one

of the following ways:
a) If the drawee does not accept the bill within 48 hours from the time of presentment though it is
duly presented for acceptance;
b) If there are several drawees (who are not partners) and all of them do not accept;
c) When presentment for acceptance is excused, and the bill is not accepted;
d) When the drawee is incompetent to contract;
Copyrights Reserved
e) When the drawee gives a qualified acceptance;
f) When the drawee is a fictitious person or
g) When the drawee cant be found after reasonable search.
If a drawee in case of need is mentioned in a bill, the bill is not deemed to be dishonoured unless it
is dishonoured by such drawee in case of need also.
Dishonour by non-payment: An instrument is said to be dishonoured by non payment in any one
of the following circumstances:
a) When the primarily liable (i.e. the maker of the note or acceptor of the bill or drawee of the
cheque) makes default in payment, when required to pay the same. (Sec.92)
b) When presentment for payment is excused and the instrument remains unpaid on the due
date. (Sec.76)
Q.No.35. What is Negotiation back with respect to a negotiable instrument?
NEGOTIATION BACK: An instrument is said to have been negotiated back to him and he is said to
have taken up or taken back the negotiable instrument when a person who has been a party to the
negotiable instrument takes it again.
For example, suppose that the endorsements on a negotiable instrument are as under:
P
A
B
X
Y
A
1. Here A is person who is a prior party to the instrument. He negotiated it to B, B to X,X to Y and Y
again to A. On account of this last endorsement, A should have right to claim money from X, Y
and B, because the rule is that every prior party is liable to every subsequent party.
2. Due to the last endorsement, A will get rights to claim money from Y or X or B or all the 3.
However, Y or X or B in turn can sue A because of As prior endorsement. This will lead to a
circuitry of action.
3. This rule is made to prevent multiplicity of actions and it is an exception to the general rule that
a holder in due course can sue all prior parties.
4. Thus A, in the above case cannot sue Y, X or B. But A can sue P since the latter is prior to As
original endorsement.
5. If however A, in original endorsement, had signed sans recourse there could be no circuitry of
action and A could sue Y, X or B.
QUESTIONS FOR ACADEMIC INTERST ONLY
Q.No.36. Examining the provisions of the Negotiable Instruments Act, 1881, Distinguish
between a 'Bill of Exchange' and a 'Promissory Note'.
DISTINCTION BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE:

The distinctive features of these two types of negotiable instruments are tabulated below:-
SI.NO Promissory Note Bill of Exchange
1. It contains a promise to pay It contains an order to pay
2. The liability of the maker of a note is The liability of the drawer of a bill is secondary
primary and absolute and conditional. He would be liable if the
drawee, after accepting the bill fails to pay the
money due upon it provided notice of
dishonor is given to the drawer within the
prescribed time.
3. It is presented for payment without any If a bill is payable sometime after sight, it is
previous acceptance by maker required to be accepted either by the drawee
himself or by someone else on his behalf,
before it can be presented for payment.
4. The maker of a promissory note The maker or drawer of an accepted bill
stands in immediate relationship with stands in immediate relationship with the
the payee and is primarily liable to the acceptor and the payee
payee or the holder.
5. It cannot be made payable to the In the case of bill, the drawer and payee or
maker himself, that is the maker and the drawee and the payee may be the same
the payee cannot be the same person person.
6. In the case of a promissory note there In the case of a bill of exchange, there are
are only two parties, viz. the maker three parties, viz., drawer, drawee and payee,
(debtor) and the payee (creditor). and any two of these three capacities can be
filled by one and the same person.
7. A promissory note cannot be drawn in A promissory note cannot be drawn in Sets
Sets
8. A promissory note cannot be drawn in A bill of exchange too cannot be drawn
Sets conditionally, but it can be accepted
conditionally with the consent of the holder. It
should be noted that neither a promissory
note nor a bill of exchange can be made
payable to bearer on demand.
Q.No.37. Examining the provisions of the Negotiable Instruments Act, 1881, Distinguish
between a 'cheque' and a 'Bill of Exchange'.
DIFFERENCE BETWEEN CHEQUE AND BILL OF EXCHANGE:

1) In the case of a cheque the drawee- i.e., the person on whom the bill is drawn-must always be
banker whereas in the case of a bill of exchange the drawee may be any person.
2) No days of grace are allowed in the case of a cheque, and a cheque is as a rule, payable
immediately on demand, whereas three days grace is allowed in the case of a bill which is not
payable on demand.
3) In the case of dishonour of a cheque, bank only gives the reason in writing but there is no
system of Noting or Protest ,whereas in the case of a bill, there can be Noting and Protest to
prove that the bill has been dishonoured.
4) A cheque is always payable on demand, whereas a bill which is other than a cheque may be
either a time bill or it may be payable on demand.
5) Cheques do not require to be stamped in India, whereas bills must be stamped according to
the law. In England and several other countries, cheques also are required to be stamped.
6) A cheque may be crossed, whereas a bill cannot be crossed.
Q.No.38. Whether demand draft is a cheque?
Section 131 of the Negotiable Instruments Act, 1881 is intended to widen the scope of a crossed
draft as to contain all incidences of a crossed cheque. This is for the purpose of foreclosing a
possibility of holding the view that a draft cannot be crossed. Even if it is possible to construe the
draft either as a Promissory note or as a bill of exchange, the law has given the option to the holder
to treat it as he chooses. This can be determined from the Section 137 which says that where an
instrument may be construed either as a promissory note or bill of exchange, the holder may, at his
discretion, treat it as either and the instrument shall thence forward be treated accordingly. This
means, once the holder has elected to treat the instrument as a cheque, it cannot but be treated as
a cheque thereafter. This is an irretrievable corollary of exercising such an election by the holder
himself. A pay order was accordingly held to be a cheque entitling the bank holding the instrument
to lodge a complaint under Section 138. [Punjab & Sind Bank v Vinkar Sahakari Bank Ltd., (2001)
4 CLJ 188 (SC)]
Q.No.39. Write about Acceptor for honour.
ACCEPTOR FOR HONOUR:

Meaning: The person who accepts the bill for the honour of any other person is called as an
Acceptor for honour.
Conditions for acceptance for honour: The bill must have been noted/protested for non-
acceptance. The acceptance is given for the honour of any party already liable under the bill. The
acceptance is given by who is not already liable under the bill. The acceptance is given with the
consent of the holder of the bill. The acceptance must be made in writing on the bill.
Liability of acceptor for honour: He is liable to pay the amount of the bill, if the drawee does not pay
on maturity. He is liable only to the parties subsequent to the party for whose honour the bill is accepted.
Rights of acceptor for honour: He is entitled to recover the amount paid by him from the party for
whose honour the bill was accepted and from all the parties prior to such party.
Q.No.40. What is meant by Payment for Honour in respect of a Bill of Exchange? When can
the Payment for Honour be made? What are the rights of the Payer for Honour? (PM)
PAYMENT FOR HONOUR: It means a payment which is made by any person for the honour of
any party liable on the bill after it has been protested for non-payment.
The following conditions are essential for the payment of honour:
1. The bill must have been noted or protested for non-payment.
2. The person paying or his agent declares before Notary Public the party for whose honour he pays.
3. Such declaration must have been recorded by the Notary Public.
4. Payment must be made for the honour of any party liable on the bill or not (Section 113).
The drawee in case of need may, however, accept and pay the bill of exchange without previous
protest. (Section 110).
Right of the payer for honour: Any person making payment for honour is entitled to all the rights,
in respect of the bill, of the holder at the time of such payment. He may recover from the party for
whose honour he pays all sums so paid with interest thereon and all expenses properly incurred in
making such payment (Section 114).
Q.No.41. State the legal provisions relating to electronic cheques and Truncated Cheques?
ELECTRONIC CHEQUE: Provisions of electronic cheque has been made by Amendment Act,
2002. A cheque in an 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.
Thus the cheque can be electronically presented to Drawers Bank through electronic clearing
house. Thus, all work will be handled without paper.
TRUNCATED CHEQUE: A truncated cheque means a cheque which is truncated during the
course of 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.
The collecting bank, instead of sending physical cheque, will send 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.
Who will truncate the cheque? The truncating of cheque can be done either by bank receiving
payment or by clearing house.
Paying bank can ask for further details: Sec.64(2) provides that where electronic image is
presented, the drawee bank (i.e. bank paying the amount) is entitled to demand any further
information regarding truncated cheque from the bank holding the truncated cheque, if it has
reasonable suspicion about genuineness of apparent tenor of instrument.
Q.No.42. Comment as per the provisions of NI Act: Once a bearer instrument always a
bearer instrument. (PM)
Meaning: A bearer instrument is one, which can change hands by simple delivery of the
instrument. The instrument may be a promissory note or a bill of exchange or a cheque. It must be
expressed to be so payable or the last endorsement on the instrument is a blank endorsement
(Explanation 2 to Section 13 of the Negotiable Instruments Act,1881).
According to Sec.46:
1. A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery
thereof.
2. A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by
endorsement and delivery thereof.
Sec.49 states that a holder of negotiable instrument endorsed in blank, may, without signing his
own name, by writing above the endorsers signature, instruct that payment must be made to
another person. In such a case the feature of the instrument is changed and the instrument cant
be transferred further by simple delivery.
The law followed in the case of cheque is little bit different. As per Sec.85(2) where a cheque is
actually expressed to be payable to bearer, the drawee gets discharged by payment in due course
to the bearer thereof, inspite of any endorsement whether in blank or full appearing thereon not
withstanding that any such instrument purported to restrict or exclude further negotiation.
Thus the statement is correct that once a bearer instrument always a bearer instrument

Q.No.43. What is the protection given to a collecting banker of a crossed cheque on
behalf of a customer under the NI Act, 1881?
According to section 131, a banker who in good faith but without negligence receives payment for
a customer of a cheque crossed generally or specially to himself, shall not, in the event of the title
of the customer to the cheque proving to be defective, incur any liability to the true owner of the
cheque for having received such payment This sections provides protection to a collecting banker
of a crossed cheque on behalf of the customer and is available to bank only if it acts in good faith
but without negligence.
Given below are a few illustrations of circumstances in which a banker has been deemed to have
complied with these conditions:
1. That the collecting banker has acted in good faith and without negligence.
2. That the collecting banker has received payment of the crossed cheque for a customer.
3. That the collecting banker acts only to receive payment of the crossed cheque for customer.
The section will be restricted to a case where the banker is acting as an agent for collection but
not to a case where the banker is himself the holder.
4. That the payment has been received only for a crossed cheque, and that crossing had been
made before the cheque fell into the hands of the collecting bankers.
If the aforementioned conditions do not co-exist, this protection would be denied to the collecting
banker. The protection can be claimed by the collecting banker even when he credited his
customers account with the amount of the cheque before receiving payment thereof. The
protection is also available in respect of any draft as defined in Section 85A.
Q.NO.44. Under the NI Act, explain the rights and obligations of a person: 1) Who is a finder of
lost instrument. 2) A person who obtained instrument by Unlawful consideration.
Ans: The following are the rights and obligations of - (N 98- 7M)
FINDER OF LOST INSTRUMENT:
a) When a negotiable instrument is lost, the finder acquires no title to it as against the rightful
owner. He has no right to sue the acceptor or maker in order to enforce payment on it.
b) If the finder of lost instrument gets the payment then the person who pays it in due course may
be able to get a valid discharge for it. But the real owner can get back the money due on the
instrument as damages from the finder.
c) If the instrument is lost by anyone and if it passes by delivery to the third party, who acquires it
bonafide, for valuable consideration and before maturity then such third party has the right to
retain the instrument against the actual owner and to compel payment from prior parties.
d) The loser of the instrument has the right to apply to the drawer for a duplicate of the lost bill.
(Sec.45A )
A person who obtained instrument by unlawful consideration: The instrument will be void, if
the consideration for a negotiable instrument is unlawful. However, A holder in due course gets a
good title to an instrument which was originally made or drawn or subsequently negotiated for an
unlawful consideration
Q.No.45. Write a short note an allonge. (For students self study)
An allonge is a slip of paper annexed to an instrument on which extra endorsements are made.
Sec.15 of the Negotiable Instruments Act permits the use of such annexed slips for the purpose of
endorsements. In fact, such a slip forms part of the instrument.
Copyrights Reserved
MASTER MINDS, GunturTo

PRACTICAL QUESTIONS
Q.No.1. State whether the following statements are promissory notes or not? (PM)
a. "I promise to pay B or order Rs.500".
b. "I acknowledge myself to be indebted to B in Rs.1,000 to be paid on demand, for value
received".
c. Mr. B said, I owe you Rs.500".
d. I am liable to B, in a sum of Rs.500 to be paid by installments.
e. I am bound to pay the sum of Rs.500 which I received from you.
f. "I promise to pay B Rs.500 and all other sums which shall be due to him".
g. "I promise to pay B Rs.1,000 and the fine according to the rules".
h. "I promise to pay B Rs.500, first deducting there out any money which he may owe me".
i. "I promise to pay B Rs.500 by installments with a provision that no payment shall be made
after my death".
j. "I promise to pay B a sum of Rs.500 when convenient or able".
k. "I promise to pay B Rs. 500 when he delivers the goods".
l. "I promise to pay B Rs. 500 seven days after my marriage with C".
m. "I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum".
n. "I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next"
o. "I promise to pay B Rs. 200 and deliver one quintal of paddy".
p. "I promise to pay B in 20 shares and 10 bonds of XY Ltd".
q. "I promise to deliver to B 100 bags of wheat". (For students self study)
a) Yes since it is an absolute promise to pay a specific sum of money to a specific person or his
order.
b) Yes The maker is acknowledging his debt and also promises to pay for the value received.
c) No - It is a mere acknowledgement of debt and there is no specific promise to pay the sum.
d) No - It is a mere acknowledgement of debt and there is no specific promise to pay the sum.
e) No In this case drawer is agreeing that he is bound to pay. But he is promising to pay the sum.
f) No The amount is uncertain. (In commercial transactions the amount should be certain.)
g) No same as above.
h) No same as above.
i) No In this case death is a certain event and a negotiable instrument can be drawn on the
basis of such certain event. But this instrument is uncertain as to the amount. In commercial
transactions certainty is very important.
j) No A negotiable instrument cant be drawn on the basis of future uncertain event. In this case
it is uncertain as to date of payment.
k) No A negotiable instrument cant be drawn on the basis of future uncertain event. In this case
it is uncertain as to the date of payment. The other party may never deliver the goods.
l) No Negotiable instruments can be drawn to be payable on the basis of some future certain
event. But marriage with C is an uncertain event. Maker may never marry C.
m) No Negotiable instruments can be drawn to be payable on the basis of some future certain
event. In this case Ds death is a certain event. But D may not leave enough sum. This is an
uncertain event.
n) No A negotiable instrument must be drawn for money and money only. In this case it is
written for partly cash and partly kind.
o) No same as above.
Copy Rights Reserved
p) No same as above.
q) No Same as above.

Q.No.2. Mr. X executes a promissory note in the following form, 'I promise to pay a sum of
Rs.10,000 after three months'. Decide whether the promissory note is a valid promissory note.
The promissory note is unconditional promise in writing. Amount is certain. It is not dated, but
dating is not a mandatory requirement. Filling of date later will not be 'material alteration' as long as
date put is not before the date of actual execution. Thus, the instrument fulfils all requirements of
promissory note as per Negotiable Instruments Act.
However, name of payee is not mentioned and hence it is a bearer instrument. As per RBI Act, a
promissory note cannot be made payable to bearer - whether on demand or after certain days.
Hence, the instrument is illegal as per RBI Act and cannot be legally enforced.
Q.No.3. A owes money to B. A makes a promissory note for the amount in favour of B. For safety
of transmission he cuts the note in two halves and posts one half to B. He then changes his mind
and calls upon B to return the half of the note which he had sent. B requires A to send the other
half of the promissory note. Decide as to how the rights of the parties are to be adjusted.
The relevant question in the given situation is whether the making of the promissory note is complete
when one half of the note was delivered to B. Under Section 46 of the Negotiable Instruments Act,
1881, the making of a promissory note is completed by delivery, actual or constructive.
Delivery, of course, refers to the delivery of the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. Therefore, the
claim of B to have the other half of the Promissory note sent to him is not maintainable.
Thus A is justified in demanding the return of the first half sent by him.
Q.No.4. A Bill is drawn payable at No. A-17, CA apartments, Mayur Vihar, New Delhi, but does not
contain drawees name. Mr.Vinay who resides at the above address accepts the bill. Is it a valid
Bill? (PM, RTP N14)
Yes, it is a valid Bill and Mr.Vinay is liable thereon. The drawee may be named or otherwise
indicated in the Bill with reasonable certainty. In the present case, the description of the place of
residence indicates the name of the drawee and Mr.Vinay, by his acceptance, acknowledges that
he is the person to whom the bill is directed (Gray vs. Milner 1819).
Q.No.5. Examine the validity of the following in the light of the provisions of the Negotiable
Instrument Act, 1881:
i) An oral acceptance
ii) An acceptance by mere signature without writing the word accepted. (RTP - N13)
Case (i): One of the essential elements of a valid acceptance is that the acceptance must be
written on the bill and signed by the drawee. An oral acceptance is not sufficient in law. Therefore,
an oral acceptance of the bill does not stand to be a valid acceptance.
Case (ii): The usual form in which the drawee accepts the Instrument is by writing the word
accepted, across the face of the bill and signing his name underneath. The mere signature of the
drawee without the addition of the words accepted is a valid acceptance. As the law prescribes no
particular form for acceptance but it must satisfy the requirements of Section 7 of the Act i.e. it
must appear on the bill and must be signed by the drawee.
Q.No.6. X accepts a bill for the accommodation A (drawer). A transfers it to B, without

consideration. B transfers it to C without consideration. C transfers it to D for value. D transfers it to
without consideration. On the due date, the bill dishonored by X. Discuss the rights of A, B, C, D
and E. (PM)
a) E cannot recover from D, C cannot recover from B, B cannot recover from A, and A cannot
recover from X because a negotiable instrument without consideration creates no obligation of
payment between the parties to the transaction.
b) D and E can recover from X, A, B and C because any holder for consideration (D), and every
subsequent holder deriving title from him (E) can recover the amount due from the transferor
for consideration or any prior party thereto.
Q.No.7. A draws a bill of exchange on B for Rs.1,000 payable to the order of A. B accepts the bill
but subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was accepted
for value as to Rs.500 and as an accommodation to the plaintiff as to the residue. Can A recover
Rs.1,000 (N 10 8M) (PM)
Facts of the case: A draws a bill of exchange on B for Rs.1,000 and accepted by B but
subsequently dishonored and A sues B on the bill. However, B proves that it was accepted for
value as to Rs.500 and balance as an accommodation.
Provisions of Law: Section 44- Partial absence or failure of money consideration.
Analysis: As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for
which a person signed a promissory note, bill of exchange or cheque consisted of money, and was
originally absent in part or has subsequently failed in part, the sum which a holder standing in
immediate relation with such signer is entitled to receive from him is to be proportionately reduced.
Conclusion: Consideration is absent in part. A can recover only Rs.500
Q.No.8. State with reasons whether each of the following instrument is an Ambiguous Instrument
or Fictitious Instrument:
a. A bill is drawn by A, an agent, acting within the scope of his authority, upon his principle P.
b. X draws a bill on Y who is a fictitious person and negotiates it himself.
c. X draws a bill on Y who is a minor.
d. A bill is drawn by Delhi branch of Dena Bank upon its Bombay branch.
e. A bill is drawn upon Y who is a major person payable to Z who is a fictitious person.
f. A bill is drawn upon Y as payable to Z. The drawer is a fictitious person.
First state the provisions related to ambiguous instrument and fictitious instrument.
Case Decision Reason

a. Ambiguous instrument [Sec.17] The drawer and the drawee are the same person.
b. Ambiguous instrument [Sec.17] The drawee is a fictitious person.
c. Ambiguous instrument [Sec.17] The drawee is competent to contract.
d. Ambiguous instrument [Sec.17] The drawer and the drawee are the same person.
e. Fictitious instrument [Sec.42] The payee is a fictitious person.
f. Fictitious instrument [Sec.42] The drawer is a fictitious person.
Q.No.9. State with reasons whether each of the following instruments is an Inchoate Instrument or
not:
a. X signs and delivers an unstamped and blank promissory note to Y.
b. X delivers a stamped and blank promissory note to Y without his signature.
c. X signs a stamped and blank promissory note and keeps in his safe.
d. X signs and delivers a stamped and blank promissory note to Y.
e. X signs and delivers a stamped and complete promissory note to Y.
First write the provisions related to Inchoate instrument (Section 20).

