Legal & Tax Aspects of Business

Legal & Tax Aspects of Business: 1. Indian Contract Act - 29-Jan-2012 2. Indian Sale of Goods act – 05-Feb-2012 3. Salient Features of Companies Act: a. Characteristics of a company b. Formation of a company c. Types of companies — private, public. Government etc. 11-Feb2012 d. Management of company — Directors, Meeting, Accounts & Audits. 4. Restrictive & Unfair Trade Practices. – 12-Feb-2012 5. Salient Features of Negotiable Instruments Act a. Bill of exchange, cheque, promissory note, b. Negotiation & Endorsement 26-02-2012 c. Dishonour of Instruments including noting and protest 6. Elements of Income Tax: a. Scope and charge of income tax b. Selected definitions relevant to computation of Total Income c. Residential status 04-Mar-2012 d. Heads of income & computation thereof with special reference to Business Income. & CapitalGains e. Exemptions from Total, Income& Deductions from total income 7. Salient Feature of Central Excise Act—including assessable value. CENVAT credit. – 10-03-2012 8. Salient features of Maharashtra value added Tax Act – 11-03-2012 9. Salient features of Central Sales Tax Act – 18-03-2012 Reference Text : 1. Business Law — N. D. Kapoor 2. Business Law — Buichandani 3. Company Law — Aviar Singi 4. Income Tax — Dr. Singhania 5. Indian Taxes — V.S.Datey 6. S. S. Gulshan. Mercantile Law (Excel Rooks) 7. A. K. Majumdar & G.K. Kapoor: Students guide to Company Law (Taxmann) 8. S K Tuteja: Business Law for Managers (Sultan Chand)

Indian Contract Act 1872 Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended. It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties. The Indian Contract Act 1872 sections 1-75 came into force on 1 September 1872. It applies to the whole of India except the state of Jammu and Kashmir. It is not a complete and exhaustive law on all types of contracts.

Topics to discuss: •

Definition

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Essential Elements of a Valid Contract

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Proper offer and proper acceptance

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Lawful consideration

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Competent to contract or capacity

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Free Consent

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Lawful Object and Agreement

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Agreement not declared void or illegal

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Intention To Create Legal Relationships

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Certainty, Possibility Of Performance

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Legal Formalities

Types of contracts : On the basis of,

o validity o

formation

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performance

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Offer

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Acceptance

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Lawful consideration

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Competent To Contract

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Free Consent

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Revocation of Offer

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Agency

Definition Section 2(h) of the Act defines the term contract as "any agreement enforceable by law". There are two essentials of this act, agreement and enforceability. Section 2(e) defines agreement as "every promise and every set of promises, forming the consideration for each other." Again Section 2(b) defines promise in these words: "when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted, becomes a promise." And other words Say Agreement is Sum of Promise and offer Essential Elements of a Valid Contract According to Section 10, "All agreements are contracts, if they are made by the free consent of the parties, competent to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void." Essential Elements of a Valid Contract are: 1.Proper offer and proper acceptance. there must be an agreement based on a lawful offer made by person to another and lawful acceptance of that offer made by the latter. section 3 to 9 of the contract act, 1872 lay down the rules for making valid acceptance 2.Lawful consideration: An agreement to form a valid contract should be supported by consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration should be real and lawful. 3.Competent to contract or capacity: In order to make a valid contract the parties to it must be competent to be contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion:   

The person has reached the age of maturity. The person is of sound mind. The person is not disqualified from contracting by any law.

4.Free Consent: To constitute a valid contract there must be free and genuine consent of the parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. 5.Lawful Object and Agreement: The object of the agreement must not be illegal or unlawful. 6. Agreement not declared void or illegal: Agreements which have been expressly declared void or illegal by law are not enforceable at law; hence they do not constitute a valid contract. 7. Intention To Create Legal Relationships:-when the two parties enter in to an agreement,there must be intention must be to create a legal relationship between them ...if there is no such intention on the part of the parties ..there is no contract between them ..agreements of a social or domestic nature do not contemplate legal relationship; as such they are not contracts. 8. Certainty, Possibility of Performance 9. Legal Formalities

Types of contracts On the basis of validity: 1. Valid contract: An agreement which has all the essential elements of a contract is called a valid contract. A valid contract can be enforced by law. 2. Void contract[Section 2(j)]: A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void. -- There are many judgments which have stated that where any crime has been converted into a "Source of Profit" or if any act to be done under any contract is opposed to "Public Policy" under any contract—than that contract itself cannot be enforced under the law3. Voidable contract[Section 2(i)]: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party. 4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. These agreements are punishable by law. These are void-ab-initio. “All illegal agreements are void agreements but all void agreements are not illegal.” 5. Unenforceable contract: Where a contract is good in substance but because of some technical defect cannot be enforced by law is called unenforceable contract. These contracts are neither void nor voidable. On the basis of formation: 1. Express contract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be express contract. 2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, promise is said to be implied. 3. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party who is required to perform it. A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another. On the basis of performance: 1. Executed contract: An executed contract is one in which both the parties have performed their respective obligation. 2. Executory contract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as executory contract. 3. Unilateral contract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence.

4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration. Offer Proposal is defined under section 2(a) of the Indian contract Act, 1872 as "when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer". Thus, for a valid offer,the party making it must express his willingness to do or not to do something. But mere expression of willingness does not constitute an offer. An offer should be made to obtain the assent of the other. The offer should be communicated to the offeree and it should not contain a term the non compliance of which would amount to acceptance. Classification of Offer 1. General Offer: Which is made to public in general. 2. Special Offer: Which is made to a definite person. 3. Cross Offer: Exchange of identical offer in ignorance of each other. 4. Counter Offer: Modification and Variation of Original offer. 5. Standing, Open or Continuing Offer: Which is open for a specific period of time. The offer must be distinguished from an invitation to offer. Invitation to offer An invitation to offer is only a circulation of an offer, it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an offer does not result contract and only an offer emerges in the process of negotiation. A statement made by a person who does not intend to bound by it but, intends to further act, is an invitation to offer. Acceptance According to Section 2(b), "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted." Rules: 1. Acceptance must be absolute and unqualified. 2. Communicated to offeror. 3. Acceptance must be in the mode prescribed. 4. Acceptance must be given within a reasonable time before the offer lapses. 5. Acceptance by the way of conduct. 6. Mere silence is no acceptance. Silence does not per-se amounts to communication- Bank of India Ltd. Vs. Rustom Cowasjee- AIR 1955 Bom. 419 at P. 430; 57 Bom. L.R. 850- Mere silence cannot amount to any assent. It does not even amount to any representation on which any plea of estoppel may be founded, unless there is a duty to make some statement or to do some act 7. offree and offerer must be consent Lawful consideration According to Section 2(d), Consideration is defined as: "When at the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to do or abstain something, such an act or abstinence or promise is called consideration for the promise."

In short, Consideration means quid pro quo i.e. something in return. An agreement must be supported by a lawful consideration on both sides. The consideration or object of an agreement is lawful, unless and until it is: 1. forbidden by law, or 2. is of such nature that, if permitted, it would defeat the provisions of any law, or 3. is fraudulent, or involves or implies injury to the person or property of another, or 4. the court regards it as immoral, or opposed to public policy. 5. consideration may take in any form-money,goods, services, a promise to marry, a promise to forbear etc. Contract Opposed to Public Policy can be Repudiated by the Court of law even if that contract is beneficial for all of the parties to the contract- What considerations and objects are lawful and what not-Newar Marble Industries Pvt. Ltd. Vs. Rajasthan State Electricity Board, Jaipur, 1993 Cr. L.J. 1191 at 1197, 1198 [Raj.]- Agreement of which object or consideration was opposed to public policy, unlawful and void- -- What better and what more can be an admission of the fact that the consideration or object of the compounding agreement was abstention by the board from criminally prosecuting the petitioner-company from offence under Section 39 of the act and that the Board has converted the crime into a source of profit or benefit to itself. This consideration or object is clearly opposed to public policy and hence the compounding agreement is unlawful and void under Section 23 of the Act. It is unenforceable as against the Petitioner-Company. Competent To Contract Section 11 of The Indian Contract Act specifies that every person is competent to contract provided: 1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 17 years. 2. He should be of sound mind while making a contract. A person with unsound mind cannot make a contract. 3. He is not a person who has been personally disqualified by law. Free Consent According to Section 14, " two or more persons are said to be consented when they agree upon the same thing in the same sense (Consensus-ad-idem). A consent is said to be free when it not caused by coercion or undue influence or fraud or misrepresentation or mistake. Elements Vitiating free Consent 1. Coercion (Section 15): "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code under(45,1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. 2. Undue influence (Section 16): "Where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other."

3. Fraud (Section 17): "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract. 4. Misrepresentation (Section 18): " causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement". 5. Mistake of fact (Section 20): "Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void". Revocation of Offer A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. A proposal is revoked (1) by the communication of notice of revocation by the proposer to the other party; (2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; (3) by the failure of the acceptor to fulfill a condition precedent to acceptance; or (4) by the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance. Agency In law, the relationship that exists when one person or party (the principal) engages another (the agent) to act for him, e.g. to do his work, to sell his goods, to manage his business. The law of agency thus governs the legal relationship in which the agent deals with a third party on behalf of the principal. The competent agent is legally capable of acting for this principal vis-à-vis the third party. Hence, the process of concluding a contract through an agent involves a twofold relationship. On the one hand, the law of agency is concerned with the external business relations of an economic unit and with the powers of the various representatives to affect the legal position of the principal. On the other hand, it rules the internal relationship between principal and agent as well, thereby imposing certain duties on the representative (diligence, accounting, good faith, etc.). Under section 201 to 210 an agency may come to an end in a variety of ways: (i) By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled with interest when the agent himself has an interest in the subjectmatter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity. (Illustrations to section 201) (ii) By the agent renouncing the business of agency; (iii) By the business of agency being completed; (iv) By the principal being adjudicated insolvent (Section 201 of The Indian Contract Act. 1872)

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (Section 204), though he can always do so, before such authority has been so exercised (Sec 203). Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (Section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (Section 208). When an agent’s authority is terminated, it operates as a termination of subagent also. (Section 210).

Indian Sale of Goods Act Sale of Goods: What is Sale of Goods Contract? As per Section 4(1) of the Indian Sale of Goods Act, 1930, the contract of sale of goods is defined as, “A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.” Few definitions under the Indian Sale of Goods Act, 1930, are: • Goods: Every kind of moveable property other than actionable claims and money, includes stock and shares, growing crops, grass, and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale. •

Buyer: This means a person who buys or agrees to buy goods.

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Price: This means the money consideration for the sale of goods.

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Property: This refers to the general property in goods, and not merely a special property.

Sale: Under a contract of sale, the property in goods is transferred from a seller to the buyer, it is called a sale. •

Sale of Goods: Difference between Contract of Sale and Agreement to Sell The ‘contract of sale of goods’ is a broader term that includes sale and an agreement to sell. The agreement to sell is defined as a legal agreement between parties regarding the transfer of the property in the goods, that is to take place at future time period or subjected to execution of specific conditions. Simply put, suppose you want to sell a house and a plot that comes with it. You can enter into an agreement to sell your property with a prospective buyer stating that in six months if the transaction is not complete, the agreement is null and void and that you get to retain the advance amount paid for this agreement and that you don’t need to return it if the buyer is unable to pay the rest of the amount agreed on to complete the transaction. Here are few major differences between contract of sale and agreement to sell: Contract of Sale

Agreement to Sell

An agreement to sell is a contract that has to be Sale is a contract that has been already executed. executed. In case of loss or damage of goods, in sale, the damages will be covered by the buyer even though the goods are in seller’s custody.

The damage to the goods shall be borne by the seller even if the goods are in custody of the buyer.

In a sale, the seller can sue the buyer for the price of the goods because the property has passed to the buyer.

In an ‘agreement to sell’, the seller has a right to file a law suit for damages for breach of contract.

Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of Contract. Initially, this was part of Indian Contract Act itself in chapter VII (sections 76 to 123). Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed in 1930. The Sale of Goods Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of Sale of Goods also. Basic requirements of contract i.e. offer and acceptance, legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to contract of Sale of Goods also. Contract of Sale - A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. [section 4(1)]. A contract of sale may be absolute or conditional. [section 4(2)]. Thus, following are essentials of contract of sale - * It is contract, i.e. all requirements of ‘contract’ must be fulfilled * It is of ‘goods’ * Transfer of property is required * Contract is between buyer and seller * Sale should be for ‘price’ * A part owner can sale his part to another part-owner * Contract may be absolute or conditional. How Contract of sale is made - A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed. [section 5(1)]. Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. [section 5(2)]. Thus, credit sale is also a ‘sale’. - - A verbal contract or contract by conduct of parties is valid. e.g. putting goods in basket in super market or taking food in a hotel. Two parties to contract - Two parties are required for contract. - - “Buyer” means a person who buys or agrees to buy goods. [section 2(1)]. “Seller” means a person who sells or agrees to sell goods. [section 2(13)]. A part owner can sale his part to another part-owner. However, if joint owners distribute property among themselves as per mutual agreement, it is not ‘sale’ as there are no two parties. Contract of Sale includes agreement to sale - Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. [section 4(3)]. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. [section 4(4)]. The provision that contract of sale includes agreement to sale is only for the purposes of rights and liabilities under Sale of Goods Act and not to determine liability of sales tax, which arises only when actual sale takes place. Transfer of property - “Property” means the general property in goods, and not merely a special property. [section 2(11)]. In layman’s terms ‘property’ means ‘ownership’. ‘General Property’ means ‘full ownership’. Thus, transfer of ‘general property’ is required to constitute a sale. If goods are given for hire, lease, hire purchase or pledge, ‘general property’ is not transferred and hence it is not a ‘sale’.

POSSESSION AND PROPERTY - Note that ‘property’ and ‘possession’ are not synonymous. Transfer of possession does not mean transfer of property. e.g. - if goods are handed over to transporter or godown keeper, possession is transferred but ‘property’ remains with owner. Similarly, if goods remain in possession of seller after sale transaction is over, the ‘possession’ is with seller, but ‘property’ is with buyer. Goods - “Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [section 2(7)]. Price - “Price” means the money consideration for a sale of goods. [section 2(10)]. Consideration is required for any contract. However, in case of contract of sale of goods, the consideration should be ‘price’ i.e. money consideration. Ascertainment of price - The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties. [section 9(1)]. Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. [section 9(2)]. Conditions and Warranties - Opening para of section 16 makes it clear that there is no implied warranty or condition as to quality of fitness of goods for any particular purpose, except those specified in Sale of Goods Act or any other law. - - This is the basic principle of caveat emptor’ i.e. buyer be aware. However, there are certain stipulations which are essential for main purpose of the contract of sale of goods. These go the root of contract and non-fulfilment will mean loss of foundation of contract. These are termed as ‘conditions’. Other stipulations, which are not essential are termed as ‘warranty’. These are collateral to contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved party can claim damages. - - A breach of condition can be treated as breach of warranty, but vice versa is not permissible. A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. [section 12(1)]. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. [section 12(2)]. A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. [section 12(3)]. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract. [section 12(4)]. Where a particular stipulation in contract is a condition or warranty depends on the interpretation of terms of contract. Mere stating ‘Conditions of Contract’ in agreement does not mean all stipulations mentioned are ‘conditions’ within meaning of section 12(2). When condition to be treated as warranty - Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. [section 13(1)]. Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect. [section 13(2)]. Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility or otherwise. [section 13(3)]. Time of payment is not essence of contract but time of delivery of goods is, unless specified otherwise - Unless a different intention appears from the terms of the contract, stipulations as to

time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract. [section 11]. As a general rule, time of payment is not essence of contract, unless there is specific different provision in Contract. In other words, time of payment specified is ‘warranty’. If payment is not made in time, the seller can claim damages but cannot repudiate the contract. Caveat Emptor - The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no implied condition or warranty as to quality or fitness of goods for any particular purpose. As per section 2(12), “Quality of goods” includes their state or condition. Transfer of property as between seller and buyer - Transfer of general property is required in a sale. ‘Property’ means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of goods even if in the meanwhile buyer has become insolvent. - - - Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. [section 18]. Property passes when intended to pass - Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. [section 19(1)]. For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. [section 19(2)]. Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. [section 19(3)]. Specific goods in a deliverable state - Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. [section 20]. Auction sale - Auction sale is special mode of sale. The sale is made in open after making public announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer accepts a bid.- - - In the case of a sale by auction — (1) where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale; (2) the sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner; and, until such announcement is made, any bidder may retract his bid; (3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction; (4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer; (5) the sale may be notified to be subject to a reserved or upset price; (6) if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. [section 64]. Delivery of goods to buyer - The Act makes elaborate provisions regarding delivery of goods to buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. [section 31]. Unless otherwise agreed, delivery

of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. [section 32]. - - Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can agree to different provisions in respect of payment and delivery. Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - - - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [section 41(1)]. - - Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [section 41(2)]. Buyer’s and Seller’s duties - The Act casts various duties and grants certain rights on both buyer and seller. Rights of unpaid seller against the goods - After goods are sold and property is transferred to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller if his dues are not paid. Suits for breach of the contract - Unpaid seller can exercise his rights to the extent explained above. In addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of breach of contract. Measure for compensation and damages – The Sale of Goods Act does not specify how to measure damages. However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as provided in sections 73 and 74 of Contract Act. Types Of Contracts (With Regard To Delivery Of Goods) There are various types of contracts from the point of view of the delivery of goods. 1. F.A.S. or F.A.R. Contract - F.A.S. stands for 'Free Alongside Ship' and F.A.R. stands for 'Free Along with Rail'. Under FAS or far contracts, the seller is required to deliver the goods alongside the ship or rail named in the contract and to notify the buyer that the goods have been so delivered. The property in the goods passes to the buyer when the seller delivers the goods alongside the ship or rail. Thereafter, it is the buyer's duty to arrange for the contract of affreightment and insurance of the goods while the transit. 2. F.O.B. OR F.O.R Contracts - F.O.B. stands for 'Free on Board' and F.O.R. stands for 'Free on Rail'. In a F.O.B. (or F.O.R.) contract, the seller is required to deliver the goods on board the sip (or on rail), named in the contract. Thus, the seller has to bear all expenses upto and including shipment of goods on behalf of the buyer, who is responsible for their freight, insurance and subsequent expenses. Thus, as soon as the goods are put on board the ship, the property in them passes to the buyer. This will be so even if the goods are not specific or ascertained. The buyer is liable to pay the price even if the goods are lost in transit. The property in goods shall, however not pass if the seller reserves the right of disposal.

3. C.I.F. Contract - The words 'C.I.F.' stand for cost, insurance and freight. A CIF contract is a type of contract wherein the price includes cost, insurance and freight charges. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The property in the goods passes to the buyer on the delivery of documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods. If in the meantime the goods are lost neither the buyer nor the seller is put to loss, whoever is the owner at the time of the loss can recover it from the insurer. 4. Ex-ship contracts - Under an 'ex-ship contract the seller has to delivery the goods to the buyer at the port of destination. In such contracts the property in the goods does not pass until actual delivery. The goods are at the seller's risk during the voyage. It is therefore, for the seller to insure the goods to protect his interest. The seller is to pay the freight, or otherwise release the ship owner's lien and to furnish the buyer with a delivery order or an effectual direction to the ship owner to deliver.

Effects Of Destruction Of Goods - Already Contracted There are various kinds of goods and the parties have various options to agree about the delivery of the goods. What shall be the fate of a contract if the goods are perished or destroyed? 1. Destruction before making of contract -- Where in a contract for sale of specific goods, at the time of making the contract, the goods, without knowledge of the seller, have perished or become so damaged as no longer to answer to their description in the contract, the contract shall become null and void. This is based on the rule of impossibility of performance. Since the subject matter of the contract, which is one of its essential ingredients, itself is destroyed, the contract cannot be carried out. 'Perishing of goods' includes not only complete destruction of the goods when the seller has been irretrievably deprived by the goods or when the goods have been stolen or have in some other way been lost and are untraceable, but also when the goods become un merchantable i.e. when the goods has lost their commercial value. 2. Destruction After the Agreement to Sell but before Sale -- Where in an agreement to sell specific goods, if subsequently the goods, without any fault on the part of the seller of buyer, perish or become so damaged as no longer answer to their description in the agreement, the agreement shall become void, provided the goods are perished before the ownership and risk passes to the buyer. This rule is based on the ground of impossibility of performance. If the title to be goods has already passed to the buyer, he must pay for the goods though the same cannot be delivered.

Documents Of Title To Goods A document of title to goods is one, which entitles and enables its rightful holder to deal with the goods represented by it, as if he were the owner. It is used in the ordinary course of business as proof of the ownership, possession or control of goods. It authorises the possessor to receive the

goods. It also confers a right on the possessor to transfer the goods to another person, by mere delivery or by proper endorsement the delivery. Cash memo, bill of lading, dock warrant, warehouse keeper's or wharfinger's certificate, lorry receipt (L/R), railway receipt (R/R) and delivery order are some of the instances of document of title to goods.

Rights Against The Goods A. Where the property in the goods has passed to the buyer. 1. Right of Lien -- 'Lien is the right to retain possession of goods until certain charges in respect thereof are paid. An unpaid seller who is in possession of the goods is entitled to retain them until payment of the price, where -i. The goods have been sold without any stipulation s to credit; ii. The goods have been sold on credit, but the term of credit has expired or iii. The buyer becomes insolvent. Where the goods have been sold on credit, the right of lien shall remain suspended over the period of credit and shall revive on the expiry of that period. 2. The right of lien is linked with possession of the goods and not with the title. It is not affected even if the seller has transferred the documents of title till he remains in possession of the goods. However, if the buyer has further transferred the documents of title to a bona fide purchaser the seller's lien is defeated. 3. Right of Stoppage in transit -- The right of stoppage of goods in transit, arises to an unpaid seller after he has parted with the possession of the goods. The seller has the right to resume possession of the goods while they are in the course of transit and to retain them until payment or tender of the price. The right of stoppage in transit is available to an unpaid seller, when the buyer becomes insolvent and the goods are in transit. The buyer is said to be 'insolvent' when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they becomes due whether he has committed an act of insolvency or not. 4. Right of Resale -- The rights of lien and stoppage in transit, would not have been of much value if he seller had no right to resell the goods, because the seller cannot continue to hold the goods indefinitely. Section 54 provides an unpaid seller with a limited right to resell the goods. An unpaid seller may resell the goods -i.

When the goods are of perishable nature, without giving any notice to the buyer, of the resale. ii. In case of other goods, when after giving a notice to the buyer of his intention to resell the goods, the buyer does not pay the price within a reasonable time; and iii. Where the seller has expressly reserved the right of resale in the contract. No notice to the buyer is required in that case. B. Where the property in the goods has not passed to the buyer Right of with holding Delivery -- Where the property in the goods has not passed to the buyer, the unpaid seller has the right to withhold delivery of the goods, which is similar to and co-

extensive with his rights of lien and stoppage in transit which he would have had if the property had passed. Rights Against the Buyer Personally (Seller's Remedies Against buyer for Breach of Contract)-- Besides, the above rights against the goods, an unpaid seller has certain rights against the buyer personally. The seller enjoys the following rights in personam (also known as remedies for breach of contract). 1. Suit for Price -- When the property in the goods has passed to the buyer, and the buyer wrongfully neglects or refuses to pay the price, the seller is entitled to sue him for the price. Where under a contract of sale the price is payable on a certain day irrespective of delivery or passing of property, and the buyer refuses or neglects to pay on that day, the seller may sue him for the price. 2. Suit for Damages for Non-Acceptance -- Where the buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him for damages for non-acceptance. 3. Suit for Damages for Repudiation of contract before date of delivery Where the buyer repudiates the contract before the date of delivery, the seller may adopt any of the following two courses of action, viz.i. The seller may treat the contact as rescinded and sue the buyer for damages. This is also known as 'damages for anticipatory breach'. The damages will be assessed according to the prices prevailing on the date of breach. ii. The seller may treat the contract as subsisting and wait till the date of delivery. The contract remains open at the risk and for the benefit of both the parties. If the buyer subsequently chooses to perform there shall be no damages; otherwise he shall be liable to damages assessed according to the prices on the day stipulated for delivery. 4. Suit for Interest --The seller may recover interest or special damages whereby law interest or special damages may be recoverable. Express & Implied Conditions / Warranties : A Sale Conditions and warranties may be express or implied. Express conditions and warranties are which, are expressly provided in the contract. Implied conditions and warranties are those which are implied by law or custom; these shall prevail in a contract of sale unless the parties agree to the contrary. 1. Condition as to title -- In every contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the part of the seller, that : i. In case of a sale, he has a right to sell the goods, and ii. In case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass. The words 'right to sell' contemplate not only that the seller has the title to what he purports to sell, but also that the seller has the right to pass the property. If the seller's title turns out to be defective, the buyer may reject the goods. 2. Condition as to Description -- In a contract of sale by description, there is an implied condition that the goods shall correspond with the description. The term ' sale by description' includes the following situation:

i.

Where the buyer has not seen the goods and buys them relying on the description given by the seller. ii. Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of the goods from the description is not apparent. iii. Packing of goods may sometimes be a part of the description. Where the goods do not conform to be method of packing described (by the buyer or the seller) in the contract, the buyer can reject the goods. 3. Condition as to Quality or Fitness -- Where the buyer, expressly or by implication, makes known the seller the particular purpose for which goods are required, so as to show that the buyer relies on the seller's skill or judgement and the goods are of a description which it is in the course of the seller's business to supply (whether or not as the manufacturer of producer), there is an implied condition that the goods shall be reasonably fit for such purpose. In other words, this condition of fitness shall apply, if: 1. The buyer makes known to the seller the particular purpose for which the goods are required, 2. The buyer relies on the seller's skill or judgement, 3. The goods are of a description which he sellers ordinarily supplies in the course of his business, and 4. The goods supplied are not reasonably fit for the buyer's purpose. 2. Condition as to Merchantability -- Where the goods are bought by description from a seller, who deals in goods of that description (whether or not as the manufacturer or producer) there is an implied condition that the goods shall be of merchantable quality. Merchantable quality ordinarily means that the goods should be such as would be commercially saleable under the description by which they are known in the market at their full value. 3. Condition as to Wholesomeness -- In case of sale of eatable provisions and foodstuff, there is another implied condition that the goods shall be wholesome. Thus, the provisions or foodstuff must not only correspond to their description, but must also be merchantable and wholesome. By 'wholesomeness' it means that goods must be for human consumption. 4. Condition Implied by Custom or Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. In certain sale contracts, the purpose for which the goods are purchased may be implied from the conduct of the parties or from the nature or description of the goods. In such cases, the parties enter into the contract with reference to those known usage. For instance, if a person buys a perambulator or a medicine the purpose for which it is purchased is implied from the thing itself; the buyer need not disclose the purpose to the seller. 5. Conditions in a Sale by Sample: A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied to that effect. Usually, a sale by sample is implied when a sample is shown and the parties intend that the goods should be of he kind and quality as the sample is. 6. Conditions in a sale by Sample as well as by Description: A vast majority of cases where samples are shown, are sales by sample as well as by description. In a contract for sale by sample as well as by description, the goods supplied must correspond both with the sample as well as with the description. Implied Warranties A condition becomes a warranty when -a. the buyer waives the conditions or opts to treat the breach of the condition as a breach of warranty ; or b. The buyer accepts the goods or a part thereof, or is not in a position to reject the goods.

1. Implied Warranty of Quiet Possession -- In every contract of sale, unless there is a contrary intention, there is implied warranties that the buyer's shall have and enjoy quiet possession of the goods. If the buyer's right to possession and enjoyment of the goods is in any way disturbed as consequences of the seller's defective title, the buyer may sue the seller for damages for breach of this warranty. 2. Implied Warranty of Freedom from Encumbrances -- The buyer is entitled to a further warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to buyer before or at the time when the contract is made. If the buyer is required to discharge the amount of the encumbrance it shall be a breach of this warranty and the buyer shall be entitled to damages for the same.

Transfer Of Property In goods The property in the goods is said, to be transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in Goods' which means the ownership of goods, is different from ' possession of goods' which means the physical custody or control of the goods. The transfer of property in the goods from the seller to the buyer is the essence of a contract of sale. Therefore the moment when the property in goods passes from the seller to the buyer is significant for following reasons: 1. Ownership -- The moment the property in goods passes, the seller ceases to be their owner and the buyer acquires the ownership. The buyer can exercise the proprietary rights over the goods. For example, the buyer may sue the seller for non-delivery of the goods or when the seller has resold the goods, etc. 2. Risk follows ownership -- The general rule is that the risk follows the ownership, irrespective of whether the delivery has been made or not. If the goods are damaged or destroyed, the loss shall be borne by the person who was the owner of the goods at the time of damage or destruction. Thus the risk of loss prima facie is in the person in whom the property is. 3. Action Against Third parties -- When the goods are in any way damaged or destroyed by the action of third parties, it is only the owner of the goods who can take action against them. 4. Suit for Price - The seller can sue the buyer for the price, unless otherwise agreed, only after the gods have become the property of the buyer. 5. Insolvency - In the event of insolvency of either the seller or the buyer, the question whether the goods can be taken over by the Official Receiver or Assignee, will depend on whether the property in goods is with the party who has become insolvent. Essentials for Transfer of Property -- The two essentials requirements for transfer of property in the goods are: 1. Goods must be ascertained: Unless the goods are ascertained, they (or the property therein) cannot pass from the seller to the buyer. Thus, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained 2. Intention to PASS Property in Goods must be there: In a sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Buyer's Remedies Against Seller For Breach Of Contract

A buyer also has certain remedies against the seller who commits a breach. These are: 1. Suit for Damages for Non-Delivery- When the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery. This is in addition to the buyer's right to recover the price, if already paid, in case of non-delivery. 2. Suit for price- Where the buyer has paid the price and the goods are not delivered to him, he can recover the amount paid. 3. Suit for specific performance- When the goods are specific or ascertained, a buyer may sue the seller for specific performance of the contract and compel him to deliver the same goods. The court orders for specific performance only when the goods are specific or ascertained and an order for damages would not be an adequate remedy. Specific performance is generally allowed where the goods are of special significance or value e.g. a rare paining, a unique piece of jewellery, etc. 4. Suit for Breach of Warranty- Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat the breach of condition as breach of warranty, the buyer cannot reject the goods. The buyer may, a. set up the breach of warranty in extinction or diminution of the price payable by him, or b. sue the seller for damages for breach of warranty. 5. Suit for Damages for Repudiation of contract before Due date-Where the seller repudiates the contract before the date of delivery, the buyer may adopt any of the following two courses of action -a. He may treat the contract as rescinded and sue the seller for damages. This is also known as 'damages for anticipatory breach'. The damages will be assessed according to the prices prevailing on the date of breach. b. He may treat the contract as subsisting and wait till the date of delivery. The contract remains open at the risk and for the benefit of both the parties. If the seller subsequently chooses to perform there shall be no damages otherwise he shall be liable to damages assessed according to the prices on the day stipulated for delivery. 6. Suit for interest- The buyer may recover such interest or special damages, as may be recoverable bylaw. He may also recover the money paid where the consideration for the payment of it has failed. In the absence of a contract to the contrary, the court may award interest, to the buyer, in a suit by him for the refund of the price in a case of a breach on the part of the seller, at such rate as it thinks fit on the amount of the price from the date on which the payment was made. Rights And Duties Of The Buyer Rights

Duties

1.

To accept the delivery of goods, when the seller To have delivery of the goods as per contract. is willing to make the delivery as per the (secs. 31 & 32) contract (Sec. 31)

2.

To reject the goods when they are not of the description, quality or quantity as specified in To pay the price in exchange for possession of the contract the goods (Sec 37).

3.

To repudiate the contract when goods are delivered in installments without any agreement to that effects (Sec. 38 (1))

To apply for delivery of the goods. (Sec. 35)

To be informed by the seller, when the goods are to be sent by sea route, so that he may

To demand delivery of the goods at a reasonable hour

4.

arrange for their insurance Sec 39 (30)

sec 36 (4)

5.

To have a reasonable opportunity to examine the goods for ascertaining whether they are in conformity with the contract. (sec. 41)

To accept delivery of the goods in installments and pay for them, in accordance with the contract. (Sec. 38 (2)

6.

To sue the seller for recovery of the price, if already paid, when the seller fails to deliver the goods.

To bear the risk of deterioration in the course of transit, when the goods are to be delivered at a place other than where they are sold (sec 40)

7.

To sue the seller for damages if the seller wrongfully neglects or refuses to deliver the gods to the buyer (sec 57)

To inform the seller in case the buyer refuses to accept or rejects the goods (sec 43)

8.

To sue the seller for specific performance

To take the delivery of the goods within a reasonable time after the seller tenders the delivery (Sec. 44)

9.

To sue the seller for damages for breach of a warranty or for breach of a condition treated as breach of a warranty (Sec 59)

To pay the price, where the property in the goods are passed to the buyer, in accordance with the terms of the contract (Sec 55)

To sue the seller the damages for anticipatory To pay damages for non-acceptance of goods 10. breach of contract (Sec 56) (Sec 60) To sue the seller for interest where there is a breach of contract on the part of the seller and 11. price has to be refunded to the buyer (sec 61) Rights and Duties Of Seller Rights 1.

To reserve the right of disposal of the goods until certain conditions are fulfilled. (sec 25 (1)

Duties To make the arrangement for transfer of property in the goods to the buyer.

To assume that the buyer has accepted the goods , where the buyer

2.

3. 4.

i. ii.

Conveys his acceptance; Does an act adopting the sale; or

iii.

Retains the goods without giving a notice of rejection, beyond the specified date (or reasonable time), in a sale on approval. (sec 24)

To ascertain and appropriate the goods to the contract of sale

To deliver the goods only when applied for by To pass an absolute and effective title to the the buyer goods, to the buyer. (sec 35) To make delivery of the goods in installments, To deliver the goods in accordance with the when so agreed terms of the contract

(sec 39 (1)

(sec 31)

5.

To exercise lien and retain possession of the goods, until payment of the price (sec 47 (1)

To ensure that the goods supplied conform to the implied / express conditions and warranties.

6.

To stop the goods in transit and resume To put the goods in a deliverable state and to possession of the goods, until payment of the deliver the goods as and when applied for by price the buyer (sec 49 (2) and 50) (sec 35)

7.

To resell the goods under certain circumstances (sec 54)

To deliver the goods within the time specified in the contract or within a reasonable time and a reasonable hour. [sec 36 (2) and (4)]

8.

To withhold delivery of the goods when the property in the goods has not passed to the buyer (sec 46 (2)

To bear all expenses of and incidental to making a delivery (i.e. upto the stage of putting the goods into a deliverable sate 0 (sec 36 (5)

9.

To deliver the goods in the agreed quantity. (Sec. 37 (1). To deliver the goods in installments only when so desired by the buyer. To sue the buyer for price when the property (Sec 38 (1)) To arrange for insurance of the in the goods has passed to the buyer or when goods while they are in transmission or custody the price is payment on a certain day, in terms of the carrier. of the contract, and the buyer fails to make (Sec. 39 (2)) the payment To inform the buyer in time, when the goods are (sec 55) sent by a sea route, so that he may get the goods insured [Sec. 39 (3) ]

Salient Features of Companies Act A Company is defined as a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability. Companies, whether public or private, are an indispensable part of an economy. They are the modes through which a country grows and expands world wide. Their performance is an important parameter of a countries economic position. In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organisational, financial, managerial and all the relevant aspects of a company. It provides for the powers and responsibilities of the directors and managers, raising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc. The Act applies to whole of India and to all types of companies, whether registered under this Act or an earlier Act. But it does not apply to universities, co-operative societies, unincorporated trading, scientific and other societies. The Act empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of Investigation.

The Companies Act is administered by the Central Government through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of incorporation of new companies and the administration of running companies. The Ministry of Corporate Affairs, earlier known as Department of Corporate Affairs under Ministry of Finance, is primarily concerned with administration of the Companies Act, 1956, other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law. The Ministry has a three-tier organisational set-up:

The Headquarters at New Delhi,

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The Regional Directorates at Mumbai, Kolkata, Chennai and Noida, and

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The Registrars of Companies (ROCs) in States and Union Territories.

The Official Liquidators who are attached to the various High Courts functioning in the country are also under the overall administrative control of the Ministry. The set-up at the Headquarters includes the Company Law Board, a quasi-judicial body, having the principal Bench at New Delhi, an additional principal bench for Southern Region at Chennai and four Regional Benches located at New Delhi, Mumbai, Kolkata and Chennai. The organisation at the Headquarters also includes two Directors of Inspection and Investigation with a complement of staff, an Economic Adviser for Research and Statistics and other Officials providing expertise on legal, accounting, economic and statistical matters. The four Regional Directors, who are in charge of the respective regions, comprising a number of States and Union Territories, interalia, supervise the working of the Offices of Registrars of Companies and the Official Liquidators working in their regions. They also maintain liaison with the respective State Governments and the Central Government in matters relating to the administration of the Companies Act, 1956. Registrar of Companies (ROCs) appointed under Section 609 of the Companies Act, covering various States and Union Territories, are vested with the primary duty of registering companies floated in the respective States and the Union Territories and ensuring that such companies comply with the statutory requirements under the Act. Their offices function as registry of records relating to the companies registered with them. The powers vested with the ROCs are:

Registration of memorandum and articles.