a. No It is not stamped. Not a P/N at all.
b. No It has not been signed by the maker. Not a P/N at all.
c. No It has not been delivered.
d. Yes There is a delivery of a signed, stamped & blank instrument.
e. No It is not incomplete.
Q.No.10. A signs, as the maker, a blank stamped paper and gives it to B and authorises him to fill it
as a note for Rs.2,000, it being the amount of advances made by B to A. B fraudulently fills it up as a
note for Rs.3,000 and then, for consideration, endorses it to C. Can C enforce the instrument? (Or)
'A' signs, as maker, a blank stamped paper and gives it to 'B', and authorises him to fill it as a note
for Rs.500, to secure an advance which 'c' is to make to. 'B'. 'B' fraudulently fills it up as a note for
Rs.2,000, payable to 'C', who has in good faith advanced Rs.2,000. Decide, with reasons, whether
'C' is entitled to recover the amount, and if so, upto what extent? (N 99 - 8M) (PM)
A duly signed blank stamped instrument is called an inchoate instrument. According to Section 20
of the Negotiable Instruments Act an Inchoate instrument is an incomplete Instrument in some
respect. When a person signs and delivers blank or incomplete stamped paper to another, such
other is authorised to complete it for any amount not exceeding the amount covered by the stamp.
The person so signing is liable upon such instrument, to any holder in due course for any amount.
But any other person cant claim more than the amount intended by the signer of the instrument.
Case-A: Thus, for C's claim to be valid and enforceable, two things are important:
1. That C is a holder in due course, i.e., there should be valid consideration and he would have
obtained it in good faith and before maturity.
2. The amount filled in i.e. Rs.3,000 is covered by stamp amount.
In Negotiable Instruments Act every holder is deemed to be a holder in due course. Thus the other
party has to establish that C is not a holder in due course.
Case-B: C is a 'holder in due course'. If stamp paper is sufficient to cover value of Rs.2,000, A is
liable to C for full amount of Rs.2,000. This is provided in section 20 of Negotiable Instruments Act.
Q.No.11. Promissory note dated 1st February, 2001 payable two months after the date was
presented to the maker for payment 10 days after maturity. What is the date of Maturity? Explain
with reference to the relevant provisions of the Negotiable Instruments Act, 1881 whether the
endorser and the maker will be discharged by reasons of such delay. (PM)
Delay in presentment for payment of a promissory note: If a promissory note is made payable
a stated number of months after date, it becomes payable three days after the corresponding date
of months after the stated number of months (Section 23 read with Section 22 Negotiable
Instruments Act 1881). Therefore, in this case the date of maturity of the promissory note is 4th
April, 2001.
In this case the promissory note was presented for payment 10 days after maturity. According to
Section 64 of Negotiable Instruments Act read with Section 66, a promissory note must be
presented for payment at maturity by on behalf of the holder. In default of such presentment, the
other parties of the instrument (that is, parties other than the parties primarily liable) are not liable
to such holder. The endorser is discharged by the delayed presentment for payment. But the
maker being the primary party liable on the instrument continues to be liable.
Copyrights Reserved
MASTER MINDS, Guntur To

Q.No.12. Ascertain the date of maturity of a bill payable 100 days after sight and which is
presented for sight on 4th May, 2000. (PM) (For students self study)
In case of bill payable after a certain period after sight, the date of maturity is calculated by adding
three days of grace to the period after which the bill is payable. In case of bills payable after sight,
the period is calculated from the date when the bill is presented for sight. In case the date of
maturity happens to be a public holiday including Sunday, the bill falls due for payment on the day
proceeding the public holiday. In the given case, the bill is made payable 100 days after sight and
the same was sighted on 4th May, 2000. 100 days from 4th of May, 2000 works out to 12th of
August, 2000, adding three days of grace makes the bill due for payment on 15th of August, 2000
which happens to be a public holiday.
Thus, the date of maturity of the bill shall be 14th of August, 2000 unless the same is also a public
holiday (including Sunday).
Q.No.13. Bharat executed a promissory note in favour of Bhushan for Rs.5 crores. The said amount
was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st
January, 2008 to Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants to
recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable
Instruments Act, 1881, whether he is liable to pay the interest for one day?
(RTP, MTP M15), (M 08 - 5M) (PM)
Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or
note is payable after date or after sight or after happening of a specified event, the time of payment
is determined by excluding the day from which the time begins to run.
Therefore, in the given case, Bharat will succeed in objecting to Bhushans claim. Bharat paid
rightly three days after sight. Since the bill was presented on 1st January, Bharat was required to
pay only on the 4th and not on 3rd January, as contended by Bharat.
Q.No.14. M drew a cheque amounting to Rs. 2 lakh payable to N and subsequently delivered to
him. After receipt of cheque N endorsed the same to P but kept it in his safe locker. After
sometime, N died, and P found the cheque in Ns safe locker. Does this amount to endorsement
under the Negotiable Instruments Act, 1881? (PM)
No, P does not become the holder of the cheque as the negotiation was not completed by delivery
of the Cheque to him. (Section 48, the Negotiable Instruments Act, 1881)
Q.No.15. A cheque payable to bearer is crossed generally and is marked "not negotiable". The
cheque is lost or stolen and comes into the 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, the cheque is drawn.
a) Can both the bankers, viz., banker paying the cheque and the banker collecting it plead
exoneration from their liability?
b) Can B be compelled to refund the money to the true owner of the cheque.
MTP N15, (M 05 - 4M)
a) Yes. A person who takes a cheque crossed 'not negotiable' has no better title to keep such a
cheque than his immediate transferor, and the true owner can always reclaim it or the amount
of it. On the other hand both collecting banker and paying banker will be protected under the
Act, provided the payment and the collection have been made in good faith and without
negligence [Sec. 128 & 130].
b) Yes. B can be compelled to refund the money as he was not entitled to receive payment upon
instrument.
Copyrights Reserved
MASTER MINDS, GunturTo

Q.No.16. Mr. X executed an account payee cheque on the name of the Mr. B for the amount of
rupees 20,000. Mr. B submitted the cheque in the bank. Later b finds that no amount have been
credited to his account. In fact the amount has been credited to some other person with the same
name. State the legal position of b with respect to the negotiable instruments Act, 1881. (RTP-M 14)
As per the Negotiable Instruments Act, 1881, a cheque marked Account Payee is a form of
restrictive crossing, represented by the words Account Payee entered on the face of the cheque.
Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited
only to the account of the payee.
If the collecting banker allows the proceeds of the cheque so crossed to be credited to pay any
other account, he may be held guilty of a negligence in the event of an action for wrongful
conversion of funds being brought against him. These words are not an addition to the crossing but
are mere direction to the receiving or collecting bankers. These do not affect the paying banker
who is under no duty to ascertain that the cheque in fact has been collected for the account of the
person named as the payee.
Conclusion: Thus accordingly Mr. B can hold the bank with whom the cheque is deposited for the
credit (collecting banker), liable for negligence for wrongful conversion of funds to the other account.
Q.No.17. State with reasons whether each of the following instruments is an Inland Instrument or a
Foreign Instrument:
a. A bill drawn in Delhi upon a merchant in Agra and accepted payable in London.
b. A bill drawn in Delhi upon a merchant in London and accepted payable in Agra.
c. A bill drawn in Delhi upon a merchant in London and accepted payable in London.
d. A bill drawn in London upon a merchant in Agra and accepted payable in Delhi.
e. A bill drawn in Delhi on a merchant in Agra but endorsed in London.
f. A bill drawn in London on a merchant in Agra and endorsed in Delhi.
First state the provisions related to Inland instrument and Foreign instrument.

a. Inland instrument [Section 11 ] It is drawn in India and the drawee is resident in India.
b. Inland instrument [Section 11] It is drawn in India and is payable in India.
c. Foreign Instrument [Section 12] It is not accepted payable in India and at the same
time its drawee is not a resident of India.
d. Foreign instrument [Sec 12] It is not drawn in India
e. Inland instrument [Section 11] It is drawn in India and drawee is resident in India.
f. Foreign instrument [Section 12] It is not drawn in India.
Q.No.18. State with reasons whether each of the following instruments is a Time Instrument or
Demand Instrument:
a. I promise to pay B Rs.500. Copy Rights Reserved
b. I promise to pay B Rs.500 on Demand. To MASTER MINDS, Guntur
c. Pay Rs.500 at sight.

d. Pay Rs.500 on presentment.
e. I promise to pay B Rs.500 after 3months.
f. I promise to pay B Rs.500 on 1st Jan. 1997.
g. I promise to pay Rs.500 after sight.
h. I promise to pay B Rs.500 after C s Death.
i. Pay B Rs.500 on or before 1st Jan. 1997. (For students self study)

First state the provisions related to order instruments and time instruments.
a. Demand instrument [Sec.19 & 21] No time for payment has been specified.
b. Demand instrument [Sec.19 & 21] It is expressed to be so payable.
c. Demand instrument [Sec.19 & 21] The expression at sight means on demand.
d. Demand instrument [Sec.19 & 21] The expression on presentment means on demand.
e. Time instrument [Sec.21] Fixed period has been specified.
f. Time instrument [Sec.21] A particular day has been specified.
g. Time instrument [Sec.21] After sight means after presentment for sight.
h. Time instrument [Sec.21] It is payable on the happening of an event (i.e.
death) which is certain to happen.
i. Not a negotiable instrument at all Time is uncertain.
Q.No.19. Discuss with reasons, whether the following persons can be called as a holder under the
Negotiable Instruments Act, 1881:
a. X who obtains a cheque drawn by Y by way of gift.
b. A, the payee of the cheque, who is prohibited by a court order from receiving the amount of
the cheque.
a. M, who finds a cheque payable to bearer, on the road and retains it.
b. B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee.
c. B, who steals a blank cheque of A and forges As signature. (RTP N14)(MTP 5M)
Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 holder
of a Negotiable Instrument means any person entitled in his own name to the possession of it and
to receive or recover the amount due thereon from the parties thereto.
On applying the above provision in the given cases-
a) Yes, X can be termed as a holder because he has a right to possession and to receive the
amount due in his own name.
b) No, he 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.
c) No, M is not a holder of the Instrument though he is in possession of the cheque, so is not
entitled to the possession of it in his own name.
d) No, B 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.
e) No, B is not a holder because he is in wrongful possession of the instrument.
Q.No.20. 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. (PM)
Facts of the Case: X draws a bill on Y but signs it in the fictitious name of Z and it was accepted
by Y. M obtains the bill from X thus becoming its holder in due course.
Provisions of Law: Section 42- Acceptance of bill drawn in fictitious name
Analysis: As per Section 42 of the Negotiable Instruments Act, 1881, in case a bill of exchange is
drawn payable to the drawers order in a fictitious name and is endorsed by the same hand as the
drawers signature, it is not permissible for the acceptor to allege as against the holder in due
course that such name is fictitious.
Conclusion: In the given case, Y cannot avoid payment by raising the plea that the drawer (Z) is
fictitious. The only condition is that the signature of Z as drawer and as endorser must be in the
same handwriting.
Q.No.21. H is the holder in due course of a bill of which A is the acceptor. D, the drawer of the bill,
is fictitious. Can A escape from his liability to H?
Section 42 of the Negotiable Instruments Act provides that where a bill of exchange is drawn by a
fictitious person and is payable to his order, the acceptor cannot be relieved from his liability to the
holder in due course. Thus, H being holder in due course, A cannot escape liability. However, H
shall have to establish that the bill was endorsed by the same hand as drawer's signature.
Q.No.22. J purchases some bills amounting to Rs.1,727 for a sum of Rs. 200 only. He knows at
the time of purchase that both drawer and the acceptor are in embarrassed circumstances but
accepts them without enquiry and explanation. The bill proved to have been obtained by fraud. J
insists that he is a holder in due course and is therefore entitled to get the full value of the
instruments. Will he succeed?
No. According to Sec.9 of the Act - Holder in due course means any person who, for consideration,
became the possessor of a promissory note, bill of exchange or cheque, if payable to the bearer,
or the payee or endorsee thereof, if payable to the order, 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.
In the given case there are clear grounds of suspicion and J has shown negligence in enquiring the
validity of the instrument. So, he cant be considered as holder in due course.
Q.No.23. J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and
handing over the proceeds to J. K having failed to discount it, returned the bill to J. J tore the bill in
two pieces with the intention of cancelling it and threw the pieces in the street. K picked up the
pieces and pasted the two pieces together, in such manner that the bill seemed to have been
folded for safe custody, rather than cancelled. K put it into circulation and it ultimately reached L,
who took it in good faith and for value. Is J liable to pay for the bill under the provisions of the
Negotiable Instruments Act, 1881? (M 10 5M) (PM)
Facts of the Case: J tore the bill in two pieces with the intention of cancelling it and threw the
pieces in the street. K picked up the pieces of the bill and pasted together and put it into circulation
which ultimately reached L.
Issue - Whether J is liable to pay the bill or not.
Provisions of Law: Section 120 - Estoppel against denying the original validity of the instrument,
Section 9 - Holder in due course
Analysis: As per Sec.9 - Holder in due course means any person who, for consideration, became
the possessor of a promissory note, bill of exchange or cheque, if payable to the bearer, or the
payee or endorsee thereof, if payable to the order, 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.
As per Section 120 of the Act no drawer of a bill, shall, in a suit thereon, by a holder in due course,
be permitted to deny the validity of the instrument as originally drawn. A holder in due course gets
a good title to the bill.
Conclusion: L is a holder in due course, who got the bill in good faith and for value. Therefore, in
the given problem, J is liable to pay for the bill.
Q.No.24. On a Bill of Exchange for Rs.1 lakh, Xs 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. (CMA J 14 4M)
Facts of the case: Xs acceptance to the Bill is forged. A takes the Bill from his customer for
value and in good faith before the Bill becomes payable.
Provisions of Law: Section 9 - Holder in due course
Analysis: As per Section 9, holder in due course means any person who for consideration
because the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the
payee or endorsee thereof, if payable to order, before the amount 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.
In this case, Prima facie, A became possessor of the bill for value and in good faith before the bill
became payable. So, he can be considered as a holder in due course.
But the holder of a forged instrument cannot enforce payment thereon. In the event of the holder
being able to obtain payment, inspite of forgery, he cannot retain the money. The true owner may
sue the person who had received. Even a holder in due course is not exempt from it.
Conclusion: 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.
As signature on the negotiable instrument is forged, it becomes a nullity. Hence A cannot receive
the amount on the bill.
Q.No.25. X obtains Y's acceptance to a bill by fraud. X endorses it to Z who takes it in good faith
for valuable consideration. Z endorses the bill to F who knows of the fraud. Discuss the rights of X,
Y and Z. (N 06 - 5M)
B obtains As 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.
a. X cannot recover from Y because X is not a holder in due course.

b. Z can recover from X or Y because Z is a holder in due course. [Section 58].
F can recover from X, Y and Z because F derives the title from Z who is a holder in due course and
at the same time Z is not a party to fraud. [Section 53]
Q.No.26. A draws a cheque in favour of B. A's clerk forges B's endorsement and negotiates the
cheque to C, who takes it in good faith and for value. C receives payment on the cheque. Discuss
the rights of A and C.
In the given problem, issues involved are:
Can A claim the reimbursement of the payment from his bank for the payment having been made
to a person under forged endorsement? (MTP 2M)
C having received the payment, does he enjoy the right of retaining the amount?
Regarding the first issue i.e., right of A, it may be stated that a paying banker is not expected to
know the signature of the payee or endorsers. Therefore, if it makes the payment in due course
and without negligence, Section 85 of the Negotiable Instruments Act offers the bank protection
against any action for wrongful payment. Thus, A may have no claim unless negligence or
connivance of the banker's staff can be established.
Regarding C's right: The answer to this question is wholly dependent upon whether the
instrument had been endorsed in full or in blank. In the former case, the person claiming under the
forged endorsement even if he is a purchaser for value and in good faith, cannot acquire the rights
of a purchaser for value and in good faith, cannot acquire the rights of a holder in due course. He
acquires no title to the bill or note. (Mercantile Bank vs. D Silva).
Since it is stated that he took the cheque in good faith and for value, he is a holder in due course
and even he can not get better title than that of transferor of the instrument(being absence of title)
Therefore, he does not have lawful right to retain the amount.

Q.No.27. Raman is the payee of an order cheque. John steals the cheque and forges Ramans
signatures and endorses the cheque in his own favour. John then further endorses the cheque to
Anil, who takes the cheque in good faith and for valuable consideration.
Examine the validity of the cheque as per provisions of the Negotiable Instruments Act, 1881 and
also state whether Anil can claim the privileges of a Holder in Due course. (Similar N15- 4M)
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 endorsemet, the person claiming under forged endorsement even if he is purchaser for value
and in good faith, cannot acquire the rights of a holder in due course. Therefore, Anil acquires no title
on the cheque ( Mercantile Bank vs. DSilva).
Q. No.28.
1) B obtains A's acceptance to a bill by fraud. B endorses it to C who takes it as a holder in due
course. C endorses the bill to D who knows the fraud. Can D recover from A?
2) S by inducing T obtains a Bill of Exchange from him fraudulently in his (S) favour. Later, he
enters into a commercial deal and endorses the bill to U towards consideration to him (U) for the
deal. U takes the bill as a Holder-in-due-course. U subsequently endorses the bill to S for value,
as consideration to S for some other deal On maturity the bill is dishoonoured. S sues T for the
recovery of the money. With reference to the provisions of Negotiable Instruments Act. 1881
decide S will successed in the case or not. (N14 4M) (For students self study)
1. Yes, D can recover the amount from A as he derived the title from C who is a holder in due
course. Moreover, D is not a party to the fraud. Once, the title has been cleaned of the defect,
notwithstanding notice of the fraud, D shall get a good title. According to Section 53 of the
Negotiable Instruments Act, 1881 any defect in the title of the transferor will not affect the rights
of the holder in due course even if he had knowledge of the previous defect provided he
himself is not a party to the fraud.
2. As per Sec.53 any defect in the title of the Transferor will not affect the rights of the Holder in
due course even if he had knowledge of the prior defect, unless he himself is not a party to the
fraud. Once a Negotiable Instrument passes through the hands of Holder in due course, it gets
cleansed of its defects.
Analysis & Conclusion: S who originally induced T in obtaining the Bill of Exchange
fraudulently, therefore he cannot succeed in this case, as S himself is party to the fraud.
Q.No.29. A bill is dishonoured by non-acceptance. The bill is endorsed to 'A'. 'A' endorses it to 'B'.
As between 'A' and 'B', the bill is subject to an agreement as to the discharge of 'A'. The bill is
afterwards endorsed to 'C', who takes it with notice of dishonour. Decide, with reasons, whether 'C'
is entitled to accept the bill in the capacity of a holder in due course. (N 99 - 6M, N 10 8M)
To constitute a holder in due course, Section 9 of the Negotiable Instruments Act requires the
holder to have obtained the instrument in good faith.
However, Section 53 provides that a holder of a negotiable instrument who derives title from a
holder in due course, will also acquire the status of holder in due course.
If a document reaches the hands of holder in due course, it will be cleansed of all defects and it
remains good even if the subsequent holder has the notice of past defects provided that he was
not a party to them.
Thus, 'C' shall get a good title to the bill.
Copyrights Reserved

IPCC _ 36e_Business Laws_NI Act__________________________________138
Q.No.30. A' is the holder of a bill of exchange made payable to the order of 'B'. The bill of
exchange contains the following endorsements in the blank. First endorsement 'B', second
endorsement 'C', third endorsement 'D', fourth endorsement 'E' - 'A' strikes out, without E's
consent, the endorsement by 'C' and 'D'. Decide with reasons whether 'A' is entitled to recover
anything from 'E'. MTP M15, (M 99, N 09 5M N 12 8M)
Every endorser is entitled to recover amount of Bill from prior endorsers. Hence, Section 40
provides that if a holder of a negotiable instrument destroys or impairs the endorser's remedy
against a prior party (without the consent of the endorser), the endorser is discharged from liability
to the holder as if the instrument had been paid at maturity.
In the above case, A is a holder who has cancelled endorsement of C and D without consent of E.
This has destroyed remedy which E had against C and D. Hence, E gets discharged from his
liability towards A, as provided in section 40.
Q.No.31. Can an acceptor of a bill avoid his liability against a person who is a holder in due course
or who derives his title from a holder in due course, on the following grounds:
a. That the instrument has not been filled in accordance with the authority given by him.
b. That the other parties to the bill were fictitious.
c. That the instrument was drawn without consideration.
d. That the delivery of the instrument was conditional.
e. That the instrument had been lost.
f. That the instrument was obtained from him by means of fraud.
g. That the instrument was obtained from him for an unlawful consideration.
h. That his signature was forged.
i. That payee had no capacity to endorse. (For students self study)
First state the privileges of holder in due course.

Ground Decision Explanation
Privilege given to holder in due course under Section 20 provided the
a. No
stamp put on the instrument was sufficient to cover the amount.
b. No Privilege given to a holder in due course u/s 42
c. No Privilege given to a holder in due course u/s 43
d. No Privilege given to a holder in due course u/s 46
e. No Privilege given to a holder in due course u/s 58
f. No Privilege given to a holder in due course u/s 58
g. No Privilege given to a holder in due course u/s 58
h. Yes Forgery passes no title to anyone at all.
i. No Privilege given to a holder in due course u/s 121
Note: The aforesaid decisions also hold good for a person who derives title from a holder in due
course.
Q.No.32. Do the following alterations of a negotiable instrument render the instrument void? (P.M)
a. The holder of a bill alters the date of the instrument to accelerate or postpone the time of payment.
b. The drawer of a negotiable instrument draws a bill but forgets to write the words 'or order'.
Subsequently, the holder of the instrument inserts these words.
c. A bill payable three months after date is altered into a bill payable three months after sight.
d. A bill was dated 1992 instead of 1993 and' subsequently the agent of the drawer corrected the mistake.
e. A bill is accepted payable at the Union Bank, and the holder, without the consent of the
acceptor, scores out the name of the Union Bank and inserts that of the Syndicate Bank.

f. A bill payable with lawful interest is altered into one payable with 12% interest.
g. A bill is accepted payable at the Indian Bank, Sarita Vihar, New Delhi. The holder without the
consent of the acceptor scores out Sarita Vihar and inserts Chandni Chowk instead.
According to Section 87 of the N.I. Act, 1881 any material alteration of a Negotiable Instrument
renders the same void as against anyone who is party there to 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. If any such alteration is made by an endorsee, the endorser is
discharged from all liability to him in respect of the consideration thereof. The alteration must be so
material that it alters the character of the instrument, to a great extent. Generally, alteration of the
date, amount payable, time, place of payment is regarded as material alteration.
Conclusion in the given cases:
(a) Yes. (b) No. (c) Yes. (d) No. (e) Yes. (f) Yes (Since lawful interest is 18% under the Banking,
Public Financial Institutions & Negotiable Instruments (Amendment) Act, 1988) (g) Yes.
Q.No.33. A issues an open bearer cheque for Rs.10,000 in favour of B who strikes out the word
bearer and crosses the cheque. The cheque is thereafter negotiated to C and D. when it is finally
presented by Ds banker, it is returned with remarks payment countermanded by drawer. In
response to a legal notice from D, A pleads that the cheque was altered after it had been issued
and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable
Instruments Act, 1881 decide, whether As argument is valid or not? (CMA J 14 - 3M) (J 09 - 5M)
The cheque bears two alterations when it is presented to the paying banker. One, the word bearer
has been struck off and two, the cheque has been crossed. Both of these alterations do not
amount to material alteration under the provisions of the Act and hence the liability of any including
the drawer is not at all affected. A is liable to pay the amount of the cheque to the holder.
Q.No.34. X a major, and M, a minor, executed a promissory note in favour of P. Examine with
reference to the provisions of the Negotiable Instruments Act, the validity of the promissory note
and Whether it is binding on X and M. RTP N 15 (M 15- 4M) (Or)
A, a broker draws a cheque in favour of B, a minor. B endorses the cheque in favour of C, who in
turn endorses it in favour of D. Subsequently, the bank dishonoured the cheque. State the rights of
C and D and also state whether B can be made liable? (M 00 - 6M, N 05 - 4M) (PM) (MTP 2M)
As per section 26, a minor may draw, endorse, deliver and negotiate any negotiable instrument so
as to bind all parties except himself. Hence, the instrument is valid. So the instrument is binding on
X but not on M.
Q.No.35. Mr. Clever obtains fraudulently from J a cheque crossed 'Not Negotiable'. He later transfers
the cheque to D, who gets the cheque encashed from ABC Bank, which is not the Drawee Bank. J,
on coming to know about the fraudulent Act of Clever, sues ABC Bank for the recovery of money.
Examine with reference to the relevant provisions of the Negotiable Instruments Act, 1881, whether J
will be successful in his claim. Would your answer be still the same in case Clever does not transfer
the cheque and get the cheque encashed from ABC Bank himself?
RTP M15 (N 00 - 6M, J 09 - 5M) (PM)
According to Section 130 of the Negotiable Instruments Act, 1881 a person taking cheque crossed
generally or specially bearing in the words 'Not Negotiable' cant get a better title than that of
transferor. Thus, if the title of the transferor is defective, the title of the transferee will also be defective.
Based on the above provisions, it can be concluded that if the holder has a good title, he can still
transfer it with a good title, but if the transferor has a defective title, the transferee is affected by
such defects, and he cannot claim the right of a holder in due course by proving that he purchased
the instrument in good faith and for value.

In the given case Mr. Clever had obtained the cheque fraudulently. As his title is defective, he
could not get good title to D and ABC Bank would be liable for the amount of the cheque for
encashment. (Great Western Railway Co. vs. London and County Banking Co.)
The answer in the second case would not change and shall remain the same for the reasons given
above. Thus in both the cases, J will be successful in his claim from ABC Bank.
Q.No.36. X, by inducing Y, obtains a Bill of Exchange from him fraudulently in his (X) favour. Later,
he enters into a commercial deal and endorses the bill to Z towards consideration to him (Z) for the
deal. Z takes the Bill as a holder in due course. Z subsequently endorses the bill to X for value, as
consideration to X for some other deal. On maturity, the bill is dishonoured. X sues Y for recovery of
money. With reference to the provisions of Negotiable Instruments Act, decide whether X will
succeed in the case. (N14 4M) (M 01 - 6M) (For students self study)
Section 58 of Negotiable Instruments Act provides that when an instrument is obtained by fraud,
offence or for unlawful consideration, possessor or endorsee cannot receive the amount of Instrument.
Hence, normally, X would not be entitled to sue Y as X has obtained instrument through fraud.
However, as per section 53, a holder who derives title from holder in due course has all rights of a
holder in due course. Since X derives his title from Z (who is a holder in due course), X has all
rights of Z.
Second part of section 58 also makes it clear that even if a negotiable instrument is obtained by
means of an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled to
receive the amount from the maker, if he is a holder in due course or claims through a person who
was a holder in due course. However in the given case x is a party to fraudulent activity, hence
he wont get better title even he is a holder in due course.
Q.No.37. A issues a cheque for Rs.25,000/- in favour of B. A has sufficient amount in his account
with the Bank. The cheque was not presented within reasonable time to the Bank for payment and
the Bank, in the meantime, became bankrupt. Decide under the provisions of Negotiable
Instruments Act, 1881, whether B can recover the money from A? (M 03 - 6M, M 14 4M) (PM)
Section 84(1) provides that cheque should be presented to Bank within reasonable time. If cheque
is not presented within reasonable time, meanwhile the drawer suffers actual damage, the drawer
is discharged to the extent of such actual damage. This would be so if the cheque would have
been passed if it was presented within reasonable time. As per section 84(2), in determining what
is a reasonable time, regard shall be had to (a) the nature of the instrument (b) the usage of trade
and of bankers, and (c) facts of the particular case.
The drawer will get discharge, but the holder of the cheque will be treated as creditor I of the bank,
in place of drawer. He "Will be entitled to recover the amount from Bank. I [section 84(3)].
In the above case drawer i.e. A has suffered damage as cheque was not presented by B within
reasonable time. Hence, A will get discharged but B will be the creditor of bank for amount of
cheque and can recover the amount from bank.
Q.No.38. A cheque was dishonoured at the first instance and the payee did not initiate action. The
cheque was presented for payment for the second time and again it was dishonoured. State in this
connection whether the payee can subsequently initiate prosecution for dishonour of cheque. (PM)
Supreme Court in Sadanandan Bhadran v. Madhavan Sunil Kumar case held that on a careful
analysis of Section 138 of the Negotiable Instruments Act, 1981 it is seen that a cheque is said to
be dishonoured when it is returned by the bank unpaid for any of the reasons mentioned therein.
The said proviso lays down three conditions for the applicability of the above section. They are:
1. The cheque should have been presented to the bank within six months of its issue or within the
period of its validity whichever is earlier;
2. The payee should have made a demand for payment by registered notice after the cheque is
returned unpaid (within 30 days of receiving information that cheque was dishonoured); and
3. The drawer should have failed to pay the amount within 15 days of the receipt of notice.
Prosecution under section 138 can be launched only when all the 3 conditions are satisfied.
So far as the first condition is concerned, clause (a) of the proviso to Section 138 does not put any
restriction upon the payee to successively present a dishonoured cheque during the period of
validity. It is not uncommon for a cheque being presented again and again within its validity period
in the expectation that it would be encashed. The question whether dishonour of the cheque on
each occasion of its presentation gives rise to a fresh cause of action, the following facts are
required to be proved to successfully prosecute the drawer for an offence under Section 138:
a) That the cheque was drawn for payment of an amount of money for discharge of a debt/liability
and the cheque was dishonoured;
b) That the cheque was presented within the prescribed period;
c) That the payee made demand for payment of the money by giving a notice in writing to the
drawer within the stipulated period; and
d) That the drawer failed to make the payment within 15 days of the receipt of the notice.
However, there are apparently section 138 conflicts with Section 142(C) of the Act, which enable the
payee to repeatedly present the cheque but the Sec 142(C) gives him only one opportunity to file a
complaint for its dishonour and that too within one month from the date the cause of action arises.
The Court held that the two provisions can be harmonised with the interpretation that on each
presentation of the cheque and its dishonour, a fresh right and not cause of action accrues in his
favour.
Therefore, the holder / payee of a cheque cannot initiate prosecution for an offence under Section
138 for its dishonour for the second time, if he had not initiated such prosecution on the earlier
cause of action.
Q.No.39. Whether giving of notice of dishonor itself constitutes receipt of notice for constituting
offence under section 138 of the Negotiable Instruments Act, 1881.
Case: Dalmia Cement (Bharat) Ltd Vs.Galaxy Traders and Agencies Ltd
Provision: The Court observed that, the payee has to make a demand by giving notice in writing
and it is a failure on the part of the drawer to pay the amount within 15 days of the receipt in writing
of the said notice. Then the drawer of the Cheque is liable under sec 138.
Analysis: Giving notice in writing is a process for which receipt is the accomplishment.
Conclusion: It is therefore clear that giving of notice is not the same as receipt of notice for
constituting offence under this Act.
The focus in the clause is on the need to make a demand. It is only the mode for making such demand,
which the legislature has prescribed. A payee can send the notice for doing his part for giving the
notice. Once it is dispatched, his part is over and the next depends on what the sender does.
Q.No.40. A promoter who has borrowed a loan on behalf of company, who is neither a director nor
a person-in-charge, sent a cheque from the companies account to discharge its legal liability.
Subsequently the cheque was dishonoured and the compliant was lodged against him. Does he
liable for an offence under section 138? (M16 - 5M) (PM)
Facts of the Case: A promoter who has borrowed a loan on behalf of company, sent a cheque from
the companies account to discharge its legal liability. Subsequently the cheque was dishonoured.
Relevant provision: Sec 138 - Dishonour of cheque for insufficiency, etc., of funds in the account.
Analysis: According to Section 138 of the Negotiable Instruments Act, 1881 where any cheque
drawn by a person on an account maintained by him with a banker for payment of any amount of
money to another person from/out of that account for discharging any debt or liability, and if it is
dishonoured by banker on sufficient grounds, such person shall be deemed to have committed an
offence and shall be liable.
However, in this case, the promoter is neither a director nor a person-in-charge of the company
and is not connected with the day-to-day affairs of the company and had neither opened nor is
operating the bank account of the company.
Further, the cheque, which was dishonoured, was also not drawn on an account maintained by him
but was drawn on an account maintained by the company.
Conclusion: Therefore, he has not committed an offence under section 138
Q.No.41. J, a shareholder of a Company purchased for his personal use certain goods from a Mall
(Departmental Store) on credit. He sent a cheque drawn on the Companys account to the Mall
(Departmental Store) towards the full payment of the bills. The cheque was dishonoured by the
Companys Bank. J, the shareholder of the company was neither a Director nor a person in-charge of
the company. Examining the provisions of the Negotiable Instruments Act, 1881 state whether J has
committed an offence under Section 138 of the Act and decide whether he (J) can be held liable for
the payment, for the goods purchased from the Mall (Departmental Store) RTP N15 N 06 - 4M) (PM)
Relevant Case: H.N.D. Mulla Feroze Vs. C.Y. Somayajulu
Facts: The Andhra Pradesh High Court held that although the petitioner has a legal liability to
refund the amount to the appellant, petitioner is not the drawer of the cheque, which was
dishonoured and the cheque was also not drawn on an account maintained by him but was drawn
on an account maintained by the company.
Hence, it was held that the petitioner could not be said to have committed the offence under
Section 138 of the Negotiable Instrument Act, 1881.
Conclusion: Therefore J also is not liable for the cheque but legally liable for the payments for the goods.
Q.No.42. Ram has rupees 2000 in his bank account and has no authority to overdraft. He issued a cheque
for 5000 rupees to Gopal which was dishonoured by the bank. Point out whether Gopal must necessary
give notice of dishonoured to ram under NI Act 1881 . (M14 5M)
Sec 98 of the NI Act 1881 prescribes the cases in which no notice of dishonor is necessary. This
includes and also states when drawer has not sufficient balance and issues cheque of excess
amount and also not has authority to overdraft and if that cheque was dishonoured by bank then
notice is not required to be given to drawer.
In the present case no notice is required according to sec 98 of the act
TEST YOUR KNOWLEDGE

1. X draws a bill of exchange payable at 1,pitampura,New Delhi. It does not contain the name of any
drawee, although Y lives at the stated address. Y accepts the bill. Would Y be liable under the bill?
2. Distinguish between the following:

a) Liability of a drawer of a bill of exchange and drawer of a promissory note.
b) Dishonour by non-acceptance and dishonor by non-payment.
c) Dischage of an instrument and discharge of a party.
d) Noting and protest.
3. Explain the liabilities of a drawer of a bill of exchange.
4. State the effects of non-presentment for acceptance.
5. Explain the rights and liabilities of an acceptor for honour.
6. Explain the rights of payer for honour.
7. State the effect of omission to give notice of dishonor.

8. When is notice of dishonor unnecessary?
9. State the contents of noting.
10. State the contents of protest.
11. Is noting equivalent to protest?
12. State the provisions regarding presentment of promissory note for sight
13. What is meant by presentment for payment?
14. When is presentment for payment is necessary?
15. When is presentment for payment is not necessary?
16. State the provisions regarding presentment for payment.
17. What is meant by dishonor by non-payment?
18. Distinguish between the dishonor by non-acceptance and dishonor by non-payment.
19. Explain the provisions relating to notice of dishonor.
20. State the effect of omission to give notice of dishonor.
21. When is notice of dishonor unnecessary?
22. State the rights of holder in case of an instrument acquired after dishonor or after maturity.
23. What is meant by Noting?
24. State the procedure and contents of noting.
25. State the meaning of Notarys Charges.

Copyrights Reserved
26. State the time limit within which noting is to be done.
27. Is noting compulsory?
28. What is mean by protest?
29. Explain the provisions regarding Drawee in case of need.
30. What is meant by Discharge of a party?
31. Explain the various modes of discharge of an instrument.
32. What is meant by Discharge of a party?
33. Explain the various modes of discharge of a party.
34. Distinguish between discharge of an instrument and discharge of a party.
35. Can there be more than one payee in a Negotiable Instrument?
36. What is meant by maturity of a Negotiable Instrument?
37. What is meant by days of grace?
38. To whom the payment of an instrument is required to be made?

39. Can a promissory note payable to bearer be issued by any person?
40. Can a bill of exchange payable to bearer be issued by any person?

41. Explain the provisions relating to the payment of interest.
42. Give four point of distinction between a holder and a holder in due course.
43. Enumerate the privileges of a holder in due course

44. Explain the meaning and effect of qualified acceptance with examples.
45. Enumerate the essential characteristics of a cheque.
46. What is the effect of 'Not negotiable crossing'?
47. Who can cross a cheque after issue?
48. Explain the liability of a drawee on a dishonor of a cheque.
49. Explain the liability of a drawer on a dishonor of a cheque.
50. State the cases in which a banker must refuse to honour a customer's cheque.
51. State the parties who can and who cannot be sued in case of negotiation back.
52. State the legal position of a person who obtained an instrument illegally and retains the instrument.
53. State the legal position of a person who obtained an instrument illegally and receives the
payment of the instrument.
54. State the legal position of a person who obtained an instrument illegally and transfers a bearer
instrument to a person who is not a holder in due course.
55. State the legal position of a person who obtained an instrument illegally and transfers a bearer
instrument to a holder in due course.
56. State the legal position of a person who obtained an instrument illegally and transfers an order
instrument by making a forged endorsement.

THE END

14. BAILMENT AND PLEDGE
M-13
M-10 To N-11 To
No. ABC M-09 N-09 M-11 N-12 To N-14 M- 15 N- 15 M-16
N-10 M-12
M-14
1. B - - - 1 - - - - 1 - -
2. A - - - - - - - - - - -
3. A - - - - - - - - - - -
4. A - - - - - - - 1 - - -
5. A - - - - - - - - - - -
6. B - - - - - - - - - - -
7. B - - - - - - - - - - -
8. C - - - - - - - - - - -
9. C - - - - - - - - - - -
10. A - - - - - - - - - - -
11. C - - - - - - - - - - -
12. C - - - - - - - - - - -
13. B - - - - - - - - - - -
Q.No.1. What is meant by Contract of Bailment? What are the essential elements of
Bailment and forms of Bailment? (SM) (PM)(M11 1M, M15-1M)
MEANING OF CONTRACT OF BAILMENT:

a) The word Bailment is derived from the French word Ballier which means to deliver.
b) Bailment etymologically means handling over or change of possession of goods.
c) According to Sec-148 Bailment is the delivery of goods by one person to another for
some purpose,
i) upon a contract that they shall,
ii) when the purpose is accomplished, be returned or otherwise disposed off according to
the directions of the person delivering them.
d) The person delivering the goods is called Bailor.
e) The person to whom they are Bailed (delivered) is called Bailee and the transaction is
called Bailment. The property which is Bailed is called Bailed property
f) For example where X delivers his car for repair to Y, X is the Bailor and Y is the Bailee.
ESSENTIAL CHARACTERISTICS OF BAILMENT (SEC.148):

a) Contract: Bailment is based upon a contract. Sometimes it could be implied by law as it
happens in the case of finder of lost goods.
b) Movable Goods: Bailment is only for moveable goods and never for immovable goods or
money.
c) Change of possession of Goods: In Bailment possession of goods changes. Change of
possession can happen by:
i) physical delivery or
ii) Constructive delivery i.e. by any action which has the effect of placing the goods in the
possession of Bailee
IPCC _36e_Business Laws _ Bailment & Pledge________________________146

d) No change in ownership: In Bailment, Bailor continues to be the owner of goods as there
is no change of ownership.
e) Goods shall be returned back: Bailee is obliged to return the goods physically to the
Bailor. The Bailee cannot deliver some other goods, even not those of higher value.
GENERAL ISSUES:
a) The recipient must knowingly accept the property.
b) No change in ownership: In Bailment both custody and possession must change but not
the ownership.
c) Custody without possession: But where a person is in custody without possession then
he does not became a Bailee.
For example depositing ornaments in a bank locker is not Bailment, because ornaments
are kept in a locker whose key are still with the owner and not with the bank. The
ornaments are in possession of the owner, though kept in a locker at the bank. (M15 - 1M)
d) Constructive Delivery: Possession and custody do not however mean physical delivery
of goods. Constructive delivery could also create a Bailor and Bailee relationship. This
arises in situations where the Bailee is already in possession of goods but agrees to be a
Bailee through a contract.
e) Money Deposits in Banks: Deposit of money in a bank is not Bailment since the money
returned by the bank would not be identical currency notes. (CMA J 14 2M)
f) The recipient must knowingly accept the property.
DIFFERENT FORMS OF BAILMENT: Following are the popular forms of Bailment
a) Delivery of goods by one person to another to be held for the Bailors use.
b) Goods given to a friend for his own use without any charge
c) Hiring of goods.
d) Delivering goods to a creditor to serve as security for a loan.
e) Delivering goods for repair with or without remuneration.
f) Delivering goods for carriage.
Note: On the basis of reward, Bailment can be classified into two types viz., Gratuitous
and Non-Gratuitous Bailment. In case of Gratuitous Bailment no consideration passes
between the Bailor and the Bailee. In case of Non-Gratuitous Bailment consideration
passes between the Bailor and the Bailee.
Similar Question: Define 1) Bailment 2) Bailor and 3) Bailee.
Similar Question: What are the essential elements of Bailment?
Similar Question: Examine whether the following constitute a contract of Bailment under the
provisions of the Indian Contract Act, 1872:
1. V parks his car at a parking lot, locks it, and keeps the keys with himself.
2. Seizure of goods by customs authorities. (PM) (May-05,07) (RTP-May 13)
Ans:
1. No. Mere custody of goods does not mean possession. For a Bailment to exist the Bailor
must give possession of the Bailed property and the Bailee must accept it, Section 148, of
the Indian Contract Act, 1872 is not applicable.
2. Yes, the possession of the goods is transferred to the custom authorities. Therefore
Bailment exists and section 148 is applicable. (State of Gujarat Vs Menon Mohammad)

Q.No.2. Briefly state the rights of Bailor? (PM) (M 98 - 5M)
RIGHTS OF BAILOR: Rights of Bailor = Duties of Bailee.