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Registration of prospectus.

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Registration of reduction of capital.

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Call information or explanation.

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Seizure of documents.

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Investigation into affairs of a company.

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Inspection of books of accounts, etc of companies.

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To strike off defunct companies from register.

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Enforcement of duty of company to make returns, etc to Registrar.

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Non-disclosure of information in certain cases.

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Winding up petition by the Registrar.

Official Liquidators are the officers appointed by the Central Government under Section 448 of the Companies Act and are attached to the various High Courts. They are under the administrative charge of the respective Regional Directors who supervise their functioning on behalf of the Central Government. According to the Act, a company means "a company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws". The salient features of a company are:

Artificial legal person:- a company is an artificial person in the sense that it is created by law and lacks the attributes possessed by natural persons. It is invisible, intangible, immortal and exists only in the contemplation of law. Hence, it has to operate through a board of directors consisting of individuals.

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Separate legal entity:- a company is a distinct legal entity, different from its members or shareholders. This implies that:- the property of the company belongs to it and not to the members or shareholders; no member can either individually or jointly claim any ownership rights in the assets of the company; an individual member cannot be held liable for the wrongful acts of the company even if he/she holds virtually the entire share capital; the members of the company can enter into contracts with the company.

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Perpetual succession:- a company enjoys continuous existence and its continuance is not affected by the death, insolvency, mental or physical incapacity of its members. It is created by law and law alone can dissolve it.

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Limited liability of members:- the liability of its members is limited to the amount remaining unpaid on the shares subscribed by them. Thus, in case of fully paid-up shares, the members cannot be asked to contribute any further, if the company goes into liquidation.

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Common seal:- a company has a common seal, which is the signature of that company and signifies common consent of all the members. The company's seal is affixed on all the documents executed for and on its behalf.

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Transferability of shares:- the shares of a public company are freely transferable without the permission of the company but in a manner provided in the Articles. The shareholders may transfer their shares to another person and this does not affect the funds of the company. But, a private company imposes restrictions on transfer of its shares.

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Separate property:- all the property of the company vests in it. The company can control, manage and hold the same in its own name. The members have no ownership rights in the company's property, either individually or collectively. A shareholder does not even have an insurable right in the property of the company. The creditors of the company can have a claim only against the property of the company and not against the property of the individual members.

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Capacity to sue and being sued:- a company can enforce its rights through suits and can also be sued for breach of its statutory rights.

The basic objectives underlying the Act are:

A minimum standard of good behaviour and business honesty in company promotion and management;

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To help in the development of companies on healthy lines;

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To protect the interests of the shareholders;

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To safeguard the interests of the creditors;

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To equip the Government with adequate powers to intervene in the affairs of a company in public interest and as per the procedure prescribed by law;

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A fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts;

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Proper standard of accounting and auditing;

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A ceiling on the share of profits payable to managements as remuneration for services rendered;

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A check on their transactions where there was a possibility of conflict of duty and interest;

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A provision for investigation into the affairs of any company managed in a manner oppressive to minority of the shareholders or prejudicial to the interest of the company as a whole;

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Enforcement of the performance of their duties by those engaged in the management of public companies or of private companies which are subsidiaries of public companies by providing sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of law applicable to public companies;

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To help in the attainment of the ultimate ends of the social and economic policy of the Government;

In response to the changing business environment, the Companies Act, 1956 has been amended from time to time so as to provide more transparency in corporate governance and protect the interests of small investors, depositors and debenture holders, etc. For example, the Companies (Amendment) Act, 2006 introduced an important provision of Director Identification Number (DIN), which is an unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006). The various amendments are:

The Companies (Amendment) Act, 2000

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The Companies (Amendment) Act, 2001

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The Companies (Amendment) Act, 2002

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The Companies (Second Amendment) Act, 2002

a) Characteristics of a company: Any Company Private or Public formed and registered according to The Company Act of 1956 has the following salient features:

• • • • • • • • • •

A separate legal entity An artificial legal body or person An organized and incorporated body Perpetual succession Limited range of liabilities Common seal Right to enter in contracts Right to own property Right to sue Flexibility of investment

Separate Legal Entity : On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. Limited Liability : The liability of the members of the company is limited to contribution to the assets of the company upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company. Perpetual Succession: A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. Separate Property: A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company's property during the existence of the company. Transferability of Shares: Shares in a company are freely transferable, subject to certain conditions, such that no share-

holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Common Seal: A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. Capacity to sue and being sued: A company can sue or be sued in its own name as distinct from its members. Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company. One Share-One Vote: The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has 10 votes in the company. This is in direct contrast to the voting principle of a cooperative society where the "One Member - One Vote" principle applies i.e. irrespective of the number of shares held, one member has only one vote. Distinction between Company and Partnership 1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law. 2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder. 3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members. 4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of provision to contrary in articles of association of the company. 5. In case of partnership, the number of members must not exceed 20 in case of banking business and 10 in other businesses. A Public company may have as many members as it desires subject to a minimum of 7 members. A Private company cannot have more than 50 members. 6. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public limited company is seven and two for a private limited company. 7. In case of a partnership, 100 % consensus is required for any decision. In case of a company, decision of the majority prevails. 8. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder the company' existence does not get terminated.

Illegal Association: Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business, unless the association is registered under the Companies Act or any other Indian law. Any association which does not comply with the above norms is an illegal association. Therefore, a partnership of more 10 or 20 members, as the case may be, is an illegal association unless the registered under the Companies Act or any other Indian law. However, this provision does not apply in the following cases :1. A Joint Hindu Family business comprising of family members only. But where two or more Joint Hindu families come together for business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor members of such family will be excluded. 2. Any association of charitable, religious, scientific trust or organisation which is not formed with a profit motive 3. Foreign companies. When the number of members exceed the prescribed maximum, members must register it under Companies Act or any other Indian law. Consequences of non-registration: An illegal association is not recognised by law. An illegal association cannot enter into any contract, cannot sue any members or any outsider, cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter connected with the association. Minimum number of members A public company must have at least 7 members whereas a private company may have only 2 members. If the number of members fall below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen, the reduction of number of members below the legal minimum is a ground for the winding up of the company.

b) Formation of a company:

Incorporation of Companies in India and setting up of branch offices of foreign corporations in India are regulated by the Companies Act, 1956. The Companies Act of 1956 sets down rules and regulations for the establishment of both public and private companies in India. For the purpose of incorporation in India under the Companies Act, 1956, the first step for the formation of a company is the approval of the name by the Registrar of Companies (hereinafter referred as “ROC”) in the State/Union Territory in which the company will maintain its registered office. This approval is subject to certain conditions. For instance, there should not be an existing company by the same name. Further, the last words in the name are required to be "Private Ltd." in the case of a private company and "Limited" in the case of a Public Company.

Foreign companies engaged in manufacturing and trading activities are permitted by the Reserve Bank of India to open its branch offices in India. Application for permission to open a branch, a project office or liaison office is made via the Reserve Bank of India by submitting form FNC-5 to the Foreign Investment and Technology Transfer Department of the Reserve Bank of India. For opening a project or site office, application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India. A foreign investor need not have a local partner, whether or not the foreigner wants to hold full equity of the company. The portion of the equity thus not held by the foreign investor can be offered to the public. The ROC generally informs the applicant within seven days from the date of submission of the application, whether or not any of the names applied for is available. Once a name is approved, it is valid for a period of six months, within which time Memorandum of Association and Articles of Association together with miscellaneous documents are required to be filed. A company is formed by registering the Memorandum and Articles of Association with the Registrar of Companies. After the duly stamped Memorandum of Association and Articles of Association, documents and forms are filed and the filing duly fees are paid, the ROC scrutinizes the documents and, if necessary, instructs the authorized person to make necessary corrections. The ROC will give the certificate of incorporation after the required documents are presented along with the requisite registration fee, (Annexure A) which is scaled according to the share capital of the company, which will be stated in its Memorandum of association. In case the Memorandum and Articles is to be signed by any of the promoters out side India, then the signatures are required to be made in the presence of Consul of India at the Indian Consulate. Minimum number of Directors and shareholders: a) For incorporating a Private Limited Company a minimum of two directors are required and minimum two shareholders. b) For incorporating a Public Limited Company a minimum of three directors are required and minimum seven subscribers. Thereafter, a Certificate of Incorporation is issued by the ROC, from which date the company comes in to existence. It takes about one to two weeks from the date of filing Memorandum of Association and Articles of Association to receive a Certificate of Incorporation. A private company can commence business on receipt of its certificate of incorporation. A public company has the option of inviting the public for subscription to its share capital. Accordingly, the company has to issue a prospectus, which provides information about the company to potential investors. The Companies Act specifies the information to be contained in the prospectus. The prospectus has to be filed with the ROC before it can be issued to the public. In case the company decides not to approach the public for the necessary capital and obtains it privately, it can file a statement in lieu of prospectus with the ROC. On fulfillment of these requirements, the ROC issues a Certificate of Commencement of business to the public company. The company can commence business immediately after it receives this certificate. To sum up, a company is formed by registering the Memorandum and Articles of Association with the Registrar of Companies of the State in which the main office of the proposed

company would be located. After the duly stamped Memorandum of Association and Articles of Association, documents and forms are filed and the filing fees are duly paid, the ROC scrutinizes the documents and, if necessary, instructs the authorized person to make necessary corrections. The ROC grants the certificate of incorporation after the required documents are presented along with the requisite registration fee, which is scaled according to the share capital of the company, as stated in its Memorandum. Thereafter, a Certificate of Incorporation is issued by the ROC and the company officially comes in to existence w.e.f the date shown on this certificate. It usually takes one to two weeks from the date of filing Memorandum of Association and Articles of Association to receive a Certificate of Incorporation. As a recent development in incorporation procedures, various forms and applications under Companies Act, 1956 and the Rules and Regulations are being facilitated through e-filing which is projected by Ministry of Company Affairs.

c) Types of companies: 1.Public Company means a company which not a private company. 2.Private Company means a company which by its articles of association :a. Restricts the right of members to transfer its shares b. Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered. c. Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company. If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is entitled. Following are some of the privileges and exemptions of a private limited company:1. Mimimum number is members is 2 (7 in case of public companies) 2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply. 3. Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company. 4. Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business. 5. Provisions of Section 165 relating to statutory meeting and submission of statutory report does not apply. 6. One (if 7 or less members are present) or two members (if more than 7 members are present ) present in person at a meeting of the company can demand a poll. 7. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporates incorporated outside India, no person other than the member of the company concerned shall be entiled to inspect or obtain the copies of profit and loss account of that company. 8. Minimum number of directors is only two. (3 in case of a public company)

The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the aforesaid 3 conditions does not automatically convert a private company into a public company. It continues to remain a private company; it merely ceases to be entitled to the privileges and exemptions available to a private company. 3.Companies deemed to be public limited company: A private company will be treated as a deemed public limited company in any of the following circumstances :1. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become the public company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company. 3. Where not less than 25% of the paid up capital of a public company limited is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held. 4. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and from date such acceptance or renewal is first made. 4.Limited and Unlimited companies: Companies may be limited or unlimited companies. Company may be limited by shares or limited by guarantee. a. Company limited by shares In this case, the liability of members is limited to the amount of uncalled share capital. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares. b. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital. Unlimited Company: The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm. 5.Section 25 Companies: Under the Companies Act, 1956, the name of a public limited company must end with the word 'Limited' and the name of a private limited company must end with the word 'Private Limited'. However, under Section 25, the Central Government may allow comapnies to remove the word "Limited / Private Limited" from the name if the following conditions are satisfied :1. The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects 2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects.

6.Holding and Subsidiary companies A company shall be deemed to be subsidiary of another company if :1. That other company controls the composition of its board of directors ; or 2. That other company holds more than half in face value of its equity share capital 3. Where the first mentioned company is subsidiary company of any company which that other's subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A. The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person. 7.Government Companies Means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies. 8. Foreign Companies Means a company incorporated in a country outside India under the law of that other country and has established the place of business in India. What are the type of Business Entities Available in India? The following types of Business entitles are available in India: • • • • •

Private Limited Company Public Limited Company Unlimited Company Partnership Sole Proprietorship

In addition to the above legal entities, the following types of entities are available for foreign investors/foreign companies doing business in India: • • • • • •

Liaison Office Representative Office Project Office Branch Office Wholly owned Subsidiary Company Joint Venture Company

What is a Private Limited Company? A Private Limited Company is a Company limited by shares in which there can be maximum 50 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by

him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 2. What is a Public Limited Company? A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7. What are the advantages of a Limited Company? A limited company has following advantages: Members' (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares. • The management structure is clearly defined, which makes it easy to appoint, retire or remove directors. • If extra capital is needed, it can be raised by selling more shares privately. It is simple to admit more members. • The death, bankruptcy or withdrawal of capital by one member does not affect the company's ability to trade. • The disposal of the whole or part of the business is easily arranged. High status. •

What are the disadvantages of a Limited Company? A limited company has following disadvantages: Requirement to register the company with the registrar of companies and provide annual returns and audited statement of accounts. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns. • Can be more expensive to set up. • May need professional help to form. • As a director, you are treated as an employee and must pay tax. • The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business. •

What entity is best suited? The choice of entity depends on circumstance of each case. Private Limited Company has lesser number of compliances requirements. Therefore, generally where there is no requirement of raising of finances through a public issue and the ownership is intended to be closely held by limited number of persons, Private Limited Company is the best choice. What is the minimum paid-up capital of a Private Limited Company? The minimum paid up capital at the time of incorporation of a private limited company has to be Indian Rupees 1,00,000 (about United States Dollars 2,250). There is no upper limit on having the authorized capital and the paid up capital. It can be increased any time, by payment of additional stamp duty and registration fee.

What is the difference between authorized capital and paid up capital? The authorized capital is the capital limit authorized by the Registrar of Companies up to which the shares can be issued to the members / public, as the case may be. The paid up share capital is the paid portion of the capital subscribed by the shareholders. What is the procedure in obtaining a name approval for the proposed Company? An application in Form No. 1A needs to be filed with the Registrar of Companies (ROC) of the state in which the Registered Office of the proposed Company is to be situated. The application is required to be signed by one of the promoters. The details to be state in the said application are as follows:1. Four alternative names for the proposed company. (The name can be coined names from the objects of the proposed company or the names of the directors, etc. but should definitely be indicative of the main object of the company. Justification for the name needs to be specified along with the application)2. Names and addresses of the promoters (Minimum 7 for a public company while 2 for private company).3. Authorized Capital of the proposed company.4. Main objects of the proposed company.5. Names of other group companies. On submitting the application, the ROC scrutinizes the same and sends the approval / objections in about 10 days to the applicant. On fulfilling of the objections a formal letter of name approval is issued. What is the Memorandum of Association (MOA) and the Articles of Association (AOA) of a company and what is the procedure in their regard? On receipt of the name approval letter from the ROC the MOA and the AOA are required to be drafted. The MOA states the main, ancillary / subsidiary and other objects of the proposed company. The AOA contains the rules and procedures for the routine conduct of the proposed company. It also states the authorized share capital of the proposed company and the names of its first / permanent directors. After the MOA and AOA are required to be stamped. A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty depends on the authorized share capital. What are the documents required to be executed for incorporation? The following documents are required to be executed (signed) before they are submitted to the ROC: 1. MOA and AOA - These are required to be executed by the promoters in their own hand in the presence of a witness in quadruplicate stating their full name, father's name, residential address, occupation, number of shares subscribed for, etc. 2. Form No. 1 - This is a declaration to be executed on a non-judicial stamp paper of INR 20 by one of the directors of the proposed company or other specified persons such as Attorneys or Advocates, etc. stating that all the requirements of the incorporation have been complied with. 3. Form No. 18 - This is a form to be filed by one of the directors of the company informing the ROC the registered office of the proposed company. 4. Form No. 29 - This is a consent obtained from all the proposed directors of the proposed company to act as directors of the proposed company. (Not required in case of private company). 5. Form No. 32 - This is a form stating the fact of appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors.

6. Name approval letter in original. 7. Power of Attorney signed by all the subscribers of MOA authorizing one of the subscribers or any other person to act on their behalf for the purpose of incorporation and accepting the certificate of incorporation. 8. Power of Attorney in case of a subscriber who has appointed another person to sign the MOA on his behalf.9. Filing fees as may be applicable.

d) Management of company:

1. Section 269 in The Companies Act, 1956 2. 269. 4[ Appointment of managing or whole- time director or manager to require Government approval only in certain cases. 3. (1) On and from the commencement of the Companies (Amendment) Act, 1988 , every public company, or a private company which is a subsidiary of a public company, having a paid up share capital of such sum as may be prescribed, shall have a managing or whole- time director or a manager. 4. (2) On and from the commencement of the Companies (Amendment) Act, 1988 , no appointment of a person as a managing or whole- time director or a manager in a public company or a private company which is a subsidiary of a public company shall be made except with the approval of the Central Government unless such appointment is made in accordance with the conditions specified in Parts I and II of Schedule XIII (the said Parts being subject to the provisions of Part III of that Schedule) and a return in the prescribed form is filed within ninety days from the date of such appointment. 5. (3) Every application seeking approval to the appointment of a managing or wholetime director or a manager shall be made to the CentralGovernment within a period of ninety days from the date of such appointment. 6. (4) The Central Government shall not accord its approval to an application made under sub- section (3), if it is satisfied that7. (a) the managing or whole- time director or the manager appointed is, in its opinion, not a fit and proper person to be appointed as such or such appointment is not in the public interest; or 8. (b) the terms and conditions of the appointment of managing or whole time director or the manager are not fair and: reasonable. 9. (5) It shall be competent for the Central Government while according approval to an appointment under sub- section (3) to accord approval for a period lesser than the period for which the appointment is proposed to be made. 10.(6) If the appointment of a person as a managing or wholetime director or a manager is not approved by the Central Government under sub- section (4), the person so appointed shall vacate his office as such managing or whole- time director or manager on the date on which the decision of the Central Government is communicated to the company, and if he omits or fails to do so, he shall be punishable with fine which may extend to five hundred rupees for every day during which he omits or fails to vacate such office. 11.(7) Where the Central Government suo motu or on any information received by it is, prima facie, of the opinion that any appointment made under sub- section (2) without the approval of the Central Government has been made in contravention of the requirements of Schedule XIII, it shall be competent for the Central Government to refer the matter to the Company Law Board for decision. 12.(8) The Company Law Board shall, on receipt of a reference under sub- section (7), issue a notice to the company, the managing or whole- time director or the manager, as the case may be, and the director or other officer responsible for complying with the requirements of Schedule XIII, to show cause as to why such appointment shall not be terminated and the penalties provided under sub- section (10) shall not be imposed.

13.(9) The Company Law Board shall, if, after giving a reasonable opportunity to the company, the managing or whole- time director or the manager, or the officer who is in default, as the case may be, comes to the conclusion that the appointment has been made in contravention of the requirements of Schedule XIII, make an order declaring that a contravention of the requirements of Schedule XIII has taken place. 14.(10) On the making of an order by the Company Law Board under sub- section (9),- (a) the company shall be liable to a fine which may extend to five thousand rupees; 15.(b) every officer of the company who is in default shall be liable to a fine of ten thousand rupees; and 16.(c) the appointment of the managing or whole- time director or manager, as the case may be, shall be deemed to have come to an end and the person so appointed shall, in addition to being liable to pay a fine of ten thousand rupees, refund to the company the entire amount of salaries, commissions and perquisites received or enjoyed by him between the date of his appointment and the passing of such order. 17.(11) If a company contravenes the provisions of sub- section (10) or any direction given by the Company Law Board under that sub- section, every officer of the company who is in default and the managing or whole- time director or the manager, as the case may be, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine which may extend to fifty rupees for every day of default. 18.(12) All acts, done by a managing or whole- time director or a manager, as the case may be, purporting to act in such capacity and whose appointment has been found to be in contravention of Schedule XIII, shall, if the acts so done are valid otherwise be valid notwithstanding any order made by the Company Law Board under sub- section (9). Explanation.- In this section" appointment" includes reappointment and" wholetime director" includes a director in the' whole- time employment of the company] The company agrees to comply with the following provisions: I. Board of Directors (A) Composition of Board i. The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. ii. Where the Chairman of the Board is a non-executive director, at least onethird of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors. Explanation-For the purpose of the expression “related to any promoter” referred to in sub-clause (ii): a. If the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it; b. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.” iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who:

a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director; b. is not related to promoters or persons occupying management positions at the board level or at one level below the board; c. has not been an executive of the company in the immediately preceding three financial years; d. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: i. the statutory audit firm or the internal audit firm that is associated with the company, and ii. the legal firm(s) and consulting firm(s) that have a material association with the company. e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. g. is not less than 21 years of age Explanation For the purposes of the sub-clause (iii): a. Associate shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India. b. “Senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. c. “Relative” shall mean “relative” as defined in section 2(41) and section 6 read with Schedule IA of the Companies Act, 1956. d. Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. Explanation: “Institution’ for this purpose means a public financial institution as defined in Section 4A of the Companies Act, 1956 or a “corresponding new bank” as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].” (B) Non executive directors’ compensation and disclosures All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. Provided that the requirement of obtaining prior approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the Central Government. (C) Other provisions as to Board and Committees

i. The board shall meet at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in Annexure– I A. ii. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. Explanation: 1. For the purpose of considering the limit of the committees on which a director can serve, all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 25 of the Companies Act shall be excluded. 2. For the purpose of reckoning the limit under this sub-clause, Chairmanship/membership of the Audit Committee and the Shareholders’ Grievance Committee alone shall be considered. iii. The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances. iv. An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director within a period of not more than 180 days from the day of such resignation or removal, as the case may be: Provided that where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director within the period of 180 days shall not apply (D) Code of Conduct i.

The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company. ii. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO. Explanation: For this purpose, the term “senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. II. Audit Committee (A) Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following: i. The audit committee shall have minimum three directors as members. Two-thirds of the members of audit committee shall be independent directors.

ii. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Explanation 1: The term “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. iii.

The Chairman of the Audit Committee shall be an independent director;

iv. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries; v. The audit committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee; vi.

The Company Secretary shall act as the secretary to the committee.

(B) Meeting of Audit Committee The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present. (C) Powers of Audit Committee The audit committee shall have powers, which should include the following: 1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal or other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary. (D) Role of Audit Committee The role of the audit committee shall include the following: 1.

Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. 3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. 4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to:

a.

Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956 b. Changes, if any, in accounting policies and practices and reasons for the same c. Major accounting entries involving estimates based on the exercise of judgment by management d. Significant adjustments made in the financial statements arising out of audit findings e. Compliance with listing and other legal requirements relating to financial statements f. Disclosure of any related party transactions g. Qualifications in the draft audit report. 5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval 5A. Reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter. 6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems. 7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors. 12. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. Explanation (i): The term "related party transactions" shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the said audit committee shall have such additional functions / features as is contained in this clause. (E) Review of information by Audit Committee The Audit Committee shall mandatorily review the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the statutory auditors;

4. 5.

Internal audit reports relating to internal control weaknesses; and The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee

III. Subsidiary Companies i.

At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company. ii. The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company. iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. Explanation 1: The term “material non-listed Indian subsidiary” shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Explanation 2: The term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year. Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned. IV. Disclosures (A) Basis of related party transactions i. A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. ii. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee. iii. Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the audit committee, together with Management’s justification for the same.. (B) Disclosure of Accounting Treatment Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. (C) Board Disclosures – Risk management The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically

reviewed to ensure that executive management controls risk through means of a properly defined framework. (D) Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. Furthermore, where the company has appointed a monitoring agency to monitor the utilisation of proceeds of a public or rights issue, it shall place before the Audit Committee the monitoring report of such agency, upon receipt, without any delay. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. (E) Remuneration of Directors i. All pecuniary relationship or transactions of the non-executive directors visà-vis the company shall be disclosed in the Annual Report. ii. Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the Annual Report: a. All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc. b. Details of fixed component and performance linked incentives, along with the performance criteria. c. Service contracts, notice period, severance fees. d. Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. iii. The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report. iv. The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report. v. Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director (F) Management i. As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position: 1. Industry structure and developments. 2. Opportunities and Threats. 3. Segment–wise or product-wise performance. 4. Outlook 5. Risks and concerns. 6. Internal control systems and their adequacy. 7. Discussion on financial performance with respect to operational performance.

8.

Material developments in Human Resources / Industrial Relations front, including number of people employed. ii. Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) Explanation: For this purpose, the term "senior management" shall mean personnel of the company who are members of its. core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads. (G) Shareholders i. In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: a. A brief resume of the director; b. Nature of his expertise in specific functional areas; c. Names of companies in which the person also holds the directorship and the membership of Committees of the Board; and d. Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above ia. Disclosure of relationships between directors inter-se shall be made in the Annual Report, notice of appointment of a director, prospectus and letter of offer for issuances and any related filings made to the stock exchanges where the company is listed. ii. Quarterly results and presentations made by the company to analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. iii. A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’. iv. To expedite the process of share transfers, the Board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight. V.CEO/CFO certification The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that: a. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief : i. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; ii. these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

b.

There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct. c. They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. d.

They have indicated to the auditors and the Audit committee i. significant changes in internal control over financial reporting during the year; ii. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and iii. instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system over financial reporting.

VI. Report on Corporate Governance i. There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annexure- I Cand list of non-mandatory requirements is given in Annexure – I D. ii. The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given inAnnexure I B. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company VII. Compliance 1.

The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company. 2. The non-mandatory requirements given in Annexure – I D may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the nonmandatory requirements shall be made in the section on corporate governance of the Annual Report. Annexure I A Information to be placed before Board of Directors 1. 2. 3. 4. 5.

Annual operating plans and budgets and any updates. Capital budgets and any updates. Quarterly results for the company and its operating divisions or business segments. Minutes of meetings of audit committee and other committees of the board. The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary.

6.

Show cause, demand, prosecution notices and penalty notices which are materially important 7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems. 8. Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company. 9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company. 10. Details of any joint venture or collaboration agreement. 11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property. 12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc. 13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business. 14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material. 15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc. Annexure I B Format of Quarterly Compliance Report on Corporate Governance Name of the Company: Quarter ending on: Particulars I. Board of Directors

Clause of Listing agreement 491

(A) Composition of Board (B) Non-executive Directors’compensation & disclosures (C) Other provisions as to Board and Committees (D) Code of Conduct II. Audit Committee

49 (IA) 49 (IB)

(A) Qualified & Independent Audit Committee (B) Meeting of Audit Committee (C) Powers of Audit Committee (D) Role of Audit Committee (E) Review of Information by Audit Committee III. Subsidiary Companies

49 (IIA)

IV. Disclosures

49 (IV)

49 (IC) 49 (ID) 49 (II)

49 (IIB) 49 (IIC) 49 II(D) 49 (IIE) 49 (III)

(A) Basis of related party transactions 49 (IV A) (B) Disclosure of Accounting 49 (IV B) Treatment

Compliance Remarks Status Yes/No

Particulars

Clause of Listing agreement (C) Board Disclosures 49 (IV C) (D) Proceeds from public issues, rights 49 (IV D) issues, preferential issues etc. (E) Remuneration of Directors 49 (IV E) (F) Management 49 (IV F) (G) Shareholders 49 (IV G) V. CEO/CFO Certification 49 (V) VI. Report on Corporate Governance VII. Compliance

Compliance Remarks Status Yes/No

49 (VI) 49 (VII)

Note: 1. The details under each head shall be provided to incorporate all the information required as per the provisions of the Clause 49 of the Listing Agreement. 2. In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A.. For example, if the Board has been composed in accordance with the Clause 49 I of the Listing Agreement, "Yes" may be indicated. Similarly, in case the company has no related party transactions, the words “N.A.” may be indicated against 49 (IV A) 3. In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in the "Remarks" column as – “will be complied with at the AGM”. Similarly, in respect of matters which can be complied with only where the situation arises, for example, "Report on Corporate Governance" is to be a part of Annual Report only, the words "will be complied in the next Annual Report" may be indicated. Annexure I C Suggested List of Items to Be Included In the Report on Corporate Governance in the Annual Report of Companies 1.

A brief statement on company’s philosophy on code of governance.

2.

Board of Directors: a.

Composition and category of directors, for example, promoter, executive, nonexecutive, independent non-executive, nominee director, which institution represented as lender or as equity investor. b. Attendance of each director at the Board meetings and the last AGM. c. Number of other Boards or Board Committees in which he/she is a member or Chairperson. d. Number of Board meetings held, dates on which held. 3.

Audit Committee: i. ii. iii.

4.

Brief description of terms of reference Composition, name of members and Chairperson Meetings and attendance during the year

Remuneration Committee: i. ii.

Brief description of terms of reference Composition, name of members and Chairperson

iii. iv. v. 5.

Shareholders Committee: i. ii. iii. iv. v.

6.

Attendance during the year Remuneration policy Details of remuneration to all the directors, as per format in main report.

Name of non-executive director heading the committee Name and designation of compliance officer Number of shareholders’ complaints received so far Number not solved to the satisfaction of shareholders Number of pending complaints

General Body meetings: i. Location and time, where last three AGMs held. ii. Whether any special resolutions passed in the previous 3 AGMs iii. Whether any special resolution passed last year through postal ballot – details of voting pattern iv. Person who conducted the postal ballot exercise v. Whether any special resolution is proposed to be conducted through postal ballot vi. Procedure for postal ballot

7.

Disclosures: i. Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large. ii. Details of non-compliance by the company, penalties, strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years. iii. Whistle Blower policy and affirmation that no personnel has been denied access to the audit committee. iv. Details of compliance with mandatory requirements and adoption of the nonmandatory requirements of this clause

8.

Means of communication. i. ii. iii. iv. v.

9.

Quarterly results Newspapers wherein results normally published Any website, where displayed Whether it also displays official news releases; and The presentations made to institutional investors or to the analysts.

General Shareholder information: i. AGM : Date, time and venue ii. Financial year iii. Date of Book closure iv. Dividend Payment Date v. Listing on Stock Exchanges vi. Stock Code vii. Market Price Data : High., Low during each month in last financial year viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.

ix. Registrar and Transfer Agents x. Share Transfer System xi. Distribution of shareholding xii. Dematerialization of shares and liquidity xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity xiv. Plant Locations xv. Address for correspondence Annexure I D Non-Mandatory Requirements 1.

The Board

The Board - A non-executive Chairman may be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in performance of his duties. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company. The company may ensure that the person who is being appointed as an independent director has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him to contribute effectively to the company in his capacity as an independent director." 2.

Remuneration Committee

i. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. ii. To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director. iii. All the members of the remuneration committee could be present at the meeting. iv. The Chairman of the remuneration committee could be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries. 3.

Shareholder Rights

A half-yearly declaration of financial performance including summary of the significant events in last six-months, may be sent to each household of shareholders. 4.

Audit qualifications

Company may move towards a regime of unqualified financial statements. 5.

Training of Board Members

A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them. 6.

Mechanism for evaluating non-executive Board Members

The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend / continue the terms of appointment of non-executive directors. 7.

Whistle Blower Policy

The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. Meetings Protection of investors is one of the primary themes of the companies Act, 1956. The Act provides the shareholders a forum of self-protection and then leaves them to a large extent to take care of themselves. The forum is the general meeting of shareholders. Apart from this, having regard to the position and status envisaged for directors and the role that is assumed to them in the affairs of the company, it is also essential to hold meetings of the board at regular intervals and to discuss in these meetings, all major questions of policy. This enables the directors to be in touch with the management of Company affairs as often as they should be. The committees constituted by the directors shall also meet regularly as per the statutory requirements. There shall also be meetings of debenture holders and creditors of the Company in order to ensure the protection of their interest in the affairs of the Company. Thus, the meetings in a Company can be either general meetings, meetings of directors, or meeting of other persons related to and interested in the affairs of the Company GENERAL MEETINGS General Meeting may take any of the following forms as and when required under the provisions of the Act: • • • •

Statutory meeting Annual General Meeting Extraordinary general meeting Class meeting

STATUTORY MEETING Statutory meeting is mandatory for every company limited by shares or limited by guarantee and having share capital It must be held within not less than 1month nor more than 6 months from the date entitled to commence the business. (Sec. 165(1))

Notice must be send to all the members entitled to attend the meeting 21 days prior to the date of meeting(Sec. 171) Board of Directors shall forward the statutory report to every member at least 21 days before the date of meeting. (Sec. 165(2)) Proviso to Sec.165 (2) provides that if, all the members entitled to attend and vote at the meeting agree, statutory report may be forwarded even after this period. Report shall be certified as correct by at least 2 directors, one being a managing director (if there is one). (Sec. 165(4)).It shall also be certified by auditors as to allotment of shares and cash received on such shares and receipts and payments of the company. (Sec.165(4)). Copy of certified report shall be delivered to the RoC for registration. (Sec. 164(5)). Sec 165(6) mandates to prepare, produce and make accessible, at the meeting the register of members and particulars of their share holding. Minimum 5 (public company) or 2 (any other company) members may be personally present within half an hour from the time for holding the meeting. (Sec.174 (1) and (3)). A chairman shall be elected by the members from themselves on show of hands. (Sec.175) Discussion may be done on any matters relating to the formation of the company or arising out of the report. (Sec. 165(7)). Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting. (Sec.176). Resolutions shall be passed only after giving prior notice as per the Act. (Sec165 (7)).In case of any default of these provisions, every director or officer in default shall be punishable with fine up to Rs. 5,000. (Sec. 165(9)) These provisions shall not be applicable to private companies. (Sec.165 (10)). ANNUAL GENERAL MEETING An Annual General Meeting must be held by every type of company, once a year. (Sec.166(1)). Not more than 15 months must elapse between two annual general meetingsi. (Sec. 166(1)). Proviso to Sec.166(1) mandates that first annual general meeting must be held within 18 months from the date of its incorporation. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by all the members entitled to vote thereat. (Sec.171(2) (i)). The notice of the meeting must be accompanied by a copy of the annual accounts of the company, director’s report on the position of the company for the year and auditor’s report on the accounts.(Sec.210) Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and he is also entitled to appoint proxies in his absence. A proxy need not be a member of that company.A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting. (Sec. 176).