1. Bailor has a right to enforce the duties of the Bailee such as
a) right to claim damages for loss caused to the goods by the negligence of Bailee;
b) right to claim compensation for loss caused by an unauthorized use of the goods
Bailed;
c) right to claim damages arising out of mixing the goods of the Bailor with his own goods.
2. Termination of contract: Bailor has a right to terminate the contract if the Bailee does
anything which is inconsistent with the conditions of Bailment.
For example A lets on hire his horse to B for his own riding but B uses the horse for
driving his carriage. A has a right to terminate the contract of Bailment.
3. Right to receive back the Goods: Bailor in the case of gratuitous Bailment has a right to
demand the goods back even before the expiry of the period of Bailment. If in the process,
loss is caused to the Bailee, Bailor is bound to compensate.
4. Can Claim Increase or Profits From goods : Bailor has a right to claim the increase or
profit from the goods Bailed which may have occurred from the goods value.
For example where A Bails his cow to B and if the cow gives birth to a calf, B is bound
to return the cow and the calf to A.
Q.No.3. Briefly state the Duties of Bailor? (PM) (M 98 - 5M)
DUTIES OF BAILOR: The duties of Bailor are spelt out in number of Sections. These are
enumerated hereunder:
i) Disclosure of Defects: Bailor must disclose all defects/faults in the goods Bailed. If the
Bailor does not disclose, he would be responsible for any loss or damage suffered by the
Bailee while keeping the goods in his custody. The Bailor is particularly responsible for
defects in goods hired to Bailee whether Bailor was aware of such defects or not (i.e, in
case of non gratuitous Bailment).
ii) Reimbursement of Expenditure: where the Bailment is gratuitous, the Bailor must
reimburse the Bailee for any expenditure incurred in keeping the goods.
iii) The Bailor should reimburse any expense which the Bailee may incur by way of loss in the
process of returning the goods or complying with other directions for returning the goods.
iv) Compensation to the Bailee: The Bailor must compensate the Bailee for the loss or
damage suffered by the Bailee that is in excess of the benefit received, where he had lent
the goods gratuitously and decides to terminate the Bailment before the expiry of the
period of Bailment
v) Bound to accept the goods: The Bailor is bound to accept the goods after the purpose is
accomplished. If Bailor fails, he is responsible for any loss or damage to the goods and
has to reimburse for expenses incurred by the Bailee for keeping the goods safely.
vi) Duty to indemnify the bailee for his loss due to defective title of Bailor.
vii) Duty to bear Normal risks.
Copyrights Reserved

Q.No.4. Briefly discuss the Rights of Bailee?
RIGHTS OF BAILEE: The Bailee has the following rights [These rights are also the duties of
the Bailor]-
i) To Terminate Contract: The Bailee has the right to terminate a contract of Bailment, if the
Bailor does any thing inconsistent with Bailment conditions.
ii) To Claim Compensation: Right to claim compensation for any loss arising from non -
disclosure of known defects in the goods.
iii) Right to claim indemnification for any loss or damage as a result of defective title.
iv) Deliver the Goods Back: Right to deliver back the goods to joint Bailors according to the
agreement or directions.
v) Right to deliver the goods back to the Bailor whether or not the Bailor has the right to the
goods
vi) Lien: Right to exercise his right of lien. This right of lien is a right to retain the goods and
is exercisable where charges due in respect of goods retained have not been paid.
The right of lien is a particular lien for the reason that the Bailee can retain only these
goods for which the Bailee has to receive his fees/remuneration.
vii) Action against third Parties: Right to take action against third parties if that party
wrongfully denies the Bailee of his right to use the goods.
viii) To file a suit to decide the title of goods bailed, when a person other than Bailor claims the
goods from the Bailee.
Q.No.5. Briefly discuss the Duties of Bailee?
DUTIES OF A BAILEE:
1. Take Care of Goods: The Bailee is bound to take as much care of the goods Bailed to
him as a man of ordinary prudence with regard to quantity, bulk and value would take. In
such a case he will not be responsible, in the absence of special contract, for any special
loss or destruction or deterioration of the goods Bailed, since he has taken as much care
as a man of ordinary prudence.
For example if X Bails his ornaments to Y and Y keeps these ornaments in his own
locker at his house along with his own ornaments and if all the ornaments are lost/stolen in
a riot Y will not be responsible for the loss to X. If on the other hand X specifically
instructs Y to keep them in a bank, but Y keeps them at his residence, then Y would be
responsible for the loss [caused on account of riot].
2. Bailee has no right to make unauthorized use of goods Bailed
3. Bailee has no right to mix the goods Bailed with his own goods without the consent of the
Bailor. (N14 1M)
4. Bailee has to return the goods on expiration of period of Bailment
5. Return extra Profits: Bailee has a duty to return any extra profit accruing from goods
Bailee.
Ex: Where A Bails his cow to B and if the cow gives birth to a calf, B must return both
the cow and the calf to A.
6. Bailee has duty not to do anything inconsistent with the condition of Bailment.
SUIT BY BAILOR & BAILEE AGAINST WRONG DOERS:
a) Both Bailor and Bailee have right to sue a third party who has deprived the Bailee to the
use or possession of goods Bailed. (Sec.180)
b) Any relief obtained against such deprivation or injury can be shared between the Bailor
and Bailee according to their respective interest. (Sec.181)
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 3, 4, 5 ,6)
Similar Question: A Bails his jewellery with B on the condition to safeguard in Banks safe
Locker. However, B kept in safe locker at his residence, where he usually keeps his own
jewellery. After a month all jewellery was lost in religious riot. A filed a suit against B for recovery.
Referring to the provisions of Indian Contract Act, 1872 state whether A will succeed or not.
Ans: Referring to Sec.152 of the Indian Contract Act, 1872 B is liable to compensate A as
they both agreed to keep the jewellery in the Banks safe locker and not at the residence of B.
Similar Question: Bailee has no right to mix the goods Bailed with his own goods without the
consent of the Bailor. (N14 1M)
Ans: Refer Point (iii) above under the duties of Bailee.
Q.No.6. Briefly discuss the Rights and Duties of Finder of lost Goods as a Bailee?
(FOR STUDENTS SELF STUDY)
MEANING: A person who finds goods belonging to another and takes them into his custody is
subject to the same responsibility of a Bailee.
RIGHTS & DUTIES:
i) Same As Bailee: The duties of finder of lost goods are that of the Bailee. Such a finder
of lost goods is as good as a Bailee and he enjoys all the rights and carries all the
responsibilities of a Bailee.
The finder is bound to take as much care of the goods as a man of ordinary prudence
would take care of his own goods.
ii) The property in goods shall vest in the finder and he is entitled to retain it against the
whole world, except the true owner.
iii) Can ask for reimbursement of expenses: the finder of lost goods can ask for
reimbursement for expenditure incurred for preserving the goods but also for searching the
true owner. If the real owner refuses to pay compensation, the finder cannot sue but
retain the goods so found.
In other words, the finder can exercise lien right on goods for expenses incurred by him in
preserving the goods and finding the true owner. However he cannot sue the real owner.
iv) Collect Reward: Further where the real owner has announced any reward, the finder is
entitled to receive the reward. The right to collect the reward is a primary and a superior
right even more than the right to seek reimbursement of expenditure.
v) No right to sell the Goods: The finder though has no right to sell the goods found in the
normal course, he may sell the goods if the real owner cannot be found with reasonable
efforts or if the owner refuses to pay the lawful charges subject to the following conditions:
a) When the article is in danger of perishing and losing the greater part of the value or
b) When the lawful charges of the finder amounts to two-third or more of the value of the
article found.
Similar question: what is the status of finder of goods under the Indian contract Act, 1872?
What are his rights? (M-03)
Q.No.7. Write about Bailees Right of Lien? (Or) Write about General Lien and Particular
Lien? (M 98, M 01 - 5M)
INTRODUCTION:
a) The right of lien may be defined as the right of a person
i) To retain the possession of any property of some other person until
ii) The charges/remuneration due to the person in possession are paid.
b) It is a possessory right because possession is must for retention of any property.
c) As soon as the possession is lost, right of lien is also lost.
LIEN MAY BE OF TWO TYPES:
General Lien:
i) A general lien is the right to retain the property of another for a general balance of account.
ii) In contrast the particular lien is the right to retain the particular goods Bailed for non-
payment of charges / remuneration.
iii) Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien in
respect of goods which come into their possession during the course of their profession.
For instance a banker enjoys the right of a general lien on cash, cheques, bills of
exchange and securities deposited with him for any amounts due to him.
For instance A borrows 500/- from the bank without security and subsequently again
borrows another Rs. 1000/- but with security of say certain jewellery. In this illustration,
even where A has returned Rs. 1000/- being the second loan, the banker can retain the
jewellery given as security to the second loan towards the first loan which is yet to be
repaid.
iv) Under the right of general lien the goods cannot be sold but can only be retained for dues.
v) The right of lien can be waived through a contract.
vi) Interestingly, Chartered Accountants have a general lien against the books of their clients
which come into their possession against professional fees not paid to them by those
clients.
Particular lien:
i) In accordance with the purpose of Bailment if the Bailee by his skill or labour improves the
goods Bailed, he is entitled for remuneration for such services.
ii) Towards such remuneration, the Bailee can retain the goods Bailed if the Bailor refuses to
pay the remuneration.
iii) Such a right to retain the goods Bailed is the right of particular lien. He however does not
have the right to sue.
iv) Where the Bailee delivers the goods without receiving his remuneration, he has a right to
sue the Bailor. In such a case the particular lien may be waived. The particular lien is also
lost if the Bailee does not complete the work within the time agreed.
v) Right of lien may be excluded by an agreement to the contrary.
Q.No.8. When Bailment gets terminated? (Or) When Bailment comes to an end. (N 00 - 5M)
CONTRACT OF BAILMENT COMES TO AN END IN THE FOLLOWING CIRCUMSTANCES:

1. Expiry of the specified period:
a) If bailment is made for specified period, then
i) It automatically terminates on the expiry of such period.
For example, bailment in case of a car, bailed to a friend, for one month terminates on
expiry of one month.
2. Achievement of the object: If bailment is made for a specific purpose, it terminates as
soon as the purpose is achieved.
3. Inconsistent use of goods:
a) If Bailee does some act to bailed goods which is inconsistent with the terms of
bailment,
b) The contract of bailment becomes voidable at the option of Bailor and he can terminate
it at his choice [Sec. 153].
4. Death of the Bailor or Bailee: A gratuitous bailment is terminated by death of Bailor or
Bailee [Sec.162].
5. Termination by Bailor: A gratuitous bailment may be terminated by the Bailor at any time
even if the purpose or period of bailment is not over.
6. Destruction of the subject matter: A bailment is terminated when the subject matter of
the bailment
a) Is destroyed, or
b) By reason of a change in its nature becomes incapable of use for the purpose of the
bailment
Q.No.9.What is meant by Pledge or Pawn? What are the essential features of Pledge?
(N 98 - 10M)
INTRODUCTION:
a) Pledge is a variety or specie of bailment.
b) When in a contract of Bailment, goods are delivered as a security for repayment of money
or for performance of an obligation, resulting transaction is known as Pledge.
c) Sec.172 to 182 of the ICA,1872 deals specifically with the bailment of pledge.
d) Sec.172 of the Indian Contract Act, 1872, provides that, the Bailment of goods as a
security for payment of a debt or performance of a promise is called pledge.
e) The person who pledge or bails is known as pledgor or also as pawnor, the bailee is
known as pledgee or also as Pawnee.
f) In pledge there is no change in ownership of the property.
g) Under exceptional circumstances, the pledgee has a right to sell the property pledged.
E.g.: Ram took a loan of Rs.1 Lac from Shyam and delivered his car to him as a security for
the loan. This is a transaction of pledge where Ram is a pawnor, Shyam is a pawnee and car
is the pawned property.
As pledge is a special kind of Bailment, all essential elements of Bailment must be present in
case of contract of pledge also.
ESSENTIAL FEATURES OF PLEDGE:

i) There must be Bailment for security for payment of debt/ performance of a promise.
ii) Goods must be the subject matter of the contract of pledge.
iii) The goods pledged must be in existence.
iv) There must be a delivery of goods from pawnor to pawnee
Thus, all the pledges are bailments but all the bailments are not pledges.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.7,10)
Similar Question: Discuss whether pledge is a special type of contract of Bailment.
Ans: Yes, pledge is a special type of Bailment. All the essential elements of Bailment must be
present in the contract of Pledge also. In case of Pledge, possession of goods is transferred
from Pledgor to the Pledgee for the purpose of security to the loan amount borrowed. Once
the loan amount is repaid then automatically the possession of goods will come back to
Pledgor. Like Bailment, pledge can be made for movable goods only. The essential elements
of pledge are similar to that of Bailment.
Refer Essential features of Pledge of above question for further discussion.
Q.No.10. State the rights of Pawnor and Pawnee.? (SM) (CMA J11- 2M)
RIGHTS OF A PAWNOR: (Also known as duties of Pawnee)

a) Right to redeem: Pawnor has a basic right to redeem the goods pledged by performing
his promise.
b) Right to sue: Pawnor has a right to sue, but within a period of 3 years in view of provision
of Limitation Act only in the event of pawnee refusing to return the goods even after
payment of debt etc.
c) Right to take care of the goods: Pawnor has a right to demand a pawnee to take all
reasonable care and preservation of the goods pledged.
d) Right to receive increase or profit from the goods: Pawnor is entitled to receive the
increase or profit from the goods if there is any increase/profit relating to it during the
pledged period
PAWNEES RIGHTS: (Also known as duties of Pawnor)

a) Right of retainer: Pawnee has right to retain the goods pledged not only for payment of
debt or performance of a promise but also for recovery of debts and all expenses incurred
for preservation of goods pledged.
Ex:Where M pledges stock of goods for certain loan from a bank, the bank has a right to
retain the stock not only for adjustment of the loan but also for payment of interest.
b) Right to retention to subsequent debts: Pawnee has a right to retain the goods pledged
towards subsequent advances as well, however subject to such right being specifically
contemplated in the contract.
c) Right to seek reimbursement of extraordinary expenses: Pawnee has a right to seek
reimbursement of extraordinary expenses incurred. However his right to retain the goods
shall not extend to such extraordinary expenses but is restricted to ordinary expenses.
d) Right to sue: In the event of pawnor failing to redeem the debt or perform the promise, the
pawnee has a right to sue the goods which he has retained. He can in the alternative,
under certain circumstances, sell the goods after giving a reasonable notice, to the
pledgor. The two rights namely the right to sue and the right to sell are alternative rights
and not cumulative rights.
(IMMEDIATELY REFER PRACTICAL QUESTION NO 8,9)
Q.No.11. State the instances relating to Pledge by Non-owners?
1. Pledge by Mercantile Agent (Refer Question No.12)

2. Pledge by seller who left with possession after sale.
3. Pledge by buyer who obtains possession of goods before sale.
4. Pledge where pawnor has limited interest. Eg. Finder of lost goods.
5. Pledge by one of the co-owners with the consent of other co-owners.
6. Pledge by person who obtains possession of goods under voidable contract.
Q.No.12. State the provisions relating to Pledge by Mercantile Agents?
PLEDGE BY MERCANTILE AGENT:

a) Though generally only a owner of goods can pledge, the Act recognizes the right of certain
mercantile agents to pledge provided it is done with the consent of the owner of the
goods.Such a pledge done in the ordinary course of business is valid.
b) Pledge in this case can be effected through pledge of documents like a bill of lading or a
railway receipt etc.
Q.NO.13. Distinguish between Bailment and Pledge.
Basis Bailment Pledge

For some purpose but not as As security for a loan or for the
1. Purpose
security. fulfillment of obligation.
2. Right of No right of sale Has right to sell, on default by the
sale pledger, after giving notice.
3. Right to use No restriction for a Bailee. No right of using the goods pledged.
Remain with the Bailee till the Sometimes, goods remain with the
4. Possession
purpose of bailment is achieved. pledgor for some special purpose
PRACTICAL QUESTIONS
Q.No.1. Mrs.X delivered her old gold jewellery to Mr.Y, a goldsmith, for the purpose of making
new jewellery out of it. Every evening she used to receive the unfinished jewellery to put it into
a box kept at Mr.Ys shop. She kept the key of that box with herself. One night, the jewellery
was stolen from the box. Was there a contract of Bailment? Whether the possession of the
goods (Actual or Constructive) delivered, constitute contract of Bailment or not?
Facts of the case: Mrs.X delivered her old gold jewellery to Mr.Y, a goldsmith for the purpose
of making new jewellery out of it. Every evening she will receive the unfinished jewellery to put
it into a box kept at Mr.Ys shop and kept the key with her. One night, the jewellery was stolen
from the box.
Provision: Sec 148 of the contract Act 1872 - Bailment means 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 off according to the directions of the person
delivering them.
Sec 149 says that the delivery to the Bailor may be made by doing anything which has the
effect of putting the goods in the possession of the intended Bailee or of any person
authorized to hold them on his behalf. In simple words, delivery can be either actual or
constructive.
Analysis: Delivery is necessary to constitute Bailment. The mere keeping of the box at Ys
shop, when X herself took away the key cannot amount to delivery as per the meaning of the
provision in Sec 149.
Conclusion: The first important characteristic of contract of Bailment is delivery of possession
of the goods. In this case there is no contract of Bailment because Mrs.X has not delivered the
complete possession of the goods by keeping the key with her every evening.
Q.No.2. A hires a car from B and agrees to pay Rs.5,000 as hire charges. The car is not safe,
though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B
refuses to pay. Discuss the liability of B. (MAY 05) (PM)
Facts of the case: A hires a car from B for Rs.5,000 as hire charges. The car is unsafe,
though B is unaware of it. A is injured and claims compensation, but B refuses to pay.
Whether B is liable to pay compensation.
Provision: Sec. 150 of the Indian Contract Act, 1872 states that if the goods are Bailed for
hire, the Bailor is responsible for such damage whether he was or was not aware of the
existence of such faults in the goods Bailed.
Analysis: The duty of the Bailor for consideration is much greater. He is making profit from his
profession and, therefore, it is his duty to see that the goods which he delivers are reasonably
saf3e for the purpose of Bailment. There is no use in saying that he was not aware of the defeats.
Conclusion: It is the duty of Bailors (B) to see that the carriage is safe for the purpose for
which it was Bailed. Hence, the Bailor (B) is liable to compensate the loss to Bailee (A).
Q.No.3. M lends a sum of Rs.5,000 to B, on the security of 2 shares of a Limited Company on

1st April 2007. On 15th June 2007, the company issued 2 bonus shares. B repays the loan
amount of Rs.5,000 alongwith interest but M returns only 2 shares which were pledged and
refuses to give the 2 bonus shares. Advise B in the light of the provisions of the Indian Contract
Act, 1872. (PM) (N 08 - 5M) (For students self study)
Facts of the case: M lends a sum of Rs.5,000 to B, on the security of 2 shares. Later on, the
company issued 2 bonus shares. B repays the loan amount of Rs.5,000 along with interest.
But M returns only 2 shares to B and refuses to return the 2 bonus shares. Whether B is
entitled to get bonus shares from M or not?
Provision:
a) Sec. 163 of the Indian contract Act 1872 says that the Bailor is entitled to increase of profit
from goods Bailed.
b) In the absence of any contract to the contrary, the Bailee is bound to deliver to the Bailor
or according to his directions, any increase or profit which may have accrued from the
goods Bailed.
Analysis: (Applicability of the Law) The Bailee is bound to return the natural increase or
profits accruing to the goods to the Bailor, during the period of Bailment.
Conclusion: On the above analysis and provision of Law, when there is an increase to the
shares lent to M during the Bailment then it is the duty of the Bailee (M) to return the increase
to the Bailor (B). In simple words, B is entitled to get bonus shares from M.
Q.No.4. X delivered some cattle to Y for feeding grass in Ys farm against some payment.
Without any negligence on Ys part, cattle were stolen. Y did not inform the same to the owner
or the police or made any efforts to recover the cattle because he thought it would be useless
to do so. Who is liable and why?
Facts of the case: X delivered cattle to Y for feeding grass in Ys farm for some payment. Cattle
were stolen without any negligence on the part of Y. Y did not inform to the owner or the police or
made any effort to recover the cattle. Whether Bailee (Y) is liable for the loss of cattle?
Provision: Sec.151 of the Indian contract Act, 1872 states that in all the cases of Bailment,
the Bailee is bound to take as much care of the goods Bailed to him as a man of ordinary
prudence would, under similar circumstances, takes care of his own goods of the same bulk,
quality and value as the goods Bailed.
Analysis: The most important duty of the Bailee is to take care of the goods Bailed with him
by the Bailor. In this case Bailee should have used reasonable care to recover the lost cattle.
Conclusion: As the Bailee has not taken any steps to recover the cattle or he has not taken
care of the goods as mentioned in Sec. 151, Bailee is liable to compensate the loss occurred
to the Bailor. (Coldman Vs Hill).
Q.No.5. A lends his Motor car to B for a drive on a condition that only B should drive the motor
car. B allowed his daughter C, who is an expert car driver, to drive the vehicle. C drives the car
carefully but its axle suddenly breaks and the car is damaged. Is B liable for the damage?
(CMA J 12 - 2M)(For students self study)

Facts of the case: A lends his car to B with a condition that only B should drive the motor car.
But B allowed his daughter to drive it who is an expert in driving. Suddenly the axle breaks and
the car gets damaged. Whether B is liable for damages?
Provision: Sec.154 Liability of the Bailee making unauthorized use of the goods Bailed.
If the Bailee makes any use of the goods Bailed, which is not according to the conditions of
the Bailment then he is liable to compensate the loss to the Bailor, for any damage arising to
the goods from unauthorized use of such goods Bailed.
Analysis: Goods must be used by the Bailee, strictly for the purpose for which they have been
Bailed to him. Any unauthorised use of the goods would make the Bailee absolutely liable for
any loss or damage occurred to such goods.
Conclusion: In this case the conditions of Bailment are that Bailee alone should drive the car.
By allowing his daughter to drive the car the Bailee has used the car unauthorizedly. For the
reason mentioned above, the Bailee is liable for the damage caused to the car.
Q.No.6. Sunil delivered his car to Mahesh for repair. Mahesh completed the work but did not return
the car to Sunil within reasonable time, though Sunil 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 Indian Contract Act, 1872. (PM) (N 03 - 6M)
Facts of the case: Sunil delivered his car to Mahesh for repair work. After completion of work,
Mahesh didnt deliver the car to Sunil, though Sunil has reminded Mahesh repeatedly. A fire
occurred in the neighborhood and the car was destroyed.
Provision: Sec.160. It is the duty of the Bailee to return or deliver the goods Bailed, according
to the Bailors directions, without demand, as soon as the time for which they were Bailed was
expired, or the purpose for which they were delivered has been accomplished.
Sec.161 - If due to the default of the Bailee, the goods are not returned, delivered or tendered
at proper time then he is responsible to the Bailor for any loss or deterioration of the goods
from that time.
Analysis: According to sec. 160 and 161 it is the duty of the Bailee to return or deliver the
Bailed goods according to the Bailors directions. If he fails to do so, he is responsible to the
Bailor for any loss, not withstanding the exercise of reasonable care on his part.
Conclusion: In the given case, Mahesh neglected to return the goods even after the expiry of
reasonable time. Therefore, Mahesh is liable for the loss.
Q.No.7. Mr. G delivered a shopkeeper to repair a watch on the payment of Rs.