The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions.If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be treated as a working day. (Sec. 166(2)) Minimum 5 (public company) or 2(any other company) members may be personally present withinhalf an hour from the time for holding the meeting. (Sec174) A company may, by appropriate provisions in its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings. (Proviso, Sec.166(2)) In case of default in holding an annual general meeting, Any member of the company may apply to the CLB. The CLB may call, or direct the calling of the meeting, anD give such ancillary or consequential and finewhich may extend to Rs. 5,000 for continuing default, a further fine of Rs. 250 per day. (Sec. 167) The ordinary business at an AGM include:Consideration of annual accounts, director’s report and the auditor’s report • Declaration of dividend • Appointment of directors in the place of those retiring • Appointment of and the fixing of the remuneration of the statutory auditors. (Sec. 168) •

In case any other business (special business) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting.(Sec. 173(1)) Achairman shall be elected by the members from themselves on show of hands.(Sec. 173(2)) EXTRAORDINARY GENERAL MEETING An extraordinary general meeting shall be called by the Board of Directors. (Sec. 169(1)) Such calling shall be on requisition by members of the company holding not less than 1/10 of such of the voting rights in regard to the matter to be discussed at the meeting ; or if the company has no share capital, the members representing not less than 1/10 of the total voting rights in regard to the said matter. (Sec. 169(4)) Such requisition must state the objects of the meeting, signed by the requisitionists and be deposited at the registered office. (Sec169 (2)) Directors should within 21 days, move to call a meeting and the meeting should be actually be held within 45 days from the date of the requisition. (Sec169 (6))

If the directors fail to call and hold the meeting as aforesaid, the requisitionists or, by such requisitionists as representing either a majority in value of paid up capital held by them all or members of the company holding at the date of making the demand for an EGM not less than 1/10 of such of the voting rights in regard to the matter; or if the company has no share capital, the members representing not less than 1/10 of the total voting rights at that date in regard to the said matter may themselves proceed to call meeting within3 months from the date of the requisition, and claim the necessary expenses from the company. (Sec169 (6)) Minimum 5 (public company) or 2(any other company) members may be personally present withinhalf an hour from the time for holding the meeting. (Sec.174) A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. (Sec. 171(2) (ii)) A chairman shall be elected by the members from themselves on show of hands. (Sec. 175) MEETINGS OF THE BOARD In the case of every company, a meeting of its Board of directors shall be held at least once every three months and at least four such meetings must be held every year. (Sec.285) Notice of every meeting of the Board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director. (Sec 286(1)) Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to one thousand rupees. (Sec 286(2)) The quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, whichever is higher. (Sec 287(2)) where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength, the number of the remaining directors, that is to say, the number of the directors who are not interested, present at the meeting being not less than 2 shall be the quorum during such time. (Proviso, Sec.287 (2)) If a meeting of the Board could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place. (Sec 288(1))

The Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board:the power to make calls on shares holders in respect of money unpaid on their shares • power to authorize buy-back referred to in first proviso to sec. 77-A(2)(b) • the power to issue debentures • the power to borrow moneys otherwise than on debentures • the power to invest the funds of the company • the power to make loans. (Sec 292) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting :•

sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking • remit, or give time for the re-payment of, any debt due by a director except in the case or renewal or continuance of any advance made by a banking company to its director in the ordinary course of business • invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any such undertaking as is referred above or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time • borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company, (apart from temporary loans obtained from the company’s bankers in the ordinary course of business) will exceed the aggregate of the paid-up capital of the company and its free reserves • contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty thousand rupees, or five per cent of its average net profits during the three financial years immediately preceding, whichever is greater. (Sec.293) OTHER MEETINGS MEETINGS OF DEBENTURE HOLDERS A company issuing debentures may provide for the holding of meetings of the debenture holders. At such meetings, generally in matters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debenture holders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. •

MEETINGS OF CREDITORS Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. For eg u/s 393, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application, may order the holding of a creditors’ meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the threefourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court’s order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar. ACCOUNTS PROPER BOOKS OF ACCOUNT MAINTAINED UNDER COMPANIES ACT, 1956 The article mainly focus on proper books of account i.e. accrual basis and double entry book keeping. Brief: Section 209 of the Companies Act provides books of account kept by the company. The books of accounts to be kept at registered office of the company in a proper manner. In a brief, the following details to be mentioned in the books of accounts 1) all sums of money received and expended by the company and the matters in respect to which the receipt and expenditure takes place 2) all sales and purchases of goods of the company 3) the assets and liabilities of the company In case of books of accounts are kept at other than registered office of the company at such other place in India as the board may decide the place and necessary intimation to Registrar of Companies a notice in writing giving the full address of that other place within seven days of decision taken in the board meeting. Sub Section (2) provides that the company is having branch office in or outside India, then it should also comply sub section (1) of the Companies act, 1956. Sub section (3) provides that for the purpose of sub section (1) and (2) proper books of account shall not be deemed to be kept to the matters specified therein Sub clause (a) of section 3 of Section 209 provides that books are not kept as are necessary to give true and fair view of the state of affairs of the company or branch office as the case may be and explain its transactions. Sub clause (b) of sub section 3 of section 209 provides that if such books are not kept on accrual basis and according to the double entry system of recording. In the above clause there are two point, one is accrual basis and another is double entry system of recording. If both the methods are not followed then it will not be treated as proper books of accounts maintained by the company as per Section 209 of the Companies Act, 1956 Sub clause(b) of sub section 3 of section 227 of the companies act, 1956 provides that the auditor has to state in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and

proper returns adequate for the purposes of his audit have been received from branches not visited by him; Sub clause (iii) of sub section (2AA) of Section 217 provides that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; From the above, Section 209, 217 and 227 emphasizing proper books of accounts to be maintained. Accrual basis: Accruals is nothing but accumulation. Accrual basis of accounting is a system of accounting that matches revenues and expenses, respectively, to the period they were earned and incurred. Under accrual basis accounting, revenue is recorded when product is shipped or services provided. Similarly, accrual basis accounting requires expenses be recorded in the period in which the related revenues were recognized. Accrual basis accounting differs from cash basis accounting, where revenue and expense are recorded when Cash is received or paid. Here's an example of accrual basis accounting: suppose a company sells and Motor pumps to a customer for Rs.10000 in year 1. The customer pays Rs.3000 in year 1 and Rs.7000 in year 2. Under accrual basis accounting, the entire Rs.10000would be reported as revenue in year 1, even though Rs.7000 wasn't received until year 2. Under accrual basis accounting, the company recognizes revenue when it has substantially fulfilled its obligations to the customer. Because accrual basis accounting requires allocating revenue and expense to different time periods, it is subject to both error and abuse. Nevertheless, only accrual basis accounting meets generally accepted accounting principles. AS-1 of Accounting Standard on Disclosure of accounting policies refers in its report that if the fundamental accounting assumptions viz going concern, consistency and accrual are followed in financial statements, then specific disclosure is not required. If the assumptions are not carried out, then necessary disclosure to be reported in the accounts.

Double Entry Book keeping: The double-entry bookkeeping system refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. There should be debit and credit for each transactions The double entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries. • Any accounting entry in double entry accounting system has two effects one of increasing one account and decreasing another account by equal amount • The following example relates to double entry book keeping. •

The golden rule of Double entry book keeping. Double entry book keeping: Debit the receiver credit the giver Debit what comes in and credit what goes out

Debit all expenses and losses and credit all profits.

incomes and

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Inspection of Books of accounts: As per sub section (4) of section 209 of the companies act, the books of accounts and other books and papers shall be open to inspection by any director during business hours. In case the director wants to send his agents to inspect the books of accounts subject to the condition that the agent must give an undertaking to the company that he shall not pass on any information to any person other than the Director who has appointed him to carry out the inspection. ( Sugrabai Alibhain vs Amtee properties Private limited ) Preservation and destruction of books of accounts: As per sub section 4A of section 209, the books of accounts of the company together with the vouchers relevant to any entry in such books of account relating to a period not less than eight years immediately preceeding current year In case the incorportion of the company is less than eight years, then entire books of accounts preceeing current year shall be preserved. Non compliance of Section 209 of the Companies Act, 1956 : Sub section 5 of Section 209 provides that if any of the person referred in sub section 6 of section 209 fails to take reasonable steps to secure compliance by the company with requirements of this section or any wilful act then he will be liable for imprisonment for a term which may extend to six months or with a fine of Rs.ten thousand rupees or both. The person referred in sub section 6 are as follows

Where the company has managing director or manager , such managing director or manager and all officers and employees of the company In case the company has neither managing director or manager then every director of the company will be referred as person referred in sub section 6 of Section 209 of the Companies Act, 1956. Section 224. Appointment and remuneration of auditors.— 1

[(1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed 2[***]: 3

[Provided that before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re-appointment, if made, will be in accordance with the limits specified in sub-section (1B).] (1A) Every auditor appointed under sub-section (1), 2[***] shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted or refused to accept, the appointment.] 3

[(1B) On and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its Board of directors shall appoint or re-appoint any person 4[who is in full-time employment elsewhere] or firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies: 5

[Provided that in the case of a firm of auditors “specified number of companies” shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere:] Provided further that where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed the specified number in the aggregate: Provided also that where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number, in the aggregate. 6

[Provided also that the provisions of this sub-section shall not apply, on and after the commencement of the Companies (Amendment) Act, 2000, to a private company.] (1C) For the purposes of enabling a company to comply with the provisions of sub-section (1B), a person or firm holding, immediately before the commencement of the Companies (Amendment) Act, 1974, appointment as the auditor of a number of companies exceeding the specified number, shall, within sixty days from such commencement, intimate his or its unwillingness to be re-appointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be reappointed as the auditor; and shall simultaneously intimate to the Registrar the names of the companies of which he or it is willing to be reappointed as the auditor and forward a copy of the intimation to each of the companies referred to therein.

Explanation I.—For the purposes of sub-sections (1B) and (1C), “specified number” means,— (a) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakh, twenty such companies; (b) in any other case twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakh or more. Explanation II.—In computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account.] (2) 7[Subject to the provisions of sub-section (1B) and section 224A at any annual general meeting,] a retiring auditor, by whatsoever authority appointed, shall be re-appointed, unless — (a) he is not qualified for re-appointment; (b) he has given the company notice in writing of his unwillingness to be re-appointed; (c) a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed; or (d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with. (3) Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. (4) The company shall, within seven days of the Central Government’s power under subsection (3), becoming exercisable, give notice of that fact to that Government; and, if a company fails to give such notice, the company, and every officer of the company who is in default, shall be punishable with fine which my extend to 8[five thousand rupees]. (5) The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold offices until the conclusion of the first annual general meeting: Provided that— (a) the company may, at a general meeting, remove any such auditor or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting; and (b) if the Board fails to exercise its powers under this sub-section, the company in general meeting may appoint the first auditor or auditors. (6) (a) The Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act:

Provided where such vacancy is caused by the resignation of an auditor, the vacancy shall only be filled by the company in general meeting. (b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. (7) Except as provided in the proviso to sub-section (5), any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf. (8) The remuneration of the auditors of a company— (a) in the case of an auditor appointed by the Board or the Central Government, may be fixed by the Board or the Central Government, as the case may be; and 9

[(aa) in the case of an auditor appointed under section 619 by the Comptroller and AuditorGeneral of India, shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine;] (b) subject to clause (a), shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. For the purposes of this sub-section, any sums paid by the company in respect of the auditors’ expenses shall be deemed to be included in the expression “remuneration”. ---------------------------1. Subs. by Act 65 of 1960, sec. 67, for sub-section (1) (w.e.f. 28-12-1960). 2. The words “unless he is a retiring auditor” omitted by Act 41 of 1974, sec. 23 (w.e.f. 1-2-1975). 3. Ins. by Act 41 of 1974, sec. 23 (w.e.f. 1-2-1975). 4. Ins. by Act 31 of 1988, sec. 33 (w.e.f. 15-6-1988). 5. Subs. by Act 31 of 1988, sec. 33, for the first proviso (w.e.f. 15-6-1988). 6. Ins. by Act 53 of 2000, sec. 107 (w.e.f. 13-12-2000). 7. Subs. by Act 41 of 1974, sec. 23, for “At any general meeting” (w.e.f. 1-2-1975). 8. Subs. by Act 53 of 2000, sec. 107, for “five hundred rupees” (w.e.f. 13-12-2000). 9. Ins. by Act 53 of 2000, sec. 107 (w.e.f. 13-12-2000).

224A. Auditor not to be appointed except with the approval of the company by special resolution in certain cases.— 1

[224A. Auditor not to be appointed except with the approval of the company by special resolution in certain cases.—(1) In the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by—

(a) a public financial institution or a Government company or Central Government or any State Government, or (b) any financial or other institution established by any Provincial or State Act in which a State Government holds not less than fifty-one per cent of the subscribed share capital, or (c) a nationalised bank or an insurance company carrying on general insurance business, the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution. (2) Where any company referred to in sub-section (1) omits or fails to pass at its annual general meeting any special resolution appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting, and thereupon the provisions of sub-section (3) of section 224 shall become applicable in relation to such company. Explanation.—For the purposes of this section,— (a) “general insurance business” has the meaning assigned to it in the General Insurance (Emergency Provisions) Act, 1971 (17 of 1971); (b) “nationalised bank” means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) 2[or in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (10 of 1980)].] ---------------------------1. Ins. by Act 41 of 1974, sec. 24 (w.e.f. 1-2-1975). 2. Ins. by Act 31 of 1988, sec. 34 (w.e.f. 15-6-1988). 225. Provisions as to resolutions for appointing or removing auditors. — (1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed. (2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,— (a) in any notice of the resolution given to members of the company, state the fact of the representations having been made; and (b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company, and if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting:

Provided that copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the 1 [Central Government] is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the 1 [Central Government] may order the company's costs on such an application to be paid it in whole or in art by the auditor, notwithstanding that he is not a party to the application. (4) Sub-sections (2) and (3) shall apply to a resolution to remove the first auditors or any of them under sub-section (5) of section 224 or to the removal of any auditor or auditors under sub-section (7) of that section, as they apply in relation to a resolution that a retiring auditor shall not be re-appointed. ---------------------------1.Subs. by Act 11 of 2003, sec. 27, for “Company Law Board”. Earlier the words “Company Law Board” were substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f. 31-5-1991). 226. Qualifications and disqualifications of auditors.— (1) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949): Provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm. (2) (a) Notwithstanding anything contained in sub-section (1) but subject to the provisions of any rules made under clause (b), the holder of a certificate granted under a law in force in the whole or any portion of a Part B State immediately before the commencement of the Part B States (Laws) Act, 1951 (3 of 1951) 1[or of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956) as the case may be,] entitling him to act as an auditor of companies 2[in the territories which, immediately before the Ist November, 1956, were comprised in that State] or any portion thereof, shall be entitled to be appointed to act as an auditor of companies registered anywhere in 3[India]. (b) The Central Government may, by notification in the Official Gazette, make rules providing for the grant, renewal, suspension or cancellation of auditors’ certificates to persons in 4[the territories which, immediately before the 1st November, 1956, were comprised in Part B States] for the purposes of clause (a), and prescribing conditions and restrictions for such grant, renewal, suspension or cancellation. (3) None of the following persons shall be qualified for appointment as auditor of a company — (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

5

[(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000. Explanation.—For the purpose of this section, “security” means an instrument which carries voting rights.] Explanation.—References in this sub-section to an officer or employee shall be construed as not including references to an auditor. (4) A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of sub-section (3), disqualified for appointment as auditor of any other body corporate which is that company‘s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company. (5) If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4), he shall be deemed to have vacated his office as such. ---------------------------1. Ins. by Act 62 of 1956, sec. 2 and Sch. (w.e.f. 1-11-1956). 2. Subs. by the A. O. (No. 3) 1956, for “in that State”. 3. Subs. by Act 65 of 1960, sec. 68, for “those territories” (w.e.f. 28-12-1960). 4. Subs. by the A.O. (No. 3) 1956, for “Part B States”. 5. Subs. by Act 53 of 2000, sec. 108, for clauses (e) and (f) (w.e.f. 13-12-2000). 227. Powers and duties of auditors.— (1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. 1

[1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire—

(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account;

(f) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance-sheet is correct, regular and not misleading.] (2) The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance-sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance-sheet or profit and loss account which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view— (i) in the case of the balance-sheet, of the state of the company’s affairs as at the end of its financial years; and (ii) in the case of the profit and loss account, of the profit or loss for its financial year. (3) The auditor’s report shall also state— (a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; 2

[(bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company’s auditor has been awarded to him as enquired by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor’s report;] (c) whether the company’s balance-sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; 3

[(d) whether, in his opinion, the profit and loss account and balance-sheet comply with the accounting standards referred to in sub-section (3C) of section 211;] 4

[(e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f) whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274.] 5

[(g) whether the cess payable under section 441A has been paid and if not, the details of amount of cess not so paid.]. (4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b), 6[(bb)] 7[(c) and (d)] of sub-section (3) is answered in the negative or with a qualification, the auditor’s report shall state the reason for the answer. 8

[(4A) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditor’s report shall also include a statement on such matters as may be specified therein:

Provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.] 9

[(5) The accounts of a company shall not be deemed as not having been, and the auditors report shall not state that those accounts have not been properly drawn up on the ground merely that the company had not disclosed certain matters if— (a) those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and (b) those provisions are specified in the balance-sheet and profit and loss account of the company.] comments (i) The audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the company. The Directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the Directors the auditor acts in the interest of the shareholders who are in the position of beneficiaries; Institute of Chartered Accountants of India v. P.K. Mukherjee, 1968 (38) Comp. Cas. 628: 1968 (2) Com LJ 211: AIR 1968 SC 1104. (ii) The provisions of section 227 of the Companies Act do not apply to a Government Company because a Government Company is subject to the provisions of section 619 of the Act; Guru Gobinda Basu v. Sankari Prasad Ghosal, 1963 (33) Comp. Cas. 1132: 1964 (1) Com LJ 87: AIR 1964 SC 254. ---------------------------1. Ins. by Act 31 of 1965, sec. 21 (w.e.f. 15-10-1965). 2. Ins. by Act 65 of 1960, sec. 69 (w.e.f. 28-12-1960). 3. Ins. by Act 21 of 1999, sec. 16 (w.r.e.f. 31-10-1998). 4. Ins. by Act 53 of 2000, sec. 109 (w.e.f. 13-12-2000). 5. Ins. by Act 11 of 2003, sec. 28. 6. Ins. by Act 65 of 1960, sec. 69 (w.e.f. 28-12-1960). 7. Subs. by Act 21 of 1999, sec. 16, for “and (c)” (w.r.e.f. 31-10-1998). 8. Ins. by Act 31 of 1965, sec. 21 (w.e.f. 15-10-1965). 9. Subs. by Act 65 of 1960, sec. 69, for sub-section (5) (w.e.f. 28-12-1960).

228. Audit of accounts of branch office of company.— (1) Where a company has a branch office, the accounts of that office shall,1[be audited by the company’s auditor appointed under section 224 or] by a person qualified for appointment as

auditor of the company under section 226, or where the branch office is situate in a country outside India, either 2[by the company’s auditor or a person qualified as aforesaid] or by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country. (2) Where the accounts of any branch office are 3[audited by a person other than the company’s auditor] the company’s auditor— (a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of has duties as auditor, and (b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office: Provided that in the case of a banking company having a branch office outside India, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from the books and accounts of the branch as have been transmitted to the principal office of the company in India. 4

[(3) (a) Where a company in general meeting decides to have the accounts of a branch office audited otherwise than by the company’s auditor, the company in that meeting shall for the audit of those accounts appoint a person qualified for appointment as auditor of the company under section 226, or where the branch office is situate in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country, or authorise the Board of directors to appoint such a person in consultation with the company’s auditor; (b) the person so appointed (hereafter in this section referred to as the branch auditor) shall have the same powers and duties in respect of audit of the accounts of the branch office as the company’s auditor has in respect of the same; (c) the branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the company’s auditor who shall in preparing the auditor’s report, deal with the same in such manner as he considers necessary; (d) the branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorised by the company in general meeting. (4) Notwithstanding anything contained in the foregoing provisions of this section, the Central Government 5[may make rules providing for the exemption of] any branch office from the provisions of this section to the extent specified in the rules and in making such rules the Central Government shall have regard to all or any of the following matters, namely:— (a) the arrangement made by the company for the audit of accounts of the branch office by a person otherwise qualified for appointment as branch auditor even though such person may be an officer or employee of the company; (b) the nature and quantum of activity carried on at the branch office during a period of three years immediately preceding the date on which the branch office is exempted from the provisions of this section; (c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the branch office;

(d) any other matter which in the opinion of the Central Government justifies the grant of exemption to the branch office from the provisions of this section.] ---------------------------1. Subs. by Act 65 of 1960, sec. 70, for “unless the company in general meeting decides otherwise, be audited” (w.e.f. 28-12-1960). 2. Subs. by Act 65 of 1960, sec. 70, for “by a person qualified as aforesaid” (w.e.f. 28-12-1960). 3. Subs. by Act 65 of 1960, sec. 70, for “not so audited” (w.e.f. 28-12-1960). 4. Ins. by Act 65 of 1960, sec. 70 (w.e.f. 28-12-1960). 5. Subs. by Act 31 of 1965, sec. 22, for “may, by rules made in this behalf, exempt” (w.e.f. 15-10-1965). 229. Signature of audit report, etc.— Only the person appointed as auditor of the company, or where a firm is so appointed in pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm practising in India, may sign the auditor’s report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

230. Reading and inspection of auditor’s report.— The auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

231. Right of auditor to attend general meeting.— All notices of any other communications relating to, any general meeting of a company which any member of the company is entitled to have sent to him shall also be forwarded to the auditor of the company; and the auditor shall be entitled to attend any general meeting and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor.

Restrictive & Unfair Trade Practices

The Monopolistic and Restrictive Trade Practices Act, 1969, was enacted o

To ensure that the operation of the economic system does not result in the concentration of economic power in hands of few,

o

To provide for the control of monopolies, and

o

To prohibit monopolistic and restrictive trade practices.

Monopolistic trade practice: Monopolistic trade practice is that which represents abuse of market power in the production and marketing of goods and services by eliminating potential competitors from market and taking advantage of the control over the market by charging unreasonably high prices, preventing or reducing competition, limiting technical development, deteriorating product quality or by adopting unfair or deceptive trade practices. Unfair Trade Practice: • Misleading advertisement and False Representation • Falsely representing that goods and services are of a particular standard, quality, grade, composition or style. • Falsely representing any second hand renovated or old goods as new. • Representing that goods or services, seller or supplier have a sponsorship, approval or affiliation which they do not have. • Making a false or misleading representation concerning need for, or usefulness of goods or services. • Giving to public any warranty, guarantee of performance that is not based on an adequate test or making to public a representation which purports to be such a guarantee or warranty. • False and misleading claims with respect to the price of goods or services. • Giving false or misleading facts disparaging the goods, services or trade of another person or concern. Restrictive Trade Practice: To maximise profits and market power, traders often attempt to indulge in certain trade practices which tend to obstruct the flow of capital into the stream of production. It may also bring manipulation of prices or conditions of delivery or affect the flow of supplies in the market so as to impose unjustified costs. DEFINITION OF UNFAIR TRADE PRACTICE. In this Part, unless the context otherwise requires “unfair trade practice” means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provisions of any services, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely :(1) the practice of making any statement, whether orally or in writing or by visible representation which, (i) falsely represents that the goods are of a particular standard, quality, quantity, grade, composition, style or model; (ii) falsely represents that the services are of a particular standard, quality or grade; (iii) falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new goods;

(iv) represents that the goods or services have sponsorships, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have; (v) represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have; (vi) makes a false or misleading representation concerning the need for, or the usefulness of, any goods or services; (vii) gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof : Provided that where a defence is raised to the effect that such warranty or guarantee is based on adequate or proper test, the burden of proof of such defence shall lie on the person raising such defence; (viii) makes to the public a representation in a form that purports to be (i) a warranty or guarantee of a product or of any goods or services; or (ii) a promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specified result. if such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out; (ix) materially misleading the public concerning the price at which a product or like products or goods or services, have been, or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made; (x) gives false or misleading facts disparaging the goods, services or trade of another person. RESTRICTIVE TRADE PRACTICE A restrictive trade practice is a trade practice, which Prevents, distorts or restricts competition in any manner; or Obstructs the flow of capital or resources into the stream of production; or

Which tends to bring about manipulation of prices or conditions of delivery or effected the flow of supplies in the market of any goods or services, imposing on the consumers unjustified cost or restrictions. THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT, 1969 POLICY, PROVISIONS AND PERFORMANCE 4.1 The MRTP Act, 1969 has its genesis in the Directive Principles of State Policy embodied in the Constitution of India. Clauses (b) and (c) of Article 39 of the Constitution lay down that the State shall direct its policy towards ensuring: (i) that the ownership and control of material resources of the community are so distributed as to best serve the common good; and (ii) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. Provisions Relating to Monopolistic, Restrictive and Unfair Trade Practices 4.2.1 Section 10 of the MRTP Act, 1969 empowers the MRTP Commission to enquire into monopolistic or restrictive trade practices upon a reference from the Central Government or upon its own knowledge or on information. The MRTP Act, 1969 also provides for appointment of a Director General of Investigation and Registration for making investigations for the purpose of enquiries by the MRTP Commission and for maintenance of register of agreements relating to restrictive trade practices. 4.2.2 The MRTP Commission receives complaints both from registered consumer and trade associations and also from individuals either directly or through various Government Departments. Complaints regarding Restrictive Trade Practices or Unfair Trade Practices from an association are required to be referred to the Director General of Investigation and Registration for conducting preliminary investigation in terms of Sections 11 and 36C of the MRTP Act, 1969 and Regulation 119 of the MRTP Commission Regulations, 1974. The Commission can also

order a preliminary investigation by the Director General of Investigation and Registration when a reference on a restrictive trade practice is received from the Central/ State Government, or when Commission's own knowledge warrants a preliminary investigation. Enquiries are instituted by the Commission under relevant Sections of the MRTP Act, 1969 after the Director General of Investigation and Registration has completed the preliminary investigation and as a result of the findings, submits an application to the Commission for an enquiry. Monopolistic Trade Practices 4.3 Five enquiries under Section 10(b) were pending with the MRTP Commission at the beginning of the year 2005, while no fresh inquiry was instituted during the period April, 2005December, 2005. All the 5 enquiries were pending as on 31.12.2005. 46 Restrictive Trade Practices Under Section 10(a)(i) 4.4 293 enquiries, including 267 brought forward from the previous year, were considered during April 2005-December 2005 of which 48 enquiries were disposed of during the said period and the remaining 245 enquiries were pending with the Commission as on 31st December 2005. Under Section 10(a)(ii) 4.5 Neither any enquiry was brought forward from the previous year nor any enquiry was instituted under this Section during the year. Under Section 10(a)(iii) 4.6 39 enquiries including 37 brought forward from the previous year were taken up by the Commission during April 2005 to December 2005. One enquiry was disposed of during the period and the remaining 38 were pending with the Commission as on 31st December 2005. Under Section 10(a)(iv) 4.7 58 enquiries were brought forward from the previous year and 3 fresh enquiries were

instituted by the Commission during the year from April 2005 to December 2005. 6 enquiries were disposed of during the said period and 55 enquiries were pending with the Commission as on 31st December 2005. Unfair Trade Practices 4.8 Provisions relating to Unfair Trade Practices were incorporated in the MRTP Act, 1969 in 1984. Unfair Trade Practices have been defined in Section 36A as trade practices which for the purpose of promoting the sale, use or supply of any goods or for provision of any services, adopt one or more of the practices mentioned therein and thereby cause loss or injury to the consumers of such goods or services, whether by eliminating or restricting competition or otherwise. Under Section 36B(a) 4.9 491 enquiries including 410 enquiries brought forward from the previous year were considered by the Commission during April, 2005 - December 2005. Of these, 54 enquiries were disposed of and the remaining 437 enquiries were pending as on 31st December 2005. Under Section 36B(b) 4.10 Neither any enquiry under Section 36B (b) of the MRTP Act, 1984 was initiated nor any enquiry was brought forward during April, 2005- December, 2005. Under Section 36B(c) 4.11 1 enquiry brought forward from the previous year before the Commission is still pending as on 31.12.2005. Under Section 36B(d)47 4.12 176 enquiries, including 169 brought forward from the previous year, were taken up by the Commission during April, 2005 - December 2005. Eight enquiries were disposed of and 168 enquiries were pending with the Commission as on 31st December 2005. Temporary Injunctions

4.13 Besides 143 applications pending under Section 12A with the MRTP Commission as on 1 st April, 2005, 43 applications were received by the Commission during the period April, 2005 December 2005. Out of 186 applications, 55 were disposed of and the remaining 131 applications were pending under Section 12A with the Commission as on 31st December, 2005. Award of Compensation 4.14 During the period April, 2005 - December 2005, 1341 applications under Section 12B including 1264 applications brought forward from the previous year were considered by the Commission. Of these, 126 applications were disposed of by the Commission during the period and the remaining 1215 applications were pending as on 31st December, 2005 48 Enquiries considered and disposed of by MRTP Commission as on 31.12.2005 Registration of Agreements 4.15.1 Section 35 of the MRTP Act, 1969 requires every agreement relating to Restrictive Trade Practices falling within one or more of the categories enumerated in Section 33(1) of the Act to be furnished for registration within 60 days of the making of such agreement. 4.15.2 In pursuance of this provision, during the period April, 2005 to December 2005, 7 agreements were received for registration. The same were registered and entered in the Register of Agreements. 4.15.3 A total number of 39,993 agreements were filed up to the end of 31 st December, 2005, by various undertakings. Out of these, particulars of 39,116 agreements were entered in the Register of Agreements.

Investigation by Director General (Investigation & Registration) Investigation 4.16 The Director General is required to conduct preliminary investigation in respect of restrictive, monopolistic and unfair trade practices as and when an order of preliminary investigation is received from the MRTP Commission. As on 1.4.2005, one investigation was in progress. During the period from 1.4.2005 to 31.12.2005, 49 fresh orders of preliminary investigations were received. Out of 50 investigations, Preliminary Investigation Report was submitted in 11 cases and 39 investigations were pending at the end of the year. Besides, the Director General has suo motto powers to initiate preliminary investigations into monopolistic, restrictive and unfair trade practices, and in case any of these trade practices are detected during such investigation, the Director General is empowered to file applications under Sections 10(a)(iii)/ 10(b)/36B(c) of the Act for initiation of enquiry proceedings by the MRTP Commission. As a result of such suo moto investigations, 5 applications were filed under Section 36B(c) alongwith 4 applications under Section 12A of the Act for interim injunction during the period 1.4.2005 to 31.12.2005. In addition, 3 applications were filed under Section 10(a)(iii) of the Act for enquiry into restrictive trade practices during the said period. Thus, a total of 12 applications have been filed during the period 1.4.2005 to 31.12.2005. Consumer Protection 4.17 Of late, consumer protection movement has been sweeping across the whole country. The consumers have been organising themselves into consumer bodies all over the country to safeguard the public and consumers' interest against unfair trade practices being indulged in by parties through misleading advertisements, bargain-sales, organisation of sale promotion contests, marketing goods which do not conform to standards of safety etc. An independent Chapter regarding unfair trade practices was inserted in the MRTP Act in 1984 and the consumers are taking full benefit of the provisions contained in this Chapter by filing complaints in this office.

Facility of speedy redressal of their grievances is provided by this office. During the period April, 2005 to December, 2005, this office has handled as many as 123 complaints received from consumers and other parties including 22 brought forward from the previous year. Of these, 64 complaints were disposed of during the period and 59 complaints were pending as on 31.12.05. 50 Carriage of proceedings Before the Commission 4.18 The Director General is the custodian of public interest in the enquiry proceedings before the Commission and he has to appear in person or through his counsel to safeguard the public interest before the Commission. As on 31.12.05, 144 enquiries were being prosecuted before the MRTP Commission. Before the Supreme Court/ High Courts 4.19.2

The Director General has been appearing in all the required Appeals/ Writ

Petitions before the Supreme Court and High Courts through the counsels appointed by the Central Agency Section Litigation Branches of the Department of Legal Affairs, Ministry of Law & Justice.

Salient Features of Negotiable Instruments Act 1881 What is a negotiable instrument? A Negotiable Instrument means " a written document transferable by deliver".

What is salient feature? Salient feature means "characteristic". Or you may interpret it as "notable feature". e.g. The most salient feature of a bird is its wings. THE NEGOTIABLE INSTRUMENTS ACT AND THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) ACT, 2002 Negotiable instruments are of great importance in the business world and by extension in banking. They are instruments for making payments and discharging business obligations What is a Negotiable Instrument? The Negotiable Instruments Act does not define a negotiable instrument but merely states, “ a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer.” (Section 13). This section does not prohibit any other instrument that satisfies the essential features of portability. Justice K. C. Willis defines these as, “ one the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defect in title in the person from whom he took it.” STATUTORY DEFINITION OF NEGOTIABLE INSTRUMENT - A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation (i) : A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting

transfer or indicating an intention that it shall not be transferable. Explanation (ii) : A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation (iii) : Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option. [section 13(1)]. - - A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. [section 13(2)]. Thomas defines it in his book “Commerce, Its theory and Practice “A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona-fide transferee for value, notwithstanding any defect in the title of the transferor.” It : (1) (2) (3)

entitles a person to a sum of money is transferable (by customs of trade) by delivery, like cash, or by Endorsement and delivery and delivery, and is capable of being used upon by the person holding for the time being i.e. the person to whom it is transferred becomes entitled to money and also a right to further transfer it. Characteristics of negotiable instruments

The important characteristics are as follows – (1)

Free Transferability : A negotiable instrument may be transferred by delivery if it is a bearer instrument or by endorsement and delivery if it is an instrument payable to order. Thus, a Fixed Deposit Receipt, which is marked as ‘not transferable’is not a negotiable instrument. On the other hand all instruments which are transferable are not negotiable instruments e.g. share certificate. An instrument to be negotiable must possess other features also. Further, a negotiable instrument may be transferred any number of times till it is discharged.

(2)

(3) (4)

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 once can give a better title then he himself has. Entitlement to sue : The holder can sue in his own name. Presumptions : Every negotiable instrument is subject to certain presumptions which are as under – Presumption as to negotiable instrument

For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court is entitled to make certain presumptions. These are briefly stated as follow : 1.

Consideration : That every negotiable instrument is made or drawn for a consideration. Thus, this need not necessarily be mentioned.

2.

Date : That the negotiable instrument was drawn on the date shown on the face of it.

3.

Acceptance before maturity : That the bill of exchange was accepted before its maturity, i.e., before it became overdue.

4.

Transfer before maturity : That the negotiable instrument was transferred before its maturity.

5.

Order of Endorsements : That the Endorsements appearing upon a negotiable instrument were made in the order in which they appear.

6.

Stamping of the instrument : That an instrument which has been lost was properly stamped.

7.

Holder is Holder in due course : That the holder of a negotiable instrument is the ‘holder in due course’, except where the instrument has been obtained from its lawful owner or its lawful custodian by means of offence or fraud.

8.

Proof of dishonour : If a suit is filed upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved. (Section 119) Rules of estopped applicable to negotiable instruments (Sections 120 to 122)

Certain rules of estoppel are applicable to negotiable instruments . These are as follows : (1)

Estoppel against denying original validity of instrument : The maker of the note and drawer of the bill of exchange or cheque are directly responsible for the bringing into existence of the instrument and, thus, cannot be allowed afterwards to deny the validity of the instrument. (Section 120)

(2)

Estoppel against denying capacity of the payee to endorse : The maker of a promissory note or an acceptor of a bill shall not, in a suit by holder in due course, be allowed to deny the capacity of the payee to endorse the bill. (Section 121)

(3)

Estoppel against denying signature or capacity of prior party : An endorser of a negotiable instrument shall, in a suit thereon by the subsequent holder, be allowed to deny the signature or capacity to contract of any prior party to the instrument. Payee in a negotiable instrument

All three kinds of negotiable instruments mentioned under section 13 of the Act could be made payable in any of the following ways – • •

Payable to bearer; or Payable to order.

Payable to bearer : The expression “bearer instrument” signifies an instrument, be it promissory note, bill of exchange or a cheque, which is expressed to be so payable or on which the last endorsement is in blank. This character of the instrument can be altered subsequently e.g. an endorsee can convert an ‘Endorsement in blank’ into an ‘Endorsement in full’. In such a case, the holder of the instrument would not be able to negotiate the instrument by mere delivery. He will be required to endorse the instrument before delivering it. Payable to order : An instrument is payable to order when it is payable to:

(i) (ii) (iii)

the order of a specified person, or a specified person or his order, or a specified person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.

When an instrument is not payable to bearer, the payee must be indicated with reasonable certainty Promissory Note The term Promissory note has been defined under Section 4 of the Negotiable Instruments Act, as under : “A promissory note is an instrument (not being a bank note or a currency-note) in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a, certain person, or to the bearer of the instrument. Illustrations A signs instrument in the following terms : (a) (b) (c) (d) (e) (f) (g) (h)

“I promise to pay B or order Rs.500.” “I acknowledge myself to be indebted to B in Rs.1,000 to be paid on demand, for value received.” “Mr B, I O U Rs.1,000.” “I promise to pay B Rs.500 and all other sums that shall be due to him.” “I promise to pay B Rs.500, first deducting thereout any money which he may owe me.” “I promise to pay B Rs.500 seven days after my marriage with C.” “I promise to pay B Rs.500 and D’s death, provided D leave me enough to pay that sum.” “I promise to pay B Rs.500 and to deliver to him my black horse on 1” January next.”

The instruments respectively numbered as (a) and (b) are promissory notes. The instruments numbered (c), (d), (e), (f), (g) and (h) are not promissory notes.” Essentials of a promissory note (1)

It must be in writing :

(2)

Promise to pay : The promissory note must contain an express promise or undertaking to pay. An implied undertaking cannot make a document a promissory note.

(3)

The promise to pay must be unconditional : The promise to pay must be unconditional or subject to only such conditions which according to the ordinary experience of mankind is bound to happen. · ·

“ 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. “I promise to pay Q Rs. 500 on A’s death provided A leaves me enough to pay the sum” is not a promissory note as it is conditional.

(4)

There must be a promise to pay money only : The instrument must be payable only in money.

(5)

A definite sum of money : Certainty (a) (b)

as to the amount, and as to the persons by whose order and to whom payment is to be made

(6) The instrument must be signed by the maker : A promissory note 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. Two or more persons may make a promissory note and they may be liable thereon jointly or severally (Joint family of MR Bhagwandas V. State Bank of Hyderabad 1971 SC 449). It must be clearly understood, however, that the two makers cannot be liable in alternate. Where a pronote was shown to have been executed by two persons and later it was found that signature of one of the persons were forged, the person whose signature was forged cannot be held liable. The other person will, however, be liable. (7) The person to whom the promise is made must be a definite person : The payee must be a certain person. Where the name of the payee is not mentioned as a party, the instrument becomes invalid. It is to be kept in mind that a promissory note cannot be made payable 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. A promissory note must point out with certainty the person who is entitled to receive the money. Where it is made payable to the bearer, the bearer is the definite person to whom payment is to be made. The words ‘certain person’ means a person who is capable of being ascertained at the time of making of the instrument. Therefore, if any person has not been named in the instrument but sufficient description of such person have been included therein by which such person may be ascertained, the requirement is fulfilled (Ponnuswami V. Velliamuthu AIR 1957 Mad 355). If the payee is mentioned as ‘you’, it does not indicate any certainty about the person (Naraindas V. Purnidas AIR 1959 Orissa 176). Section 4 of the Act recognizes three kinds of promissory notes – (a)

payable to a specified person

(b)

payable to the order of a specified person

(c)

payable to a bearer

A promissory note cannot be made payable to the bearer on demand. It has been prohibited under the RBI Act. (8)

Other points : The following points shall also be remembered in connection with promissory notes :

(a) (b)

Consideration need not be mentioned. Place and date of making it need not be mentioned. A promissory note on which date is not mentioned is deemed to have been drawn on the date of its delivery. An ante-dated or post dated instrument is not invalid.

(c)

(d) (e) (f) (g) (h) (i) (j) (k)

Place of payment also need not be mentioned in the promissory note. However, it can be made payable at any specified place. It cannot be made payable to bearer on demand or payable to bearer after a certain time. (Section 31 of the Reserve Bank of India Act) It may be made payable on demand or after a certain time. A demand promissory note becomes time barred on expiry of three years from the date it bears. It must be duly stamped as per the state laws in which it is executed, under the Indian Stamp Act. A promissory note which is not stamped is a nullity. Stamping may be before or after the execution. A promissory note cannot be made payable to the maker himself. Such a note is nullity. But, if it is endorsed by the maker to some other person, or endorsed in blank, it becomes a valid promissory note (Gay V. Landal (1848) LT CP 286). Where two or more persons sign the promissory note, their liabilities will be joint as well as several. A note cannot be signed in alternative. It is usual to mention in a promissory note the words ‘for value received’, but such a statement is not essential for the validity of the note, because the note is presumed to be for consideration unless contrary proved. A promissory note is not invalid by reason only that it contains any matter in addition to promise to pay e.g. a recital that the maker has deposited the title deeds with the payee as a collateral security. Promissory note payable on demand

Mumbai October 25 , 200X

On demand I promise to pay Ravi Naik or order the sum of Rupees one thousand only, for value received.

Rs.

1000 Ram Laxman

Promissory note payable after date with interest

Mumbai October 25, 200X

On month after date I promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @12% per annum until payment..

Rs. 1000 Ram Laxman

Joint Promissory note

Mumbai October 25, 200X

On month after date we promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @12% per annum until payment..

Rs. 1000 Ram and Laxman

Joint and Several Promissory Note

Mumbai October 25, 200X

On month after date we jointly and severally promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @12% per annum until payment..

Rs. 1000 Ram and Laxman

BILL OF EXCHANGE A Bill of Exchange has been defined under section 5 of the Act as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain persons or to the bearer of the instrument.” In England it has been defined as “ an unconditional order in writing, addresses by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed rate or determinable future time a sum certain in money or to the order of a specified person, or to the bearer.”

Characteristic features of a Bill of Exchange (i)

It must be in writing : The Bill of Exchange must be in writing.

(ii)

Order to pay : There must be an order to pay. It is of the essence of the bill that its drawer orders the drawee to pay money to the payee. The term ‘order’ does not mean command. Any request or direction or other words, which show an intention of the drawer to cause a payment being made by the drawee is sufficient. Politeness may be admissible but excessive politeness may prompt one to disregard it as an order.

(iii)

Unconditional order : This order must be unconditional, as the bill is payable at all events. It is absolutely necessary for the drawer’s 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.

(iv)

Signature of the drawer : The drawee must sign the instrument. The instrument without the proper signature will be inchoate (unclear or unformed or undeveloped) and hence ineffective. It is permissible to add the signature at any time after the issue of the bill.

(v)

Drawee : A bill, in order to be perfect, must indicate a drawee who should be called upon to accept or pay it.

(vi)

Parties : The drawer, the drawee (acceptor) and the payee- the parties to a bill are to be specified in the instrument with reasonable certainty.

(vii)

Certainty of amount : The sum must be certain.

(viii)

Payment in kind is not valid : The medium of payment must be money and money only. The distinctive order to pay anything in kind will vitiate the bill.

(ix)

Stamping : A Bill of Exchange, to be valid, must be duly stamped as per the Indian Stamp Act.

(x)

Cannot be made payable to bearer on demand : A Bill of Exchange as originally drawn cannot be made payable to the bearer on demand.

Bill of Exchange payable to order on demand

Mumbai December 25, 200X

On demand pay Mr. Ravi Naik or order the sum of Rupees one thousand only.

Rs. 1000/Thomas Mathew

To. Mr._______________ __________________

Order Bill payable on presentment or sight

Mumbai December 25, 200X

On presentment (or sight) pay Mr. Ravi Naik or order the sum of Rupees one thousand only.

Rs. 1000/Thomas Mathew

To. Mr._______________ __________________

Ordinary bill payable to the order after date or sight with interest

Mumbai December 25, 200X

Three months after the date (or sight or presentment) pay Mr. Ravi Naik or order the sum of Rupees one thousand only with interest thereon at 18% per annum.

Rs. 1000/Thomas Mathew

To. Mr._______________ __________________

Bill payable to bearer

Mumbai December 25, 200X

Fifteen days after date (or sight) please pay the bearer the sum of Rupees one thousand only.

Rs. 1000/Thomas Mathew

To. Mr._______________ __________________ PARTIES TO THE BILL OF EXCHANGE 1.

Drawer : The maker of a bill of exchange or cheque is called drawer.

2.

Drawee : The person who is directed to pay by the drawer.

3.

Acceptor : One who accepts the bill. Generally the drawee is the acceptor but a stranger may accept it on behalf of the drawee.

4.

Payee : Person to whom the sum stated in the bills is payable.

5.

Holder : Section 8 of the Negotiable Instruments Act states that “The ‘holder’ of a promissory note, bill of exchange or cheque means “any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.”

6.

Holder in due course : A person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer).

7.

Endorser : Holder who endorses the bill in favour of any other person.

8.

Endorsee : Person in whose favour the bill is endorsed by the endorser.

9.

Drawee in case of need : When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called as the ‘drawee in case of need’.

10.

Acceptor for honour : When a bill of exchange has been noted and protested for nonacceptance or for better security, any other person accepts it supra protest for honour of the drawer or of any of the endorsers, such person is called the ‘Acceptor for honour’. Special benefits of Bill of Exchange

Following special benefits associated with the Bill of Exchange : 1. 2. 3.

A Bill of Exchange is a double secured instrument i.e. where the drawee fails to honour the order, the holder of the instrument may look to the drawer for payment. In case of immediate requirement a Bill may be discounted with a bank. The drawer or any endorser thereof may mention a person as ‘drawee in case of need’ to be resorted to for payment by the payee in case of dishonour of the bill by the drawee. Distinction between a promissory note and a bill of exchange The distinctive features of these two types of negotiable instruments are tabulated below :

Promissory Note

Bill of Exchange

It contains a promise to pay.

It contains an order to pay.

The liability of the maker of a note

The liability of the drawer of a bill is

is primary and absolute (S.32).

secondary and conditional.

It

payment

If a bill is payable some time after sight, it is

without any previous acceptance

required to be accepted either by the drawee

by the maker.

himself or by some one else on his behalf,

is

presented

for

before it can be presented for payment.

The maker or drawer of an accepted bill The maker of a promissory note

stands in immediate relationship with the

stands in immediate relationship

acceptor and the payee.

with the payee and is primarily liable to the payee or the holder. The drawer and payee or the drawee and the It cannot be made payable to the

payee may be the same person.

maker himself. The maker and the payee

cannot

be

the

same

person.

There are three parties, viz, drawer, drawee and payee, and any two of these three

In the case of a promissory note

capacities can be filled by one and the same

there are only two parties, viz.,

person.

the maker (debtor) and the payee (creditor). The bills can be drawn in sets.

A

promissory

note

cannot

be

drawn in sets.

A bill of exchange too cannot be drawn conditionally,

A promissory note can never be

but

it

can

be

accepted

conditionally with the consent of the holder.

conditional. A notice of dishonour must be given in case of dishonour of a Bills of Exchange.

In case of dishonour no notice of dishonour is required to be given by the Holder.

BILLS IN SETS Section 132 : Set of Bills Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set; but the whole set constitutes only one bill, and is distinguished when one of the parts if a separate bill, would be extinguished. Exception : When a person accepts or endorses different parts of the bill in favour of different persons, he and subsequent endorser of each part are liable on such parts as if it were a separate instruments. Section 133 : Holder of the first acquired part entitled to all As between holders in due course of different parts of the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the bill. Foreign bills are generally drawn in set of two or three and such a bill is said to have been drawn in set. All these parts form one bill. Each part of the bill is numbered and contains a reference to other parts. This operates as a notice to the holder taking up that all parts constitute one bill and puts him on guard to make inquiries as to the remaining parts of the bill. A person who negotiates a bill drawn in set is bound to deliver up all the parts in his possession. All parts of the Bill are sent to the destination through different routes so as to ensure safe transmission of at least one part to the drawee and its acceptance by him at the earliest possible opportunity and also to avoid unnecessary inconvenience that may be caused due to loss in transit.

Kinds of bills (1)

Accommodation Bill (Sections 43-45)

All bills are not genuine trade bills, as some times they may be drawn for accommodating a party. An accommodation Bill is quite similar to that of a Bill of Exchange but it is distinguished from an ordinary bill by the fact that such a bill is not supported by any consideration or transaction. The drawer does not give any consideration to the drawee. The relationship between the drawer and drawee are not that of a debtor and creditor. The party lending his name to oblige the other party is known as the accommodation or accommodating party and the party being obliged is known as accommodated party. The accommodating party is not liable to the accommodated party on the instrument as there is no consideration and the instrument was drawn only to help the accommodated party. But the accommodating party is liable to the ‘holder for value’. Rules for Accommodation Bill 1.

An accommodation bill creates no obligation of payment between the parties to the transaction. The accommodation party is not liable to the accommodated party on the maturity date.

2.

No party for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.

3.

An accommodation bill can be negotiated even after its maturity i.e. when it becomes overdue, with all benefits of a ‘holder in due course’ to the transferee. (Section 59)

4.

Non-presentment of the accommodation bill to the acceptor for payment does not discharge the drawer from his liability.

5.

In the case of dishonour of an accommodation bill, failure to give notice of dishonour does not discharge the liability of prior parties as against the case in the Ordinary bill.

(2)

Fictitious Bill

A Bill of Exchange in which the name of both the drawer and the payee are fictitious i.e. imaginary. Such a bill cannot be enforced by law but it is good in the hands of a holder in due course if it has been accepted by a genuine person. This is provided that he can show that the first Endorsement on the bill and the signature of the supposed drawer (being the holder as well) are in the same hand writing, and the acceptor is liable on the bill to him. In this connection section 42 of the Act states: “An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relived from the liability to any holder in due course claiming under an Endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.” (3)

Forged Bill

A bill in which name of the drawer or the payee has been forged. Such a bill cannot be enforced by law and does not hold good even in the hands of holder in due course.

CHEQUE “A Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” (section 6). (a) "a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b) "a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. (c) "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.'.

Characteristics 1.

A cheque is an unconditional order on a specified banker where the drawer has his account.

2.

A cheque can be drawn for a certain sum of money.

3.

Cheque is payable by the banker only on demand.

4.

A cheque does not require acceptance by the banker as in the case of bill of exchange.

5.

A cheque may be drawn up in three forms i.e. (i)

Bearer cheque is one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank);

(ii)

Order cheque is one which is expressed to be so payable or which is expressed to be payable to a particular person without containing any prohibitory words against its transfer or indicating an intention that it shall not be transferable (Section 18); and

(iii) 6.

Crossed cheque is a cheque which can be collected only through a banker.

The cheque is a revocable mandate and the authority can be revoked by countermanding payment.

7.

The cheque is determined by notice of death or insolvency of the drawer.

8.

All cheques are bills of exchange but all bills of exchange are not cheques.

Difference between Cheque and Bill of Exchange

1.

Cheque Drawee 1. Cheque can be drawn only on a banker.

2.

Time of payment A cheque is payable on demand.

3.

Grace period 3. While calculating maturity three Cheque is payable on demand and day’s grace is allowed. no grace period is allowed.

4.

Notice of dishonour 4. Notice of dishonour is not necessary.

5.

Payee 5. A bill cannot be made bearer if it is A cheque can be drawn to bearer payable on demand. A bill drawn and made payable on demand. ‘payable to bearer on demand’ is void.

6.

Acceptance 6. Bills sometimes, require A cheque is not required to be presentment for acceptance and it is presented for acceptance. It needs advisable to present them for to be presented only for payment. acceptance even when it is not essential to do so. Stamping No stamp duty is payable on 7. Affixation of proper stamps is cheques. necessary in case of Bills of Exchange.

7.

2.

Bill of Exchange The drawee may be any person.

A notice of dishonour is required.

8.

Crossing A cheque may be crossed.

9.

Noting and protesting 9. In case of dishonour of a bill proper There is no system for noting and noting and protesting is necessary. protesting in case of dishonour.

10.

Discharge of drawer 10. The drawer of the bill stands The drawer does not get discharged discharged from his liability if it is not from his liability because of delay in duly presented for payment. presenting the cheque to the bank for payment.

11.

8.

A bill may be drawn payable on demand or on expiry of certain period after date or sight.

A bill crossed.

of

exchange

cannot

be

Liability of drawee for 11. In case of dishonour of the bill by dishonour non-payment on an accepted bill of In case of dishonour of cheque the exchange the drawee becomes liable to drawee is liable to the drawer and the payee. not to the payee. 12. A bill may be drawn for any period. 12. Validity period A cheque is usually valid fro a period of six months.

Bank draft A bank draft is an order drawn by an office of a bank upon another of the same bank instructing the later to pay a specified sum to a specified person or his order. These are also knows as Managers Cheques or Cashiers Cheques. A draft can be drawn either against cash deposited at the time of its purchase or by debiting the buyer’s current/ savings account the banker maintains. The buyer of the draft should furnish particulars of the person to whom the amount of the draft should be paid and where (at the time he requests the draft). The banker charges for his services a small commission. The draft like a cheque, can be made payable to drawer on demand without any legal objection thereto. Specific features of a draft 1. 2.

It is only issued by a bank on another bank or on one of its branches. It cannot be issued by an individual. It cannot be made payable to bearer. The legal position with respect to bank drafts was clarified in the case of Tukaram Bapuji Nikam V. Belgaum Bank Ltd. AIR 1976 Bom 185, as follows :

1.

The relationship of the purchaser of draft and the bank from which the draft has been purchased is merely that of the debtor and creditor.

2.

The purchaser of the bank draft can call upon the bank from which he has purchased it to cancel the draft and pay back the money to him at any time before the draft has been delivered to the payee.

3.

If the sole object of the issue of the draft was to transit the money to another person, a fiduciary relationship is created between the purchase of the draft and the bank which issued it, and the purchaser of the draft can countermand payment only if the bank has not actually parted with the money held by it as agent thus terminating the relationship of principal and agent.

4.

Ordinarily, a bank issuing a draft cannot refuse to pay the amount thereof, unless there is some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it was drawn, or in other words, unless there is reasonable ground for disputing the title of the person presenting the draft; and

5.

Once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds such as matters relating to consideration.

6.

The issuing bank can after the issue of a draft pay back the amount of the draft to the purchaser of the draft only with the consent of the payee. Marked Cheques Since a cheque is not required to be presented for acceptance the drawee of the cheque i.e. the banker, is under no liability, to the person in whose favour the cheque is drawn. However, he is liable to his customer (drawer), if he wrongly refuses to honour the cheque. In such a case, action can be taken by the drawer against the banker for the loss of his reputation.

In certain cases a cheque is marked or certified by the banker on whom it is drawn as ‘good for payment’. Such a certification or marking does not amount to acceptance but it is very similar to it and protects the person to whom the cheque is issued against the cheque being refused for payment subsequently. In the United States, these are known as cashiers’ cheques. Banks in India, as a rule, do not mark or certify cheques in this manner and bankers in India, are not liable even if a bank has marked a cheque as “good for payment”. Crossing of cheques A cheque may be a open cheque or a crossed cheque. An open cheque is one that can be paid by the paying banker across the counter while crossed cheque cannot be paid across the counter. Crossing of cheques is a universally adopted practice. Crossing on a cheque is a direction to the paying banker that the payment shall not be made across the counter. The payment on a crossed cheque can be collected only through a banker. Cheques are usually crossed as a measure of safety. Crossing is made by drawing two parallel traverse lines across the face of the cheque with or without the addition of certain words. The usage of crossing distinguishes cheques from other bills of exchange. In this regard section 123 of the Negotiable Instruments Act states: “Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two traverse lines, or of two parallel traverse lines simply, either with or without the words ‘not negotiatble’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally”. Who may cross the cheque Crossing of a cheque is an instance of an alteration which is authorized by the Act. Thus, the following parties may cross a cheque : (1)

Drawer : The drawer of the cheque may cross the cheque generally or specially.

(2)

Holder : Where the drawer does not cross the cheque, the holder may cross it generally or specially. Even if the cheque is already crossed the holder may add the words ‘not negotiable’.

(3)

Banker : Where a cheque crossed specially the collecting banker may again cross it specially to another banker as its agent for collection. This is the only case where the Act allows a second special crossing by a banker and for the purpose of collection

Types of crossing Crossing may be either (1) general or (2) special. (1) General crossing : Section 123 of the Act refers to general crossing. Where a cheque bears across its face two traverse lines with or without the words “and Co.” or any abbreviation thereof or the words ‘not negotiable, the cheque is said to have been crossed generally. “Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker” (Section 126).

The payee may get the cheque collected through a bank of his choice. (2) Special crossing Special crossing implies the specifications of the name of the banker on the face of the cheque. The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned. In the case of special crossing the addition of two parallel transverse lines is not essential though generally the name of the bank to which the cheque is crossed specially is written between the two parallel transverse line (Section 124). Section 126 of the Act provides that – “Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.” Section 127 of the Act provides that – “Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.” Special crossing may take any of the following shapes : “Account Payee” crossing or restrictive crossing This type of crossing acts as a warning to the collecting bankers that the proceeds are to be credited into the account of the payee. These words are a mere direction to the receiving or collecting banker. 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 names as the payee. It has been held that crossing cheque with the words “Account Payee” and mentioning a bank is not a restrictive endorsement so as to invalidate further negotiation of the cheque by the endorsee. It has been decided by the courts that an “account payee” crossing is a direction to the collecting banker as to how the proceeds are to be applied after receipt. The banker can disregard the direction only at his own risk and responsibility. Cheque marked “not negotiable” The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. If the holder takes the instrument in good faith, before maturity and for valuable consideration, his claim is not defeated or affected by the defective title of the transferor. In case of any dispute, it is the transferor with the defective title who is liable. Addition of the words “not negotiable” to the crossing of a cheque, makes the position different. The principle of ‘nemo date quod non habet – (nobody can pass on a title better than what he himself has) will be applicable to a cheque with a “not negotiable” crossing. Section 130 of the Negotiable Instruments Act provides that –

“A person taking a cheque crossed generally or specially bearing in either case the words ‘not negotiable’ shall not have or shall not be able to give a better title to the cheque than the title of person from whom he took had.” The effect of such a crossing is that the title of the transferee would be vitiated by the defect in the title of the transferor. The transferee of such a crossed cheque cannot get a better title than the transferor himself. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith for value. Bankers liability on payment of crossed cheque in due course In respect of a crossed cheque it is presumed that the banker, on whom it is drawn, has made payment to the true owner of the cheque, though in fact, the amount of the cheque may not reach the true owner. In other words, the banker making payment in due course is protected, whether the money is or is not, in fact, received by the true owner of the cheque (Section 128). Bankers liability on wrong payment of a crossed cheque Section 126 of the Act states that: a.

in the case of generally crossed cheque the banker shall not pay it otherwise than to a banker, and

b.

in the case of a specially crossed cheque it shall not be paid by the banker otherwise than to the banker to whom it is crossed or to his agent for collection. Where the drawee banker pays a crossed cheque otherwise than in accordance with the provisions of Section 126 it shall be liable to the true owner of the cheque for any loss he may have sustained (section 129) Protection of banker in respect of uncrossed cheques Section 85(2) reads: When a banker makes payment on an uncrossed cheque in due course he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the Endorsement thereon. For example, a cheque is drawn payable to N or order and it is stolen. Thereafter, the thief or someone else forges N’s endorsement and presents the cheque to the bank for encashment. On paying the cheque, the banker would be able to debit the drawer’s account with the amount of the cheque. The original character of the cheque issued as bearer, is not altered by subsequent endorsements , so far as the paying bank is concerned, provided that the payment is made in due course. Hence the proposition that “once a bearer instrument always a bearer instrument”. Protection in respect of crossed cheques When a banker pays a cheque drawn by his customer in accordance with section 126 of the Act he can debit the drawer’s account with the amount paid, even though the amount of the cheque does not reach the true owner. Prerequisites for claiming protection

The protection in both the cases referred above can be availed of only if the payment has been made in due course i.e. a.

According to the apparent tenor of the instrument,

b.

In good faith and without negligence.

c.

To any person in possession thereof,

d.

In circumstances that do not incite any suspicion that he is not entitled to receive payment of the cheque. Liability of drawee of cheque Section 31 of the Act states that: The drawee bank is under a duty to pay the cheque, provided he has in his hands sufficient funds of the drawer and the funds are properly applicable to such payment. If the banker refuses payment without sufficient cause being shown, he must compensate the drawer, not the holder, for any loss caused by such improper refusal (Section 31). The banker must pay the cheque only when he is duly required to do so e.g. if there is an agreement between the drawer and the banker that the former shall not draw more than one cheque every week, the banker is not bound to pay the second cheque. The amount of compensation that the drawee would have to pay to the drawer is to be measured by the loss or damage say loss of credit, suffered by the drawer. The principle is : “The lesser the value of the cheque dishonoured, the greater the damage to the credit of the drawer”. When banker shall refuse the payment A banker will be justified or bound to dishonour a cheque in the following cases, viz;

(i) (ii) (iii) (iv)

The cheque is undated. The cheque is stale i.e. it has not been presented within the validity period of the cheque. The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt. The cheque is post-dated and presented for payment before its ostensible date.

(v)

The customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former.

(vi)

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.

(vii)

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.

(viii)

Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s death, lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.

(ix) (x) (xi) (xii)

Notice in respect of closure of the account is served by either party on the other. The cheque contains material alterations, irregular signature of irregular endorsement. The customer has countermanded payment. Any ambiguity in the material part of the cheque including the defects resulting from the crossing of the cheque.

(xiii)

Any difference between the amount of cheque in words and in figures.

(xiv)

Any irregular endorsements.

(xv) (xvi)

The cheque is mutilated. Signature of the drawer has been forged.

Liability of payee’s banker Section 131 of the Act provides that – “A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.” Section 131 of the Act confers a special protection on the collecting banker which is available to him subject to fulfillment of certain conditions. If the following conditions do not co-exist, this protection would be denied to the collecting banker : (i)

The collecting banker should have acted in good faith and without negligence: In Lloyds Savouy Co. (1933) A.C. 201, the court held that if the banker receives payment of a cheque to which the customer has no title, the onus is on him to disprove negligence. What amounts to negligence is, however a question of fact in each case. “Negligence” means want of “reasonable care” with reference to the interest of the true owner. The test of “negligence” is whether the transaction of paying in any given cheque coupled with the circumstances antecedent and present was so flagrantly out of the ordinary course that it ought to have aroused suspicion in the mind of the banker and caused him to make enquiry (Bopulal Prem Chand v. The Nath Bank Ltd. 48 Bom. L.R.393).

(ii)

That the collecting banker acts only to receive payment of the crossed cheque for a customer : To make a person a customer of a bank it is essential that there must be some sort of account, either a deposit or a current account or some similar relationship. Protection under section 131 is available only when the banker is acting as an agent for collection but not to a case where the banker is himself the holder.

(iii)

That crossing had been made before the cheque fell into the hands of the collecting banker : Section 131 does not provide an absolute immunity to the collecting banker and unless the banker brings himself within the conditions stipulated under this section, he is left to his common law for conversion. The onus of proving that he had taken all reasonable steps to ensure compliance with the requirements of this section lies on the banker. It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

Dishonour of cheque Dishonour Section 92 of the Act reads as under – “A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.” If on presentation the banker does not pay then dishonour takes place and the holder acquired at once the right of recourse against the drawer and the other parties on the cheque. Effects of dishonour The important point to be noted in connection with the dishonour of a cheque is that its negotiability is lost. Types of dishonour Dishonour of cheque can be divided into two categories i.e. (a)

Rightful dishonour : Dishonour of cheque by the drawee banker for any of the reasons specified above or for any other rightful reason. In this case there is no remedy available against the banker but the holder in due course has remedy both civil and criminal against the drawer.

(b)

Wrongful dishonour : Dishonour of cheque by the banker due to negligence or carelessness by its employees. The drawer may bring an action against the bank for losses suffered by him. The payee has no action against the banker in this case.

Dishonour of cheque is an offence Section 138 of the Negotiable Instruments Act states that the return of a cheque by a banker because the money standing to the credit of the accountholder is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from the account by an agreement made with the bank, is a criminal offence. The drawer shall be deemed to have committed an offence and such offence will be punishable with imprisonment for a term up to two years imprisonment or with a fine twice the amount of the cheque or both. Provisions of section 138 of the Act are applicable only if – (a)

The cheque in question has been issued in discharge of a liability only. Unless contrary is proved, as per the provisions of section 139, a cheque is presumed to have been received by the holder in discharge of a debt or liability. A cheque given as gift will not fall in this category.

(b)

The cheque is presented to the bank for payment within six months or its specific validity period, whichever is earlier.

(c)

The payee or holder in due course has given notice demanding payment within thirty days of the receiving information of dishonour which should be for a reason other than insufficiency of funds.

(d)

The drawer does not make payment within 15 days of the receipt of the notice. The complaint can be made only by the payee/holder in due course, within one month.

Offences by companies If the person committing an offence under section 138 is a company, every person who was in charge of the affairs of the company and was responsible for the business of the company at the time offence was committed shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. (Section 139) However, a person shall not be punishable under section 139 if it is proved that the offence has been committed without his knowledge or consent and that he had taken all due care to prevent commission of the offence. Action to be taken If a cheque is dishonored for lack of funds, the drawer can be punished with imprisonment upto one year and/ or withn a fine upto double the amount of the cheque if: · The cheque has been presented to the bank within a year from the date on which it was drawn or within its validity. · The payee or holder makes a demand for paymenmt by giving notice in writing to the drawer within thirty days of the receipt of the information. · The drawer of the cheque fails to make payment within fifteen days of receipt of the notice. Classification of instruments Negotiable instruments may be divided into following categories : (1) Bearer and order instruments (2) Inland and foreign instrument (3) Ambiguous and inchoate bills (4) Sight and time bills etc. (5) Escrow Bearer and order instruments An instrument may be payable or to order his order (a)

Bearer; or

(b)

A specified person or to his order.

(a)

Payable to bearer : An instrument is payable to bearer when it is expressed to be so payable. The wording could be “Pay to X or bearer”. It also becomes payable to bearer when the last endorsement on it is in blank.

Any person in lawful possession of a bearer instrument is entitled to enforce payment due on it. An instrument made ‘payable to bearer’ is transferable merely be delivery, i.e., without any further endorsement thereon (section 46 of the NI Act). However, section 49 provides that a holder of a negotiable instrument endorsed in blank may, without signing his own name, by writing above the endorser’s signature a direction to pay any other person as endorsee, convert the endorsement in blank into an endorsement in full and the holder does not thereby incur the responsibility of the endorser.

It shall be noted that a promissory note cannot be made payable to bearer and a bill of exchange cannot be made payable to a bearer on demand. In the case of a cheque, as per Section 85(2), where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in blank or full appearing thereon and notwithstanding that any such instrument purported to restrict or exclude further negotiation. Thus, the original character of the cheque is not altered so far as the paying bank is concerned provided that the payment is made in due course. Hence the proposition that “once a bearer instrument always a bearer instrument”. (b)

Payable to order : An instrument is payable to order when it is expressed to be payable to, (i) (ii) (iii)

the order of a specified person or e.g. “Pay to order of X”, a specified person or his order, e.g. “Pay to X or order”, or a specified person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.

Inland and foreign instrument Inland bills : As per Section 11 of the Act “ 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”. Foreign bills : As per Section 12 any such instrument, not so drawn, made or payable shall be deemed to be a foreign instrument. Thus, foreign bills are: (i)

bills drawn outside India and made payable in or drawn upon any person resident in any country outside India;

(ii)

bills drawn outside India and made payable in India, or drawn upon any person resident in India;

(iii)

bills drawn in India upon persons resident outside India and made payable outside India.

In connection with the liability of the maker or foreign bill section 134 states: “In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, 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 liability of the acceptor and endorser by the law of the place where the instruments is made payable.” Illustration : A bill of exchange was drawn by A in California where the rate of interest is 5%, 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, A is liable to pay interest at 5 per cent.

Protest in case of dishonour : Inland bills need not be protested for dishonour (protest is optional). Foreign bills must be protested if the law of the place of making or drawing them requires such protest.

Ambiguous and inchoate bills Ambiguous bill Section 17 of the Act states that an instrument which may be construed either as a promissory note or as a bill of exchange (Section 17) is considered as an ambiguous instrument. In the following cases the instrument is treated as ambiguous instrument : 1.

where the drawer and drawee are the same person.

2.

where the drawee is a fictitious person

3.

where the drawee is a person incapable of entering into contract.

The holder of such a bill is at liberty to treat the instrument as a bill or a promissory note. The holder shall decide it once for all. After having made his choice he cannot afterwards fall back and say that it is the other kind of instrument. Inchoate Instrument Section 20 of the Act states: “Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby give prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for an amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount……. Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended to be paid by him to be paid there under.” From the above it can be said that an incomplete or blank negotiable instrument properly stamped and signed is termed as inchoate instrument. Principles of estoppel : In case of inchoate instruments principal of estoppel is applicable i.e. when a person gives possession to his signature on a blank stamped paper to any other person, he prima facie authorizes the latter as his agent to fill it up and give to the world an instrument as accepted by him. By signing an incomplete instrument the person binds himself as drawer, maker, acceptor or endorser. Signature of a person on an inchoate instrument purports to be an authority to the holder to fill up the blank, and complete the paper as a negotiable instrument, and no action is maintained on it. Prerequisites for applicability of rule of estoppel : For applicability of the provisions of section 20 of the Act it is necessary that – 1.

the instrument is signed by the person who delivers it.

2.

the instrument is delivered to another person by the signer;

3.

the paper so signed and delivered must be stamped in accordance with the law prevalent at the time of signing and on delivering.

In absence of above requirements the principal of estoppel, as discussed above, will not apply and the signer can show that the instrument was filled without his authority. Liability of the signer : In accordance with provision of section 20 the signer is liable to the ‘holder’ as well as the ‘holder in due course’ but the holder can recover only what the signer intended to be paid under the instrument, while holder in due course can recover the whole amount made payable by the instrument provided that it is covered by the stamp. Sight (demand) and time bills etc. Sight Bills: Bills and notes are payable either on demand or at a fixed future time. Cheques are always payable on demand. Instrument payable on demand : Section 19 of the Act provides that – “A promissory note or a bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand”. A bill or promissory note is also payable on demand when it is expressed to be payable “on demand” or “at sight” or “on presentment”. The expression “on demand” means “immediately payable”. For these instruments the period of limitations begins to run from the date on which the instrument is executed except in the cases of sight bills in which the time for limitation period starts running from the date of presentment for sight. Such an instrument must be presented within a reasonable time after its issue in order to make the drawer liable and within a reasonable time after its endorsement to render the endorser liable. It will become overdue if it remains in circulation for an unreasonable length of time. Time Bills : An instrument made payable on a fixed date or after a specified period is a time instrument. An instrument made payable after the happening of a certain event is also a time instrument. In the case of time bills the period of limitation starts running from the date of maturity of the instrument. Escrow A bill, endorsed or delivered to a person subject to the understanding that it will be paid only if certain conditions are fulfilled, is called an “Escrow”. Regarding these bills there is no liability of the drawer until the conditions agreed are fulfilled. However, the rights of a holder in due course will not be affected. Holder and Holder in due course Holder: Holder is defined in Section 8 as: “The holder’ of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person entitled at the time of such loss or destruction.” From the above definition it is clear that for being a holder a person must be entitled to – a.

the possession of the instrument in his own name; and

b.

receive or recover the amount due thereon from the parties liable thereto.

‘Possession’ of the instrument by the holders refers to ‘de factor’ control and not the actual possession. The person must be named in the instrument either as a payee or as endorsee. Meaning of ‘de facto’ contract becomes clear in the event of death of the actual holder. The legal heir of a deceased holder does not have his name endorsed on the instrument but he becomes holder by operation of law. Any person in wrongful possession of the instrument cannot be the holder. Therefore, the finder of a lost instrument payable to bearer, or a person in wrongful possession of such instrument, is not a holder. Further, the possession of the instrument and being named in it as the payee does not make a person a ‘holder’ thereof. He shall also be entitled to receive payment and to give a valid discharge. Thus, a beneficiary cannot be termed as holder of the instrument and any payment by the drawer to the beneficiary cannot discharge him from his liability. Bacha Prasad V. Janki Rai, 1957 BLJR 331 (FB). Any person who is in possession of the instrument as payee will not be a holder within the meaning of section 8 of the Act if he has been prohibited from receiving payment by an order of Court. The payee may authorize his agent to receive payment and to give a valid discharge for the same but this does not make the agent the holder of the instrument since he cannot bring an action for recovery of money in the instrument in his own name. Holder in due course Section 9 of the Act defines a ‘holder in due course’ as: “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 bearer, or the payee or the endorsee thereof, if payable to 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.” Holder in due course means a holder who takes the instrument bona fide for value before it is overdue, and without any notice of defects in the title of the person who transferred it to him. Holder in due course for bearer instruments In the case of an instrument payable to bearer, holder in due course means any person who for consideration became its possessor before the amount mentioned in it becomes payable. Holder in due course for instruments payable to order In the case of an instrument payable to order, “holder in due course” means any person who become the payee or endorsee of the instrument before the amount mentioned in it became payable. Prerequisites for being holder in due course A person who claims to be holder in due course’ is required to prove: (i)

That he is a holder :

(ii) (iii) (iv) (v)

That he is a holder for consideration: Acquisition before maturity : That he has no knowledge of defective title : The instrument was complete at the time of possession :

Privileges of a “holder in due course” (i)

In case of an inchoate instrument : As per section 20, a person, who signed and delivered to another a stamped but otherwise inchoate instrument, is estopped from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him provided the amount filled is covered by the stamps affixed. In addition, if a subsequent transferor completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not affected (section 20).

(ii)

Fictitious name : If a bill of exchange is drawn on behalf of a fictitious person and is payable to his order, the acceptor is not relieved of his liability to the holder in due course because of the fictitious name. It is essential though that the holder in due course proves that the document bears the endorsement with signature in the same hand as that of the drawer and purporting to be made by the drawer (Section 42).

(iii)

Title free from defects : He possesses title free from all defects. He always possesses better title than that of the transferor or any of the previous parties and can give to subsequent parties the good title that he possesses.

(iv)

Lost or obtained by fraud or unlawful consideration : A person liable on a negotiable instrument cannot defend himself against a holder in due course on the ground that the instrument was lost or obtained from him by means of an offence or for an unlawful consideration (Section 58)

(v)

Estoppel against denying validity of the instrument originally made : “No maker of a promissory note and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honour of the drawer shall in a suit thereon by holder in due course, be permitted to deny the validity of the instrument as originally made or drawn”(Section 120)

(vi)

Payees incapacity: No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity at the date of note or bill to endorse the same. (Section 121).

(vii)

All prior parties liable :” Every prior party to a negotiable instrument (maker or drawee, acceptor or endorser) is liable thereon to a holder in due course until the instrument is duly satisfied (Section 36).”This means that a holder in due course can recover the amount of the negotiable instrument from any or all of the previous parties to the instrument.

(viii)

Title of previous parties : No endorser of a negotiable instrument shall in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity of any prior party to the instrument (section 122) .

Distinction between a holder and a holder in due course (i)

Consideration : A holder may become the possessor or payee of an instrument even without consideration, whereas a holder in due course is one who acquires possession for consideration.

(ii)

Time of possession : A holder in due course as against a holder, must become the possessor payee of the instrument before the amount thereon become payable.

(iii)

Good faith : A holder in due course as against a holder, must have become the payee of the instrument in good faith i.e., without having sufficient cause to believe that any defect existed in the transferor’s title.