100.Subsequently the shopkeeper refused to repair it for the Rs. 100 and also claimed to
retain the watch until he is paid for the work done. Decide the right of G by examining the
provision of the Indian Contract Act, 1872. (RTP-Nov13)
Facts of the case: Mr. G delivered a shopkeeper to repair a watch on the payment of Rs.
100.Subsequently the shopkeeper refused to repair it for the Rs. 100 and also claimed to
retain the watch until he is paid for the work done.
Provision: Sec. 170 of The Indian Contract Act 1872 lays down that where the bailee has
rendered any service involving the exercise of labour /skill in respect of the goods bailed, there
he has a right to retain such goods in his possession until he receives due remuneration for
the services, he has rendered in respect of them. This right of bailee is termed as particular
lien. This right can be exercised when the services have been performed entirely and the
remuneration has become due. Bailees particular lien in contracts of service may be lost if he
does not complete the work within the agreed time or reasonable time.
Analysis: Accordingly in the given case, it is clearly expressed by the shopkeeper to repair
the watch on the payment of Rs. 100. However later his refusal to repair the watch, does not
complete the work for which he has promised and therefore he losses his right to exercise
particular lien and nothing could be claimed under it.
Conclusion:
Thus, the shopkeeper was not entitled to retain the watch.
Q.No.8. A the Pledgor, pledges a cinema projector and other accessories with Cine
Association Co operative Bank Limited, the Pledgee, for a loan. A requests the bank to allow
the pledged goods to remain in his possession and promises to hold the same in trust for the
Pledgee and further promises to handover the possession of the same to the bank whenever
demanded. Examining the provisions of the Indian Contract Act, 1872 decide, whether a valid
contract of pledge has been made between A, the Pledgor and Bank, the Pledgee?
(J - 09) (PM) (RTP-Nov 15,M16) (MTP 8M)
Facts of the Case: A pledges a cinema projector and other accessories for a loan and
requested the bank to allow the pledged goods to remain in his possession and promises to
hold the same in trust for the Pledgee and further promises to handover the possession of the
same to the bank whenever demanded..
Provision and Case Law: Section 149 - Delivery to Bailee how made
Bank of Chittor Ltd. Vs. P.Narsimhula Naidu and others
Analysis:
a) Sec. 149 of the Act provides that the delivery of the goods to the Pledgee may be made by
actual or constructive delivery or delivery by attornment to the bank.
b) In such a case there is change in the legal character of the possession of goods though not
in the actual or physical custody.
c) Though the Pledgor continues to be in possession of the goods, it is deemed be in the
possession of the Pledgee.
In the given problem the delivery of the goods is constructive i.e. delivery by attornment to the
Pledgee and the possession of the goods by A, the Pledgor is treated as possession by
Pledgee, the Bank. A constructive pledge comes into existence as soon as the Pledgor,
without actually delivering the goods, promises to deliver them on demand.
Conclusion: Therefor the above stated transaction is a valid pledge.
Q.No.9. Ravi sent a consignment of goods worth Rs.60,000 by railway and got railway receipt.
He obtained an advance of Rs.30,000 from the bank and endorsed the railway receipt in
favour of the bank by way of security. The railway failed to deliver the goods at the destination.
The bank filed a suit against the railway for Rs.60,000. Decide in the light of provisions of the
Indian Contract Act, 1872, whether the bank would succeed in the said suit? (Or)
X sent a consignment of mobile phones worth Rs. 60,000 to Y and obtained a railway receipt
therefore. Later, he borrowed a loan of Rs. 40,000 from Star Bank and endorsed the railway
receipt in favour of the Bank as security. In transit the consignment of mobile phones was lost.
The Bank files a suit against the railway for a claim of Rs. 60,000, the value of the
consignment. The railway contended that the Bank is entitled to recover the amount of loan
i.e. Rs. 40,000only. Examining the provisions of the Indian Contract Act, 1872, decide,
whether the contention of the railway is valid. (M 08)(PM) (Similar N 10, 14)
Facts of the case: Ravi sent goods on consignment worth Rs. 60,000 by Railway and
received a receipt from them. Later, he obtained advance from bank for Rs.30,000 and
endorsed the receipt as a security. But railways failed to deliver the goods. Whether the bank
would succeed in the suit and get Rs. 60,000/- from the Railway Co.
IPCC _ 36e_Business Laws _ Bailment & Pledge________________________157
Provision: MORVI MERCANTILE BANK LTD. Vs. UNION OF INDIA
The Supreme Court has held that the Bank (Pledgee) was entitled to recover not only to the
extent of the amount of advance due to it, but the full value of consignment. However, the
amount over and above his interest is to be held by him in trust for the Pledgor.
Analysis: When Ravi deposited the Railway receipt, which is document of title to goods, in the
bill as a security and obtained an advance of Rs.30,000 it amounted to pledge. The bank as a
Pledgee has got all rights against the goods as if he is the true owner. When the railway Co.
failed to deliver the goods, the Bank, as a pledgee can sue the Railway Co. not only for his
interest in the goods pledged, but for all such remedies that the owner of the goods would
have against them. If the amount exceeds over and above his interest it is to be held by him in
trust for the Pledgor.
Conclusion: In the given case, the bank is entitled to recover not only the amount of advance
due to it, but full value of the consignment. The excess amount if any will be held by the
Banker in trust for the Pledgor i.e. Ravi.
Q.No.10. X took Ys motorcar garage for 2 years on a monthly rent of Rs 1,000. X was entitled
to take the car out of garage when he wanted. After 6 months, X stopped the payment of rent.
Y retained the car at the garage until payment of arrears of rent. Advise the liability of X.
Facts of the case: X took Ys garage for rent for 2 years on a monthly rent of Rs.1000 and
also entitled to take the car out of garage whenever he wanted. After 6 months, X stopped the
payment of rent. Y retained the car at the garage until payment of arrears of rent.
State whether Y (Bailee) has any lien right on the car. In other words, whether X is liable to
pay arrears of rent for taking back his car?
Provision: Sec.170 of the contract Act. Where the Bailee has, in accordance with the purpose
of the bailment, rendered any service involving the exercise of labour or skill in respect of the
goods bailed, he has in the absence of a contract to the contrary, a right to retain such goods
until he receives due remuneration for the services he has rendered in respect of them.
Analysis: Sec. 170 of the Act provides lien right to Bailee, i.e. he can retain the goods until
the charges due are paid. To exercise the right of lien, Bailee must have the possession of the
goods. The lien never arises unless the Bailee has a right to continuing possession of the
goods. In other words, if the Bailor has the right to remove the goods from time to time then
there is no continuing possession of the goods with Bailee. Hence Bailee cant exercise lien
right over such goods.
Conclusion: In the problem, X the Bailor, was entitled to take the car out of garage whenever
he wanted. Therefore, Y has no continuous possession of the goods which is essential to
exercise right of lien. So, Y has no right of lien.
TEST YOUR KNOWLEDGE
1. A takes a mobile by fraud from owner. Before owner avoids the contract, A pledges the
mobile with C, who takes it in good faith, Can owner recover the mobile from C?
2. M had taken the car from N for use for three days. M keeps it for seven days. Then inspite
of his utmost care, the car is damaged. Is M liable for damages to N?
3. Is depositing of money in a bank is a Bailment? And why or why not?
4. Is depositing of ornaments in a bank locker is a Bailment?
5. In Bailment the Bailee cannot sell the goods, he can either retain the goods or sue for non-
payment of dues. Comment.
6. What is the position in the case of pledge?
7. Mrs. X delivered her old gold jewllery to her husband Mr X a goldsmith for the purpose of
making new one out of it. Is there a contract of Bailment?
8. X finds a defective watch lying on road. He gets it repaired for Rs. 100 and pledges with Y
for Rs. 300. Later on when X the true owner, came to know about this, he sued Y to
recover his watch. Can z recover his watch?
Copyrights Reserved Verified By: K. Venkanna Sir, Sudheer sir,

THE END

15. INDEMNITY AND GUARANTEE

M-11
No. ABC M-09 N-09 M-10 N-10 TO M-14 N-14 M-15 N-15 M-16
N-13
1. B - 1 - - - - - - - -
2. C - - - 1 1 - - - - -
3. C - - - - - - - - - -
4. A - - - - - - - - - -
5. A - - - - - 8 - - 5 -
6. B - - - - - - - - - -
7. A - - - - - - - - - -
8. A 1 - - - - - - - - -
9. B - - - - - - - - - -
10. B - - - - - - - - - -
Q.No.1. Write about Contract of Indemnity? State the rights of Indemnity holder and
Indemnifier? (PM, SM) (N 98, M 99, M 01 - 5M, N09 1M)
MEANING: Dictionary meaning of the word Indemnify is to compensate.

a) When a person assures the other to compensate the probable cost or loss, a contract
of indemnity occurs.
b) In terms of Section 124 of the Act, a contract by which one party promises to save the
other from loss caused to him
i) By the conduct of the promisor himself or the conduct of any person is called Contract
of Indemnity.
c) This is also a known as typical form of contingent contract.
PARTIES:
a) Indemnifier: The party who promises to indemnify/ save the other party from loss is
known as indemnifier
b) Indemnified: The party who is promised to be saved against the loss is known
asindemnified.
For Ex:, A shareholder of a company lost his share certificate. He applied for the duplicate.
The company agreed to issue the same on the term that X will compensate the company
against the loss where any holder produces the original certificate. Here there is contract
of indemnity between X and the company.
ESSENTIAL FEATURES OF INDEMNITY CONTRACTS:
a) A contract of indemnity is like any other contract: It must have all the essentials of a
valid contract.
E.g.: Free consent, Competent parties, Lawful object, etc.
b) A contract of indemnity is a contingent contract: Since the contract of indemnity
assures to indemnify the loss, its performance is contingent upon incurring of such loss by
the indemnity holder.
c) A contract of indemnity may be express or implied from the circumstances of each case.
E.g.: A, an auctioneer, sold certain goods on the instructions of B. Subsequently, it was
found out that the goods did not belong to B but to another person C. Now, C claimed
damages from A for unauthorised selling of goods belonging to him. A had to give
compensation to C. Now A sued B for recovery of the amount of loss he has suffered.
Court held that there was an implied contract of indemnity between A and B. It was held
that A can recover his loss from B.
IPCC _36e_Business Laws _ Indemnity & Guarantee______________________160

RIGHTS OF INDEMNITY HOLDER:
In a contract of indemnity, the promisee i.e., indemnity- holder acting within the scope of his
authority is entitled to recover from the promisor i.e., indemnifier the following rights:
a) all damages which he may be compelled to pay in any suit
b) all costs which he may have been compelled to pay in bringing/ defending the suit and
c) all sums which he may have paid under the terms of any compromise of suit
Note:
a) It may be understood that the rights contemplated under section 125 are not exhaustive.
b) The indemnity holder/ indemnified has other rights besides those mentioned above. If he
has incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier
to save him from the liability and to pay it off.
RIGHTS OF INDEMNIFIER: There is no provision in the Indian Contract Act about the
Indemnifiers rights. However, the rights of the Indemnifier are same as the rights of a Surety.
Similar Question: The contract of insurance is not fully covered under the contract of
indemnity. Comment. (N08 1M)
Ans: According to Sec 124 of Indian contract Act, 1872 loss should occur due to conduct of
promisor or some other person it does not include loss due to natural calamity, on the other hand
contract of insurance includes loss due to natural calamity also. Thus contact of insurance though
a contact of indemnity but is not fully covered under Indian contract Act, 1872.
Q.No.2. What is meant by Contract of Guarantee? State the special features of contract
of guarantee. (Sec 126)
MEANING: A contract of guarantee is a contract to

a) Perform the promise made or
b) Discharge the liability incurred by a third person in case of default of such third party.
E.g.: X and his friend Y enters into a shop and X says to the shopkeeper Z, Supply the
goods required by Y and if he does not pay to you, I will.
PARTIES: In a contract of guarantee there will be 3 parties.
a) Surety: The person who gives the guarantee is called Surety.
E.g.: In the aforesaid example, X is called Surety.
b) Principal Debtor: The party in respect of whose default the guarantee is given is called
Principal Debtor.
E.g.: In the aforesaid example, Y is called Principal Debtor.
c) Creditor: The person to whom the guarantee is given is called Creditor.
E.g.: In the aforesaid example, Z is called Creditor.
FEATURES OF A CONTRACT OF GUARANTEE:
a) Tripartite Agreement: A contract of guarantee is a tripartite agreement between the
Principal Debtor, Creditor and Surety.
b) A contract of Guarantee may be either oral or written.
c) The principle of implied promise to indemnify surety(one who gives guarantee) is
contained in Section 145 of the Act which provides that in every contract of guarantee
there is an implied promise by the principal debtor to indemnify the surety and the surety is
entitled to recover from the principal debtor whatever sum he has rightfully paid under the
guarantee but no sum which he has wrongfully paid.
d) The right of surety is not affected by the fact that the creditor has refused to sue the
principal debtor or that he has not demanded the sum due from him.
e) What constitutes consideration in a case of guarantee is an important issue and is laid
down in Section 127 of the Act. As per Section 127 of the Act anything done or any
promise made for the benefit of the principal debtor may be sufficient consideration to the
surety for giving the guarantee.
For example A had advanced money to B on a bond hypothecating Bs property stating
that C is the surety for any balance that might remain due after realization of Bs property.
C was not a party to the bond. He, however signed a separate surety bond two days
subsequent to the advance of the money. It was held that the subsequent surety bond was
void for want of consideration(Nanak Ram vs. Mehinlal 1877, I Allahabad 487).
NATURE OF SURETYS LIABILITY:

As per Section 128 of the Act, the liability of the surety is co-extensive with that of the
principal debtor unless it is otherwise provided by the contract.
Thus it can be seen:
i) the liability of surety is the same as that of principal debtor
ii) where a debtor cannot be held liable on account of any defect in the document, the liability
of the surety also ceases
iii) Continue liability: Suretys Liability continues even if the principal debtor has not been
sued or is omitted from being sued. This is for the reason that the liability of the surety is
separate on the guarantee.
Similar Question: In a contract of guarantee there are three contracts. Comment.
(N 10, N 13 1M, PM)
Ans: Yes. One between Principal Debtor and Creditor, One between Surety and Creditor, and
one between Surety and Principal Debtor.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.1 & 2)
Q.No.3. Contract of Indemnity Vs. Contract of Guarantee
Basis Contract of Indemnity Contract of Guarantee

It is a contract to perform the promise/
Where one party promises to save
1. Meaning discharge the liability of third party in
the other from loss caused to him
case of his default.
2. Parties Indemnifier & indemnity holder. Creditor, Principal debtor & Surety.
3. No. of
Only one contract in one deal. Three contracts in one deal
Contracts
To provide security of a debt or perfor-
4. Purpose To reimburse the loss.
mance of the promisor.
The liability of indemnifier is The liability of a Surety is secondary and
5. Liability
primary and unconditional. conditional.
6. Right to
An indemnifier cannot sue the third A Surety can proceed against the
sue the
party. Principal debtor in his own name
third party
Not necessary that it should be
Surety should give the guarantee at the
7. Request given at the request of indemnity
request of the Principal debtor.
holder.
8. Eligible All parties must be competent to When a minor is Principal debtor even
parties contract. then the contract is valid.

Q.No.4. Write about specific guarantee and Continuing Guarantee?

(M 98, M 99, M 015M)
SPECIFIC GUARANTEE: A guarantee given to a

a) Single debt or specific transaction is called Specific or Simple guarantee.
b) The specific guarantee ceases to be effective on the repayment of debt.
E.g.: X gave his godown to Y on a lease for 10 years on a lease rent of Rs.12,000 p.a. Z
guaranteed that Y would fulfill his obligations. This is a contract of specific guarantee because
the lease for 10 years is entirely an indivisible transaction and cannot be classified as a series
of distinct transactions.
CONTINUING GUARANTEE [SEC.129]: A guarantee which extends to a series of
transactions is called a continuing guarantee (Section 129).
Examples: 1. Where A promises B to be responsible, so long B employs only C to collect
his rentals from tenants for an amount of ` 5000/-, there is a continuing guarantee by A to B so
long C is employed as rent collector. In other words A stands a guarantor to B for rent
collected by C.
1. In the continuing guarantee, the liability of surety continues till the performance or the
discharge of all the transactions entered into or the guarantee is withdrawn.
2. There are two important aspects regarding the revocation of continuing guarantee is:
a) By Notice to the Creditor: The first aspect is the continuing guarantee may at any
time be revoked by the surety as to future transactions by notice to creditors. However
no revocation is possible where a continuing relationship is established.
For instance where A becomes surety of C for Bs conduct as manager in Cs bank
and B is appointed on the faith of this guarantee, A is precluded from annulling the
guarantee so long as B acts as manager in Cs bank.
b) By Death of the Surety: The second aspect is upon the death of surety, the
continuing guarantee is revoked for all future transactions in the absence of any
contract to the contrary.
Q.No.5. State the rights of a Surety against the Principal Debtor, Creditor? (N 99 5M, PM)
After the performing of the promise or discharging of the liability of the principle debtor, surety
acquires various rights against the parties.
The rights of surety are contained in sections 140 and 141 of the Act. These are
1. AGAINST THE PRINCIPAL DEBTOR:
a) Right of subrogation: where a guaranteed debt has become due or default of the
principal debtor to perform a guaranteed duty has taken place, the surety upon
payment or performance of all that he is liable for, is vested with all the rights which the
creditor had against the principal debtor.
The right of the surety is known as the right of subrogation namely the right to stand in
the shoes of the creditor.
b) Right to securities: the surety is entitled to the benefit of all securities made available to
the creditor by the principal debtor whether the surety was aware of its existence or not.
c) Right to recover the amount paid/ Right to indemnity : the surety is entitled to
recover from the principal debtor whatever sums he has rightfully paid.
In this connection the following principles were laid down in Reed vs. Norris