Capacity to incur liability under negotiable instruments Section 26 of the Act states that every person who is capable of entering into a contract and to bind himself can make, draw, accept or negotiate a negotiable instrument, Section 27 provides that the negotiable instruments may also be drawn, accepted, and negotiated by an authorized agent on behalf of the principal. Therefore, a person not capable of entering into a contract cannot bind himself by being a party to the negotiable instrument. Different cases of parties’ capacity to incur liability under a negotiable instrument are discussed below : Minor : A minor is not competent to contract and, therefore, he cannot bind himself by becoming a party to the negotiable instrument. Section 26 provides that “A minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself.” An instrument does not void just because a minor is party to it. It remains binding on all other parties. Lunatics : A lunatic or drunken person who is incapable of understanding the effect of contracting on his interest is on the same footing as that of minor. Corporation : the contractual capacity of a company or corporation depends on the provisions contained in its memorandum of association or the charter. It may become a party to the negotiable instrument only if so authorized by the charter of the company. In this connection section 26 provides that “Nothing herein contained shall be deemed to empower a corporation to make, endorse or accept such instrument except in cases in which, under the law for the time being in force, they are so empowered.” Agency : A person capable of contracting may also bind himself through his duly authorized agent acting in his name. But a general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or indorsing bills of exchange so as to bind the principal. Thus, an agent who has specifically been authorized to draw, accept and negotiate negotiable instruments only can bind his principal. The agent has to make it clear that he is acting in a representative capacity. The form of signature must show that he intends to act as agent or that he does not intend to incur any personal liability. If this is not so done, he becomes personally liable. (Sections 27 and 28) Legal representative : A legal representative of a deceased person who signs his personal name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such (Section 29),

The term “legal representative” includes heirs, executors and administrators. Liabilities of Parties to Negotiable Instruments Liability of drawer Section 30 of the Act states: “The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate to the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.” (a) (b)

case of dishonour by non-acceptance case of dishonour by payment :

Liability of drawee cheque Section 31 of the Act states: “The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”. The drawee of a cheque who is always a banker is liable to the drawer if he, having sufficient funds of his customer, wrongfully refuses or fails to honour his customer’s cheque. The liability of the drawee arises only when the cheque has been dishonored by mistake. But where the cheque is dishonoured for any of the reasons explained earlier in this chapter, the banker does not incur any liability for rightful dishonour. Liability of maker of note and acceptor of bill Section 32 of the Act stats: “In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand”. The maker of a promissory note is bound to pay the amount at maturity, according to the tenor of the note and in case of default of such payment, he is bound to compensate any party to the note for any loss sustained by reason of such default. A promisor in case of promissory note and a drawer in the case of bill of exchange or cheque is the principal debtor. But after acceptance by the drawee the acceptor becomes the principal debtor. Therefore, in case of a bill the liability of the drawee arises only when the accepts the bills (Section 32). In the absence of a contract to the contrary, (An acceptor of a bill of exchange may become surety and the principle liability may have been agreed to be that of the drawer), the acceptor (drawee) of a bill is bound to pay the amount only at maturity, in accordance with the apparent tenor of the acceptance. In the event of the bill being accepted after maturity, he is bound for the amount to the holder on demand. In default of such payment, he is bound to compensate any party to the bill for any loss or damage caused to him by such a default.

The following persons incur liability by acceptance; (1) drawee (2) person named as drawee in case of need, and (3) acceptor for honour. Where there are several drawers, each can accept only for himself, unless they are partners. Effect of forged Endorsement on acceptor’s liability An acceptor of a bill already endorsed is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to believe that the Endorsement was forged when he accepted the bill (Section 41). Liability of acceptor of a bill drawn in a fictitious name Section 42 of the Act provides that an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an Endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer. Liability of endorser The endorser of an instrument by endorsing and delivering the instrument, before maturity, undertakes the responsibility that – 1. 2.

That on the due presentment it shall be accepted, (if a bill), and paid; and That if it is dishonoured by the drawee, acceptor or maker, he will indemnify the holder or subsequent endorsers who are compelled to pay, provided due notice of dishonour is received by him.

But he may or make his liability conditional. In this respect, his position is better than that of a drawer or an acceptor, neither of whom can exclude his liability. Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the extent as if the instrument had been paid at maturity. Liability of parties to holder in due course Every prior party (i.e. maker or drawer, acceptor and all intervening endorsers to an instrument is liable to a holder in due course until the instrument is satisfied (paid). Therefore, the maker and endorsers of a note are jointly and severally liable for the payment and may be sued jointly. Liability on an instrument made drawn etc. without consideration An instrument made, drawn accepted, endorsed or transferred without consideration creates no obligation of payment between the parties to the transaction. Further, a bill drawn or accepted without consideration does not impose any liability either on the drawer or on the acceptor to pay the holder. Similarly, if an instrument is endorsed without consideration, the endorser is not liable. But if any party to such an instrument has transferred the instrument to a holder for a consideration such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or from any party prior thereto. Presentment of Instrument

Presentment means placing of a negotiable instrument before the drawee for any of the following purposes : (a)

Presentment of bills for acceptance

(b)

Presentment of promissory note for sight.

(c)

Presentment of instrument for payment

Presentment of bills for acceptance Acceptance signifies the assent of the drawee of his liability. It is made by the drawee by signing his name across the face of the bill and its delivery. Where presentment for acceptance is not necessary A bill of exchange payable on demand or payable on a certain day etc. need not be presented for acceptance. But as a matter of common practice acceptance of the drawee is always obtained on a bill at the earliest opportunity after if it is drawn in order to: a. b.

To get additional security of the drawee’s name on the bill, and To get an immediate right of recourse against the drawer in case of dishonour for acceptance.

non-

Where presentment for acceptance is necessary Presentment of the bill for acceptance is necessary in the following two cases : (i)

where the bill is payable after sight – presentment for acceptance is with a view to fixing the maturity of the instrument;

(ii)

where a bill expressly stipulates that it shall be presented for acceptance before being presented for payment.

Presentment – to whom The bill shall be presented for acceptance to a person who is capable of accepting the bill i..e. to the following : a. b.

The drawee or his duly authorized agent, All the drawees where there are several drawees except in the case where all the drawees are partners and accepting partner is duly authorized to do so,

c.

The legal representative in case of the death of the drawee,

d.

The official receiver or assignee in case the drawee has become insolvent,

e.

The drawee in case of need,

f.

An acceptor for honour.

Time for presentment Time for presentment of the instrument may be divided into following categories :

a.

Where the presentment is optional the bill may be presented at anytime before the time for payment.

b.

Where the time has been specified in the bill for presentment in the bill, it shall be presented within the specified time.

c.

In case of bill payable after sight, if no time is specified therein for presentment for acceptance, it shall be presented within a reasonable time after it is drawn. The bill shall be presented for accepted during business hours on a business day.

Place of presentment The bill should be presented either at the residence or at the normal place of business of the drawee unless some other place has been specified in the bill. Proof of presentment There must be a definite proof of presentment of the bill for acceptance to the drawee. Drawee’s time for deliberation The drawee is entitled to have forty eight hours’ time (exclusive of public holidays) to consider whether he should accept a bill presented to him for acceptance (Section 63). If the drawee gives his acceptance, it is effective from the date of presentment. When presentment is excused Presentment of the bill for acceptance is excused if: (a)

The drawee is a fictitious person (Section 91) or

(b)

He cannot, after reasonable search, be found (Section 61) or

(c)

Where the presentment is irregular, such irregularity is excused if the bill has been dishonoured by non-acceptance on some other ground.

Effect of non-presentment Where the presentment of the bill is compulsory for acceptance and the holder fails to do so, the drawer and the all the endorsers are discharged from the liability to him. Who can accept Section 26 of the Act states “that every person capable of legally entering into a contract, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, Endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque”. As a rule a bill of exchange cannot be accepted by a person who is not a party to the bill, but as an exception to this general rule, a bill may be accepted by a stranger also for honour of any of the parties of the bill. Such person is known as acceptor for honour. Acceptance by several drawees

It there are several drawees in a bill of exchange who are not partners, each of them can accept it for himself but none of them can accept it for another without authority. If all the drawees in a bill happen to be partners, one of them can accept the bill so as to bind all partners because a partner is deemed to be an agent for all other partners. But in case a non-trading firm the power to draw, endorse, or accept or otherwise deal in negotiable instruments must be given by the partnership agreement. If the partnership agreement does not give such power to the to the partners, then any partner cannot accept a bill so as to bind all the partners. However, in the case of non-trading firm the authority to draw, endorse, accept and negotiate bills of exchange, negotiable instruments, cheques, hundies, is implied and so a partner can accept so as to bind all the partners. Acceptance through agent Section 27 of the Act says that every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorized agent acting in his name. The authority of an agent to make, draw, accept or endorse notes and bills depends on the general law of agency. Sections 27 and 28 indicate that a general authority to transact business and to discharge debits does not confer upon an agent the power to endorse bills of exchange so as to bind his principal; nor can an agent escape personal liability unless he indicates that he signs as an agent and does not intend to incur personal liability. Parmode Kumar V. Damodar AIR, (1953) Orissa 179. Essentials of a valid acceptance 1.

Acceptance must be in writing The drawee may use any appropriate word to convey his assent. It may be sufficient acceptance even if just a bare signature is 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. An unsigned acceptance is not a valid acceptance.

3.

Acceptance must be on the bill The acceptance of the bill either on the face or on the back of it has been held to be sufficient in law. But it is necessary that it is written on the bill failing which it does not create liability as acceptor on the part of the person who signs it. Therefore, an acceptance on any other paper attached to the bill is not sufficient acceptance.

4.

Acceptance must be completed by delivery The acceptance would be complete and the drawee would be bound only when 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. A bill of exchange drawn in set requires acceptance on any one part of it. If the drawee signs his acceptance on two or more parts, he may become liable on each of them separately.

5.

Acceptance may be either general or qualified In general acceptance, the acceptor assents to the order of the drawer, without qualification. On the other hand an acceptance of a bill is said to be qualified where the drawee does not accept it according to the apparent tenor of the bill but attaches some conditions or qualification which have the effect of either reducing his liability or acceptance or the liability subject to certain conditions. Effect of qualified acceptance : The holder of a bill is entitled to require an absolute and unconditional acceptance. He also reserves a right to treat the bill dishonoured, if it is accepted subject to any qualification as may be imposed by the acceptor. However if the holder agrees to qualified acceptance he does so at his own peril, since thereby he discharges all parties prior to himself, unless he has obtained their consent. Instances of qualified acceptance : According to the Explanation to Section 86 of the Act, an acceptance is to be treated as qualified. (i)

Acceptance subject to event :

(ii)

Acceptance for part payment:

(iii)

Specific place :

(iv)

Specific time :

Presentment of promissory note for sight A promissory note does not require acceptance since the payment is to be made by the maker himself. But, a promissory note payable at a certain period “after sight” must be presented to the maker for sight. The presentment is to be made by a person entitled to demand payment who is usually the holder. Again, the note must be presented within a reasonable time after it is made and in business hours on a business day. In default of such presentment, the maker is not liable to pay anything to the holder. In the case of such a note without presentment the maturity of the note cannot be fixed. Presentment of instrument for payment Presentment of a bill of exchange means its exhibition to the drawee or acceptor by the holder with a request for payment in accordance with its apparent tenor (Section 64 (1)). Presentment may be made through a registered letter if such a mode of presentment is authorized by agreement or usage. If the bill is paid, the holder would have to hand it over to the payer. In default of presentment by the holder, the drawer and all the endorsers would be discharged from their liability to the holder. Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification: Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.".

(1)

By whom and to whom presentment is to be made : Presentment is to be made either by the holder or by somebody on behalf of the holder. Promissory notes are to be presented to the maker; bills of exchange are to be presented to the acceptor; and cheques are to be presented to the drawee.

(2)

Time of presentment for payment : Presentment should be made during the usual business hours (Section 65).

(a)

If the bill is made payable a specified period after date of sight, it must be presented or payment at its maturity (Section 66).

(b)

If the bill payable on demand, if must be presented for payment within a reasonable time after is receipt the holder (Section 74)

(3)

Place of presentment for payment :

(a)

If the bill is drawn is accepted payable at a specified place and not elsewhere, it must be presented for payment at such a place in order to charge any party to the bill (Section 68).

(b)

If however the bill is accepted payable at a special place (the word” and not elsewhere” being omitted) then to charge the drawer (but not the acceptor), presentment should be made at the place specified (Section 69).

(c)

If no place of payment is specified then the bill should be presented for payment at the place of business (if any) or the residence of the drawee or acceptor of (if he has no fixed place of business or residence) to him in person wherever he can be found (Section 70 and 71).

(4)

Presentment of promissory note payable by installment : A promissory note payable by installments must be presented for payment on the third day after the day fixed for payment of each installment.

(5)

Presentment of cheque to drawer : It is the duty of the holder of a cheque to present it at the bank upon which it drawn. If payment is refused by the bank, the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed. If the holder does not present the cheque at the bank in time, the position of the bank may become unsound and it may not be possible for the banker to honour the cheque; in this case, the drawer is not liable if the bank refuses payment on presentment. The rule is that the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer.

(6)

Distinction between drawer of bills and drawer of cheques : If a bill is not presented in time, the drawer is absolutely discharged; but the drawer of a cheque, in case of delay in presentment is discharged only if he has suffered some loss or injury and that too, to the extent of such loss only. Therefore, if the bank remains solvent, the drawer will remain bound after presentment and refusal, although months (short of the period of limitation) have elapsed since the drawing.

(7)

Presentment of cheque to charge any other person : In order to charge the drawer, the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer, but in order to charge any person other than the drawer of cheque, it must be presented within a reasonable time (Section 73).

(8)

Presentment of instrument to agents etc : Presentment for acceptance or payment may be made not only to the drawer maker of acceptor but also to his duly authorised agent or

where he is dead to his legal representative, or where he has been declared an insolvent, to his assignee (Section 75). When presentment is unnecessary (a)

Presentment for payment is not necessary in any of the following cases : (1)

if the maker, of acceptor intentionally prevent the presentment of the instrument;

(2)

if the instrument being payable at his place of business, he (i.e. maker, drawer or acceptor) closes such place on a business day during the usual business hours;

(3)

if the instrument being payable at some other specified place, neither he nor any person authorized to pay it at tends at such place during the usual business hours;

(4)

if the instrument not being payable at any specified place, he (i.e. maker etc.) cannot after due search be found.

(b)

No presentment for payment is necessary as against any party sought to be charged with payment if he has engaged to pay notwithstanding non-presentment.

(c)

No presentment for payment is necessary as against any party if, after maturity and with the knowledge that instrument has been presented : (1)

he makes a part-payment on account of the amount due on the instrument; or

(2)

he promises to pay the amount due thereon in whole or in part; or

(3)

he otherwise waives his right to take advantage of any default in presentment for payment.

MATURITY Section 22 of the Negotiable Instruments Act states: : “The maturity of a promissory note or bill of exchange is the date at which it falls due. Days of grace Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be so payable. Negotiable instruments, except cheques, may be made payable either on demand or on a specified date or after a specified period of time. Cheques are always payable on demand. The date on which a negotiable instrument falls due for payment is the date of maturity of the instrument. An instrument payable on demand or on sight become payable immediately on the date of execution and there is no question of its maturity. Thus, the question of maturity arises only in case of instruments payable otherwise than on demand. Time instruments are given three days of grace and should be presented for payment only on the last day of grace. Presentment of instrument earlier than third day will be premature. Thus, an instrument will be deemed to have been dishonoured only if it remains unpaid after the expiry of the grace period.

Rules for calculating maturity 1.

Payable after stated number of months : If a note or bill is made payable a specified number of months after the date or after insight, or after a certain event, it matures or becomes payable three days after the corresponding date of the month after the stated month. If the month in which the instrument becomes payable does not have a corresponding date, the period shall terminate on last day of the month.

2.

When made payable after stated number of days : If a note or bill is made payable after a certain number of days after date or after sight or after a certain event, the maturity is calculated by excluding the day on which the instrument is drawn or presented for acceptance or sight or on which the event happens.

3.

If grace period ends on Sunday or another holiday : If the date on which a bill or note is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day. Thus, if the maturity falls on Sunday, it shall be deemed to be payable on Saturday.

Payment in due course Under Section 10 of the Negotiable Instrument Act – “Payment in due course” means payment in accordance with the apparent tenor of the instruments in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.” The essentials for a payment in due course are: (i)

Payment on or after the maturity : The payment should be made in accordance with the apparent tenor of the instrument. A payment before maturity is not a payment in accordance with the apparent tenor of the instrument; and as such it is not a payment in due course.

(ii)

Payment in cash only : The payment should be made in money only, because the instrument is expressed to be payable in money. A different form of payment may however be adopted but only with the consent of the holder of the instrument.

(iii)

Payment to a person in possession : That the person to whom payment is made should be in possession of the instrument. Therefore, payment must be made to the “holder” or a person authorized to receive payment on his behalf. Suppose, the instrument is payable to a particular person or order and is not endorsed by him. Payment to any person in actual possession of the instrument in such case, will not amount to payment in due course. However, in the event of the instrument being payable to bearer or endorsed in blank, the payment to a person who possess the instrument is, in the absence of suspicious circumstances, payment in due course.

(iv)

Payment in good faith: The payment should be made in good faith i.e. without negligence, and under circumstances which do not afford a reasonable ground for believing that the person to whom payment is made is not entitled to receive the amount. If suspicious circumstances are there, then person making the payment shall put on an enquiry. If he does not make the enquiry, the payment would not be in due course.

Payment of Interest The Act lays down following principles under sections 79 and 80 regarding payment of interest : 1.

If rate is specified : If the rate of interest has been specified in the Bill of Exchange or the promissory, the interest has to be calculated on the principal amount of the instrument at the specified rate from the date of the instrument till the date of actual payment or until such other date after the suit has been launched as the Court may direct (Section 76).

2.

If rate has not been specified : As per section 80 of the Act, where the rate of interest has been specified in the Bill or the note, as the case may, it has to be calculated at the rate of 18% P.A. from the date it ought to have been paid.

3.

Endorser’s liability to pay interest : If an endorsed instrument is dishonoured the liability of the endorser to pay interest arises from the date he receives notice of dishonour.

Negotiation and Assignment Who may negotiate As per Section 51 of the Act a negotiable instrument may be negotiated by the following person : (1)

Sole maker,

(2)

Drawer,

(3)

Payee,

(4)

Endorsee,

(5)

All of several joint makers, drawers, payees or endorsees.

A maker of drawer can negotiate only when the instrument is drawn to his own order. In case of restrictive Endorsements the endorsee must exercise his power of negotiation strictly in accordance with the express terms of his authority. Therefore, if negotiability is excluded by the respective endorsement, the endorsee, as holder, cannot negotiate. Further, explanation to section 51 provides that a maker or a drawer or endorsee or negotiate an instrument, only if – 1.

the instrument falls into his possession in a lawful manner; or

2.

he is the holder thereof.

Time of negotiation Section 60 of the Act provides that a negotiable instrument may be negotiated until the payment or satisfaction thereof by the maker or drawer or acceptor or drawee, as the case may be, at or after the maturity but not after the payment. Thus, negotiability of a negotiable instruments terminates only on payment or satisfaction at or after maturity. Any payment before maturity does not stop negotiability of the instrument. Types of negotiation

Under the Act, negotiable instruments may be negotiated either 1.

by delivery when these are payable to bearer; or

2.

by endorsement and delivery when these are payable to order.

Endorsement As per section 15 of the Act Endorsement means – “When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face of or on a slip of a paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the endorser.” Form of Endorsement The Act does not lay down any directions about the form of Endorsement. Only requirement of Endorsement is that the transferor shall use appropriate writing on an instrument so as to transfer his right, title and interest therein to some other person. Essentials of Endorsement (a)

On the instrument :

(b)

Endorser :

(c)

Signed :

(d)

Blank or full :

(e)

Intention to transfer rights :

(f)

Delivery :

Different types of the endorsements (a)

Blank or general

(b)

Special or in full

(c)

Restrictive – Section 50 permits restrictive endorsements which take away the negotiability of such instruments. “Pay the contents to C only”, “Pay C for my use.”

(d)

Conditional (i)

Sans Recourse – when endorser excludes his liability “pay to X or order at his own risk” or “Pay to C without recourse to me.”

(ii)

Sans Frais When the endorser does not want the endorsee or any subsequent holder to incur any expenditure on his account on the instrument, all endorsers are liable to him.

(iii)

Facultative – Endorsee must give notice of dishonour of the instrument to the endorser, but the latter may waive this duty of the endorsee by writing in the

endorsement “ notice of dishonour waived.” The endorsee remains liable to the endorsee for the non payment of the instrument. (iv)

Contingent . The endorser may make an endorsement so as to make the endorsee entitled to receive the amount due under the instrument only in case of happening or non happening of a certain event. “Pay X on his marriage to Y”.

Liability of endorser on dishonour Under Section 35 that except in the case of a contract to contrary, every endorser of a negotiable instrument is liable to every subsequent party to it provided due notice of dishonour is given to or received by him. Illustration : A bill is drawn by A upon B and is payable to C or order. C endorses the bill to D, who in turn endorses it to E. If B dishonours the bill, the holder, E has a right of action against all the parties i.e. D, C and A. Effect of endorsement (a)

The endorsement of an instrument, followed by delivery, transfers to the endorsee the property in the instrument with right of further negotiation i.e. the endorse may further endorse it to some other person.

(b)

A holder of an instrument deriving title from a holder in due course has rights thereon of the holder in due course (Section 53).

Negotiation by unauthorized parties Right and liabilities in case of loss of instrument 1.

The holder of negotiable instrument shall give a notice to all parties liable on the instruments. He shall also give a public notice.

2.

Under Section 45A, the loser of a bill of exchange has a right to apply to the drawer for a duplicate of the lost bill, giving security to the drawer to indemnify him against all persons. If the drawer does not grant the application the loser may compel him to provide him with a duplicate.

3.

When a negotiable instrument payable to order has been lost, the finder or the endorsee from the finder, is not entitled to receive the amount of it from maker, acceptor or holder, or from any party prior to such holder. He is bound to return the instrument to the real owner.

4.

If the instrument lost by one is payable to bearer or endorsed in blank, the third person acquiring it bona fide and for valuable consideration before maturity, is entitled both to retain the instrument against the real owner and to compel payment from the prior parties thereon i.e. if the possessor of a lost instrument is a holder of it in due course, he is entitled to receive the amount due thereon from the acceptor or holder or from any party prior to such holder.

5.

The holder of the lost instrument shall give a notice for payment on maturity date to the drawer. If the drawer or acceptor refuses payment, he must give notice of dishonour to the drawer, acceptor as well as to all prior parties failing which he will lose his right to take against the person liable on the instrument.

Stolen instrument

The position in case of stolen instrument is same as in the case of lost instrument. The thief does not get any title to the instrument. But, if a stolen instrument, payable to bearer, is negotiated to a holder in due course, such holder in due course gets a good title. Instruments obtained by fraud Free consent of parties is one of the most important for a valid contract. Absence of consent or absence of free consent vitiates all contracts including contracts relating to negotiable instruments. Thus, if an instrument is obtained from any maker, acceptor or holder by means of an offence or fraud, the possessor is not ordinarily entitled to receive the amount under it from the acceptor or holder, or from any party prior to such holder. But if such instrument, payable to bearer is transferred to holder in due course he will get good title. Even if the instrument is negotiated by endorsement, the holder in due course gets good title. The endorsement will be valid though the title of the endorser is defective. Rights and obligations of a person who has obtained an instrument by unlawful consideration A negotiable instrument given for a consideration which is illegal either because it is immoral and contrary to public policy or because it is specially interdicted or prohibited by the statute is void and creates no obligations between the parties. If the possessor endorses it in favour of some other person, the endorsee also would not be entitled to claim payment, unless he is holder in due course. The endorsee would be regarded as a holder in due course if it is endorsed to him for valuable consideration without any notice having been received by him as to the consideration being unlawful. Effect of forgery Forged instrument : In relation to negotiable instruments forgery means fraudulent making or altering a writing on the instruments to the prejudice of another man’s right. If the signature of the maker, drawer or acceptor is forged on the instrument, it is said to be a forged instrument and, in the eyes of law, a negotiable instrument with forged signature is a null and void. Such an instrument fails to create any right or obligations. In the case of forged instrument even a holder in due course also does not get a good title. It is also to be noted here that a forgery cannot be ratified since the forger does not act and does not purport to act on behalf of the person whose signature he forges. Forged Endorsement : When signature of the endorser is forged on the instrument it is said to be a forged endorsement. In the eyes of law, a forged endorsement is not an endorsement at all. If the instrument is payable to a person or to his order, it cannot be negotiated except with the signature of the person. Therefore, if the instrument is negotiated under the forged signature of the person to whom the instrument has been made payable the endorsee does not receive any title even though he is a purchaser for value and in good faith, for the endorsement is a nullity. But in case of bearer instrument or instruments endorsed in blank which can be negotiated by mere delivery, a forged endorsement is immaterial and it does not affect the title of the holder because he derives his title through delivery and not through Endorsement. Negotiation of over due and dishonoured instruments The holder of an instrument, who has acquired it after dishonour, has as against the other parties only the rights thereon of his transferor. Negotiation after maturity does not convey a good title to the transferee because of defective title of the transferor himself. Only a holder in due course gets a good title even if title of the transferor is defective but to become holder in due the instrument should have been acquired before maturity.

However, in case of Accommodation Bills, the proviso to Section 59 lays down that, any person who becomes holder of an accommodation bill after maturity, in good faith for consideration becomes the holder in due course. Negotiable instruments without consideration A negotiable instruments made, drawn, accepted or negotiated without consideration or for a consideration which fails, creates no obligation of payment between the parties but if such an instrument is transferred for a valuable consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor. Discharge from liability on Notes, bills and cheques Discharge of the Instrument An instrument is said to be discharged when – (a)

All the rights under it are extinguished.

(b)

It ceases to be negotiable.

(c)

Even a holder in due course does not acquire any right under it.

In short, an instrument is discharged only when the part primarily and ultimately liable on the instrument is freed from liability. Discharge of a party to an instrument does not discharge the instrument itself. Consequently, the holder in due course may proceed against the other parties liable for the instrument. Different modes of discharge from liability Parties to negotiable instruments are discharged from liabilities when the right of action on the instrument is extinguished. The right of action on a negotiable instrument is extinguished by the following methods : (a)

By payment in due course : The parties primarily liable to make payment on an instrument are discharged from liability to all parties if the instrument is payable to bearer or endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon i.e. when the payments have been made to the holder of the instrument at or after maturity in good faith and without notice of any defect in the title to the instrument (Section 82).

(b)

By cancellation of acceptor’s endorser’s name : The maker, acceptor and endorser respectively of a negotiable instrument are discharged from liability to a holder who cancels the acceptor’s or endorser’s name with the intent to discharge him and to all parties claiming under such holder i.e. if the holder of a bill cancels the signature of acceptor with an intention to discharge him, both maker and the acceptor of such negotiable instrument are discharged from the liability to the holder and to all parties claiming under such a holder [Clause (a) Section 82)]. However, it is to be noted that any cancellation under mistake or without the authority of the holder is inoperative.

(c)

By release : the holder of an instrument may release any of the parties to the instrument by any method other than cancellation of names e.g. a separate agreement of waiver, or release. The release may be express or implied [ Clause (b) of Section 82]. The

party so released and all subsequent parties who have a right against the party so released will also stand released and discharged from the liability. (d)

By allowing more than 48 hours to the drawee for acceptance : If the holder of a bill of exchange allows the drawee more than forty-eight hours, exclusive of public holidays to decide whether he will accept the bill, all prior parties not consenting to such an allowance of more than 48 hours are discharged from liability to such holder. This is because the holder must treat the instrument as dishonoured if the drawee fails to signify his acceptance within forty-eight hours, and then the holder must give notice to the drawer and to all prior parties, and must not allow time unless they give their consent that more time should be allowed (Section 83).

(e)

Dissenting parties discharged by qualified or a limited acceptance : The holder of a bill is entitled to unqualified acceptance. If he elects to take a qualified acceptance, he does so at his own peril and discharges all parties prior to himself unless he obtains their consent to such an acceptance are discharged. All previous parties are discharged in the following cases : (1)

when acceptance is qualified,

(2)

when acceptance is for a part of the sum,

(3)

when acceptance substitutes a different place or time of payment,

(4)

when acceptance is not signed by the drawee not being partners.

But, if the prior parties subsequently approve of such acceptance by the holder, they will not be discharged. (f)

By payment, alteration not being apparent : If a person makes payment on an altered note, bill or cheque, and the alteration is such that it is not apparent the payment is deemed to have been made in due course and the person (banker or other person) who is liable to pay the amount is protected (Section 89). Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.".

(g)

By negotiation back : If a bill of exchange which has been negotiated is, at or after maturity held by the acceptor in his own right all right to action thereon are extinguished (Section 90).

(h)

By delay in presenting the cheque within a reasonable time : If a cheque is not presented for payment within a reasonable time after its issue the drawer is not liable for the delay. However, if the drawer suffers some loss due to failure of the bank, the drawer is discharged as against the holder to the extent of losses suffered by him. For example, if X draws 10 cheques of Rs.250 each, but when the cheques ought to be presented, has only Rs.2,000 at the bank and subsequently the bank fails before the cheques are presented, X will be released from liability to the extent of Rs.2,000 but will remain liable for the balance. If he had the full amount of Rs.2,500 at the bank, he will be discharged in full.

(i)

(j)

By operation of law : A negotiable instrument is also discharged by operation of law under any of the following circumstances : (a)

By lapse of time i.e., when the claim under the instrument becomes barred by the Limitation Act on the expiry of the period prescribed for the recovery of the amount due on the instrument; or

(b)

By merger, i.e., when the debt, under the instrument is merged in the judgement debt obtained against the acceptor make or endorser.

(c)

Under the law of insolvency i.e. when the acceptor, maker, or endorser, who becomes insolvent, is discharged by an order of the Court made in the insolvency proceedings.

By payment by the drawee of a cheque payable to order or to bearer : Payment in due course discharges the bank from liability even if the payment is made to a wrong person. A cheque is said to have been paid in due course when it has been paid in good faith, after taking proper care to ascertain the genuineness of the endorsements. But if the drawer’s signatures is forged, the banker can, under no circumstances, claim discharge on payment. The bank is discharged by payment in due course to the bearer notwithstanding any endorsement thereon, whether in full or in part and whether or not such endorsement purports to restrict or exclude further negotiation. The endorsee under an endorsement in full cannot recover the amount from the banker who has paid it to the bearer (Section 85). The rule of the discharge applicable to a cheque payable to order also applies, to a draft drawn by one of the bank upon another payable to order or demand (Section 85A).

(k)

By material alteration of the instrument without assent of all parties liable : Material alteration is that change in the negotiable instrument which affects the validity of the instrument or rights of the parties thereto. Validity of the instrument is affected only when the alteration is material. Any material alteration of a negotiable instrument renders the same void as against any one who is party thereto at the time of making such alterations. Following have been held to be material alterations : 1. 2. 3. 4. 5. 6. 7. 8.

Alterations of the date of the instrument Alteration of the sum payable Alteration of the time of payment Alteration in the place of payment Alteration in the rate of interest Alteration by addition of new party Alteration by adding the place of payment Tearing off the material part of the instrument

A change is said to be material when – (a) (b) (c)

it changes the identity of the contract between the parties it changes the rights and liabilities of the parties of the parties or any of the parties of the instrument. It alters the operation of the instrument.

Alterations not considered as material alterations : Certain alterations, though material, do not have the effect of vitiating the instrument. Those are as under :

1. 2. 3. 4. 5. (a) (b) (c)

Alterations made before the issue of instrument Alterations made to correct a mistake Alterations made to carry out common intention of parties Alterations made with the consent of the parties Alterations which are not considered material e.g. Filing up of amount in an inchoate instrument Conversion of an Endorsement in blank into an Endorsement in full Crossing of a cheque after it has been issued.

Dishonour A bill may be dishonoured for non-acceptance as well as non-payment. Cheques and promissory notes may be dishonoured by non-payment only. When a negotiable instrument is dishonoured the holder is required to give a notice to all the previous parties so as to make them liable to the instrument. Except in the cases where notice of dishonour is waived, the holder’s failure to give notice of dishonour to previous parties, he loses his right to bring any action against them. Kinds of Dishonour 1. 2.

Dishonour by non-acceptance Dishonour by non-payment Dishonour by non-acceptance : Section 91 provides that – “A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of the several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where the presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured”.

A dishonour by non-acceptance may take place in any one of the following circumstances : (a)

when the drawee either does not accept the bill within forty-eight hours of presentment or refuses to accept it;

(b)

when one of several drawees, not being partners, makes default in acceptance;

(c)

when the drawee gives a qualified acceptance;

(d)

when presentment for acceptance is excused and the bill remains unaccepted;

(e)

when the drawee is incompetent to contract;

(f)

when the drawee is a fictitious person and could not be found after reasonable search.

Presentment for acceptance is not necessary : Presentment of the bill for acceptance is not necessary to treat an instrument as dishonoured in any of the following cases : (i) (ii) (iii)

Where the drawee cannot be found, or Where the drawee is incompetent to contract, or Where the drawee is a fictitious person.

Effect of dishonour for non-acceptance : In the case of dishonour by non-acceptance, the holder becomes entitled immediately to have recourse against the drawer or the endorser. Dishonour by non-acceptance constitutes a material ground entitling the holder to take action against the drawer and he need not wait till the maturity of the bill. Dishonour by non-payment In accordance with the provisions of Section 92 of the Act – “A promissory note, bill of exchange or cheque is dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same”. Thus, an instrument is said to have been dishonoured by non-payment only when the party primarily liable i.e. (a)

the acceptor of a bill,

(b)

the maker of a note, and

(c)

the drawee of a cheque,

make default in payment. Distinction between dishonour by non-acceptance and by non-payment In case of dishonour of a bill by non-acceptance no action lies against the drawee as he is not a party to the bill. The holder of the bill can proceed only against the drawer or endorser, if any. In the case of dishonour of a bill by non-payment action lies against the drawee also as he becomes a party to the instrument. On dishonour by non-payment the drawee can be sued. Notice of dishonour By whom notice to be given When an instrument is dishonoured either by non-acceptance or by non-payment 1.

The holder thereof or some party thereto who remains liable thereon must give notice of dishonour (Section 93).

2.

Any party receiving notice of dishonour must also transmit it to within a reasonable time to all the parties prior to him in order to render them liable to himself unless such party otherwise received due notice as provided under Section 93 (Section 95). Illustration : A draws a bill in favour of B on X : B endorses it to C; C endorses it to D; D endorses it to E; E endorses it to F. If the bill is dishonoured by X, F, the holder, may give notice to all his prior parties to make all of them.liable to himself. But if he gives notice of dishonour only to E and A his right to claim will be valid against E and A only. In this case if E does not transmit the notice to D, C, and B he will not have any claim against them. In order that E also has right of action against D, C and B, E must transmit to all his prior parties i.e. D, C and B.

Where several persons are required to give notice of dishonour to their prior parties, a person may take advantage of notice of dishonour served by other person to any person to whom he is also required to give notice. Thus, serving of notice of dishonour is necessary and not the fact that who serves the notice. Notice by agent Notice for dishonour can also be given by a duly authorized agent. When an instrument is deposited with the agent for presentment and if the instrument is dishonoured, the agent himself can give notice of dishonour to all prior parties on behalf of the holder. Further the agent may also give such notice to his principal who, in turn, may serve notice to all his prior parties (Section 96). To whom notice is to be given Notice must be given to all such parties to whom the holder proposes to charge with liability severally or jointly, e.g., the drawer and the endorsers. Notice may be given either to the party himself or to his agent, or to his legal representative on this death, or to the official assignee on his insolvency. It is not necessary to give notice to the maker of a note or the drawee or acceptor of a bill or cheque (Section 93). Where the party to whom notice is to be given is dead, the notice addressed to him due to ignorance will not become invalid and such a notice is sufficient to bind the estate of the agent. However, where the holder or any other person who is giving notice is aware of the fact of the death of the party to whom notice is to be given, in that case the notice shall be addressed to his legal representative otherwise it will not be treated as a valid notice. Similarly, in case of insolvency the notice must be given to the Official Assignee. Effect of non-service of notice Notice of dishonour is so necessary that an omission to give notice discharges all parties. The parties are discharged not only on the bill but also in respect of the original consideration. Notice of dishonour is a condition precedent to the continuation of the liability of the drawer under Section 30 and of the endorsee under Section 35 of the Act. Contents of notice The notice of dishonour may be given in any form but it must inform the party to whom it is given, either in express terms or by reasonable intendment. The notice need not be signed but it must inform the party to whom it is given : (a)

that a specified instrument has been dishonoured

(b)

that the instrument has been dishonoured by non-acceptance or non-payment

(c)

that he will be held liable thereon. The notice must give an exact description of the instrument dishonoured, for mis-description, which misleads the addressee, vitiates the notice.

Place of service of notice The notice, if in writing, may be given by post at the place of business or at the residence of party for whom it is intended. The notice is not rendered invalid by miscarriage in post. Parties may also fix by an agreement a place to which notice of dishonour may be forwarded and a notice sent to such specified place is valid even if it takes longer time. If the holder does not know the place at which the notice of dishonour shall be served, he must exercise due diligence to ascertain the place.

Time of serving the notice After dishonour of the instrument a notice of dishonour shall be given within a reasonable time. In determining what is reasonable time for giving notice of dishonour, regard must be had to the nature of the instrument and the usual course of dealing with respect to similar instrument. In calculating such time, public holidays are excluded. Under section 106 of the Act, the reasonable time for giving notice of dishonour of an instrument is as under : (a)

Where the holder of the instrument and the party to whom notice is given carry on business or live in different places, the notice of dishonour must be posted by the next post, if there be one on the same day. In other case, on the next day after the day of the dishonour.

(b)

If the parties live or carry on business in the same place, it is sufficient if the notice is dispatched so that it reaches its destination on the day next after the day of dishonour.

(c)

A party receiving notice of dishonour, who seeks to enforce his right against the prior party, transmit the notice within a reasonable time if he transmits it within the same time after its receipt as he would have had to give notice if he had been the holder (Section 107).

When notice of dishonour is unnecessary (Section 98) In a suit against the drawer or endorser on an instrument being dishonoured, the notice of dishonour is not necessary in the following cases : (a)

When it has been dispensed with by an express waiver by the party entitled to it.

(b)

When the drawer has countermanded payment of a cheque.

(c)

When the party charged would not suffer damage for want of notice.

(d)

When the party entitled to notice after due search, cannot be found.

(e)

(f) (g)

(h) (i)

Where there are been accidental omission to give the notice, provided the omission has been used by an unavoidable circumstances, e.g., death or dangerous malady of the holder or his agent, or other inevitable accident or over whelming catastrophe not attributable to the default, misconduct or negligence of the party tendering notice. When one of the drawers is acceptor. Where the drawer and the acceptor are the some person. However, any partnership between the drawer and drawee of a bill does not give rise to the presumption that they are partners in respect of the drawing of the bill, or that the bill was drawn by one of them on behalf of both. In this type of case the rule mentioned above does not apply. In the case of promissory not which is not negotiable. When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.

Duties of holder on dishonour of an instrument The holder shall take the following steps in case of dishonour of an instrument :

1.

Notice of dishonour : The holder shall send a notice of dishonour to all the parties to whom he desires to charge in accordance with the provisions of the Act.

2.

Noting and protesting : When a bill is dishonoured by non-acceptance and a promissory note is dishonoured by non-payment the holder may cause such dishonour to be noted and/or by the notary public.

3.

Suit for recovery : After fulfilling the formalities of noting and protesting the holder may bring a suit against the parties liable to pay for the recovery of the amount due on the negotiable instrument. Noting and Protesting Noting

In this connection section 99 of the Act provides as under : “When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. Such note must be made within a reasonable time after the dishonour, and must specify the date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary’s charges” Mode of noting Therefore, noting is a convenient mode of authenticating the fact that a bill or note has been dishonoured. When a bill is to be noted it is taken to the notary public who represents it for acceptance or payment, as the case may be, and if the drawee or acceptor still refuses to accept or pay the bill, the bill is noted. Noting is optional Noting is not required in case of cheques because in such a case the banker returning the cheque give reason in writing for the dishonour of the same, which is accepted as authentic evidence of dishonour. In case of inland bills noting is not compulsory. Advantages of noting 1.

Under section 104A, wherever protest is required to be made within a specified time, it is sufficient if noting is made within that time.

2.

A bill of exchange may be accepted for honour after it has been noted.

3.

A bill of exchange may be paid for honour after it has been noted.

Time for noting As per section 105, the noting shall be made by the notary public within a reasonable time. It has been held that the noting shall take place on the day of dishonour or not later than the next business day unless the holder is prevented by circumstances beyond his control. Protest Section 100 of the Act provides that –

“When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.” When an instrument is dishonoured, the holder may cause the fact not only to be noted, but also to be certified by a Notary Public that the bill has been dishonoured. Such a certificate is referred to as a protest. Advantage of protest Neither noting nor protesting is compulsory in the case of inland bills, But under Section 104 every foreign bill of exchange must be protested for dishonour when such a protest is required by the law of the country where the bill was drawn. The advantage of both noting and protesting is that this constitutes prima facie good evidence in the Court of the fact that instrument has been dishonoured in accordance with the provisions of section 119, the Court is bound to recognize a protest. Provisions of section 104A shall also be noted which provide that – “For the purpose of this Act, where a bill or note is required to be protested within a specified time or before some further proceeding is taken, it is sufficient that the bill has been noted for protest before the expiration of the specified time or the taking of the proceeding; and the formal protest may be extended at any time thereafter as of the date of noting.” Thus, where a document has been noted within the time required by law, legal proceeding cannot be vitiated on account of protest not having been made. Protest in absence of notary public The Act does not provide the place where the protest shall be made. The Act is also silent about the cases where services of notary public are not available at the place of dishonour of the bill. In this connection the Bill of Exchange Act provides that any householder or substantial resident of the place may, in the presence of two witnesses, give a certificate, signed by them, attesting the dishonour of the bill, and such certificate operates as a formal protest of the bill. Contents of protest Section 101 provides that the protest must contain the following particulars : 1. 2. 3.

The instrument itself or literal transcript of the instrument of everything written or printed thereon. The name of the person for whom and against whom the instrument has been protested. The fact and reasons of dishonour, i.e. a statement that payment or acceptance or better security, as the case may be, was demanded by the notary public from the person concerned and he refused to give it, or did not answer, or that he could not be found.

4.

The time and place of dishonour.

5.

The signature of the notary public.

6.

In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid.

Notice of protest

When a promissory note or a bill of exchange is required by law to be protested, notice of such protest in lieu of notice of dishonour must be given in the same manner as notice of dishonour (Section 102). Protest for better security A bill may be protested even for better security before the maturity of the bill. In this connection section 101 of the Act provides as under : “When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.” LOCAL USAGE PREVAILS UNLESS EXCLUDED - The Act does not affect any local usage relating to any instrument in an oriental language. However, the local usage can be excluded by any words in the body of the instrument, which indicate an intention that the legal relations of the parties will be governed by provisions of Negotiable Instruments Act and not by local usage. [section 1]. Thus, unless specifically excluded, local usage prevails, if the instrument is in regional language. BILL OF EXCHANGE AND PROMISSORY NOTES EXCLUDED FROM INFORMATION TECHNOLOGY ACT - Section (1)(4)(a) of Information Technology Act provides that the Act will not apply to Bill of Exchange and Promissory Notes. Thus, a Bill of Exchange or Promissory Note cannot be made by electronic means. However, cheque is covered under of Information Technology Act and hence can be made and / or sent by electronic means. CHANGES MADE BY AMENDMENT ACT, 2002 - (a) Definition of ‘cheque’ and related provisions in respect of cheque amended to facilitate electronic submission and/or electronic clearance of cheque. Corresponding changes were also made in Information Technology Act. (b) Bouncing of cheque - Provisions amended * Provision for imprisonment upto 2 years against present one year * Period for issuing notice to drawer increased from 15 days to 30 days * Government Nominee Directors excluded from liability * Court empowered to take cognizance of offence even if complaint filed beyond one month * Summary trial procedure permitted for imposing punishment upto one year and fine even exceeding Rs 5,000 * Summons can be issued by speed post or courier service * Summons refused will be deemed to have been served * Evidence of complainant through affidavit permitted * Bank’s slip or memo indicating dishonour of cheque will be prima facie evidence unless contrary proved * Offence can be compounded. - - The amendments have been made effective from 6-2-2003. Transferee can get better title than transferor – Normal principle is that a person cannot transfer better title to property that he himself has. For example, if a person steals a car and sells the same, the buyer does not get any legal title to the car as the transferor himself had no title to the car. The real owner of car can anytime obtain possession from the buyer,even if the buyer had purchased the car in good faith and even if he had no idea that the seller had no title to the car. This provision is no doubt sound, but would make free negotiability of instrument difficult, as it would be difficult to verify title of transferor in many cases. Hence, it is provided that if a person acquires ‘Negotiable Instrument’ in good faith and without knowledge of defect in title of the transferor, the transferee can get better title to the negotiable instrument, even if the title of transferor was defective. This is really to ensure free negotiability of instrument so that persons can deal in the instrument without any fear.

DIFFERENCE BETWEEN NEGOTIATION AND TRANSFER/ASSIGNMENT - Difference between “Negotiation’ and assignment/transfer is that in case of negotiation, the transferee can get title better than transferor, which can never happen in assignment/transfer. Promissory Note - A “promissory note” is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. [Section 4]. Bill of Exchange – As per statutory definition, “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. [Para 1 of section 5]. A cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on demand. DRAWER, DRAWEE AND PAYEE - The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “drawee” [section 7 para 1]. - - The person named in the instrument, to whom, or to whose order the money is by the instrument directed to be paid, is called the “payee” [section 7 para 5]. - - However, a drawer and payee can be one person as he can order to pay the amount to himself. AT SIGHT, ON PRESENTMENT, AFTER SIGHT - In a promissory note or bill of exchange the expressions “at sight” and “on presentment” mean ‘on demand’. The expression “after sight” means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance. [section 21]. - - Thus, in case of document ‘after sight’, the countdown starts only after document is ‘sighted’ by the concerned party. Stamp duty on Negotiable Instrument – A negotiable instrument is required to be stamped. Stamp duty on Bill of Exchange and Promissory Note is a Union Subject. Hence, stamp duty is same all over India. Hundi – a local instrument – Hundi is an indigenous instrument similar to Negotiable Instrument. The term is derived from Sanskrit word ‘hund’ which means ‘to collect’. If it is drawn in local language, it is governed by local usage and customs. Provisions in respect of Cheques - A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. ‘Cheque’ includes electronic image of a truncated cheque and a cheque in electronic form. [section 6]. The definition is amended by Amendment Act, 2002, making provision for electronic submission and clearance of cheque. The cheque is one form of Bill of Exchange. It is addressed to Banker. It cannot be made payable after some days. It must be made payable ‘on demand’. Crossing of Cheque – The Act makes specific provisions for crossing of cheques. CHEQUE CROSSED GENERALLY - Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. [section 123] CHEQUE CROSSED SPECIALLY - Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. [section 124].

PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY - Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection. [section 126]. CHEQUE BEARING “NOT NEGOTIABLE” - A person taking a cheque crossed generally or specially, bearing in either case the words “not negotiable”, shall not have, and shall not be capable of giving, a better title to the cheque than that which the person form whom he took it had. [section 130]. Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had. Electronic Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(a) to section 6, ‘A cheque in the electronic form’ means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed by a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. Truncated Cheque - Provisions of electronic cheque has been made by Amendment Act, 2002. As per Explanation I(b) to section 6, ‘A truncated cheque’ means a cheque which is truncated during the clearing cycle, either by the clearing house during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Penalty in case of dishonour of cheques for insufficiency of funds - If a cheque is dishonoured even when presented before expiry of 6 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.. The drawer should make payment within 15 days of receipt of notice. If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against drawer within one month from the last day on which drawer should have paid the amount. The penalty can be upto two years imprisonment or fine upto twice the amount of cheque or both. The offense can be tried summarily. Notice can be sent to drawer by speed post or courier. Offense is compoundable. 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. Thus, the fine/imprisonment is in addition to his liability to make payment of the cheque. Return of cheque should be for insufficiency of funds - The offence takes place only when cheque is dishonoured for insufficiency of funds or where the amount exceeds the arrangement. Section 146 of NI Act only provides that once complainant produces bank’s slip or memo having official mark that the cheque is dishonoured, the Court will presume dishonour of the cheque, unless and until such fact is disproved. Calculation of date of maturity of Bill of Exchange - If the instrument is not payable on demand, calculation of date of maturity is important. An instrument not payable on demand is entitled to get 3 days grace period. Presentment of Negotiable Instrument - The Negotiable Instrument is required to be presented for payment to the person who is liable to pay. Further, in case of Bill of Exchange payable ‘after sight’, it has to be presented for acceptance by drawee. ‘Acceptance’ means that drawee agrees to pay the amount as shown in the Bill. This is required as the maker of bill (drawer) is asking drawee to pay certain amount to payee. The drawee may refuse the payment as he has not signed the Bill and has not accepted the liability.

In case of Promissory Note, such acceptance is not required, as the maker who has signed the note himself is liable to make payment. However, if the promissory note is payable certain days ‘after sight’ [say 30 days after sight], it will have to be presented for ‘sight’. If the instrument uses the expressions “on demand”, “at sight” or “on presentment”, the amount is payable on demand. In such case, presentment for acceptance is not required. The Negotiable Instrument will be directly presented for payment. Acceptance and payment for honour and drawee in need - Provisions for acceptance and payment for honour have been made in case when the negotiable instrument is dishonoured. Bill is accepted for honour when it is dishonoured when presenting for acceptance, while payment for dishonour is made when Bill is dishonoured when presented for payment. Negotiation of Instrument - The most salient feature of the instrument is that it is negotiable. Negotiation does not mean a mere transfer. After negotiation, the holder in due course can get a better title even if title of transferor was defective. If the instrument is ‘to order’, it can be negotiated by making endorsement. If the instrument is ‘to bearer’, it can be negotiated by delivery. As per definition of ‘delivery’, such delivery is valid only if made by party making, accepting or indorsing the instrument or by a person authorised by him. An instrument can be negotiated any number of times. As per section 118(e), endorsements appearing on the negotiable instrument are presumed to have been made in the order in which they appear on the instrument, unless contrary is proved. [There is no mandatory provision to put date while signing, though advisable to do so]. Section 118(d) provides that there is presumption that the instrument was negotiated before its maturity, unless contrary is proved. As per section 60, Bill can be negotiated even after date of maturity by persons other than maker, drawee or acceptor after maturity. However, person getting such instrument is not ‘holder in due course’ and does not enjoy protections available to ‘holder in due course’. Liability of parties - Basic liability of payment is as follows – (a) Maker in case of Promissory Note or Cheque and (b) Drawer of Bill till it is accepted by drawee and acceptor after the Bill is accepted . They are liable as ‘principal debtors’ and other parties to instrument are liable as sureties for maker, drawer or acceptor, as the case may be. When document is endorsed number of times, each prior party is liable to each subsequent party as principal debtor. In case of dishonour, notice is required to be given to drawer and all earlier endorsees. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS - Until the contrary is proved, the following presumptions shall be made :— (a) of consideration - that every negoticble instrument was made or drawn for consideration, and that every such instrument, when it has been $ accepted, indorsed, negotiated or transferrgd, was accepted, indorsed, negotiated or transferred for consideration; - (b) as to date - that every negotiable instrument bearing a date was oide or drawn on such date; - (c) as to time of acceptance - that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; - - (d) as to time of transfer - - that every transfer of a negotiable instrument was made before its maturity; - - (e) as to order of indorsements - that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (f) as to stamps -that a lost promissory note, bill of exchange or cheque was duly stamped; - - (g) that holder is a holder in due course - that the holder of a negotiable instrument is a holder in due course : provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for

unlawful consideration, the burden of proving that the holder in due course lies upon him. [section 118]

Questions & Answers: THE NEGOTIABLE INSTRUMENTS ACT, 1881 Question 1 State briefly the rules laid down under the Negotiable Instruments Act for determining the dateof maturity of a bill of exchange. Ascertain the date of maturity of a bill payable hundred daysafter sight and which is presented for sight on 4th May, 2000. (May 2000) Answer Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on demand, at sight, or on presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed in the case of bill payable ondemand, at sight, or presentment. When a bill is made payable at stated no. of months after date, the period stated terminates on the day of the month which corresponds with the day on which the instrument is dated. When it is made payable after a stated number of months after sight the period terminates on the day of the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance or protested for non-acceptance. When it is payable a stated no- of months after a certain event, the period terminates on the day of the month which corresponds with the day on which the event happens (Section 23). When a bill is made payable a stated number of months after sight and has been accepted for honour, the period terminates with the day of the month which corresponds with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period terminates on the last day of such month (Section 23). In calculating the date a bill made payable a certain no. of days after date or after sight or after a certain event is at maturity, the day of the date, or the day of presentment for acceptance or sight or the day of protest for non-accordance, or the day on which the event happens shall be excluded (Section 24). Three days of grace are allowed to these instruments after the day on which they are expressed to be payable (Section 22). When the last day of grace falls on a day which is public holiday, the instrument is due and Updated as per the Negotiable Instruments (Amendments & Miscellaneous Provision) Act, 2002.4.2 Business and Corporate Laws payable on the preceding business day (Section 25). Answer to Problem: In this case the day of presentment for sight is to be excluded i.e. 4th May, 2000. The period of 100 days ends on 12th August, 2000 (May 27 days + June 30 days + July 31 days + August 12 days). Three days of grace are to be added. It falls due on 15th August, 2000 which happens to be a public holiday. As such it will fall due on 14th August, 2000 i.e. the preceding business day. Question 2 Distinguish between inland and foreign bills. (May 2000) Answer (1) Inland Bills are drawn in India on a person residing in India, payable any where or drawn in India on a person residing outside India payable in India while a foreign bill is a bill which is not inland bill. Foreign bills are drawn and payable outside India or drawn in India and payable outside India or drawn in India upon persons resident outside India

and made payable outside India. Foreign bills may be of five kinds: (i) bill drawn in India on a person resident outside India and made payable outside India (ii) bill drawn outside India and made payable in India (iii) bill drawn outside India on any person resident outside India (iv) bill drawn outside India on a person resident in India (v) bill drawn outside India are made payable outside India. (2) Inland bills are drawn in a single copy but foreign bills are drawn in triplicate. (3) In Inland bills, dishonour requires noting. Protest is optional, but in foreign bills, dishonour requires protesting, (Section 11 & 12, Negotiable Instruments Act, 1881]. Question 3 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. (May 2000) Answer Minor being a party to negotiable instrument: Every person competent to contract has capacity to incur liability by making, drawing, accepting, endorsing, delivering and negotiating a promissory note, bill of exchange or cheque (Section 26, para 1, Negotiable Instrument Act, 1881). As a minor’s agreement is void, he cannot bind himself by becoming a party to a negotiable instrument. But he may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself (Section 26, para 2). In view of the provisions of Section 26 explained above, the promissory note executed by X and M is valid even though a minor is a party to it. M, being a minor is not liable; but his immunity from liability does not absolve the other joint promisor, namely X from liability [Sulochana v. Pandiyan Bank Ltd., AIR (1975) Mad. 70].The Negotiable Instruments Act, 1881 4.3 Question 4 Explain the essential elements of a Promissory note. State, giving reasons, whether the following instruments are valid Promissory notes: (i) X promises to pay Y, by a Promissory note, a sum of Rs. 5,000, fifteen days after the death of B. (ii) X promises to pay Y, by a Promissory note, Rs. 5000 and all other sums, which shall be due. (November, 2000) Answer Essential Elements of a Promissory Note: 1. must be in writing. 2. Promise to pay: The instrument must contain an express promise to pay. 3. Definite and unconditional: The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. 4. Signed by she maker: The instrument must be signed by the maker, otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there. An agent of a trading firm can sign a promissory note on behalf of the firm- (Meenakshi v. Chettiar). 5. Certain parties: The instrument must point out with certainty as to who the maker is and who the payee is. When the maker and the payee cannot be identified with certainty from the instrument itself, the instrument, even if it contains an unconditional promise to pay, is not a promissory note. 6. Certain sum of money: The sum payable must be certain and must not be capable of contingent additions or subtractions, 7. Promise to pay money only: The payment must be in the legal tender money of India. Answer to Problem: In the case number 1, the payment to be made is fifteen days after the death of B. Though the date of death is uncertain, it is certain that B shall die. Therefore the

instrument is valid. In the second case- the sum payable is not certain within the meaning of Section 4 of the Negotiable Instruments Act, 1881- Hence the Promissory Note is not a valid one. Question 5 Mr. Clever obtains fraudulently from J a cheque crossed ‘Not Negotiable1. He later transfers the cheque to D, who gets the cheque encashed from ABC Bank, which is not the Drawee Bank. J, OH comics 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 gets the cheque encashed from ABC Bank himself? (November 2000)4.4 Business and Corporate Laws Answer According to Section 130 of the Negotiable Instrument Act, 1881 a person taking chequ crossed generally or specially bearing in either case the words ‘Not Negotiable’ shall not have or shall not be able to give a better title to the cheque than the title the person from who he took had. In consequence, if the title of the transfereor is defective, the title of the transferee would be vitiated by the defect. Thus 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. As Mr. Cleaver in the case in question had obtained the cheque fraudulently, he had no title to it and could not give to the bank any titile to the cheque or money; and the bank would be liable for the amount of the cheque for encashment. (Great Western Railway Co. v. London and Country Banking Co.) The answer in the second case would not change and shall remain the same for the reasons given above. Thus J in both the cases shall be successful in his claim from ABC bank. Question 6 In what way ‘Discharge of a party’ to a nagotiable instrument differ from the ‘Discharge of instrument’. Explain the different modes of discharge of a negotiable instrument under the Negotiable Instruments Act. 1881. (November 2000) Answer Discharge of a Party to a Negotiable Instrument etc: An instrument is said to be discharged only when the party who is ultimately liable thereon is discharged from liability. Therefore, discharge of a party to an instrument does not discharge (he instrument itself. Consequently, the holder in due course may proceed against the other panics liable for me instrument. For example; the endorser of a bill may be discharged from his liability, but even then acceptor may be proceeded against. On the other hand, when a bill has been discharged by payment, all lights thereunder are extinguished even a holder in due course cannot claim any amount under the bill. Discharge of an Instrument: 1. ‘By payment in due course: The. instrument is discharged by payment made in due course by the party who is primarily liable to pay, or by a person who is accommodated in case the instrument was made or accepted for his accommodation, The payment must be made at or after the maturity to the holder of the instrument if the maker or acceptor is to be discharged. A payment by a party who is secondarily liable does not discharge the instrument.

2. By party primarily liable by becoming holder (Section 90): If the maker of a note or the acceptor of a bill becomes its holder at or after its maturity in his own right, The Negotiable Instruments Act, 1881, instrument is discharged. 3. By express waiver: 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. The renunciation must be in writing unless the instrument is delivered upto the party primarily liable. 4. By Cancellation: Where an instrument is intentionally cancelled by the holder or his agent and the cancellation is apprent thereon, the instrument is discharged. Cancellation may take place; by crossing out signatures on the instrument, or by physical destruction of the instrument with the intention of putting an end to the liability of the parties to the instrument. 5. By discharge as a simple contract: A negotiable instrument may be discharged in rile 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. Question 7 Who is a holder in due course of a Negotiable Instrument? In what respects does he differ from a holder? (November, 2000) Answer Holder In Due Course: It means any person who, for consideration became its possessor before the amount mentioned in it became payable. In the case of an instrument payable to order, 'holder in due course' means any person who became the payee or endorsee of the instrument before the amount mentioned in it became payable. In both the cases, he must receive the instrument without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. In other words, holder in due course means a holder who takes the instrument bona fide for value before it is overdue, and without any notice of defects in the title of the person, who transferred it to him. Thus a person who claims to be 'holder in due course' is required to prove that: 1. on paying a valuable consideration, he became either the possessor of the instrument if payable to order; 2. he had come into the possession of the instrument before the amount due thereunder became actually payable; and 3. he had come to possess the instrument without having sufficient cause to believe that any defect existed in the title of transferor's from whom derived his title. Distinction between Holder & Holder in Due Course: 1. A holder may become the-possessor or payee of an instrument even without consideration, whereas a holder in due course is one who acquires possession for consideration. 2. A holder in due course as against a holder, must become the possessor payee of the instrument before the amount thereon become payable.4.6 Business and Corporate Laws 3. A holder in due course as against a holder, must have become the payee of the instrument in good faith i.e., without having sufficient cause to believe that any detect existed in-the transferor's title. Question 8 Comment on the following statement with reference to the provisions Negotiable Instruments Act. 1881: “Once a bearer instrument always a bearer instrument.” (May 2001) Answer A bearer instrument is one, which can change hands by mere delivery of the instrument. The instrument may be a promissory note or a bill of exchange, or a cheque. It should be expressed to be so payable or on which the last endorsement is in blank. (Explanation 2 to

Section 13 of the Negotiable Instrument Act 1881). Under Section 46 where an instrument is made payable to bearer, it is transferable merely by delivery, i.e. without any further endorsement thereon. But this character of the Instrument can be subsequently altered. Section 49 provides that a holder of negotiable instrument endorsed in blank (i.e. bearer) may, without signing his own name, by writing above the endorser’s signature, direct that the payment of the instrument be made to another person. Thus the character of the instrument is changed and the instrument cannot be negotiated by mere delivery. But in the case of a Cheque, however, the law is a little different from the one stated above. According to the provisions of Section 85 (2) where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, despite any endorsement whether in blank or full appearing thereon not with standing that any such instrument purported to restrict or exclude further negotiation. In other words, the original character of the cheque is not altered so far as the paying bank is concerned, provided the payment is made in due course. Hence the proposition that once a bearer instrument always a bearer instrument. Question 9 Promissory note dated 1st February, 2001 payable two months after dale 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. (May 2001) Answer Delay in presentment for payment of a promissory note: If a promissory role 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.The Negotiable Instruments Act, 1881 4.7 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 the instrument (that is, parties other than the parties primarily liable) are not liable to such holder. The indorser is discharged by the delayed presentment for payment. But the maker being the primary party liable on the instrument continues to be liable. Question 10 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 the recovery of the money. With reference to the provisions of the Negotiable Instruments Act, decide whether X will succeed in the case ? (May 2001) Answer The problem stated in the question is based on the provisions of the Negotiable Instruments Act as contained in Section 53. The section provides: ‘Once a negotiable instrument passes through the hands of a holder in due course, it gets cleansed of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument in some stage of its journey. Thus 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 provided he is himself not a party to the fraud. (Section 53). Thus applying the above provisions it is quite clear that X who originally induced Y in obtaining the bill of exchange in question fraudulently, cannot succeed in the case. The reason is obvious as X himself was a party to the fraud. Question 11 Explain clearly the meaning of the term ‘Promissory’ Note as provided in the Negotiable Instruments Act, 1881. In what way does a ‘Promissory Note’ differ from a ‘Bill of Exchange’? (November, 2001) Answer Meaning of promissory note & distinction with bill of exchange: A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or the bearer of the instrument. (Section 4: The Negotiable Instruments Act, 1881). DISTINCTION: 1. There are two parties in a Promissory Note – maker and the payee. In a bill there are three parties - the drawer, the drawee and the payee. 2. Promissory Note contains an unconditional promise to pay. A Bill of Exchange contains an unconditional older to pay. 3. Maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who directs the drawee (his debtor) to pay. 4. Maker of a note corresponds in general to the acceptor of a bill. But the maker of the note cannot undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the originator of the bill. 5. The liability of a maker of a note is primary and absolute, whereas the liability of the drawer of a bill is secondary and conditional (Section 30 and 32); 6. A note cannot be made payable to the maker himself, whereas in a bill the drawer and the payee may be one and the same person. 7. A note requires no acceptance and it is signed by the person who is liable to pay. A bill payable after sight or after a certain period must be accepted by the drawee before it is presented for payment. 8. A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn ‘payable to bearer on demand’. 9. The maker of a note stands in immediate relation with the payee, the drawer of a bill stands in immediate relation with the acceptor and not the payee. (Explanation to Section 44) 10. Certain provisions like presentment for acceptance (Section 61), acceptance (Section 75), acceptance for honour (Section 108), and bill in sets (Section 132) apply to bills but not to notes. Question 12 What is a ‘Sans Recours’ indorsement? A bill of exchange is drawn payable to X or order. X indorses it to Y, Y to Z, Z to A.A to B and B to X. State with reasons whether X can recover the amount of the bill from Y. Z, A and B, if he has originally indorsed the bill to Y by adding the words ‘Sans Recours. (November 2001) Answer Meaning of Sans Recours Endorsement: It is a type of endorsement on a Negotiable Instrument by which the endorser absolves himself or declines to accept any liability on the instrument of any subsequent party. The endorser signs the endorsement putting hissignature along with the words, SANS RECOURS.

In the problem X, the endorser becomes the holder after it is negotiated to several parties. Normally, in such a case, none of the intermediate parties is liable to X. Tills is to prevent The Negotiable Instruments Act, 1881 ‘circuitry of action’. But in this case X’s original endorsement is ‘without recourse’ and therefore, he is not liable co Y, Z, A and B. But the bill is negotiated back to X, all of them are liable to him and he can recover the amount from all or any of them (Section 52 para 2). Question 13 Explain the meaning of the term ‘Holder’ under Negotiable Instruments Act, 1881. State the privileges of a ‘Holder in due course’. (November 2001) Answer Meaning of holder under the Negotiable Instrument Act, 1881 and the privileges of a holder in due course: The ‘holder’ of a negotiable instrument means any person entitled in his own name: (i) to the possession thereof, and (ii) to receive or recover the amount due thereon from the parties threat. Where the instrument is lost or destroyed, its holder is the person so entitled at the lime of such loss of destruction. Privileges of a Holder in Due Course: 1. 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). 2. In case of a bill of exchange is drawn payable to the drawer’s order in a fictitious name and is endorsed by the same hand as the drawer’s signature, it is not permissible for acceptor to allege as against the holder in due course mat such name is fictitious. (Section 42). 3. In case of 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 (Section 42 and 47). 4. 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). 5. ‘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 he permitted to deny the validity of the instrument as originaity made or drawn. (Section 120). 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 10 deny the payee’s 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. Question 14 Define a Bill of Exchange as per the Negotiable Instruments Act, 1881 and explain its salient features. (May, 2002) Answer Section 5 of the Negotiable Instruments Act, 1881, defines a Bill of Exchange as under: “A bill of exchange is an instrument in writing containing an unconditional order, signed by, the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. Example: ‘A’ wrote and signed an instrument ordering ‘B’ to pay Rs.500 to ‘C’ This is a Bill of Exchange.

Another example of a valid Bill of Exchange is : “On demand pay to ‘A’ or order the sum of rupees five hundred for value received.” In this case although the bill of exchange is payable on demand, but it is payable to a Specified person (i.e. A) or his order (i.e. to a person to whom ‘A: requires to be paid), and, therefore, it is a valid bill of exchange. Salient features of a Bill of Exchange: The essential requirements of a Bill of Exchange, may be stated briefly as below (1) The bill of exchange must be in writing. It should not be oral one. (2) The bill of exchange must contain an express order to pay. (3) The order to pay must be unconditional. The order to pay must not depend upon a condition or on happening or an uncertain event. (4) It must contain an order to pay in terms of money only. (5) It must contain an order to pay a definite (i.e. certain) amount of money. (6) The parties to a bill of exchange must be certain. Usually there are three parties to a bill of exchange, money drawer, drawee and payee. However, in some cases drawer and drawee may be same persons. (7) It must be signed by the drawer. (8) Intention to make a bill of exchange and its delivery are other additional requirements. It must be delivered to the payee. Otherwise it will be an inchoate instrument. Question 15 When is an alteration of an instrument treated as a material alteration under the Negotiable Instruments Act, 1881? What is the effect of such an alteration? (November 2001, May 2002) Answer Material alteration: An alteration is material which— (i) alters the character or identity of the instrument/or which shakes the very foundation ofThe Negotiable Instruments Act, 1881 the instrument, or (ii) changes the rights and liabilities of the parties, any of the parties to the instrument; or (iii) alters the operation of the instrument. (iv) any changes in the instrument which causes it to speak a different language in effect from that which it originally spoke or which changes the legal identity or character of this instrument, either in its terms or the relation of the parties to it, is a material alteration. It makes no difference whether the alteration is beneficial or prejudicial. (Rampadarath v. Hari Narain). The following alterations are material and vitiate the instrument, viz alterations of (i) Date (ii) Sum payable (iii) Time of payment (iv) Place of payment (v) Rate of interest (vi) Addition of place of payment The following alterations, though material, are permitted by the Negotiable Instruments Act, 1881 and do not invalidate the instrument: 1. Filling blanks of inchoate instruments. (Section 20) 2. Conversion of a blank indorsement into an indorsement in full (Section 49) 3. Qualified acceptance (Section 86) 4. Crossing of cheques (Section 125) Effect of material alteration: The effect of a material alteration of a negotiable instrument is only to discharge those who

become parties thereto prior to the alteration; But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void. Any material alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof. (Section 87). The alteration must be so material that it alters the character of the instrument to a great extent. In Hongkong and Shanghai Bank v. Lee Shi (1928) A.C. 181, it has been held that an accidental alteration will not render the instrument void. It is necessary to show that the alteration has been made improperly and intentionally. The effect of making the material alteration without the consent of the party bound is exactly the same as that of cancelling the deed. Question 16 What is meant by ‘Negotiation’? Distinguish between ‘Negotiability’ v/s ‘Assignability’ of an instrument. (May , 2002, November, 2003)4.12 Business and Corporate Laws Answer Meaning of Negotiation: According to Section 14 of the Negotiable Instrument Act, 1881 when a promissory-note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated. A negotiable instrument may be transferred in either of two ways, viz. (i) by negotiation under this Act (Section 14, 46, 47, 48). A negotiable instrument may be negotiated either by delivery, when it is payable to bearer or by endorsement and delivery when it is payable to order; or (ii) by assignment of the instrument: When a person transfer his right to receive the payment of a debt, ‘assignment of the debt’ lakes place. Thus where the holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment of the instrument, transfer by assignment takes place. (The Negotiable Instruments Act does not deal with transfer of negotiable instruments by assignment). Differences between negotiability and assignability: The following are the differences between Negotiability and Assignability. 1. In negotiation consideration is presumed. In assignment consideration must be proved. 2. In case of transfer by negotiation, the transferee acquires all the rights of a holder in due course; where tile case of transfer by assignment, the assignee does not acquire the rights of a holder in due course, but has only the right of his assignor. 3. Notice of transfer to the debtor by the transferee is not necessary. The acceptor of a bill and the maker of a note are liable on maturity to the holder in due course of the assignment in case of negotiation. In assignment it does not bind the debtor unless notice of the assignment has been given by the assignee to the debtor, and the debtor has, expressly or implied, assented to it. In negotiation the instruments payable to bearer are negotiated by mere delivery and instruments payable to order are negotiated by indorsement and delivery. In an assignment it can be made only in writing either on the instrument itself or in a separate document transferring to the assignee the transferor’s rights in the instrument. Question 17 When is presentment of an instrument not necessary under the Negotiable Instruments Act? (May, 2002) Answer According to Section 76 of the Negotiable Instruments Act 1881, no presentment to payment is necessary in any one of the following cases: (i) if the maker, drawee or acceptor intentionally prevents the presentment of the

instrument, or (ii) if the instrument being payable at his place of business, he closes such place on aThe Negotiable Instruments Act, 1881 4.13 business day during the usual business hours, or (iii) if the instrument being payable at some other specified place, neither he nor any other person authorised to pay it attends at such place during the usual business hours, or (iv) if the instrument not being payable at any specified place, if he (i.e. maker etc) cannot after due search be found; (v) as against any party sought to be charged therewith, if he (i.e maker, etc.) has engaged to pay notwithstanding non-presentment; (vi) as against any party if after maturity, with knowledge that the instrument has not been presented — he makes a part payment on account of the amount due on the instrument, or promises to pay the amount due thereon in whole or in part, or otherwise waives his right to take advantage of any default in presentment for payment; as against the drawer, if the drawer could not suffer damage from the of such presentment. Question 18 Explain the meaning of ‘Holder’ and ‘Holder in due course’ of a negotiable instrument. The drawer, ‘D’ is induced by ‘A’ to draw a cheque in favour of P, who is an existing person. ‘A’ instead of sending the cheque to ‘P’, forgoes his name and pays the cheque into his own bank. Whether ‘D’ can recover the amount of the cheque from ‘A’s banker. Decide. (Nov. 2002) Answer Meaning of ‘Holder’ and the ‘Holder in due course’ of a negotiable instrument : ‘Holder’ : Holder of negotiable instrument means as regards all parties prior to himself, a holder of an instrument for which value has at any time been given. ‘Holder in due course’ : (i) In the case of an instrument payable to bearer means any person who, for consideration became its possessor before the amount of an instrument payable. (ii) In the case of an instrument payable to order, ‘holder in due course’ means any person who became the payee or endorsee of the instrument before the amount mentioned in it became payable. (iii) He had come to possess the instrument without having sufficient cause to believe that any defect existed in the title of transferor from whom he derived his title. The problem is based upon the privileges of a ‘holder in due course’. Section 42 of the Negotiable Instrument Act, 1881, states that an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due cause claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer. In this problem, P is not a fictitious payee and D, the drawer can recover the amount of the cheque from A’s bankers [ North and South Wales Bank B. Macketh (1908) A.C. 137; Town and Country Advance Co. B, Provincial Bank (1917) 2 Ir. R.421]. Question 19 When a bill of exchange may be dishonoured by ‘non-acceptance’ and ‘nonpayment’ under the provisions of Negotiable Instruments Act, 1881? (Nov. 2002) Answer A bill of exchange may be dishonoured either by non-acceptance or by non-payment: Dishonour by non-acceptance : Section 91 of the Negotiable Instrument Act, 1881 enumerate the following circumstances when a bill will be considered as dishonoured by non-acceptance.

(i) when the drawee either does not accept the bill within forty eight hours or presentment or refuse to accept it. (ii) when one of several drawees, not being partners, makes default in acceptance. (iii) when the drawee gives a qualified acceptance. (iv) when presentment for acceptance is excused and the bill remains unaccepted; (v) when the drawee is incompetent to contract. (vi) presentment in not necessary where the drawee after diligent search cannot be discovered, or where the drawee is incompetent to contract or the drawee is a fictitious person. When a bill has been dishononred by non-acceptance, it gives the holder an immediate right to have recourse against the drawer or the endorser. Since the dishonour by nonacceptance constitutes a material ground entitling the holder to take action against the drawer, he need not wait till the maturity of the bill for it to be dishonoured on presentment for payment (Ram Ravji Janhekar B. Pruthaddas 20 Bom 133) Dishonour by non-payment (Section 92 and 76) A negotiable instrument is said to be dishonoured by non-payment when the maker, acceptor or drawee, as the case may be, makes default in payment upon being duly required to pay the same (section 92) Also a negotiable instrument is dishonoured by nonpayment when presentment for payment is excused and the instrument remains unpaid after maturity (section 76). Question 20 Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following Promissory Notes: (i) I owe you a sum of Rs.1,000. ‘A’ tells ‘B’. (ii) ‘X’ promise4s to pay ‘Y’ a sum of Rs.10,000, six months after ‘Y’s marriage with ‘Z’ (Nov. 2002).The Negotiable Instruments Act, 1881 Answer Promissory Note A Promissory Note is an instrument in writing containing an unconditional undertaking. signed by the maker, to pay a certain sum of money only to, or to the order of certain person, or the bearer of the Instrument. (Section 4, The Negotiable Instruments Act, 1881). Essential elements: 1. It must be in writing. 2. Promise to pay: The instrument must contain an express promise to pay. 3. Definite and unconditional: The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. a. Signed by the maker: The instrument must be signed by the maker, otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signatures must be there. An agent of a trading firm can sign a promissory note on behalf of the firm. b. Certain parties: The instrument must point out with certainty as to who the maker is and who the payee is. When the maker and the payee cannot he identified with certainty from the instrument itself, the instrument, even if it contains an unconditional promise to pay, is not a promissory note.