a) The claim of the surety is restricted to that smaller amount which he may have paid
under the principle of accord and satisfaction. Surety is not entitled for higher amount
than what he has paid.
b) Surety can also claim indemnity for any special damages which he has suffered while
discharging his duties
c) Surety can claim even if he has paid a time barred debt as it is a rightful payment
though there are contrary views on this issue.
In all the above instances surety can claim reimbursements only if actual payments have
been made and not where he has merely executed promissory notes. [Panth Narayana
Murthy vs. Marimuthu (1902) 26 Mad. 322,328]
Where surety becomes surety without the knowledge of principal debtor, he is entitled for
all the rights against the principal debtor but not the right to claim an indemnity against the
principal debtor.
2. AGAINST THE CREDITOR:
a) Right of subrogation: the surety gets the right of subrogation for all payments and
performances he is liable. This right would accrue only when the surety has paid the
amount of liability in full.
For example where a creditor had the right to stop the goods or sellers lien, surety
would enjoy the same right after he has paid the amount [Imperial Bank vs. SL
Kathereine Docks 1877 5 Ch.D]
b) Right to securities:
i) surety is entitled for all securities which the debtor has provided to creditor whether
surety is aware of it or not.
ii) Where a creditor loses any of the security by default or negligence the liability of
the surety abates proportionately.
iii) If a creditor does not hand over the securities to surety he can be compelled to do so.
Classic examples of suretys right are: he is entitled for all mortgage rights which
the secured creditor has. But the surety is not entitled for any security provided
subsequent to the contract of guarantee
c) Right to sue: surety has a right to require the creditor to sue for and recover the
guaranteed debt. This right of surety is known as right to file a Quia timet action
against the debtor. There is of course an inherent risk of having to indemnify the
creditor for delay and expense
d) Right to dismiss: surety has a right to call upon the creditor to dismiss the person
from service if the person whose fidelity is guaranteed by surety is persistently
dishonest
e) Right to claim set-off: surety has a right of set off against the principal debtor exactly
as a creditor would have.
f) Right of option on the claim of the funds: surety also can compel the creditor where
he has claim on two funds, to resort to that fund first on which surety has no claim.
g) Right to claim: surety can claim that he is not liable on the guarantee to the creditor, if
it can be proved that principal debtor was incapable of entering into a contract, say
because he was a minor. This is on the principle that the liability of the surety is
coextensive with that of the principal debtor.
Q.No.6. State circumstances in which contract of guarantee can be treated as invalid?
GUARANTEE WHEN INVALID: Following are the circumstances when a guarantee can be
treated as invalid.
a) Mis-representation: When the guarantee has been obtained by means of
misrepresentation made directly by the creditor or made with his knowledge and the
misrepresentation relates to a material part of the transaction.
b) Silence as to material circumstances: when the creditor has obtained any guarantee by
means of keeping silence as to material circumstances.
The expression keeping silence implies intentional concealment of a material fact, as distinct
from a mere non-disclosure thereof.
There must exist some element of fraud. [Balakrishna vs. Bank of Bengal (1891) 15 Bom.
585]. Ex : A engages B as clerk to collect money for him and B fails to account for some of his
receipts. Thereupon, A calls upon B to furnish security for his duly accounting the receipts. C
gives the required guarantee. A does not tell C of the fact of a previous misappropriation by B
and thereafter B again makes a default. The guarantee would be invalid.
c) Failure of joining of other person as co-surety: when a contract of guarantee is entered
into on the condition that the creditor shall not act upon it until another person has joined in
it as co-surety and that other party fails to join as such
Similar Question: The right of subrogation in a contract of guarantee is available to the
surety. State Correct or Not. (MTP 1M)
Ans: Correct. Refer above question.
(IMMEDIATELY REFER PRACTICAL QUESTION NO.3, 4, 5, 13)
Q.No.7. State the rights of a Surety against the Co-sureties
As per section 146 of the Act when two or more persons are co-sureties for the same debt, or
duty, either jointly, or severally and whether under the same or different contracts and whether
with or without the knowledge of each other, the co-sureties in the absence of any contract to
the contrary, are liable, as between themselves, to pay each an equal share of the whole debt,
or of that part of it which remains unpaid by the principal debtor.
A co- surety gets a right to recover from other sureties only when he has paid more than his
share of debt to the creditor.
LIABILITY OF TWO SURETIES IS NOT AFFECTED BY MUTUAL ARRANGEMENTS:
1. As per section 132 of the Act where two persons contract with a third person to undertake a
certain liability and also contract with each other that one of them shall be liable only on the
default of the other, third person not being a party to such contract, the liability of each of such
two persons to the third person under the first contract is not affected by the existence of the
second contract, although such third person may have been aware of its existence.
2. The foregoing is the position of law applicable when the liability is undertaken jointly by two
parties in respect of the same debt. But it is not so when it is in respect of different debts.
For example, a party who accepts a Bill of Exchange for the accommodation of another would
plead that he was the accommodating party. This is because the liability undertaken by the
acceptor and drawer of the bill is in no sense a joint liability. Though they contract to pay the
same sum of money, they contract severally in different ways and subject to different
conditions. [Pages vs. Bank of Bengal (1877) 3 Cal. 174].
Q.No.8. When is the Surety discharged from liability? (M 02 10M)

Point out the circumstances in which a surety is discharged from liability by the
conduct of the creditor. (CMA D 10-4M) (PM)(M09 1M)
Sections 133 to 139 of the Act lay down the law as to when a surety would be discharged.
These are as follows:
1. Where there is any variance in the terms of contract between the principal debtor and
creditor without suretys consent it would discharge the surety in respect of all transactions
taking place subsequent to such variance.

Where A stands to C as surety for B for rent payable by B to C for Cs house and if B
& C agree on a higher rent without As consent, A would stand discharged for the entire
rent amount accruing after the date of variance.
2. The surety is discharged if the principal debtor is discharged
a) by a contract or
b) any act or
c) any omission the result of which is the discharge of principal debtor
For instance where A contracts with B to build a house for him and if C stands as surety for
B, C as surety will stand discharged if A discharges B of his obligation to build house.
Yet another example could be where A agrees to build a house for B if B supplies the
necessary timber and if C stands as surety for As performance. If B fails to supply the
timber, both A and C stand discharged.
There are certain exceptions to the above rule. These are given hereunder: -
a) A mere forbearance on the part of a creditor to sue the debtor or to enforce any other
remedy would not discharge the surety in the absence of any specific provision.
b) Even where the claim is barred by limitation, surety is still responsible. In Krishto Kishore
vs. Radha Romun I.L.R. 12 Cal.330, the plaintiff sued the principal debtor and the surety
for arrears of rent. The plaintiff also made the legal representatives of the principal debtor
a party after knowing about the death of the principal debtor to avoid the debt being barred
by limitation. It was held that even if debt is barred by limitation on account of death of
principal debtor, the surety is still liable. The same view was confirmed by Privy Council in
Mahant Singh vs U Ba Yi A.I.R 1939 P.C 110 where it was held that omission of the
creditor to sue within the period of limitation does not discharge the surety.
c) Where the principal debtor compounds [settles] with the creditor regarding the amount or
promises not to sue, the surety will be discharged. But a contract for giving time to a
debtor is entered into with a third party, the surety will not be discharged.
d) Where there are co-sureties release of one co-surety would not automatically discharge
the other cosureties. Further in between other co-sureties, the released co-surety is not
absolved of his liability vis a vis other co-sureties.
e) The surety would be discharged if the creditor does anything or acts in a manner which
i) Is inconsistent with the rights of surety and
ii) Impairs the eventual remedy of the surety.
For example, A puts M as the cashier under B and agrees to stand as surety provided B
checks the cash every month. M embezzles cash. A was not held to be responsible as B
failed to verify the cash every month.
Similar Question: Under what circumstances guarantee made will be treated as invalid?
(RTP M14)
Ans: Refer above - By invalidation of the contract of Guarantee
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 6, 7, 8, 9, 10, 11& 12)
Q.No.9. Explain the nature and extent of Suretys liability? (M 98, N 00, N 01 5M, M08 1M)
1. Nature of suretys liability: As per Section 128 of the Act, the liability of the surety is co-
extensive with that of the Principal Debtor unless it is otherwise provided by the contract.
Thus it can be seen that:
a) The liability of surety is same as that of Principal Debtor.
b) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
c) Suretys liability continues even if the principal debtor has not been sued or is omitted from
being sued. This is for the reason that the liability of the surety is separate on the guarantee.
2. Commencement of suretys liability:
a) The liability of Surety arises immediately on default by the Principal debtor (i.e
Secondary).
b) The creditor is not required to:
- First sue the Principal debtor or
- First give a notice to the Principal debtor.
3. Suretys liability may be limited: The surety may fix a limit on his liability upto which the
guarantee shall remain effective.
4. Suretys liability may be continuous:
a) The surety may agree to become liable for a series of transactions of continuous nature.
b) However, the surety may fix
- A limit on his liability upto which the guarantee shall remain effective or
- A time period during which the guarantee shall remain effective.
5. Suretys liability may be conditional:
a) The surety may impose certain conditions in the contract of guarantee.
b) Until those conditions are met, the surety shall not be liable.
6. A mere forbearance on the part of a creditor to sue the debtor or to enforce any other
remedy would not discharge the surety in the absence of any specific provision.
7. Even where the claim is barred by limitation, surety is still responsible [Krishto Kishore Vs.
Radha Romun]
8. Where there are co-sureties, release of one co-surety would not automatically discharge
the other co-sureties. Further in between other co-sureties, the released co-surety is not
absolved of his liability vis a vis other co-sureties.
Q.No.10. C, the holder of an over due 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? (PM)
Facts of the case: C, the holder of a bill contracts with X a third party to give time to B
(Principal Debtor).
Provisions and Analysis: According to Sec.136 of the Indian Contract Act, 1872, where a
contract to give time to the principal debtor is made by the creditor with a third person and not
with the principal debtor, the surety is not discharged.
Conclusion: 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.
PRACTICAL QUESTIONS
Q.No.1. C sells and delivers goods to P. Is the agreement of guarantee valid in each of the
following alternative cases?
Case (a): If S afterwards agrees to pay for the goods in default of P.
Case (b): If S afterwards requests C to allow a credit for a period of 1 year to P and promises
that if C does so, he will pay for the goods if P defaults. C agrees to allow as requested.
Decision and Reason:

Case (a): The agreement of guarantee is void because such agreement was without any consideration.
Case (b): The agreement of guarantee is valid because credit period allowed was a sufficient
consideration for Ss promise.
Q.No.2. C agrees to sell goods to P on the guarantee of S for payment of the price of goods in
default of P. Is the agreement of guarantee valid in each of the following alternative cases:
Case (a): If C is a minor Case (b): If S is a minor Case (c): If P is a minor
(CMA J12 - 2M)
Case (a): The agreement of guarantee is void because the creditor is incompetent to contract.
Case (b): The agreement of guarantee is void because the Surety is incompetent to contract.
Case (c): The agreement of guarantee is valid because the incapability of Principal Debtor
does not affect the validity of the contract of guarantee.
Q.No.3.Explain the legal position in the following situations:

i) A guarantees payment to a grocer to the amount of Rs. 2,000 for any grocery that is being
purchased time to time by his wife. Grocer supplies more than the value of Rs. 2000 which is
paid by the A. Afterwards grocer again supplies the grocery to the value of Rs. 8,000. State
the liability of A.
ii) X guarantees payment to Y of the price of the four laptops sets to be sold by Y to X and to
be paid for in a month. Y delivers the sets to X. X pays for them. Later on Y delivers three
more sets to X. State the liability of X. (RTP-May 13)
According to Section 129 of the Indian Contract Act, 1872 a guarantee which extends to a
series of transactions is called a continuing guarantee. The liability of the surety in such a
guarantee continues until the performance or discharge of all the transactions entered into or
the guarantee is withdrawn.
i) In the given case guarantee given by A was a continuing guarantee and thus he is
accordingly liable to grocer to the extent of Rs, 2000.
ii) In this case, the guarantee given by X is not a continuing but in fact it is a specific
guarantee. Therefore in the given case X is not liable for the price of the three sets which
are supplied later to Y.
Q.No.4. S1, S2 and S3 are sureties to C for a sum of Rs.4,000 lent to P. P makes a default to the
extent of Rs.3,000. Discuss the liability of sureties in each of the following alternative cases:
Case (a): If there is no contract between sureties.
Case (b): If there is a contract between sureties that S1 is responsible to the extent of one-
quarter, S2 to be responsible to the extent of one quarter and S3 to be responsible to the extent
of two quarters.
Case (c): If sureties enter into three separate security bonds of different amounts. S1- Rs.700,
S2 Rs.1,100, and S3-Rs.1,200. (FOR STUDENTS SELF STUDY) (CMA D12 2M)
Sec. to which the given problem relates: Sec. 146 and 147.
Case (a): S1, S2 and S3 are liable to pay Rs 1000 each because in the absence of any contract
to the contrary, sureties are liable to contribute equally to the extent of default.
Case (b): S1, S2 and S3 are liable to pay Rs.750, Rs.750 and Rs.1500, respectively, because
co-sureties are liable to contribute according to the terms of contract.
Case (c): S1 is liable to pay Rs.700 (being least of one third of Rs.3,000 and Rs.700), S2 is
liable to pay Rs.1,100 (being least of one half of Rs.2,300 and Rs.1,100) and S3 is liable to
pay Rs.1,200 (being least of Rs.1,200 and Rs.1,200).
Reason: Co-sureties are liable to pay equally subject to the maximum amount guaranteed by
each one.
Q.No.5. Ravi becomes guarantor for Ashok for the amount which may be given to him by
Nalin within six months. The maximum limit of the said amount is Rs 1 lakh. After two months
Ravi withdraws his guarantee. Upto the time of revocation of guarantee, Nalin had given to
Ashok Rs 20,000. (Similar N15 - 5M) (PM)(M06 5M)
i. Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
ii. Whether Ravi is liable if Ashok fails to pay the amount of Rs 20,000 to Nalin?
Discharge of Surety by Revocation: As per section 130 of the India Contract Act, 1872 a
specific guarantee cannot be revoked by the surety if the liability has already accrued. A
continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by
notice to the creditor, but the surety remains liable for transactions already entered into.
As per the above provisions, the answer is Yes. Ravi is discharged from all the subsequent
loans because its a case of continuing guarantee. Where as in second case (ii) Ravi is liable
for payment of Rs 20,000 to Nalin because the transaction has already completed.
Q.No.6. A, B and C are partners in a firm. They jointly promise to pay Rs 1,50,000 to P. C
became insolvent and his private assets are sufficient to pay only 1/5 of his share of debts. A is
compelled to pay the whole amount to P. Examining the provisions of the Indian Contract Act,
1872, decide the extent to which A can recover the amount from B. MTP M16 (M 14 8M)
When two or more persons make a joint promise, the promisee may in the absence of express
agreement to the contrary, compel anyone or more of such joint promisors to perform the
whole of the promise.
In such a situation the performing promisor can enforce contribution from other joint promisors
(Section 43 of the Indian Contract Act). If anyone or more joint promisors make default in such
contribution, the remaining joint promisors must bear the loss arising from such default in equal share.
Hence in the instant case, A is entitled to receive (a) from Cs assets - Rs,10,000 (1/5th of Rs
50,000) and (Rs 50,000 is the amount to be contributed by C being 1/3rd of Rs 1,50,000), (b) from
B - Rs 70,000 (Rs 50,000 being his own share + (50,000-10,000) i.e. Rs 20,000 being one half
share of total loss of Rs 40,000 due to C's insolvency). A can recover Rs 70,000 from B.
Q.No.7. A stands as a Surety for the good conduct of B who is employed in a bank. B
misappropriates some moneys but the bank excuses him without informing A of Bs
misconduct. B again misappropriates. Is A liable to the bank? (For student self study)
Facts of the case: B whom is employed in a Bank was given Surety by A. Later, B
misappropriates banks money but they excused him without informing the same to A. Again B
has done the same.
Issue or question involved: Is A liable to the Bank or is he discharged from his liability?
Provision: Sec. 139 of the contract Act. impairing the sureties remedy if the creditor does
any act which is inconsistent with the right of the surety, or omits to do any act which his duty
to the surety requires him to do and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.
Analysis: It is the duty of the creditor not to do anything inconsistent with the rights of the surety. If
the creditors act or omission deprives the surety of benefit of his remedy, the surety is discharged.
Conclusion: In this case the Bank has failed to inform the surety of misconduct of B
therefore according to the sec.139 of the Contract Act Surety is discharged from his liability.
Q.No.8. B owes C a debt guaranteed by A. C does not sue B for a year after the debt has become
payable. In the meantime, B becomes insolvent. Is A discharged? Decide with reference to the
provisions of the Indian Contract Act, 1872. (CMA D08 2M) (PM)(RTP N 14)
Facts of the Case: B owes C a debt guaranteed by A. C does not sue B for a year after the
debt has become payable. In the meantime, B becomes insolvent.
Provisions and Analysis: It is based on the provisions of Section 137 of the Indian Contract
Act, 1872 relating to discharge of surety. The section states that mere forbearance on the part of
the creditor to sue the principal debtor and/or to enforce any other remedy against him would
not, in the absence of any provision in the guarantee to the contrary, discharge the surety.
Conclusion: In view of these provisions, A is not discharged from his liability as a surety.
Q.No.9. A gives to C a continuing guarantee to the extent of Rs.5,000 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 Indian Contract Act, 1872, decide whether A is liable on
his guarantee given to C. (PM)(N08 5M) (For student self study)
Facts of the case: Without the knowledge of A (surety) B and C contract that C shall continue
to supply B with vegetables for ready money.
Provisions: Discharge of surety by variance in the terms of the contract.
Analysis: As per Sec.133 of the Indian Contract Act, 1872 any variance made without the
suretys consent in the terms of the contract between the principal debtor and the creditor,
discharges the surety with respect to the transactions subsequent to the variance.
The reason for such a discharge in the given case is that the surety agreed to be liable for a
contract which is no more in existence and he is not liable on the altered contract because it is
different from the contract made by him.
Conclusion: In the given problem all the above requirements are fulfilled. Therefore, A is not
liable on his guarantee for the vegetables supplied after this new arrangement.
Q.No.10. M advances to N Rs 5,000 on the guarantee of P. The loan carries interest at ten
percent per annum. Subsequently, N becomes financially embarrassed. On Ns request, M
reduces the interest to six per cent per annum and does not sue N for one year after the loan
becomes due. N becomes insolvent. Can M sue P? (PM)
Facts of the Case: M advances to N Rs 5,000 on the guarantee of P. The loan carries
interest at ten percent per annum, subsequently, N becomes financially embarrassed. On Ns
request, M reduces the interest to six per cent per annum and does not sue N for one year.
Provisions and Analysis: Sec 133 of The Indian Contract Act, 1872 where there is any
variance in the terms of contract between the principal debtor and creditor without suretys
consent it would discharge the surety in respect of all transactions taking place subsequent to
such variance.
Conclusion: M cannot sue P, because a surety is discharged from liability when, without his
consent, the creditor makes any change in the terms of his contract with the principal debtor,
no matter whether the variation is beneficial to the surety or does not materially affect the
position of the surety.
Q.No.11. Mr. X, is employed as a cashier on a monthly salary of Rs 2,000 by ABC bank for a
period of three years. Y gave surety for Xs good conduct. After nine months, the financial
position of the bank deteriorates. Then X agrees to accept a lower salary of Rs 1,500/- per
month from Bank. Two months later, it was found that X has misappropriated cash since the
time of his appointment. What is the liability of Y? (PM) (RTP N 14)
IPCC _ 36e_Business Laws _ Indemnity & Guarantee______________________170

Facts of the Case: Y gave surety for Xs good conduct. After nine months, the financial
position of the bank deteriorates. Then X agrees to accept a lower salary of Rs. 1,500/- per
month from Bank.
Provisions and Analysis: Sec 133 of The Indian Contarct Act, 1872 where there is any
variance in the terms of contract between the principal debtor and creditor without suretys
consent it would discharge the surety in respect of all transactions taking place subsequent to
such variance.
Conclusion: In the instant case Y is liable as a surety for the loss suffered by the bank due to
misappropriation of cash by X during the first nine months but not for misappropriations
committed after the reduction in salary.
Q.No.12. A contracts with B for a fixed price to construct a house for B within a stipulated time.
B would supply the necessary material to be used in the construction. C guarantees As
performance of the contract. B does not supply the material as per the agreement. Is C
discharged from his liability. (PM)(For student self study)
According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by any
contract between the creditor and the principal debtor, by which the principal debtor is
released or by any act or omission for the creditor, the legal consequence of which is the
discharge of the principal debtor. In the given case the B omits to supply the timber. Hence C
is discharged from his liability.
Q.No.13.A stands surety for B for any amount which C may lend to B from time to time
during the next three months subject to a maximum of Rs. 50,000. One month later A revokes
the guarantee, when C had lent to B Rs. 5,000. Referring to the provisions of the Indian
Contract Act, 1872 decide whether A is discharged from all the liabilities to C for any
subsequent loan. What would be your answer in case B makes a default in paying back to C
the money already borrowed i.e. Rs. 5,000?
Facts of the case: A stands surety for B for any amount which C may lend to B from time
to time during the next three months subject to a maximum of Rs. 50,000. One month later A
revokes the guarantee, when C had lent to B Rs. 5,000.
Provisions: The problem as asked in the question is based on the provisions of the Indian
Contract Act 1872, as contained in Section 130 relating to the revocation of a continuing
guarantee as to future transactions which can be done mainly in the following two ways:
1. By Notice: A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor.
2. By death of surety: The death of the surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so far as regards future transactions.
(Section 131). The liability of the surety for previous transactions however remains.
Conclusion: Thus applying the above provisions in the given case, A is discharged from all
the liabilities to C for any subsequent loan. Answer in the second case would differ i.e. A is
liable to C for Rs. 5,000 on default of B since the loan was taken before the notice of
revocation was given to C.
Copyrights Reserved