6. Certain sum of money: The sum payable must be certain and must not be capable of contingent additions or subtractions. 7. Promise to pay money only: The payment must be in the legal tender money of India. Based on the above conditions in accordance with the definition of a promissory note, the answers to the two problems is as under: (i) It is not a promissory note in the first case, since there is no promise to pay. (ii) In the second case also it is not a promissory note since as it is probably that Y may not marry. Question 21 Which are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a “Bill of Exchange” but write on it “Accepted but payment will be made when goods delivered to me is sold.” Decide the validity. (May 2003) Answer Essentials of a valid acceptance of a Bill of Exchange: 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. 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 given case, the acceptance is a qualified acceptance since a condition has been attached declaring the payment to be dependent on the happening of an event therein stated. As a rule, acceptance must be general acceptance and therefore, the holder is at liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill shall be dishonoured by non-acceptance. But, if he accepts the qualified acceptance, even then it binds only him and the acceptor and not the other parties who do not consent thereto. (Section 86). Question 22 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 the Negotiable Instruments Act, 1881, whether B can recover the money from A? (May 2003) Answer

Problem on Negotiable Instruments Act,1881 The problem as asked in the question is based on the provisions of the Negotiable Instruments Act, 1881 as contained in Section 84. The section provides that 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, he is discharged from liability to the extent of such damage. In determining what is reasonable time, regard shall be had to the nature of the instrument, the usage of trade and bankers, and the facts of the particular case. Accordingly, in the given case, the drawer is discharged from the liability to pay the amount of cheque to B. However, B can sue against the bank for the amount of the cheque applying the above provisions. The Negotiable Instruments Act, 1881 Question 23 What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instrument Act, 1881 : (i) An oral acceptance (ii) An acceptance by mere signature without writing the word “accepted”. (May 2003) Answer Meaning of Acceptance It is only the bill of exchange which requires acceptance. A bill is said to be accepted when the drawee (i.e. the person on whom the bill is drawn), after putting his signature on it, either delivers it or gives notice of such acceptance to the holder of the bill or to some person on his behalf. After the drawee has accepted the bill he is known as the acceptor (Section 7 para 3 of the Negotiable Instruments Act 1881). Acceptance may be either general or qualified. The acceptance is qualified when the drawer does not accept it according to the apparent tenor of the bill but attaches some condition or qualification which have the effect of either reducing his (acceptor’s) liability or acceptance of his liability subject to certain conditions. A general acceptance is the acceptance where the acceptor assents without qualification to the order of the drawer. Validity of Acceptance: Problem (1): It is one of the essential elements of a valid acceptance 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. Problem (2): 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, there can be no difficulty in construing acknowledgement as an acceptance but it must satisfy the requirements of Section 7 of the Negotiable Instruments Act, 1881 i.e. it must appear on the bill and must be signed by the drawee. (Manakchand v. Chartered Bank). Question 24 What do you understand by “crossing of cheques”? What is the object of crossing? State the implications of the following crossing: (i) Restrictive Crossing. (ii) Not-negotiable crossing. (November 2003) Answer Crossing of Cheques:

Meaning: Crossing of cheque means putting on the cheque two parallel transverse lines with or without the words (& Co.) written between the lines. Therefore, crossing is a direction to the drawee banker to pay the amount of money on the crossed cheque generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily traced. Object: The object of crossing cheque is to provide safety to the cheque. In order to prevent the losses which might be incurred if a cheque is an open one, (i.e.- without crossing) and going to wrong hands, the crossing has been introduced. Implications of: (i) Restrictive Crossing: In this type of crossing the words ‘ Account Payee’ are added to the general or special crossing. Sometime, words like ‘Account Payee & Not Negotiable’ or ‘Bank of India (it could be any Bank) Account Mr. X’ may be added. The words ‘Account Payee’ on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. Such cheques are negotiable. (ii) Not Negotiable: The implication of this kind of crossing is that, the title of transferee of such a cheque cannot be better than of its transferor. The use of the words “not negotiable” in a crossed cheque does not render the cheque non-negotiable but only affects one of the main features of negotiability. Cheques with not negotiable crossing are negotiable so long as their title is good. Once the title of the transferor or endorser becomes defective the title of the transferee is also affected by such defect and the transferee cannot claim the right of a holder in due course. In other words, nobody can pass on a title better than what he himself has. Any one who takes a cheque marked “not negotiable” takes at his own risk. Question 25 State the grounds on the basis of which a cheque may be dishonoured by a banker, inspite of the fact that there is sufficient amount in the account of the drawer. (November 2003) Answer Dishonour of cheque by banker: A banker is justified to dishonour a cheque in the following circumstances: 1. If a cheque is undated. 2. If it is stale - i.e. not been presented within reasonable period. 3. If the instrument is inchoate or not free from reasonable doubt. 4. When cheque presented before ostensible date. 5. When customer’s funds are not properly applicable. 6. When customers draws cheque upon another branch of the same bank. 7. If the banker receives notice of customer’s insolvency or lunacy. 8. If the customer countermands the payment of cheque. 9. If the court has given order to the Banker not to make payments. 10. If the customer dies and there is notice to the Banker.The Negotiable Instruments Act, 1881 11. If notice in respect of closure of the account is served by either party on the other. 12. If it contains material alteration. Question 26 Describe, in brief, the main amendments incorporated by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of the Principal Act i.e. the Negotiable Instruments Act, 1881. (May 2004) Answer

Amendments in the Negotiable Instruments Act, 1881 The main amendments made through the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of the Negotiable Instruments Act, 1881 are as follows: Section 138 (i) To increase the punishment as prescribed under the Act from one year to two years. (ii) To increase the period for issue of notice by the payee to the drawer from 15 days to 30 days [Provision (b) to Section 138]. Section 141 To exempt those directors from prosecution under Section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a Financial Corporation owned or controlled by the Central Government, or the State Government, as the case may be [Provision to Section 141(I)]. Section 142 To provide discretion to the court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act [Provision to Section 142 (b)] Question 27 What is a “Promissory Note” and what are its elements? S writes “I promise to pay ‘B’ a sum of Rs.500, seven days after my marriage with ‘C’. Is this a promissory note? (May 2004) Answer According to the Section 4 of the Negotiable Instruments Act, 1881, “A promissory note is an instrument in writing (Not being a Bank-Note or a Currency-Note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to order of a certain person, or to the bearer of the instrument.” The essential characteristics of a promissory note are as follows: (1) It must be in writing. In other words an oral promise does not make a promissory note since it is not an instrument. (2) The promise to pay must be unconditional. It may be noted that a promise to pay is not conditional if it depends upon an event, which is certain to happen, but the time of its occurrence may be uncertain. (3) The amount promised must be a certain and a definite sum of money. (4) The instrument must be signed by the maker. (5) The person to whom the promise is made must be a definite person. Problem In the given case S promises to pay Rs.500. It is possible that ‘S’ may never marry ‘C’ and the sum may never become payable. Hence, the promise to pay is conditional as it depends upon an event, which may not happen. Hence, it is not a promissory note. Question 28 Describe the circumstances where under notice of dishonour is excused under the Negotiable Instruments Act, 1881. (May 2004)) Answer Notice of Dishonour As per section 98 of the Negotiable Instruments Act, 1881, following are the cases in which the Notice of Dishonour is excused: (i) When notice of dishonour is dispensed with by the party entitled thereto; (ii) In order to charge the drawer, when he has countermanded payment;

(iii) When the party charged could not suffer damage for want of notice; (iv) When the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it; (v) To charge the drawers, when the acceptor is also a drawer; (vi) When the promissory note is not negotiable; (vii) When the party entitled to notice of dishonour, knowing the facts unconditionally promises to pay the amount due on instrument. Question 29 Define the term ‘Cheque’ as given in the Negotiable Instruments Act, 1881 and amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act. 2002. (November 2004) The Negotiable Instruments Act, 1881 Answer Definition of Cheque: According to Section 6 of the Negotiable Instruments Act, 1881 as amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form”. A cheque in the electronic form means “a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system, ensuring the minimum safety standards with the use of digital signature (with or without biometrics signatures) and asymmetric crypto system’ [Explanation I (a)]. A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing [Explanation I (b)]. Clearing house means the clearing house managed by the Reserve Bank of India or a cleaning house recognised as such by the Reserve Bank of India [Explanation II]. Question 30 State the privileges of a ‘Holder in due course” under the Negotiable Instruments Act, 1881. A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’s indorsement and collected proceeds to the cheque through his Bankers. B the drawer wants to recover the amount from C’s Bankers. Decide in the light of the provisions of Negotiable Instruments Act, 1881(i) Whether B the drawer, can recover the amount of the cheque from C’s Bankers? (ii) Whether C is the Fictitious Payee? (iii) Would your answer be still the same in case C is a fictitious person? (November 2004) Answer Privileges of a “Holder in Due Course”: According to the provisions of the Negotiable Instruments Act, 1881, a holder in due course has the following privileges: (i) 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). (ii) In case of bill of exchange is drawn payable to drawer’s order in a fictitious name and is endorsed by the same hand as the drawer’s 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 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 (Section 42 and 47). (iv) 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 far an unlawful consideration (Section 58). (v) 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) 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 payee’s capacity, at the rate of the note or bill, to endorse the same (Section 121). In brief, it is clear that a holder in due course gets a good title in many respects. Answer to problem According to Section 42 of the Negotiable Instruments Act, 1881 an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an instrument by the same hand as the drawer’s signature, and purporting to be made by the drawer. The word “fictitious payee’ means a person who is not in existence or being in existence, was never intended by the drawer to have the payment. Where drawer intends the payee to have the payment, then he is not a fictitious payee and the forgery of his signature will affect the validity of the cheque. Applying the above, answers to the questions asked can be as under: I. In this case B, the drawer can recover the amount of the cheque from C’s bankers because C’s title was derived through forged endorsement. II. Here C is not a fictitious payee because the drawer intended him to receive payment. III. The result would be different if C is not a real person or is a fictitious person or was not intended to have the payment. Question 31 A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value. Decide-. (i) Whether D can sue the prior parties of the bill, and (ii) Whether the prior parties other than D have any right of action intense? Give your answer in reference to the Provisions of Negotiable Instruments Act. 1881 (November 2004) The Negotiable Instruments Act, 1881 Answer Problem on Negotiable Instrument made without consideration: Section 43 of the Negotiable Instruments Act, 1881 provides that a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for

consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto. (i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill without consideration and transferred it to C without consideration. Later on in the next transfer by C to D is for value. According to provisions of the aforesaid section 43, the bill ultimately has been transferred to D with consideration. Therefore, D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with consideration. (ii) As regards to the second part of the problem, the prior parties before D i.e., A, B, and C have no right of action inter se because first part of Section 43 has clearly lays down that a negotiable instrument, made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction prior to the parties who receive it on consideration. Question 32 A cheque payable to bearer is crossed generally and marked “not negotiable”. The cheque is lost or stolen and comes into possession of B who takes it in good faith and gives value for it. B deposits the cheque into his own bank and his banker presents it and obtains payment for his customer from the bank upon which it is drawn. The true owner of the cheque claims refund of the amount of the cheque from B. (May 2005) Answers The cheque in the given case was crossed generally and marked ‘Not Negotiable’. Thereafter, the cheque was lost or stolen and came into the possession of B, who takes it in good faith and gives value for it. Section 130 of the Negotiable Instruments Act, 1881 provides that a person taking a cheque crossed generally or specially, bearing in either case the words ‘not negotiable’, shall not have, and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had. In view of these provisions, B, even though he was a holder in due course, did not acquire any title to the cheque as against its true owner. The addition of the words ‘not negotiable’ entirely takes away the main feature of negotiability, which is, that a holder with a defective title can give a good title to a subsequent holder in due course. B did not obtain any better title than his immediate transferor, who had either stolen or found the cheque and was not the true owner of the cheque. Therefore, as regards the true owner, B was in no better position than the transferor. B is also liable to repay the amount of the cheque to the true owner. He can, however, proceed against the person from whom he took the cheque. In the given case, both the collecting banker and the paying bankers would be exonerated. Since the collecting banker, in good faith and without negligence, had received payment for B, who was its customer of the cheque which was crossed generally, the banker would not be liable, in case the title proved to be defective, to the true owner by reason only of having received the payment of the cheque for his customer (Section 131). Since the paying banker on whom the crossed cheque was drawn, had paid the same in due course, the banker would also not be liable to the true owner. (Section 128). Question 33 ‘A’ draws a cheque for Rs.50,000. When the cheque ought to be presented to the drawee bank, the drawer has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The payee demands payment from the drawer. What is the liability of the drawer. (May 2005)

Answer Section 84 of the Negotiable Instruments Act, 1881 provides that where a cheque is not presented for payment within a reasonable time of its issue and the drawer or person on whose account it is drawn had the right at the time when presentation ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage through the delay, he is discharged from the liability, that is to say, to the extent to which such drawer or person is a creditor of the banker to a larger amount than would have been if such cheque had been paid. In determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade and of banker, and the facts of the particular case. Applying the above provisions to the given problem since the payee has not presented the cheque to the drawer’s bank within a reasonable time when the drawer had funds to pay the cheque, and the drawer has suffered actual damage, the drawer is discharged from the liability. Question 34 State the cases in which a banker is justified or bound to dishonour cheques. (May 2005) Answer In the following cases in which a banker is bound or justified to dishonour cheques: (i) A banker is justified to dishonour a cheque in reference to payment of a post-dated cheque presented for payment before its ostensible date; (ii) The banker is bound to pay a cheque only when it has ‘sufficient funds of the drawer in his hands’ otherwise not.The Negotiable Instruments Act, 1881 4.25 (iii) The banker is bound to honour his customer’s cheque only when the funds of the customers in his hands are ‘properly applicable to the payment of such cheques’ otherwise not. (iv) A banker is justified in refusing to honour a cheque which is irregular, or ambiguous, or drawn in a form of doubtful legality; (v) A banker is justified in refusing payment of a cheque drawn by a customer having credit with one branch of the bank, where the cheque is drawn upon another branch in which he has no account or in which his account is overdrawn. (vi) When the customer becomes insolvent, or an order of adjudication has been made against him, all his assets vest in the official assignee, and the banker should thereafter refuse to pay his customer’s cheques. (vii) The duty and authority of a banker to pay a cheque drawn on him by his customer is determined by the customer countermanding payment; (viii) Notice of death of the customer determines the authority of the banker to dishonour a cheque, but if the banker pays a cheque before he receives notice of his customer’s death, payment is valid. (ix) If garnishee or other legal order from a court attaching or otherwise dealing with money in the hands of the banker, is served on the banker. (x) If it contains material alterations, irregular signature or irregular endorsement. (xi) If it is stale, that is if it has not been presented within reasonable period. Question 35 A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with reference to the provisions of the negotiable Instruments Act, 1881 the validity of the Promissory Note and state whether it is binding on A and B. (November 2005) Answer Minor being a party to Negotiable Instrument: Every person competent to enter into contract has capacity to incur liability by making, drawing, accepting, endorsing, delivering

and negotiating a Promissory Note, Bill of Exchange or clearance (Section 26, Para 1, Negotiable Instrument Act, 1881). As a Minor’s agreement is void, he cannot bind himself by becoming a party to a Negotiable Instrument. But he may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself (Section 26, para 2). In view of the provisions of Section 26 explained above, the promissory note executed by A and B is valid even though a minor is a party to it. B, being a minor is not liable; but his immunity from liability does not absolve the other joint promissory, viz., A from liability [Sulochona v. Pondiyan Bank Ltd.,]. Question 36 In what way does the Negotiable Instruments Act, 1881 regulate the determination of the ‘Date of maturity’ of a Bill of Exchange. Ascertain the ‘Date of maturity’ of a bill payable 120 days after the date. The Bill of exchange was drawn on 1st June, 2005. (November 2005) Answer Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on demand, at sight or on presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, para 2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed in the case of a bill payable on demand, at sight, or presentment. When a bill is made payable as stated number of months after date, the period stated terminates on the day of the month, which corresponds with the day on which the instrument is dated. When it is made payable after a stated number of months after sight the period terminates on the day of the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance on protested for Nonacceptance when it is payable a stated number of months after a certain event, the period terminates on the day of the month which corresponds with the day on which the event happens. (Section 23). When a bill is made payable a stated number of months after sight and has been accepted for honour, the period terminates which the day of the month which corresponds with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period terminates on the last day of such month (Section 23). In calculating the date a bill made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or the day of protest for nonaccordance, or the day on which the event happens shall be excluded (Section 24). Three days of grace are allowed to these instruments after the day on which they are expressed to be payable. (Section 22). When the last day of grace falls on a day, which is public holiday, the instrument is due and payable on the preceding business day (Section 25). Answer to Problem: In this case the day of presentment for sight is to be excluded i.e. 1st June, 2005. The period of 120 days ends on 21st September, 2005 (June 29 days + July 31 days + August 31 Days + September 29 days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2005, which happens to be a public holiday. As such it will fall due on 1st October, 2005 i.e., the preceding Business Day. Question 37 Examine when shall a holder of a negotiable instrument be considered as a holder in due course under the provisions of the Negotiable Instruments Act, 1881. (November 2005) Answer According to Section 9 of the Negotiable Instruments Act, 1881, a holder of a negotiable

instrument will be considered as holder in due course if he fulfills the following conditions. (i) that for consideration he became the possessor of the negotiable instrument of payable to bearer or the payee or endorsee thereof if payable to order. (ii) that he became the holder of the instrument before maturity. that he became the holder of the instrument in good faith i.e., without sufficient cause to believe that any infinity or defect existed in the title of the person from whom he derived the title. Question 38 Point out the differences between “transfer by negotiation” and “transfer by assignment” under the provisions of the Negotiable Instruments Act, 1881. (May 2006) Answer Negotiation and Assignment: The essential distinction between transfer by negotiation and transfer by agreement are as under as provisions of the Negotiable Instrument Act, 1881. (i) In the latter case the assignee does not acquire the right of a holder in due course but has only the right, title and interest of his assignor; on the other hand in the former case he acquires all the rights of a holder in due course i.e., right from equities (Mohammad Khuerail vs. Ranga Rao, 24 M. 654). (ii) In the case of negotiable instrument, notice of transfer is not necessary while in the case of assignment of chose in action, notice or assignment must be served by the assignee on his debtor. (iii) Again, in the case of transfer of negotiable instrument, consideration is presumed, but in the case of transfer by assignment, consideration must be proved as in the case of any other contract. (iv) Negotiation requires either delivery only in the case of “bearer” instrument, or endorsement and delivery only in the case of “ order instrument”. But in the case of an assignment, Section 130 of the Transfer of Property Act requires a document to be reduced into writing and signed by the transferor. (v) Endorsement does not require payment of stamp duty whereas negotiation requires payment of stamps duty Question 39 When is an alteration in a negotiable instrument is deemed to be a “material alternation” under the Negotiable Instruments Act, 1881? What are the consequences of material alternation in a negotiable instrument? (May 2006) Answer Material alternation and its effect: As per the negotiable Instrument Act, 1881, an alteration is material which (a) alters the character or identity of the instrument or which shakes the very foundation of the instrument. (b) changes the rights and, liabilities of the parties or any of the parties to the instrument or (c) alters the operation of the instrument. Any change in an instrument which causes it to speak a difference language in effect from that which it originally spoke, or which changes the legal identity or character of the instrument either in its terms or the relation of the parties to it is a material alteration. It makes no difference whether the alteration is beneficial or prejudicial. Instances of material alteration. The following alterations are material i.e. the alteration of the date, the sum payable, the time of payment, the place of payment, additional of place of

payment, and the rate of interest. These alterations vitiate the instrument. Effect of material alteration – As per Section 87 of the Negotiable Instrument Act, 1881, a material alteration of a negotiable instrument renders the same void against persons who were parties thereto before such alteration unless they have consented to the alteration. But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void. Any material alteration if made by an indorsee, discharges his indorser from all liability to him in ‘respect of the consideration thereof. Question 40 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 Company’s account to the Mall (Departmental Store) towards the full payment of the bills. The cheque was dishonoured by the Company’s 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 purchase from the Mall (Departmental Store). (November 2006) Answer The facts of the problem are identical with the facts of a case know as H.N.D. Mulla Feroze Vs. C.Y. Somaya Julu, J(2004) 55 SCL (AP) wherein the Andhra Pradesh High Court held that although the petitioner has an 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 J could not be said to have committed the offence under Section 138 of the Negotiable Instrument Act, 1881. Therefore X also is not liable for the cheque but legally liable for the payments for the goods. Question 41 B obtains A’s acceptance to a bill of exchange by fraud. Be 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. (November 2006) Answer Section 53 of the Negotiable Instrument Act, 1881 provides that a holder of negotiable instrument who derives title from a holder in due course has the right thereon of that holder in due course. Such holder of the bill who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards to the acceptor and all parties to the bill prior to that holder. In this case, it is clear that though D was aware of the fraud, he was himself not a party to it. He obtained the instrument from C who was a holder in due course. So D gets a good title and can recover from A. Question 42 A owes a certain sum of money to B. A does not know the exact amount and hence he makes out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due, payable by him. B fills up fraudulently the amount larger than the amount due, payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of B and C. (May 2007)

Answer Section 44 of the Negotiable Instruments Act 1881 is applicable in this case. According to Section 44 of this Act, B who is a party in immediate relation with the drawer of the cheque is entitled to recover from A only the exact amount due from A and not the amount entered in the cheque. However the right of C, who is a holder for value, is not adversely affected and he can claim the full amount of the cheque from B. Question 43 Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following: (i) A bill of Exchange originally drawn by M for a sum of Rs. 10,000, but accepted by R only for Rs.7,000. (ii) A cheque marked ‘Not Negotiable’ is not transferable. (May 2007) Answer (i) As per the provisions of the Negotiable Instruments Act 1881, acceptance may be either general or qualified. It is qualified when the drawee does not accept the bill according to the apparent tenor of the bill but attaches some condition or qualification which have the effect of either reducing his (acceptor’s) liability or acceptance of this liability is subject to certain condition. The holder of the bill is entitled to require an absolute and unconditional acceptance, otherwise he will treat it as dishonoured however, he may agree to qualified acceptance but he does so at his own peril, since he discharges all parties prior to himself, unless he has obtained their consent. Thus in this given case in accordance with the Explanation to Section 86 of the Act, when the drawee undertakes the payment of part only of the sum ordered to be paid, it is a qualified acceptance and the drawer may treat it as dishonoured unless agreed by him. If the Drawer (M) agrees to acceptance, the drawee (R) is responsible for a sum of Rs. 7000 only. (ii) It is wrong statement. A cheque marked “not negotiable” is a transferable instrument. The inclusion of the words ‘not negotiable’ however makes a significant difference in the transferability of the cheques. The holder of such a cheque cannot acquire title better than that of the transferor. Question 44 What are the essential elements of a "Promissory note" under the Negotiable Instruments Act, 1881? Whether the following notes may be considered as valid Promissory notes: (i) "I promise to pay Rs. 5,000 or 7,000 to Mr. Ram." (ii) I promise to pay to Mohan Rs. 500, if he secures 60% marks in the examination. (iii) I promise to pay Rs. 3,000 to Ravi after 15 days of the death of A. (November 2007) Answer A promissory note is an instrument (not being a bank note or currency note) in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or the holder of, a certain person or to the bearer of the instrument, (Section 4 of the Negotiable Instruments Act, 1881). In view of the above provision of the said Act, following are the essential elements of a promissory note1. It must be in writing. 2. The promise to pay must be unconditional. 3. The amount promised must be a certain and a definite sum of money. 4. The instrument must be signed by the maker. 5. The person to whom the promise is made must be a definite person.

Thus: (i) In case (i), it is not a valid promissory note because the amount is not certain. (ii) In case (ii), it is not a valid promissory note because it is conditional. . (iii) In case (iii), it is a valid promissory note because death of A is a certainty even if time of death is not certain.The Negotiable Instruments Act, 1881 Question 45 What do you understand by "Material alteration” under the Negotiable Instruments Act, 1881? State whether the following alterations are material alterations under the Negotiable Instruments Act, 1881? (i) The holder of the bill inserts the word "or order” in the bill, (ii) The holder of the bearer cheque converts it into account payee cheque, (iii) A bill payable to ' is converted into a bill payable to X and Y. (November 2007) Answer As per the Negotiable Instrument Act, 1881, an alteration can be called a material alteration if it alters or attempts to alters the character of the instrument and affects or is likely to affect the contract which the instrument contains or is evidence of. Thus, it totally alters the business effect of the instrument. It makes the instrument speak a language other than that was intended. The following materials alterations have been authorised by the Act and do not require any authentication: (a) filling blanks of inchoate instruments [Section 20] (b) Conversion of a blank endorsement into an endorsement in full [Section 49] (c) Crossing of cheque [Section 125] The important material and non-material alternation are: Material alteration Non-material alteration 1. Alteration of date of instrument (e.g. if a bill dated 1st may, 1998) is changed to a bill dated 1st June, 1998. 1. Conversion of instrument payable to bearer. 2. Alteration of time of payment (e.g. if a bill payable three months after date is changed to bill payable four months payable after date). 2. Conversion of instrument payable to bearer into order. 3. Alteration of place of payment (e.g., if a bill payable at Delhi is changed to bill payable at Mumbai). 3. Elimination of the words ‘or order' from an endorsement. 4. Alteration of amount payable (e.g., if bill for Rs. 1,000 is changed to a bill for Rs. 2000 4. Addition of the words ‘or demand’ to a note in which no time or payment is expressed. 5. Conversion of blank endorsement into special endorsement. 6. Addition of a new party to an4.32 Business and Corporate Laws instrument. 7. Alteration of one of the clauses of the instrument containing a penal action As per the above sections the changes of serial numbers (i) is non-material and changes of serial numbers (ii) (iii) are material changes in the given problem. Question 46 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? (May 2008) Answer

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 Bhushan’s 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 April, as contended by Bharat. Question 47 X draws a cheque in favour of Y. After having issued the cheque he informs Y not to present the cheque for payment. He also informs the bank to stop payment. Decide, under provisions of the Negotiable Instruments Act, 1881, whether the said acts of X constitute an offence against him ? (May 2008) Answer Problem: Offence under the Negotiable Instruments Act, 1881 This problem is based on the case of Modi Cements Ltd. Vs. Kuchil Kumar Nandi, 1998. In this case the Supreme Court held that once a cheque is issued by the drawer, a presumption under Section 139 of the Negotiable Instruments Act, 1881 follows and merely because the drawer issues a notice thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action under Section 138. The object of Sections 138 to 142 of the Act is to promote the efficacy of the banking operations and to ensure credibility in transacting business through cheques. Section 138 is a penal provision in the sense that once a cheque is drawn on an account maintained by the drawer with his banker for payment of any amount of money to another person from out of that account for the discharge in whole or in part of any debt or other liability, is informed by the bank unpaid either because of insufficiency amount to honour the cheques or the amount exceeding the arrangement made with the bank, such a person shall be deemed to have committed an offence. Question 48 Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881: (i) X who obtains a cheque drawn by Y by way of gift. (ii) A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque. (iii) M, who finds a cheque payable to bearer, on the road and retains it. (iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee. (v) B, who steals a blank cheque of A and forges A’s signature. (November 2008) Answer 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(i) 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. (ii) 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. (iii) 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. (iv) 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. (v) No, B is not a holder because he is in wrongful possession of the instrument. Question 49 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. (November 2008) Answer Bill drawn in fictitious name The problem is based on the provision of Section 42 of the Negotiable Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious name and is endorsed by the same hand as the drawer’s signature, it is not permissible for the acceptor to allege as against the holder in due course that such name is fictitious. Accordingly, in the instant 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.

Elements of Income Tax a. Scope and charge of income tax

b. Selected definitions relevant to computation of Total Income c. Residential status d. Heads of income & computation thereof with special reference to Business Income. & CapitalGains e. Exemptions from Total, Income& Deductions from total income Prof. Adams has given a comprehensive definition of Tax, covering its different aspects, as follows: "From the stand point of view of the State, a tax is a source of derivative revenue; from the angle of the citizen, a tax is a coerced payment; from the administrative point of view, it is demand for money by state in conformity to established rules, from the point of view of theory, a Tax is a contribution from individuals for common expenditure" The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There are close to 35 million income tax payers in India.[

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Tax is a legal collection: A tax has “statutory sanction”. It cannot be imposed arbitrarily. Certain legal requirements are to be followed in imposing a tax. Tax is a personal obligation: A tax is a personal obligation and it creates a personal responsibility on the taxpayers. No citizen should think of evading tax. Every citizen should pay his taxes. Tax is a compulsory contribution: It is a compulsory contribution to the State by citizens, which may be paid willingly. State has the right to tax citizens. Nobody can refuse to pay taxes claiming that he does not derive any benefit from payment of tax. Refusal to pay tax is a punishable offence. Element of Sacrifice: In the payment of taxes, an element of sacrifice is involved because they are paid for the general interest of the community. Tax is imposed by Government alone: Government alone has the authority to levy taxes. Even if the management of a Temple or Trust makes it compulsory for every devotee or family to pay a specific amount, it cannot be termed as tax Revenue collection: The power of taxation is used to raise sufficient revenues for the state, apart from achieving other collateral objectives. Socio-economic objectives: Modern governments use tax as an instrument to achieve structural changes and also realizing socio-economic objectives. Tax is a contribution for the common benefit of the society: It is levied for the common good of the society without any regard to benefit to particular individuals. Tax is intended to use the proceeds for the benefit of the community, to render public services etc., and not intended for benefiting any one or a group of individuals.

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Benefit is not a condition for tax payment: The tax payer is not promised any specific benefit. Taxes are paid because they are compulsory and the proceeds used for common good. Benefit derived by a tax payer may not be proportionate to the tax paid. Tax is not imposed to realize cost of benefit: Tax is not a realization of cost of services or benefit. A poor person may be benefited most by way of public expenditure without payment of any tax. Taxes may be assessed on capital or income but they are paid out of income. A tax may be imposed on a commodity or property or individual. But tax is actually paid by individuals.

Definitions. In this Act, unless the context otherwise requires,— • [(1) “advance tax” means the advance tax payable in accordance with the provisions of Chapter XVII-C;] • (1A)] “agricultural income”7 means8— • 9[(a) any rent10 or revenue10 derived10 from land10 which is situated in India and is used for agricultural purposes;] • (b) any income derived from such land10 by— • (i) agriculture10; or • (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market10; or • (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ; • (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : 9 • [Provided that— • (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other outbuilding, and • (ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated— • (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or • (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette11.] 12 13 • [ [Explanation 1.]—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section.]

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[Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.] 15 [Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income;] 16 17 [ [(1B)] “amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that— (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ; (iii) shareholders holding not less than 18[three-fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the firstmentioned company ;] 19 [(1C)“Additional Commissioner” means a person appointed to be an Additional Commissioner of Income-tax under sub-section (1) of section 117; (1D) “Additional Director” means a person appointed to be an Additional Director of Income-tax under sub-section (1) of section 117 ;] (2) “annual value”, in relation to any property, means its annual value as determined under section 23 ; 20 (3) [* * *] (4) “Appellate Tribunal” means the Appellate Tribunal constituted under section 252 ; (5) “approved gratuity fund” means a gratuity fund which has been and continues to be approved by the 21[Chief Commissioner or Commissioner] in accordance with the rules contained in Part C of the Fourth Schedule ; (6) “approved superannuation fund” means a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the 21[Chief Commissioner or Commissioner] in accordance with the rules contained in Part B of the Fourth Schedule ; 22 (7) “assessee”23 means a person by whom 24[any tax] or any other sum of money is payable under this Act, and includes— (a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income 25[or assessment of fringe benefits] or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person ; (b) every person who is deemed to be an assessee under any provision of this Act ; (c) every person who is deemed to be an assessee in default under any provision of this Act ;

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[(7A)“Assessing Officer” means the Assistant Commissioner 27[or Deputy Commissioner] [or Assistant Director] 27[or Deputy Director] or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or subsection (2) of section 120 or any other provision of this Act, and the 29[Additional Commissioner or] 30[Additional Director or] 31[Joint Commissioner or Joint Director] who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act ;] (8) “assessment”32 includes reassessment ; (9) “assessment year” means the period of twelve months commencing on the 1st day of April every year ; 33 [(9A)“Assistant Commissioner” means a person appointed to be an Assistant Commissioner of Income-tax 34[or a Deputy Commissioner of Income-tax] under sub-section (1) of section 117 ;] 35 [(9B)“Assistant Director” means a person appointed to be an Assistant Director of Incometax under sub-section (1) of section 117;] (10) “average rate of income-tax” means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income ; 36 [(11) “block of assets” means a group of assets falling within a class of assets comprising— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed ;] (12) “Board” means the 37[Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963)] ; 38 [(12A) “books or books of account” includes ledgers, day-books, cash books, accountbooks and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;] 39 (13) “business”40 includes any trade40, commerce or manufacture or any adventure40 or concern in the nature of trade40, commerce or manufacture ; 41 (14) “capital asset” means property42 of any kind held by an assessee, whether or not connected with his business or profession, but does not include— (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ; 43 [(ii) personal effects44, that is to say, movable property (including wearing apparel and furniture) held for personal use44 by the assessee or any member of his family dependent on him, but excludes— (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. Explanation.—For the purposes of this sub-clause, “jewellery” includes— (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;] 45 [(iii)agricultural land46 in India, not being land situate— 28

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(a) in any area which is comprised within the jurisdiction of a municipality46 (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population46 of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette47;] 48 [(iv) 6½ per cent Gold Bonds, 1977,49[or 7 per cent Gold Bonds, 1980,] 50[or National Defence Gold Bonds, 1980,] issued by the Central Government ;] 51 [(v) Special Bearer Bonds, 1991, issued by the Central Government ;] 52 [(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government ;] 53 54 55 [ (15) “charitable purpose”56 includes relief of the poor, education56, medical relief, 57 [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other 56object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business56, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:] 58 [Provided further that the first provison shall not apply if the aggregate value of the receipts from the activities referred to therein is 58a[ten lakh rupees] or less in the previous year;] 59 [(15A) “Chief Commissioner” means a person appointed to be a Chief Commissioner of Income-tax under sub-section (1) of section 117 ;] 60 61 [ [(15B)] “child”, in relation to an individual, includes a step-child and an adopted child of that individual ;] 62 [(16) “Commissioner” means a person appointed to be a Commissioner of Income-tax under sub-section (1) of section 117 63[* * *] ;] 64 [(16A) “Commissioner (Appeals)” means a person appointed to be a Commissioner of Income-tax (Appeals) under sub-section (1) of section 117 ;] 65 [(17) “company” means— (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company : Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;] (18) “company in which the public are substantially interested”—a company is said to be a company in which the public66 are substantially interested— 67 [(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or]

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[(aa) if it is a company which is registered under section 25 of the Companies Act, 1956 (1 of 1956)69 ; or (ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested : Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ; or] 70 [(ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A71 of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society ; or] 72 [(ad) if it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more cooperative societies ;] 73 [(b) if it is a company which is not a 74private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :— (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ; 75 [(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by— (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company 76[if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.] Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words “not less than fifty per cent”, the words “not less than forty per cent” had been substituted ;]] (19) “co-operative society” means a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies ; 77 [(19A) “Deputy Commissioner” means a person appointed to be a Deputy Commissioner of Income-tax 78[* * *] under sub-section (1) of section 117 ; 79 [(19AA) “demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 39480 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that— (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;

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(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. Explanation 1.—For the purposes of this clause, “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2.—For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include— (a) the liabilities which arise out of the activities or operations of the undertaking; (b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3.—For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. Explanation 4.—For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils 81[such conditions as may be notified in the Official Gazette82, by the Central Government]; (19AAA) “demerged company” means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company;] (19B) “Deputy Commissioner (Appeals)” means a person appointed to be a Deputy Commissioner of Income-tax (Appeals) 83[or an Additional Commissioner of Income-tax (Appeals)] under sub-section (1) of section 117 ;] 84 [(19C) “Deputy Director” means a person appointed to be a Deputy Director of Incometax 85[* * *] under sub-section (1) of section 117 ;] (20) 86“director”, “manager” and “managing agent”, in relation to a company, have the meanings respectively assigned to them in the Companies Act, 1956 (1 of 1956) ; 87 [(21) “Director General or Director” means a person appointed to be a Director General of Income-tax or, as the case may be, a Director of Income-tax, under sub-section (1) of section 117, and includes a person appointed under that sub-section to be 88[an Additional Director of