TEST YOUR KNOWLEDGE
1. X contracts to indemnify Y for the loss resulting out of litigation filed against him(Y) by Z. Z
obtains a court decree against Y. Before paying to Z, Y sues X to get the promised
amount. Will B succeed?
2. A became surety before X for payment of rent by Y under a lease. Subsequently, without
As consent, Y agreed to pay higher rent to X. What is the position of the A?
3. D, a dealer, supplies certain goods to F in separate lots regularly. Z guarantees payment by F
upto Rs.45,000 for goods supplied from time to time. Can a Guarantee by Z be revoked?
4. A farmer contracted to sell grains to merchant to be grown on his land. S guarantees
performance by farmer. Merchants later divert the stream of water necessary for
irrigation of Farmers land. As a result, the crop could not be grown. Is S liable for the
guarantee?
5. A obtains housing loan from LIC Housing and if B promises to repay what is the nature of
contract?
6. If A becomes a surety to C for payment of rent by B under a lease and B and C contract,
without the consent of A that B will pay higher rent, then what would be the liability of A
as a surety?
7. A puts M as the cashier under B and agrees to stand as surety provided, B checks the
cash every month. B does not check the cash every month. M embezzles the cash. What
is the liability of A in this case?
8. On discharging the debt due by the principal debtor to the creditor what is the remedy
available to the surety?
9. A,B,C and D enter in a shop. A says to the trader, supply the goods required by B and if
he does not pay, I will. C says to the trader, Let D have the required goods. I will see
that you are paid. State the nature of the contract between A and B and that of between
C and D.
10. X, an auctioneer, certain goods on the instructions of Y. Later on, it is discovered that the
goods belonged to Z and not to Y. X recovered damages from X for selling his goods. Can
X recover the compensation from Y?
11. X asks Y to beat X and promises to indemnify Y against the consequences. Y beats Z and
is fined Rs. 1,000. Can Y claim Rs. 1,000 from X?
12. C agrees to sell goods to P on the guarantee of S for payment of the price of goods in
default of P. is the agreement of guarantee valid in each of the following alternative case:
Case (a): if C is a minor
Case (b): If S is a minor
Case (c): If P is a minor
13. S gives guarantee for the loans to given by C to P. P owes Rs. 1,00,000 to C. P becomes
insolvent and a dividend of 20 paise in a rupee is declared. Discuss the rights of C and S if
(a) S gives the guarantee for the payment of the loan of Rs. 60,000 (b) S gives the
guarantee for the payment of the loan subject to a limit of Rs. 60,000.
14. S stands as surety for the good conduct of P who is employed in Bank on monthly salary
of Rs. 5,000. Discuss the liability of S in each of the following alternatives cases:
Case (a): two month after, S gave notice revoking his guarantee. Five months after it is
discovered that P has been continuously misappropriating Rs. 1,000 per month.
Case (b): two months after Ps employment, S dies. Five months after it is discovered that
P has been continuously misappropriating Rs. 1,000 per month.
Case (c): Two month after Ps employment, bank requested P to accept a salary of Rs.
4,000 and P agrees to accept. Five months after, it is discovered that P has been
continuously misappropriating Rs. 1,000 per month.
Case (d): P misappropriates Rs. 1,000 but the bank excuses him without informing S of
Ps misconduct. P again misappropriates Rs. 5,000. Bank asks S to pay Rs. 5,000.
15. Can there be oral guarantee?
16. Can the principal debtor be minor?
17. Can the surety be minor?
18. Can a specific guarantee be revoked?
19. Can a continuing guarantee be revoked?

Copyrights Reserved Pavan Sir, Adithya Kiran Sir
To MASTER MINDS, Guntur Executed By: Sai Ram Sir
THE END

16. CONTRACT OF AGENCY
N-11
No. ABC M-09 N-09 M-10 N-10 M-11 To M-13 N-13 M-14 N-14 M-15 N-15 M-16
N-12
1. B - - - 1 - - - 1 - - - - -
2. B - - 1 - - - 4 - - - - - -
3. A - - 1 - - - - - - - - - -
4. C - - - - - - - - - - - - -
5. A - - - - - - - - - - - - -
6. B - - - - - - - - - - - - -
7. A - 1 - - 1 - - - 5 - 1 - -
8. A - - - - - - - - - - - - -
9. C - - - - - - - - - - - - -
10. B - - - - - - - - - - - - 4
11. A - - - - - - - - - - - - -
12. B - - - - - - - - - - - - -
13. A - - - - - - - - - - - - -
14. B - - - - - - - - - - - - -
15. B - - - - - - - - - - - - -
Q.No.1. What is meant by Contract of Agency? State some features of contract of

agency. (PM)(N10 1M)
INTRODUCTION: The person who acts on behalf of some other person is known as Agent.
The contract which creates such relationship is known as Contract of Agency.
AGENT [SEC.182]: An agent is a person,

1. employed to do any act for another or
2. To represent another in dealings with third persons.
3. The person for whom such act is done, or who is so represented, is called the Principal.
E.g.: A, who wishes to sell his house, appoints an Estate agent to find a purchaser for it.
Here A is Principal and the Estate agent is an agent representing A.
CONTRACT OF AGENCY:
1. The Indian Contract Act,1872 does not define the word Agency.
2. Agency is a comprehensive word used to describe the relationship between one person
and another, where the first mentioned person brings the second mentioned person into
legal relation with others.
3. The Rule of Agency is based on the maxim Quit facit per alium, facit per se: i.e., he who
acts through an agent is himself acting
A contract of agency has all the essentials of a contract, with some special features of its
own, which are discussed below.
SALIENT FEATURES OF CONTRACT OF AGENCY:
a) Basis: The basic essence of agency is that the principal is bound by the acts of the agent
and is answerable to third parties.
b) Consideration not necessary: Unlike other regular contracts, a contract of agency does
not need consideration. In other words, the relationship between the principal and agent
need not be supported by consideration.
IPCC _36e_Business Laws _ Contract of Agency_______________________ 174
c) Capacity to employ an agent: A person who is competent to contract alone can employ
an agent. In other words, a person in order to act as principal must be a major and of
sound mind. Minor or unsound mind cannot employ an agent.
d) Capacity to be an agent: A person in order to be an agent must have authority to
contract. So, minor has no capacity to contract but may have authority to act as agent. An
agent brings about a contractual relationship between the principal and third persons and
therefore his contractual capacity is immaterial.
Similar Question: Agency cannot be created without consideration. Comment.
(N 10, 13 1M)
Ans: No. Refer above Sec 185
Q.No.2. Briefly explain different modes of creation of an agency relationship.

(M10 1M, M 13 - 4M)
THERE ARE FIVE GENERAL METHODS OF CREATING AGENCY THEY ARE:

1. Agency by Actual authority (Sec. 186 & 187):A contract of agency can be
a) Express or implied or
b) It can be in the form of words spoken or written.
c) While the express contract is often expressed in clear terms,
d) Implied contracts are created by circumstances.
2. Agency by ratification- Refer Question No:3
3. Agency by ostensible authority: Where the authority of the Principal is inferred by the
conduct of the Principal, there the agency through ostensible authority is born. It is further
classified into:
a) Agency by estoppels (Sec.237): Where a person, either by his conduct or by words
spoken or written, lead another person to believe that the person is his agent then he
cant deny that fact subsequently.
E.g.: A informs B, in the presence and within the audible distance of P that P is his
agent. Later B enters into contract with P thinking that P is the Agent of A. In a
situation like this, neither P nor A can refuse the obligations under the contract. P
had become the agent of A by estoppel.
b) Agency by Holding out: Past positive or affirmative action on the part of the Principal
is required to establish agency relationship under holding out principle. The following
conditions are required to be present in case of Agency by Holding out:
i) Statement or conduct of misrepresentation.
ii) A genuine, not necessarily a fraudulent misrepresentation and
iii) The third person should prove that he entered into the transaction believing the
statement so made to be true.
E.g.: X allows Y, his servant to purchase goods for him on credit from Z and later on
pays for them. One day X pays cash to Y to purchase goods. Y misappropriates the
money and purchases goods on credit from Z. Z can recover the price of his goods
from X because X had held out Y as his agent in earlier occasions.
4. Agency by necessity: Sometimes circumstances would compel and a relation of agency
would fall in place. This is often out of necessity. To constitute an agency by necessity,
following conditions must be fulfilled. (CMA D 09 4M)

a) Agent should be in a position of not being able to communicate with the Principal.
b) There must have been an actual and definite commercial necessity.
c) The Agent must have acted bonafide and for the benefit of Principal.
d) The Agent must have adopted most reasonable and practicable course of action.
E.g.: A captain of a ship can borrow money at other ports where there are no agents to act
on behalf of the owner, to carryout some repairs to the ship. In this case, the Captain
becomes an agent by necessity.
5. Actual authority and apparent authority:
a) Actual authority to act as agent stems from a consent. The consent to act may be oral
or in writing.
b) Some time the authority can also be implied authority. The implied authority is
incidental or usual or customary. It would depend on the circumstance of the case.
c) The authority of the agent is apparent where the principal represents or is regarded by
law as having represented that another has, authority.
d) Under the doctrine of apparent authority, the principal is bound to third parties by the
acts of that person though he had not given such authority or had limited the authority
by instructions not made known to third party.
The notion of apparent authority is essentially confined to relationship between the
principal and third party.
Similar Question: P says to Q in the presence of and within the hearing of R that he (P) is the
Rs agent. Q supplied goods of Rs 20,000 to P considering him as Rs agent. State the
position of R in reference to the Indian Contract Act,1872.
Ans: Refer above question Sec 237.
Q.No.3. What is meant by Agency by Ratification? State some rules for valid ratification.
(Or) The relationship of Principal and Agent may be constituted by subsequent ratification
by the Principal. (Sec.196) (CMA D 11 4M) (N 03 - 6M, N 06 - 5M, M10 1M) (PM)
MEANING: Ratification is an approval of the previous act or contract.

Agency is also created by subsequent ratification or approach. The subsequent ratification
becomes necessary because the agent acts without the knowledge or the approval of the
principal.
FOLLOWING ARE THE RULES OF RATIFICATION.

1. Ratification can be made only by a person who was in existence at the time of act.
2. Ratification must be by a person for whom the act was done, professing him to be
principal. This implies competency on the part of the person ratifying the act.
3. Ratification would date back to the date of the act, and validate it
4. Ratification may either be express or even implied by the conduct of the person on whose
behalf the act was done.
5. Ratification must be of the whole act and not just for a part of the act.
6. Ratification [by the purported principal] of the acts of an agent cannot be such as to create
any liability to third parties or cause any injury or damage to third parties
7. Ratification cannot be done if the person ratifying is in knowledge of facts which are
materially defective.

8. ILLEGAL acts cannot be ratified.
9. Acts which are void ab initio cannot be ratified
10. Ratification would be restricted to certain limitations to which original acts are limited and
ratification can be to that portion of exceeded authority by the agent.
Similar Question: Ratification of agency is valid even if the knowledge of the Principal is
materially defective. (True/False)
Ans: False. Valid ratification cant be made by a person whose knowledge of the facts of the
case is materially defective.
Q.No.4. A Delegate cant further delegate? (Or) State the provisions relating to Sub-
agent. (Sec.190) (N 00 - 5M, N01 - 10M)
1. Sub agency refers to case where an agent appoints another agent.

2. The appointment of sub agent is not lawful, because the agent is a delegatee and a
delegatee cannot further delegate.
This is based on the Latin principle delegatus non potest delegare.
3. The appointment of a sub agent would be valid if the terms of appointment originally
contemplated it.
4. Sometimes customs of the trade may provide for appointment of sub agents.
In both these cases the sub agent would be treated as the agent of the principal.
Position of sub agent Vis Vis third parties where the sub agent is properly appointed
a) Where the sub-agent is properly appointed: Where a sub agent is properly
appointed, The principal is bound by his acts and is therefore responsible to third
parties as if he were an agent originally appointed by the principal.
b) In the case of appointment without authority:
i) In case where the appointment of sub agent takes place without authority, the
principal is not bound by the acts of sub agent and sub agent is not bound to the
principal.
ii) It is the agent who is the principal of sub agent.
iii) Where the sub-agent purportedly acts in the name of first principal, that first
principal may ratify the act of sub agent.
iv) However if the sub agent acts in his own name or in the name of the agent who has
without authority delegated to the sub agent the business which is in fact of the
principal, the principal cannot ratify such acts of sub agent.
Q.No.5. Write briefly about Substituted Agent.
1. Substituted agents are not sub agents. They are agents of the principal.
2. Where the principal appoints an agent and if that agent identifies another person to carry
out the acts ordered by principal, than the second person is not to be treated as a sub
agent but only as an agent of the original principal.
For example, A directs B his solicitor to sell his property by auction and B appoints C
an auctioneer. In this regard, C is an agent of A and not a sub agent.
3. While selecting a substituted agent the agent is bound to exercise same amount of
diligence as a man of ordinary prudence and if he does so he will not be responsible for
acts or negligence of the substituted agent.
For example X consigns goods to Y a merchant for sale. Y in due course employs an
auctioneer in goods to sell goods of X and also allows him to receive the proceeds of
sale. The auctioneer becomes insolvent afterwards without handing over the proceeds.
Here Y will not be responsible to X as he has discharged his duties as a man of ordinary
prudence and diligence.
Q.No.6. State the position of Undisclosed Principal and agent towards third parties.
Particulars Principal existence Principal name

Named principal Disclosed Disclosed
Un Named principal Disclosed Not disclosed
Un Disclosed principal Not Disclosed Not disclosed
An undisclosed principal comes into play where an agent having the authority to contract,
Does not disclose the fact, concealing not only the name of the principal but also the fact that
There is a principal; here the agent gives an impression that he acts on his own.
In undisclosed principal, the mutual rights, of principal, agent and third party are as follows:
a) The liability of the agent is his own since he has not disclosed that there is a principal
b) Where the third party comes to know about the existence of the principal he can sue the
agent or the principal.
c) The third partys interest would stand protected evenly, and would not suffer even if the
principal surfaces and intervenes at a later date.
d) Third party has a right to refuse, if the principal discloses himself, on the ground that had
he known about the principal he would not have entered into the contract.
Q.No.7.What is an Irrevocable Agency? When such agency is created?

(N09, M11 -1M, M15-1M)
Where the agency cannot be terminated, it is called irrevocable agency.

a) Where agency is coupled with interest then it is a case where the agent has interest in the
subject matter of agency.
In this case, agency cannot be terminated except where there is an express provision, to
cause prejudice to the interest of the agent. For the agency coupled with interest does not
come to an end on the death, insanity, or the insolvency of the principal.
b) Where the agent has incurred personal liability, principal cannot revoke the agency leaving
the agent to face the liability.
For instance where A appoints B as his agent and B purchases as per orders of A
some rice in his personal name, A cannot revoke the authority
c) Where the agent has partly exercised the authority, the authority cannot be revoked,
where A appoints B as his agent to procure 10 bags of rice and B procures in the name
of A then A cannot revoke his authority.
Similar Question: A, who owes B Rs 10,000, appoints B as his agent to sell his landed
property at Delhi and after paying himself (B) what is due to him, to hand over the balance to
A. Can A revoke his authority delegated to B? (M 14 5M)
Ans: According to Section 202 of the Indian 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 doctrine of agency coupled with interest applies. Therefore, A cannot revoke
the authority delegated to B.
State whether the following statement is correct or incorrect: (M 15 1M)
1. Agency coupled with interest is irrevocable
Ans: correct
Q.No.8. Discuss the extent of Agents authority. (N 99 - 5M)
The agents authority is governed by two principles namely (a) in normal circumstances and
(b) in emergency.
LET US EXAMINE THESE TWO SITUATIONS -
1. Agents authority in normal circumstances: An agent has the power and authority to do
all acts lawful and necessary in the normal circumstances in discharge of his functions.
For instance, where A who lives in Andamans employs B as his agent to collect his
debts in Kanyakumari, B has all the authority including the authority to pursue legal
proceedings.
Similarly B can also give valid discharge. Again for example, where A executes a power
of attorney in favour of B in running a silk factory, but the power of attorney did not
authorize B to borrow and if B borrowed, it was stated to be an act in excess of his
authority [Ferguson vs. Uma Chand Bold (1905) 33 Cal. 343]
2. Agents authority in emergency: An agent has the authority in an emergency to do all
such acts as a man of ordinary prudence would, for protecting his principal from losses
under similar circumstances.
A typical case is where the agent who handles perishable goods like mangoes can
decide the time, date and place of sale, not necessarily as per instructions of the principal
but with the intention of protecting the principal from losses. Here the agent acts in an
emergency and acts as a man of ordinary prudence.
Notice to an agent: Any notice given to an agent or information obtained by him will be
deemed to be given to the principal. Ex T took out a policy with P, an insurance company
against accidental injury. The proposal form contained a declaration that the proposer did
not suffer from any physical infirmity. T was blind in the eye. This fact was known to the
agent. T was illiterate and the agent filled in the form without disclosing Ts infirmity. It was
held that the policy was good, as P was bound by the knowledge of the agent. [Bawden
vs. The London Insurance Co.]
Q.No.9. State the liability of named Principal for the contracts entered by the agent on his
behalf? (PM)
THE LIABILITY OF THE PRINCIPAL TO THIRD PARTIES WOULD FALL UNDER

FOLLOWING CATEGORIES -
a) When agent acts within the scope of his authority: The principal is liable for the acts of
the agent done within the scope of his actual or apparent authority. Where there are
specific restrictions on the authority of the agent, then the principal is not bound by it.
b) Principal is bound by notice given to agent: The principal is bound by the notice given
to the agent. Knowledge of the agent is knowledge of the principal. Knowledge of a bank
manager is knowledge of the bank. Therefore the principal is bound except where the
agent does acts that are fraudulent.
c) Liability by estoppels: Where the agency is by the doctrine of estoppel, the principal is
bound by the same doctrine.
d) Liability for misrepresentation: The principal is liable for any fraud or misrepresentation
done by the agent within his authority regardless of the fact that the act has resulted in
benefit to the agent or the principal.
No liab ility where agent exceeds the authority: The principal is not liable for acts of agent
done in excess of authority. Sometimes the acts can be separated as within the authority
and beyond the authority. Principal is bound for those acts which are within the authority.
But where acts are not separable, the principal may repudiate the entire transactions.
e) Unnamed principal: Where the existence of the principal is known but his name is not
Known, the principal is liable for the acts of the agent. Third parties can sue the principal
for the acts of the agent, unless agent refuses to disclose the identity of the principal.
Q.No.10. State the duties of an Agent against his Principal? RTP M- 16, (M - 16) 4M
FOLLOWING ARE THE DUTIES OF AN AGENT:

1. Duty in conducting principals business: The agent should conduct the business of the
principal as per directions of the principal or in the absence of any directions as per the
custom prevalent in the business
2. Liable for loss: The agent is liable to the principal for any loss if he deviates from the
above duty/ obligation where he did not act according to instruction of the principal. It was
held by the Supreme Court in a case that the agent had to compensate the principal where
the agent did not act according to the instructions of the principal.
In the given case the agent was under instruction to insure the goods of the principal but
he did not. There was an explosion in the Bombay dock and as a result all the goods of the
principal, along with others, was destroyed.
The Government passed an ordinance that where ever there was a fire insurance policy,
full amount would be paid to the owners and where there was no insurance cover, half the
amount would repaid. The principal was paid half the losses and he sued the agent for the
balance loss and the agent was ordered by court to pay the balance amount to
compensate him for loss.
3. Requirements as to skill and diligence: Agent must act always as a person with
diligence and skill normally exercised in the trade. He would otherwise be responsible to
compensate the principal for any loss suffered by the principal for want of his skill.
Where A acts as an agent for B and sells rice to C in the usual course of business
without verifying about Cs solvency and if C goes insolvent, then A is responsible for
losses arising to B.
4. Agents duty to account: The agent has to maintain and render proper accounts to
principal whenever demanded. He is bound to pay the principal all sums received. He is
bound to maintain accounts even if the contract is illegal or void.
5. Duty to communicate: The agent must in order to obtain instruction, communicate and
contact the principal as a man of ordinary diligence.
(IMMEDIATELY REFER PRACTICAL QUESTION NO. 6, 7)
Q.No.11. State the rights of an Agent against his Principal.
FOLLOWING ARE THE RIGHTS OF AN AGENT:

a) Right of lien on principals property: An agent is entitled to retain the goods, properties
and books for any remuneration, commission etc due to him. The possession of such
property should be however lawful.
b) Right of indemnification for lawful acts: The principal is bound to indemnify the agent
against all consequences of lawful acts done in exercise of his authority.
For example A of Delhi appoints B of Mumbai as agent to sell his merchandise. As a
result B contracts to deliver the merchandise to various parties. But A fails to send the
merchandise to B and B faces litigations for non-performance. Here A is bound to
protect B against the litigations and all costs, expenses arising out of that.
c) Right of indemnification against acts done in good faith: Where the agent acts in good
faith on the instruction of principal, agent is entitled for indemnification of any loss or
damage from the principal.
Where P appoints A as his agent and directs him to sell certain goods which in fact
turned out to be not those belonging to P and if third parties sue A for this act, A is
entitled for reimbursement and indemnification for such act done in good faith.
However the agent cannot claim any reimbursement or indemnification for any loss etc
arising out of acts done by him in violation of any penal laws of the country.
d) Right of retention: The agent can retain, out of the sums received from the principal, such
amounts towards reimbursement of expenditure, remuneration and advances paid by him
on account towards the business and render accounts only for the balance.
e) Right of remuneration: The agent in the normal course is entitled for remuneration as per
the contract. In the absence of any agreed amount of remuneration, he is entitled for usual
remuneration which is customary in the business. However he is not entitled for any
remuneration for acts done through misconduct/negligence.
Q.No.12. Enumerate the rights and duties of Principal in a Contract of Agency?
The following are the rights and duties of Principal in a Contract of Agency:
Rights of a principal: The rights of Principal are based on the duties of an Agent. These are:
1. He can enforce various duties of an Agent.
2. He can recover compensation from Agent for any breach of duty by him.
3. He can forfeit agents remuneration where the Agent is guilty of misconduct in the business of
agency.
4. Principal is entitled to get any extra or secret profit that an agent makes out of his agency.
5. If an Agent, without the knowledge of his Principal, deals in the business of the agency on
his own account, instead of on account of his Principal, then:
a) The Principal may repudiate the transaction (Sec 215) or
b) Principal is entitled to claim from the agent any benefit which may have resulted to him
from the transaction.(Sec 216)
6. Principal is entitled to receive all sums that agent receives on Principals account.
Duties of Principal: Duties of principal are similar to rights of an Agent. They are:
1. It is the duty of the Principal to pay agreed remuneration to the Agent. However, where the
Agent is guilty of misconduct in the business of agency, the Principal can forfeit the
Agents remuneration for such work.
2. It is the duty of the Principal to indemnify the Agent for the consequences of all lawful acts
entrusted to him, and for all such acts which he performs in good faith. However, he is not
bound to compensate the Agent against the consequences of unlawful acts.
3. It is the duty of the Principal to compensate the Agent for any loss or damage incurred by
him Due to principals negligence or lack of skill.
Q.No.13. State the position of an Agent towards third parties (Or) State the rules relating to
the personal liability of an Agent for a contract entered into by him on behalf of his
Principal. (M 05 - 6M) (PM)
Under certain circumstances like, where the agent exceeds his authority, or has no authority
or the principal does not ratify the act of the agent, the agent is personally liable. This is known
as doctrine of implied warranty of authority.