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Income-tax or] a 89[Joint] Director of Income-tax or an Assistant Director 90[or Deputy Director] of Income-tax ;] (22) 91“dividend”92 includes— (a) any distribution92 by a company of accumulated profits92, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution92 to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits92, whether capitalised or not ; (c) any distribution92 made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution92 to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits92 which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 93[made after the 31st day of May, 1987, by way of advance or loan to a shareholder94, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits95 ; but “dividend” does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; 96 [(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, 97[and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder 98[or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; 99 [(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A 1 of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).] Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date

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of liquidation, 2[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. 3 [Explanation 3.—For the purposes of this clause,— (a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;] 4 [(22A) “domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;] 5 [(22AA) “document” includes an electronic record as defined in clause (t)6 of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);] 7 [(22AAA) “electoral trust” means a trust so approved by the Board in accordance with the scheme made in this regard by the Central Government;] 8 9 [ [(22B)] “fair market value”, in relation to a capital asset, means— (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act ;] 10 [(23) (i) “firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932)11, and shall include a limited liability partnership12 as defined in the Limited Liability Partnership Act, 2008 (6 of 2009); (ii) “partner” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include,— (a) any person who, being a minor, has been admitted to the benefits of partnership; and (b) a partner of a limited liability partnership12 as defined in the Limited Liability Partnership Act, 2008 (6 of 2009); (iii) “partnership” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership12 as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);] 13 [(23A) “foreign company” means a company which is not a domestic company ;] 14 [(23B) “fringe benefits” means any fringe benefits referred to in section 115WB;] 15 (24) “income”16 includes16— (i) profits and gains16 ; (ii) dividend ; 17 [(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes 18[or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) 19[or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 20[or by an electoral trust]]. Explanation.—For the purposes of this sub-clause, “trust” includes any other legal obligation ;]

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(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ; 21 [(iiia) any special allowance or benefit, other than perquisite included under subclause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit ; (iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living ;] (iv) the value of any benefit or perquisite22, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid ; 23 [(iva) the value of any benefit or perquisite22, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the “beneficiary”) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary ;] (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ; 24 [(va) any sum chargeable to income-tax under clause (iiia) of section 28 ;] 25 [(vb) any sum chargeable to income-tax under clause (iiib) of section 28 ;] 26 [(vc) any sum chargeable to income-tax under clause (iiic) of section 28 ;] 27 [(vd)] the value of any benefit or perquisite taxable under clause (iv) of section 28 ; 28 [(ve) any sum chargeable to income-tax under clause (v) of section 28 ;] (vi) any capital gains chargeable under section 45 ; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule ; 29 [(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;] (viii) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;] 30 [(ix) any winnings from lotteries31, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.] 32 [Explanation.—For the purposes of this sub-clause,— (i) “lottery” includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game ;] 33 [(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ;] 34 [(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

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Explanation.—For the purposes of this clause*, the expression “Keyman insurance policy” shall have the meaning assigned to it in the Explanation to clause (10D) of section 10 ;] 35 [(xii) any sum referred to in 36[clause (va)] of section 28;] 37 [(xiii) any sum referred to in clause (v) of sub-section (2) of section 56;] 38 [(xiv) any sum referred to in clause (vi) of sub-section (2) of section 56;] 39 [(xv) any sum of money or value of property referred to in clause (vii) 40[or clause (viia)] of sub-section (2) of section 56;] (25) “Income-tax Officer” means a person appointed to be an Income-tax Officer under 41[* * *] section 117 ; 42 [(25A) “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters;] (26) “Indian company” means a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes— (i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir 43[and the Union territories specified in sub-clause (iii) of this clause]) ; 44 [(ia) a corporation established by or under a Central, State or Provincial Act ; (ib) any institution, association or body which is declared by the Board to be a company under clause (17) ;] (ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ; 45 [(iii)in the case of any of the Union territories of Dadra and Nagar Haveli, Goa†, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory :] Provided that the 46[registered or, as the case may be, principal office of the company, corporation, institution, association or body] in all cases is in India ; 47 [(26A) “infrastructure capital company” means such company which makes investments by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-IA or sub-section (1) of section 80-IAB or an undertaking developing and building a housing project referred to in sub-section (10) of section 80-IB or a project for constructing a hotel of not less than three-star category as classified by the Central Government or a project for constructing a hospital with at least one hundred beds for patients; (26B) “infrastructure capital fund” means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908) established to raise monies by the trustees for investment by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-IA or sub-section (1) of section 80-IAB or an undertaking developing and building a housing project referred to in sub-section (10) of section 80-IB or a project for constructing a hotel of not less than three-star category as classified by the Central Government or a project for constructing a hospital with at least one hundred beds for patients;] (27) 48[* * *] (28) “Inspector of Income-tax” means a person appointed to be an Inspector of Income-tax under sub-section 49[(1)] of section 117 ; 50 51 [ (28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;] 52 [(28B) “interest on securities” means,—

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(i) interest on any security of the Central Government or a State Government ; (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act ;] 53 [(28BB) “insurer” means an insurer, being an Indian insurance company, as defined under clause (7A) of section 254 of the Insurance Act, 1938 (4 of 1938), which has been granted a certificate of registration under section 3 of that Act;] 55 [(28C) “Joint Commissioner” means a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income-tax under sub-section (1) of section 117; (28D) “Joint Director” means a person appointed to be a Joint Director of Income-tax or an Additional Director of Income-tax under sub-section (1) of section 117;] (29) “legal representative” has the meaning assigned to it in clause (11) of section 2 of the Code of Civil Procedure, 1908 (5 of 1908)56 ; 57 [(29A) “long-term capital asset” means a capital asset which is not a short-term capital asset ; (29B) “long-term capital gain” means capital gain arising from the transfer of a long-term capital asset ;] 58 [(29BA) “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;] 59 [(29C) “maximum marginal rate” means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual 60[, association of persons or, as the case may be, body of individuals] as specified in the Finance Act of the relevant year ;] 61 [(29D) “National Tax Tribunal” means the National Tax Tribunal established under section 3 of the National Tax Tribunal Act, 2005;] (30) “non-resident” means a person who is not a “resident” 62[, and for the purposes of sections 92, 93 63[* * *] and 168, includes a person who is not ordinarily resident within the meaning of clause (6) of section 6] ; 64 (31) “person”65 includes— (i) an individual65, (ii) a Hindu undivided family65, (iii) a company, (iv) a firm66, (v) an association of persons66 or a body of individuals66, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. 67 [Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;] (32) “person who has a substantial interest in the company”, in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power ; (33) “prescribed” means prescribed by rules made under this Act ; (34) “previous year” means the previous year as defined in section 3 ;

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68

(35) “principal officer”, used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means— (a) the secretary, treasurer, manager or agent of the authority, company, association or body, or (b) any person connected with the management or administration of the local authority, company, association or body upon whom the 69[Assessing] Officer has served a notice of his intention of treating him as the principal officer thereof ; 70 (36) “profession” includes vocation71 ; 72 [(36A) “public sector company” means any corporation established by or under any Central, State or Provincial Act or a Government company73 as defined in section 617 of the Companies Act, 1956 (1 of 1956) ;] (37) 74“public servant” has the same meaning as in section 21 of the Indian Penal Code (45 of 1860) ; 75 [(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means— (i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head “Salaries” 76[* * *] or 77 [computation of the “advance tax” payable under Chapter XVII-C in a case not falling under 78 [section 115A or section 115B 79[or section 115BB 80[or section 115BBB] or section 115E] or] section 164 79[or section 164A 81[* * *]] 82[or section 167B], the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the “advance tax” payable under Chapter XVII-C 83[in a case falling under section 115A or section 115B 84[or section 115BB 85[or section 115BBB] or section 115E] or section 164 84[or section 164A 86[* * *]] 87[or section 167B], the rate or rates specified in section 115A or 88[section 115B or section 115BB 89[or section 115BBB] or section 115E or section 164 or section 164A 86[* * *] 87[or section 167B], as the case may be,] or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable ;] (ii) for the purposes of deduction of tax under sections 193, 194, 194A 90[, 194B] 91[, 194BB] 92[and 194D], the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year ;] 93 [(iii)for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of incometax specified in 94[an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be];] 95 (38) “recognised provident fund” means a provident fund which has been and continues to be recognised by the 96[Chief Commissioner or Commissioner] in accordance with the rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees’ Provident Funds Act, 1952 (19 of 1952) ; (39) 97[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993;] (40) “regular assessment” means the assessment made under 98[sub-section (3) of] section 143 or section 144 ; (41) “relative”, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual ; 99 [(41A) “resulting company” means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger;]

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(42) “resident” means a person who is resident in India within the meaning of section 6 ; 1 2 3 [ (42A) [“short-term capital asset” means a capital asset held by an assessee for not 4 more than [thirty-six] months immediately preceding the date of its transfer :] 5 [Provided that in the case of a share held in a company 6[or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of a Mutual Fund specified under clause (23D) of section 10] 7[or a zero coupon bond], the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted.] 8 [Explanation 1].—(i) In determining the period for which any capital asset is held by the assessee— (a) in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation ; (b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in 9[sub-section (1)] of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ; 10 [(c) in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee ;] 11 [(d) in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset ; (e) in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer ;] 12 [(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset ;] 13 [(g) in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee ;] 14 [(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation; (ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation;] 15 [(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;] (ii) In respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf.]

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16

[Explanation 2.—For the purposes of this clause, the expression “security”17 shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).] 18 [Explanation 3.—For the purposes of this clause, the expressions “specified security” and “sweat equity shares” shall have the meanings respectively assigned to them in the Explanation to clause (d) of sub-section (1) of section 115WB;] 19 [(42B) “short-term capital gain” means capital gain arising from the transfer of a shortterm capital asset ;] 20 [(42C) “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1.—For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities ;] 21 [(43) “tax” in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date 22[and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA] ;] 23 [(43A) “tax credit certificate” means a tax credit certificate granted to any person in accordance with the provisions of Chapter XXII-B24 and any scheme made thereunder ;] (43B) 25[* * *] 26 [(44) “Tax Recovery Officer” means any Income-tax Officer who may be authorised by the Chief Commissioner or Commissioner, by general or special order in writing, to exercise the powers of a Tax Recovery Officer 27[and also to exercise or perform such powers and functions which are conferred on, or assigned to, an Assessing Officer under this Act and which may be prescribed];] (45) “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act ; (46) 28[* * *] 29 (47) 30[“transfer”31, in relation to a capital asset, includes,— (i) the sale31, exchange31 or relinquishment31 of the asset ; or (ii) the extinguishment of any rights therein31 ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;] 32[or] 33 [(iva) the maturity or redemption of a zero coupon bond; or] 34 [(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A35 of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA;] 36 [(48) “zero coupon bond” means a bond—

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(a) issued by any infrastructure capital company or infrastructure capital fund or public sector company 37[or scheduled bank] on or after the 1st day of June, 2005; (b) in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company 37[or scheduled bank]; and (c) which the Central Government may, by notification38 in the Official Gazette, specify in this behalf. 39 [Explanation.—For the purposes of this clause, the expression “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to sub-clause (c) of clause (viia) of sub-section (1) of section 36.]]

a. Scope and Charge of Income Tax Charge of income-tax. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person : Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Charge to Income-tax Everyone exceeds the maximum amount which is not chargeable to the income tax is an assesse, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year, shall be determined on basis of his residential status. Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person. The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-: Income Tax Rates/Slabs Rate (%) for men: → Up to 1,80,000 = 0, → 1,80,001 – 5,00,000 = 10%, → 5,00,001 – 8,00,000 = 20%, → 8,00,001 upwards = 30%,

Up to 1,90,000 (for resident women)=0% Up to 2,50,000 (for resident individual of 60 years or above)= 0, Up to 5,00,000 (for very senior citizen of 80 years or above)= 0. Education cess is applicable @ 3 per cent on income tax, surcharge = NA Scope of total income. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

b. Selected definitions relevant to computation of Total Income Definition of Total Income [Section 2(45)] Total Income means the total amount of Income referred to in section 5, computed in the manner laid down in the Income-tax Act. •

Total income is computed under five heads of income, income computed under each head is thereafter aggregated and the aggregate amount is known as Gross Total Income. •

From Gross Total Income, certain deductions are allowed under sections 80C to 80U and the balance income after deductions is known as Total Income. •

Scope of Total Income/Incidence of tax [Section 5]

Total income of an assessee cannot be computed unless we know his residential status in India during the previous year. Question: Residential status is to be determined for: • • •

Previous year Assessment year Accounting year

Question:Total income of a person is determined on the basis of his: • • • •

Residential status in India Citizenship in India None of the above Both of the above

Question: Determine the residential status in the following cases: Year 2005 -06

Year 200607

ROR

RNOR

NR

RNOR

RNOR

NR

NR

NR

NR

ROR

Residential Status for A. Y. 2006-07

A. Y. 200809

In the case of Resident in India (resident and ordinarily resident in case of individual or HUF) [Section 5(1)]: The following incomes from whatever source derived form part of Total Income in case of resident in India/ordinarily resident in India: any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such person; •

any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year; •

any income which accrues or arises outside India during the relevant previous year. •

In the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF only) [Section 5(1) and its proviso]: The following incomes from whatever source derived form part of Total Income in the case of resident but not ordinarily resident in India: any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such person; •

any income which accrues or arises or is deemed to accrue or arise to him during the relevant previous year; •

any income which accrues or arises to him outside India during the relevant previous year if it is derived from a business controlled in or a profession set up in India. •

In the case of Non-Resident [Section 5(2)]: The following incomes from whatever source derived form part of Total Income in the case of Non-Residents in India: any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such person; •

any income which accrues or arises or is deemed to accrue or arise to him in India during the relevant previous year. •

Q. Determine whether following income is taxable in India? S. No . 1

Income

ROR

RNO R

N R

Salary income in India

2

Salary in USA

3

House rent from Property situated in India

4

Dividend income from Italy

5

Income from business

6

Interest income from Swiss Bank

7

Sale of property in Delhi

Basic rules for determining residential status of an assessee Residential status is determined for each category of persons separately. • Residential status is always determined for the every previous year separately. • If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to •

the assessment year in respect of each of his other source of income. [Section 6(5)] • A person may be a resident of more than one country for any previous year. • Citizenship of a country and residential status of that country are separate concepts. It is the duty of the assessee to place all material facts before the assessing officer to enable him to determine his correct residential status. •

Definitions of Income 1. For corporations, revenues minus cost of sales, operating expenses, and taxes, over a given period of time. Income is the reason corporations exist, and are often the single most important determinant of a stock'sprice. Income is important to investors because they give an indication of the company's expected futuredividends and its potential for growth and capital appreciation. That does not necessarily mean that low or negativeearnings always indicate a bad stock; for example, many young companies report negative income as they attempt to grow quickly enough to capture a new market, at which point they'll be even more profitable than they otherwise might have been. also called earnings. 2. For individuals, money earned through employment and investments.

Income Tax Act, 1961 Section 5 SCOPE OF TOTAL INCOME. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which - (a) Is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) Accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) 127a of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) Is received or is deemed to be received in India in such year by or on behalf of such person; or (b) Accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1 : Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2 : For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India Scope of total income (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which(a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which(a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation1.- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. The public goods and services provided by the Government are enjoyed, in general, by all persons (both natural and non-natural) living within that country. Therefore, it is logical for all such persons to contribute towards such public goods and services. This forms the underlying basis of the principle of residence-based taxation of income. The principle of residence-based taxation asserts that natural persons or individuals are taxable in the country or tax jurisdiction in which they establish their residence or domicile, regardless of the source of income. In the case of non-natural persons such as companies or firms, the place of incorporation or the place where control or management is exercised is deemed to be the place of residence. In the context of income tax, the ability to pay of the residents of that country is fully measured by their global income.

Therefore, the principle of residence-based taxation of income envisages the taxation of global income. Key reasons for taxing the foreign source income of residents are to achieve horizontal and vertical equity goals and to improve the tax neutrality of investment decisions (efficiency). However, there are individuals/entities whose "residence" is in one country but their business is actually carried on in another country and their income is earned in the latter country. In such cases, the principle of residence-based taxation would be inappropriate. This would be especially so in developing countries which attract substantial foreign investments. Therefore, there is a view that the country which provides the opportunity and facilities to generate income or profits should also have the right to tax the same. This forms the underlying basis of the principle of source-based taxation of income. This principle is invariably applied to non-residents in a country and envisages the taxation of only such income which is sourced in that country. The term 'source' is generally not defined in the tax legislation. The common law has developed a number of principles which operate in the absence of statutory provisions Whether or not the income will be seen to be sourced in a country under the common law principles is a question of fact in the circumstances of a particular case. International practice varies as to the nature and extent of the source rules. Generally, countries use geographical boundaries, types of income or a mixture of both to determine the extent to which they will seek to tax income sourced in their jurisdiction. Conceptually, a country may adopt either pure residence based taxation or pure source based taxation. The pure residence based taxation is supported on the consideration that it promotes economic efficiency since the decision on the location of the investment remains unaffected by the tax rate. It is neutral to capital export. Further, it is relatively easier to pin down the income unlike in the case of source based taxation. However, the pure residence based taxation is not adopted for three reasons. First, pure residence based taxation reduces revenues in poor developing countries, who rely heavily on source based taxation, and leans in favour of the rich developed countries where investors reside. Secondly, residence based taxation is much easier to evade or avoid, by channeling international investments through tax havens. Thirdly, political and economic considerations do not allow a country to give up the right to collect tax from foreigners doing business within its territory. Pure source based taxation is an option that has been favoured by some experts. However, the major problem with this option is that it enables foreign investors to play one

country against another or others in order to obtain the lowest source based tax rate. This leads to aggressive tax competition (race to the bottom) resulting in erosion of revenue base. In addition, the problems of determining the source of income and of unraveling aggressive transfer pricing that leads to suppression of income would become much more acute in a world of pure source based taxation. In practice, countries have tended not to stay with the pure application of either principle. They have applied a mix of residence and source based direct taxation, the former for nationals (including non-natural persons) residing in the country and the latter for income earned within the country by non-residents. The precise nature of mixes has depended on each taxing jurisdiction's perception of the relative importance of a number of factors, notably the volume of foreign investment that is attracted, the revenue implications, the domestic administrative capabilities, and the degree of cooperation that can be expected from competing jurisdictions. Under the Code, residence based taxation is applied for residents and source based taxation for non-residents. A resident in India will be liable to tax in India on his world-wide income. However, a non-resident in India will be liable to tax in India only in respect of accruals and receipts in India (including deemed accruals and receipts). The total income of a person will also include the income arising to spouse, minor child and other entities in specified circumstances. However, the Second Schedule enumerates incomes that are exempt from taxation and these incomes will not form part of the total income. What is Tax? Tax is imposition financial charge or other levy upon a taxpayer by a state or other the functional equivalent of the state. How many Types of Taxes are there and what are they? There are two types of Taxes in India – 1.Direct Taxes, 2.Indirect Taxes The Taxes whose burden falls directly on the Tax payers are the Direct Taxes like Income Tax, Wealth Tax etc., The taxes in which the burden is passed on to a third party are called Indirect Taxes like Service Tax, VAT etc., What is Income Tax? An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Who has to pay Income Tax? A Person, corporations or other legal entities, whose earned Income in India, exceeds a prescribed limit has to pay tax What is the meaning of Previous Year and Assessment Year? Previous Year is the Financial Year ending on 31st March every year. Assessment Year is the period of 12 Months commencing on the 1st day of April immediately after the Previous Year. For eg. For Previous Year/Financial year ending 31.03.2009, the Assessment Year is 2009-10 (01.04.2009-31.03.2010).

What happens if I don’t pay the Income Tax? A Person, corporations or other legal entities, whose earned Income in India, exceeds a prescribed limit has to pay tax.Any person who willfully attempts to evade the payment of any tax, penalty or interest levied under Income Tax is liable to be prosecuted u/s 276C(2) of Income Tax Act, 1961. Whether I can get refund in case I pay any extra tax by mistake? If a person has paid more tax than he is required to pay by the tax rules, he may seek refund of the excess amount deposited. The refund will be made after processing of the income tax return. What are tax penalties? "If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income" How I can know as to how much Tax had been paid by me so far? You can know the details of tax paid by you for any financial year online for which you have to register with the NSDL’s website www.tin-nsdl.com. 2. Filing of Returns What is Filing of Return? Filing of Income Tax Return is compulsory if the taxable income exceeds the basic exemption limit even if the tax payable is nil or refundable. As per the Sec 139 of Income Tax Act Every person,(a) Being a company; or (b) being a person other than a company, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed Who has to file the Income Tax Return? For the Financial Year 2009-10, following persons are required to file their return of Income Tax : a. Individuals having taxable income exceeding Rs.1,60,000 per annum. b. Women having taxable income exceeding Rs.1,90,000 per annum. c. Senior Citizens having taxable income exceeding Rs.2,40,000 per annum. I have paid more Income Tax than what I have to pay. Can I get the refund of the excess amount paid by me? Yes. The refund can be claimed while filing the Return of Income Tax showing the amount of income tax excess deposited/deducted as refundable in the appropriate column. The assessing officer shall grant the refund. What happens if I have paid the Income Tax but did not file the Return? Any person who willfully fails to furnish in due time return of Income or return of fringe benefits is liable to be prosecuted u/s 276CC of Income Tax Act, 1961. I am a salaried person. I do not know how much Income Tax I have to pay for the Financial Year 2009-10.

For the Financial Year 2009-10, the tax rates are as below:• If your earnings are less than Rs.160000 yearly, you need not to pay any tax. • If your earnings are between 160001 - 300000 yearly ……. 10 % • If your earnings are between 300001 - 500000 yearly …….20 % • If your earnings are above 500000 yearly …………………….30 % • If you are woman taxpayer – income upto Rs.190000 is taxfree. • If you are senior citizen (Age > 65 years) income upto Rs.240000 is tax free. How can I pay the Income Tax? For Salaried Persons: Income Tax can be paid on the basis of Form 16 Certificate, which is issued by the employer which contains the details of salary received from the employer. The employer would have deducted the income tax (TDS – tax deducted at source) while making the payment of your salary on monthly basis. The details of tax deducted by the employer shall be available in form 16 and pay-slips given. The persons receiving any other income (other than salary) shall get the details of TDS deducted by the paying person / entity in form 16A. Who is an Assessee? 'Assessee' as a person by whom any tax or any other sum of money is payable under Income Tax Act, 1961 What are different forms for filing returns? S No Assessee Form No 1 For Individuals having Income from Salary / Pension / Family Pension & Interest ITR - 1 2 For Individuals and HUFs not having Income from Business or Profession ITR - 2 3 For Individuals / HUFs being partners in firms and carrying out business or profession under any proprietorship ITR - 3 4 For Individuals & HUFs having Income from proprietary business or profession ITR - 4 5 For Firms, AOPs and BOIs ITR - 5 6 For Companies other than Companies claiming exemption under Section11 ITR – 6 7 For Persons including Companies required to furnish return under Section11 ITR - 7 3. Various sources of Taxations What are the various heads of Taxable Income? a. Income from Salary b. Income from House Property c. Income from profits and gains of Business or Profession d. Income from Capital gains e. Income from Other sources. What are the items which are included under the Head “Salary”? Salary includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, in whatever name called from one or more employers, as the case may be, but does not include the following, namely: a. dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned; b. employer's contribution to the provident fund account of the employee; c. allowances which are exempted from payment of tax; d. the value of perquisites specified in sub-section (2) of section 17 of the Income-tax Act; It also includes the following: a. Wages; b. Any annuity or pension;

c. Any gratuity; d. Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; e. Any advance of salary; f. Any payment received by an employee in respect of any period of leave not availed of by him; g. The annual accreditation to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and h. The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof. How is Income under House Property computed? Income from House property is computed by taking what is called Annual Value. The annual value (in the case of a let out property) is the maximum of the following: • Actual Rent received • Municipal Valuation • Fair Rent (as determined by the I-T department) If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct : • 30% of Net value as repair cost • • Interest paid or payable on a housing loan against this house In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits. The balance is added to taxable income. 4. Income Exemptions What are the various Income Exemptions? a. Agricultural Income b. Value of Leave Travel concession, only where journey is actually performed. c. Gratuity amount paid to the employee on the retirement on superannuation, retirement on VRS, termination, resignation or any gratuity paid to the spouse, children or dependents on his/her death subject to the limits prescribed. d. Any Payment on Voluntary Retirement subject to maximum of Rs. 5 lakhs. e. Payment of Provident Fund under the Provident Fund Act, 1925 or Public Provident Fund Scheme, 1968. f. Payment of commutation of Pension (1/3rd) is fully exempt. g. Encashment of Leave on Retirement subject to a maximum limit of Rs.300000. g. House Rent Allowance : HRA paid to the assessee to meet the expenditure incurred on payment of rent for accommodation. i. Special Allowance or Benefits : Any special allowance or benefit as may be prescribed which is not in nature of perquisites, specially granted to meet expenses wholly in performance of duties to the extent of such expenses are actually incurred for the purpose. What are the other Permissible Deductions?

1) Professional Tax 2) Interest paid on Housing Loan to the extent of Rs.30,000/- Rs.150000/- as the case may be) in respect of self occupied House. 3) Deduction in respect of Medical Treatment for specific ailments for self or dependents up to Rs.1.00 lakh. 4) Interest paid on Educational loans for self or dependents availed from any Bank / Financial Institutions/ charitable trusts is eligible for deduction. 5) A deduction of Rs .50,000 p.a. can be deducted from Income of the if the assessee is suffering from any disability and a deduction up to Rs.1.00 lakh can be made if suffering from severe disability 6) Donations made to Prime Minister / Chief Minister’s Relief fund etc., are eligible for deductions @ 100%. In other cases 50% of donations paid are eligible for deduction. 7) Medical Insurance premium up to Rs.30,000 u/s 80D i.e. Rs. 15,000 for self, spouse, children and Rs.15,000 for parents (Rs.20,000 pa if parents are 65 years above) Whether it is necessary to disclose tax-free income while preparing my income tax return? You are required to disclose all the incomes whether taxable or tax-free while filing your income tax return. 5. Rebates & Relief Permission what is various Rebates & Relief’s permissible IT Act? Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be taxexempt. The total limit under this section is Rs. 100,000 (Rupees One lakh) which can be any combination of the below: • Contribution to Provident Fund or Public Provident Fund • Premium paid on Insurance paid on the life of self, spouse or children. • Investment in pension Plans • Investment in Equity Linked Savings schemes (ELSS) of mutual funds • Investment in specified government infrastructure bonds • Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit) • Payments towards principal repayment of housing loans and any registration fee or stamp duty paid upto overall ceiling of Rs.1.00 lakh. • Tuition fees paid to any University/college/school or Educational Institutions in India for purpose of full time education for any two children upto an overall ceiling of Rs.1.00 lakh. • Post office investments The investment can be from any source and not necessarily from income chargeable to tax. • Specified Term Deposit made in any Scheduled Bank with maturity of 5 years or more. (eg. Synd Tax Shield) What are the other Permissible Deductions? 1) Professional Tax 2) Interest paid on Housing Loan to the extent of Rs.30,000/- (Rs.150000/- as the case may be) in respect of self occupied House. 3) Deduction in respect of Medical Treatment for specific ailments for self or dependents up to Rs.1.00 lakh. 4) Interest paid on Educational loans for self or dependents availed from any Bank / Financial Institutions/ charitable trusts is eligible for deduction. 5) A deduction of Rs.50,000 p.a. can be deducted from Income of the if the assessee is suffering from any disability and a deduction up to Rs.1.00 lakh can be made if suffering from severe disability 6) Donations made to Prime Minister / Chief Minister’s Relief fund etc., are eligible for deductions @ 100%. In other cases 50% of donations paid are eligible for deduction. 7) Medical Insurance Premium up to Rs.15000 u/s 80D. What is the overall limit under Sec 80 C? The aggregate limit of deduction u/s 80 CC.and 80 CCC are subject to overall limit of Rs.1.00 lakh only. Section 80 CCC:

An amount paid or deposited upto maximum of Rs.1.00 lakh by the assessee during the previous year to the annuity plan of LIC or other Insurance Companies for receiving pension from the fund referred to in section 10(23AAB). The amount within the overall limit of Rs.1.00 lakh including Sec 80C.: Section 80CCE : The aggregate limit of deduction u/s 80 CC.and 80 CCC are subject to overall limit of Rs.1.00 lakh only. Section 80D: Medical Insurance Premiums Medical insurance, popularly known as Mediclaim Policies, provide deduction up to Rs.30,000. This deduction is additional to Rs.1,00,000 savings. For senior citizens, the deduction up to Rs. 20,000 is allowable and for non senior citizens, the limit is Rs. 15000. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children. It is also applicable to the cheques paid by proprietor firms. Section 80 DDB: Maintenance & Medical Treatment: Amount actually incurred for medical treatment for self or for spouse/children/dependant parents for specified diseases or ailments are eligible for deduction up to Rs.1.00 lakh u/s 80 DDB. Section 80E: Interest on Educational Loans: Any amount paid out of Income chargeable to tax towards interest on Education loan availed from any Bank/Financial Institution/charitable Institution for purpose of pursuing Higher Education for self, spouse or children is eligible for deduction Section 80 U: Person with Disability for Self: U/s 80 U, a deduction of Rs.50,000 p.a. can be deducted from Income of the if the assessee is suffering from any disability and a deduction up to Rs.1.00 lakh can be made if suffering from severe disability . Section 80G: Donations made to Charitable Institutions; Donations made to Prime Minister / Chief Minister’s Relief fund etc., are eligible for deductions @ 100%. In other cases 50% of donations paid are eligible for deduction. How about the amount of Salary arrears which I have received? Relief U/S 89 Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance or is in receipt, in any one financial year, of salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to clause (iia) of section 57, being paid in arrears, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed. 6. PAN & TDS What is PAN? PAN (Permanent Account Number) is unique alphanumeric combination issued to all juristic entities identifiable under the Indian Income Tax Act 1961. It is issued by the Indian Income Tax Department under the auspices of the Central Board for Direct Taxes (CBDT). Who has to obtain PAN? Every person, whose taxable income exceeds the basic exemption limit during an accounting year, is required to obtain Permanent Account Number by making an application in form No 49A. Why Is It Necessary To Have PAN? It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. It is also necessary to quote PAN in all transactions such as sale and purchase of properties or payments in cash, travel to foreign country. Similarly, the PAN is necessary for making term deposit for Rs. 50000/- and above with the bank. Is it compulsory to quote PAN on return of income? Yes, it is mandatory to quote PAN on return of income Who must have a PAN?

i. All existing assesses or taxpayers or persons who are required to furnish a return of income, even on behalf of others, intends to enter into financial transaction where PAN is mandatory, must obtain PAN. Can a person obtain or use more than one PAN? Obtaining or possessing more than one PAN is not permitted. What is TDS? TDS (Tax Deduction at Source) means the tax required to be paid by the Assessee, which is deducted by the person paying the income to him. Whether I need to club the income shown in two or more form 16 given to me by my employer for tax purposes? Yes, you must arrive at the tax payable after clubbing the income received by you in a financial year. The employers would not have deducted the tax hence you must calculate the tax payable and pay the tax at the prescribed rate. What is TDS Certificate? A certificate issued by the person deducting tax as per the provisions of Sec 203 of Income Tax Act issued to the person whose income tax has been deducted specifying the amount so deducted, the rate at which the tax has been deducted and such other particulars as have been prescribed. This certificate enables the payee to get the credit of TDS in the Return of Income. TDS Certificates are issued within the prescribed time in the prescribed forms as under: Form 16 : For Salaries : This certificate will be having the details of the employee’s Income from salary, other sources declared by the employee, deductions claimed and tax deducted from the employee and paid to the income tax department. Form 16A: For Other payments. Residential Status The three residential status, viz., •

Resident Ordinarily Residents Under this category ,person must be living in India at least 182 days during previous year Or must have been in India 365 days during 4 years preceding previous year and 60 days in previous year. Ordinary residents are always taxable on their income earned both in India and Abroad. •

•

Resident but not Ordinarily Residents Must have been a non-resident in India 9 out of 10 years preceding previous year or have been in India in total 729 or less days out of last 7 years preceding the previous year. Not residents are taxable in relation to income received in India or income accrued or deemed to be accrue or arise in India and income from business or profession controlled from India. •

•

Non Residents Non Residents are exempt from tax if accrue or arise or deemed to be accrue or arise outside India. Taxable if income is earned from business or profession setting in India or having their head office in India.[2][3] •

Heads of Income The total income of a person is divided into five heads, viz., taxable[4]:

Individual Heads of Income Income from Salary All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as: 1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills. 2. Transport allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as transport allowance. No bills are required for this amount. 3. Conveyance allowance:is tax exempt. 4. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax. 5. House rent allowance: the least of the following is available as deduction 1. Actual HRA received 2. 50%/40%(metro/non-metro) of basic 'salary' 3. Rent paid minus 10% of 'salary'. basic Salary for this purpose is basic+DA forming part+commission on sale on fixed rate. Income from salary is the least of all the above deductions. Income from House property Income from House property is computed by taking into account what is called Annual Value of the property. The annual value (in the case of a let out property) is the maximum of the following: • • •

Rent received Municipal Valuation Fair Rent (as determined by the I-T department)

If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct : • • •

30% of Net value as repair cost (This is a mandatory deduction) No other deduction avaliable Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits. The balance is added to taxable income. Income from Business or Profession

The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts. In summary, the sections relating to computation of business income can be grouped as under: 1. Deductible Expenses - Sections 30 to 38 [except 37(2)]. 2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C. 3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41. 4. Special Provisions - Sections 42 & 43D 5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA. The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.[5] If regular books of accounts are not maintained, then the computation would be as under: Income (including Deemed Incomes) chargeable as income under this head xxx Less: Expenses deductible (net of disallowances) under this head xxx Profits and Gains of Business or Profession xxx However, if regular books of accounts have been maintained and Profit and Loss Account has been prepared, then the computation would be as under: Net Profit as per Profit and Loss Account xxx Add : Inadmissible Expenses debited to Profit and Loss Account xxx Deemed Incomes not credited to Profit and Loss Account xxx xxx Less: Deductible Expenses not debited to Profit and Loss Account xxx Incomes chargeable under other heads credited to Profit & Loss A/c xxx xxx Profits and Gains of Business or Profession xxx Income from Capital Gains Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47. For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are: 1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been

deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid. 2. In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year. 3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%. All capital gains that are not long term are short term capital gains, which are taxed as such: Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr 2009-10 the tax rate is 15%. • In all other cases, it is part of gross total income and normal tax rate is applicable. •

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid). Income from Other Sources This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head. 1. 2. 3. 4. 5.

Income by way of Dividends Income from horse races Income from winning bull races Any amount received from key man insurance policy as donation. Income from shares (dividend otherthan Indian company)

Deduction While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments. Section 80C Deductions Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income up to the maximum of 1 lac. The total limit under this section is Rs. 100,000 ) which can be any combination of the below: Contribution to Provident Fund or Public Provident Fund. PPF provides 8.6% [6] return compounded annually. Maximum limit to contribute in it is 100,000 for each year. It is a long term investment with complete withdrawal not possible till 15 years though partial withdrawal is possible after 5 years. Besides, there is employee providend fund which is deducted from the salary of the person. This is about 10% to 12% of the BASIC salary component. Recent changes are being discussed regarding reducing the instances of withdrawal from EPF especially when one changes the job. EPF has the option of full settlement on leaving the job, taking VRS, retirement after 58. It also has options of withdrawal for certain expenses related to home, marriage or medical. EPF contribution includes 12% of basic salary from employee and employer. It is distributed in ratio of 8.33:3.67 in Pension fund and Providend fund • Payment of life insurance premium •

Investment in pension Plans. National Pension Scheme is meant to save money for the post retirement which invests money in different combination of equity and debt. depending upon age up to 50% can go in equity. Annuity payable after retirement is dependent upon age. NPS has six fund managers. Individual can make minimum contribution of Rs6000/- . It has 22 point of purchase (banks). • Investment in Equity Linked Savings schemes (ELSS) of mutual funds. Among other investment opportunities, ELSS has the least lock-in period of 3 years. However, one should note that after the Direct Tax Code is in place, ELSS will no longer be an investment for 80C deduction. • Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit) • Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable. • Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid. • Payments towards tuition fees for children to any school or college or university or similar institution (Only for 2 children). • Post office investments •

The investment can be from any source and not necessarily from income chargeable to tax. Section 80CCF: Investment in Infrastructure Bonds From April, 1 2011, a maximum of Rs. 20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the 100,000 deduction allowed under Section 80C. Section 80D: Medical Insurance Premiums Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 65 years during any part of the current fiscal, e.g. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm.. Interest on Housing Loans Section For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. This deduction is in addition to the deductions under sections 80C, 80CCF and 80D. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999. If the house is not occupied due to employment, the house will be considered self occupied. For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax. The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.[7]

Use of Deductions While the use of the above sections helps one to make savings for the long-term, one should look at this more as an investment-return opportunity. One should still file income tax return, even if one doesn't fall into the bracket of paying tax, if there are sources of income as defined by Income Tax rules. Except ELSS (Equity Linked Savings Scheme) and the NPS (National Pension Scheme), other schemes under 80C typically offer a relatively risk-free investment and guaranteed returns. Tax Rates In India, Individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income[8][9] From April 1, 2011 new tax slabs apply, which are as follows: No income tax is applicable on all income up to Rs. 1