The rules with regard to personal liability of an agent are set out hereunder.
i) Where the contract expressly provides for personal liability of the agent
ii) Where the agent signs the negotiable instrument without indicating that he is signing it for
the principal
iii) Where the agent works for a foreign principal
iv) Where the agent acts for a principal who cannot be sued viz., Ambassador of a country
etc.
v) Where a Govt. servant enters into a contract on behalf of Union of India in disregard of
Article 299(1)
vi) Where according to usage in trade in certain kinds of business agents are personally
liable.
vii) Agency coupled with interest: where the agency is coupled with interest. An agency will
be treated as such where the agent himself has interest in the subject matter. The interest
of the agent to come under this category should not be an ordinary interest like towards
remuneration etc., but should be a special interest.
Similar Question: Briefly explain when the principal is liable for the acts of an agent and state
under what circumstances an agent is personally liable. (MTP 8M)
Ans: Principal liability for the acts of an agent Refer Q.no: 11 Full
Personal liability of an agent Refer above question & Answer any 4 points
Q.No.14. When an Agency gets terminated as per Section 201 of the Indian Contract Act,
1872? (Or) Different modes of termination of Agency (M 00 - 10M)
The termination of the agency arises and is based on the doctrine of revocation.
In terms of Section 201 of the Act, following are the circumstances when the authority
conferred on the agent gets terminated:
a) Revocation of authority by the principal
b) Renunciation of agency by the agent
c) Completion of business of agency
d) Death or insanity of principal or agent and
e) Insolvency of the principal
The rights of the principal to revoke the authority of the agent and the right of the agent to
renounce are each exercised at their will and pleasure.
Following are the general principles in this regard:
a) Even where the agent gets interested in the subject matter, that would not be a ground for the
principal to terminate the agency. The agency becomes an agency coupled with interest.
b) The principal cannot revoke the authority after the authority has been exercised.
c) The agents authority cannot be revoked if the agent has partially exercised the authority.
d) Where there is an implied or express contract, agency may continue for a period of time.
The agency cannot be terminated without compensation.
e) Reasonable notice must be given for termination; otherwise the agent is entitled for
compensation.
f) Revocation and Renunciation must be express or implied.
Similar Question: When termination of agent's authority takes effect as to agent and as to
third persons (Sec 208)?
Ans: Refer the heading Revocation by Principal, above.
QUESTIONS FOR ACADEMIC INTEREST
Q.No.15. State the position of Unnamed Principal towards third parties.
Introduction:
1. Unnamed Principal is a Principal whose existence is disclosed by the Agent but identity is
not disclosed.
2. Even though he has not disclosed the name of the Principal, the person acting as an agent is
able to bind the Principal by his acts with third parties, if they are within the scope of his authority.
3. The legal position of an Unnamed Principal is the same as that of a named Principal
except that in certain cases, the Agent is personally liable:
a) Where there is a custom of trade making the Agent personally liable. E.g., in case of
stock exchange transactions.
b) If Agent declines to disclose the identity of the Principal, he becomes personally liable
on the contract.
c) If the Principal stops existing (say die) before the disclosure of his identity by his Agent
then the Agent will be liable to third parties for the agency transaction.
PRACTICAL QUESTIONS
Q.No.1. Can the following persons appoint an Agent?

a. A minor who is of sound mind b. A lunatic who is major
c. Guardian of a minor who is of sound mind d. A lunatic who is minor
Applicable Section: Sec.183.

a) No, because he is not of the age of majority and hence he does not have contractual
capacity.
b) No, because he is not of sound mind and hence he does not have contractual capacity.
c) Yes, because he has contractual capacity.
d) No, because he does not have contractual capacity.
Q.No.2. A appoints M, a minor, as his agent to sell his watch for cash at a price not less than
Rs.700. M sells it to D for Rs.350. Is the sale valid? Explain the legal position of M and D,
referring to the provisions of the Indian Contract Act, 1872. (PM)(For students self study)
Facts of the case: M, a minor, as an agent, sells a watch for cash at a price less than the
price fixed by his principal.
Provision: Section 184 Who can be an agent?
Analysis: According to the provisions of Section 184 of the Indian Contract Act, 1872, as
between the principal and a third person, any person, even a minor may become an agent.
But a person who is a minor and unsound mind cannot become an agent, so as to be
responsible to his principal. Thus, if a person who is not competent to contract is appointed as
an agent, the principal is liable to the third party for the acts of the agent.
Conclusion: Thus, in the given case, D gets a good title to the watch. M is not liable to A for
his negligence in the performance of his duties as he is a minor.
IPCC _36 e_Business Laws _ Contract of Agency_______________________ 183
Q.No.3. R is the wife of P. She purchased some sarees on credit from Q. Q demanded the
amount from P. P refused. Q filed a suit against P for the said amount. Decide in the light of
provisions of the Indian Contract Act, 1872, whether Q would succeed?
(M 08) Similar M - 13 (PM)
Facts of the case: R, wife of P, purchased sarees on credit from Q. Later Q demanded P for
such amount. P refuses to pay the amount. Whether the husband is liable to pay for the saree?
Provision: The position of husband and wife is a special and significant case of implied authority.
Analysis: According to Indian Contract Act, 1872 if wife lives with her husband, there is a
legal presumption that the wife has authority to pledge her husbands credit for necessaries.
But the legal presumption can be rebutted in the following cases:
a) Where the goods purchased on credit are not necessaries.
b) Where the wife is given sufficient money for purchasing necessaries.
c) Where the wife is forbidden from purchasing anything on credit or contracting debts.
d) Where the trader has been expressly warned not to give credit to his wife.
If the wife lives apart for no fault on her part, wife has authority to pledge her husbands credit
for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv).
Conclusion: Q will succeed; he can recover the amount from P (Husband), if sarees
purchased by R (Wife) are necessaries.
Q.No.4. D, a carrier, discovers that a consignment of tomatoes owned by E has deteriorated badly
before the destination was reached. D was not able to communicate with E. He, therefore, sold the
consignment for what he can get, which was about one third of the market price for good
tomatoes. E sues D for damages. D claims that he was an agent of necessity. Advise him.
(Or)
Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After
covering half the distance, Suresh found that the apples will perish before reaching Mumbai.
He sold the same at half the market price. Ramesh sued Suresh. Will he succeed?
(PM) (CMA D 10 2M) (For students self study)
Facts of the case: D is a carrier and he is carrying some tomatoes owned by E, discovered
that goods were deteriorated before reaching the destination. D acting as an agent of
necessity, sold the tomatoes for one third of the price for good tomatoes, which was the
amount he could realise. IS D liable for damages to C (Principal) (Or) Is D agent of
necessity?
Provision: Sec.189 of the contract Act applies to the given problem, which says that
Agents authority in an emergency - 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.
Analysis: Sec. 189 of Indian Contract Act, 1872 states that this section creates a special
authority in emergency and constitutes the agent into an agent of necessity to counter any
emergency situation. An act done in the exercise of this extended authority would abide the
Principal, if the Agent was not able to communicate with his Principal and the Agent acts is
good faith in the interest of the parties concerned.
Conclusion: D, as an Agent of necessity, is not liable. Here in this problem, D was an Agent
of necessity. Therefore, he has authority to sell tomatoes which are in deteriorated condition to
protect the Principals interest. Hence as an Agent in emergency he is not liable to E for
damages.

Q.No.5.Sunil borrowed a sum of Rs. 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 Indian
Contract Act, 1872 whether the revocation of the said agency by Sunil is lawful? (M14 5M)
Facts of the case: Sunil borrowed sum 3 lakh from Rajendra and appointed him as his agent.
Afterwards Sunil revoked the agency.
Provision: The given problem is based on the provision related to agency coupled with
interest. According to Section 202 of the Indian Contract Act, 1872 an agency becomes
irrevocable where the agent has himself an interest in the property which forms the subject-
matter of the agency, and such an agency cannot, in the absence of an express provision in
the contract, be terminated to the prejudice of such interest.
Analysis: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.
Conclusion: Thus, when Sunil appointed Rajendra as his agent to sell his land and
authorized him to appropriate the amount of loan out of the sale proceeds, interest was
created in favour of Rajendra and the said agency is not revocable. The revocation of agency
by Sunil is not lawful.
Q.No.6. X, the Principal, instructed Y, his Agent to put goods in Zs warehouse. Y puts half of
the goods in Zs warehouse and the balance in another equally safe warehouse. All the goods
were destroyed by fire without any negligence on the part of Y. Is Y liable to X?
Facts of the case: X instructed Y to put goods in Zs warehouse. Y put half of the goods in Zs
warehouse and remaining in another equally safe warehouse. Without any negligence on the
part of Y all the goods were destroyed in the fire. Is Y liable to X for the loss?
Provision: Sec.211 Agent duty in conducting Principals business. An Agent is bound to

conduct the business of his Principal according to the directions given by the Principal or in the
absence of any such directions, according to the customs which prevail in doing the business
of the same kind at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his Principal and if any profit
accrues, he must account for it.
Analysis: Sec.211 of the Indian Contract Act, 1872 states that it is the duty of the Agent to
conduct the business of his Principal according to the directions of his Principal and abide to
keep himself within his authority. When the Agent acts otherwise, if any loss is sustained then
he must make it good to his Principal and of any profit accrues, he must account for it. In this
case Agent (Y) was instructed to store his Principals goods at a particular place. But he
placed part of them at a different warehouse, where the goods got destroyed.
Conclusion:
a) Y is not liable for the loss of goods put in Zs warehouse because he acted according to
the directions of his Principal.
b) Y is liable for the loss of goods put in another warehouse because he has not acted
according to the directions of his principal.
Q.No7. Mr.Ahuja of Delhi engaged Mr. Singh as his Agent to buy a house in West Extension
area. Mr. Singh bought a house for Rs.20 lakhs in the name of a nominee and then purchased
it himself for Rs.24 lakhs. He then sold the same house to Mr.Ahuja for Rs.26 lakhs. Mr.Ahuja
later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to
Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain.

(Or)
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
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 Rs 1 lac?
MTP N15, (N 05 - 4M) (PM) (RTP May-13,RTP M16: MAY-08,12),(M-16 4M)
Facts of the case: Mr.Ahuja of Delhi engaged Mr.Singh as his agent to buy a house.
Mr.Singh bought a house for Rs.20 lakhs in the name of a nominee and then purchased it
himself for Rs.24 lakhs. Later he sold the same house to Mr.Ahuja for Rs.26 lakhs. Whether
Mr.Ahuja is entitled to recover the excess amount paid to Mr.Singh?
Provision: Sec 216 - Principals right to benefit gained by agent dealing on his own account in
the business of agency.
If an Agent, without the knowledge of his Principal, in the business of his agency, deals on his
own account, instead of an account of his Principal, the Principal is entitled to claim from the
Agent any benefit which may have resulted to him from the transaction.
Analysis: As per Sec.216 an agent occupies fiduciary position and therefore, it is his duty not
to do anything which would bring his personal interest and his duty to the principal in conflict
with each other. This conflict invariably arises when the agent is personally interested in the
Principals transaction. This is what happened in the given problem. Here Mr.Singh, without
the knowledge of Mr.Ahuja, purchased the House and resold it to Principal (Mr.Ahuja) and
made a profit of Rs.6,00,000 (26 lakhs 20 lakhs)
Conclusion: According to the provisions of Sec.216, Mr.Ahuja is entitled to recover the
excess amount of Rs.6,00,000/- paid to Mr.Singh.
Q.No.8.Aditya holds a lease from Birla which is terminable on three months notice. C, an
unauthorized person gives notice of termination to Aditya. Examine with reference to the
provisions of the Indian Contract Act, 1872, whether Aditya is bound by termination of Lease.
(RTP May-15)
Facts of the case: Aditya holds a lease from Birla which is terminable on three months
notice. C, an unauthorized person gives notice of termination to Aditya.
Provision: The given problem is based on section 200 of the Indian Contract Act, 1872 which
deals with the provisions related to the ratification of unauthorized act cannot injure third
person. Provisions says that an act done by one person on behalf of another, without such
other persons authority, which if done with authority, would have the effect of subjecting a
third person to damages, or of terminating any right or interest of a third person cannot, by
ratification, be made to have such effect.
Analysis: According to the given situation, Aditya holds a lease from Birla which is terminable
on three months notice. C, an unauthorized person gives notice of termination of lease to
Aditya. Accordingly the notice given by C (unauthorized person) if, ratified, would terminate
Adityas right or interest in the lease property.
Conclusion: So such an unauthorized act of C cannot be ratified by Birla, so as to binding on
Aditya.
Copyrights Reserved

TEST YOUR KNOWLEDGE

1. A agrees to work as an agent of B without remuneration. Later A refuses to work. Can B
hold him guilty of breach of contract?
2. P without Qs authority, lends Qs money to R. Later Q accepts interest on money from R.
Discuss the rights of Q.
3. A person appointed by the original agent to act in the business of agency, but under the
control of original agent, is known as---------------
4. Which of the following agency is irrevocable?
a) agency for fixed period b) agency for single transaction
c) agency coupled with interest d) continuing agency
5. X appoints the following persons. State whether they can be called as agent of X:
a) A to cook food for X and Xs family on a monthly salary of Rs. 1,000
b) B to furnish kitchen in his house for Rs. 10,000
c) C to buy utensils for his kitchen for an agreed commission of 5% on purchases.
d) Mrs. X to buy provisions for his kitchen without any commission on purchases.
e) D to advice on financial matters.
6. Can the following persons appoint an agent
a) A minor who is of sound mind. b) A lunatic who is major
c) Guardian of minor who is of sound mind d) A lunatic who is minor
7. Can the following persons be appointed as an agent?

a) A minor who is of sound mind b) A lunatic who is a major
c) A guardian of a minor who is of sound mind
8. Mrs. X purchased some goods forming part of necessaries on Mr. Xs credit from Y. state
whether Mr. X. is liable to Y in each of the following alternative cases:
Case (a): If Mrs. X lives with Mr. Y
Case (b): If Mrs. X lives apart for no fault on her part
Case (c): If Mrs. X lives apart for no fault on part of Mr. X.
9. X, a driver of a bus requested a passenger to drive the bus to its destination. He drove the
bus negligently and injured X. is the owner of a bus liable?
10. The principal, instructed Y his agent to insure the goods. Y failed to do so and the goods
are destroyed by fire. Is Y liable to X?
11. Y, the proprietor of a newspaper published at Xs request a libel upon X in the paper and X
agreed to indemnify Y against the consequences of the publication. Y was sued by X and
had to pay damages and also incurred expenses. Is X liable to Y for such damages and
expenses?
12. X consigned goods to Y for sale and instructed him not to sell under a fixed price. Z being
ignorant to Xs instructions, enters into a contract with Y to buy the goods at a price lower
than the reserved price. Is X bound by the contract?
13. Y being Xs agent for the sale of goods, induces Z to buy them by misrepresentation which
he was not authorized by X to make. State the legal position.
14. What is meant by an agents implied authority?
15. Does the termination of agency terminate sub-agency?
16. Define agent and principal
17. Who may be an agent?
18. Who can employ an agent?
19. Is consideration for agency necessary?
20. What is the true test of agency?
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Previous Questions Papers 6 10

HOURS ALLOTMENT FOR PREPARATION OF BUISINESS LAWS

10. PAYMENT OF GRATUITY ACT, 1972

Q.No.1. Establishments covered under the Payment of Gratuity Act?

ESTABLISHMENTS COVERED UNDER THE ACT:

Initial Applicability Continued Applicability

Q.No.2. the Appropriate Government is empowered to exempt establishments and / or

The Appropriate Government may,

Such notification may be issued retrospectively, subject to the following conditions:

Eligibility / When it is Payable: Gratuity shall be payable to an employee

Establishment Computation of Gratuity Amount

(IMMEDIATELY REFER PRACTICAL QUESTION NO. 5 & 6)

Sec.2 (c) Continuous Service means as defined in Sec.2A

Sec.2(c) defines Continuous service to mean continuous service as defined in Sec.2A.

Meaning - Sec.2A(1) Permissible Interruptions

An Employee shall be said to Sickness,

IPCC _36e_Business Laws _ Payment of Gratuity Act, 1972________________14

A retrenched employee is also entitled for gratuity. State of

Wherever a partnership is converted into a registered Bommidala Bros. v.

(IMMEDIATELY REFER PRACTICAL QUESTION NO. 7, 8 & 9)

To MASTER MINDS, Guntur

Employee [Sec.2(e)] Employer [Sec. 2(f)]

THE FOLLOWING ARE THE CONDITIONS AND PROCEDURES TO BE FOLLOWED FOR

THE FOLLOWING ARE THE DUTIES OF EMPLOYERS REGARDING THE PAYMENT OF

Q.NO.9. Write a short note on the following:

1. MODE OF PAYMENT OF GRATUITY [RULE 9]:

- in cash or To MASTER MINDS, Guntur

Q.No.11. Describe the legal provisions as to compulsory insurance U/s 4A of the

1. Compulsory Insurance [Sec.4A(1)]:

THE PROVISIONS RELATING TO NOMINATION ARE:

Q.No.13. Explain the provisions in respect of disputes as to gratuity. [Sec.7(4) - 7(7)]

1. Application to Controlling Authority: In case of any dispute,

Subject Matter of Dispute Duty of the Employer

2. Inquiry & Decision on Dispute:

THE FOLLOWING ARE THE PROVISIONS RELATING TO APPOINTMENT AND POWERS

QUESTIONS FOR ACADEMIC INTEREST ONLY

Q.No.16. Miscellaneous provisions under the Payment of Gratuity Act.

CERTAIN DUTIES OF EMPLOYER UNDER THE PAYMENT OF GRATUITY (CENTRAL)

Provisions of Law: Sec 4(1) playability of gratuity.

Provisions of Law: Sec 2(4) calculation of gratuity amount payable.

To MASTER MINDS, Guntur

Q.No.7. An employee is employed in a seasonal establishment. The establishment was in

IPCC _36e_Business Laws _ Payment of Gratuity Act, 1972________________26

Q.No.8. S is employed in Golden ice-cream factory, a seasonal establishment. The factory

TEST YOUR KNOWLEDGE

IPCC _36e_Business Laws _ Payment of Gratuity Act, 1972________________32

SYMBOLS OF SELF CONFIDENCE

IPCC _36e_Business Laws _ Payment of Gratuity Act, 1972________________33

APPLICABILITY: Subject to exceptions contained in Sec.16, this act applies to

THE ACT IS NOT APPLICABLE TO THE FOLLOWING ESTABLISHMENTS - SEC.16:

1. Basic Wages: According to Sec.2 (b), Basic wages means

Whether a person is an employee or not, it rest on the Mysore State

EMPLOYEES PROVIDENT FUND SCHEME - SEC.5: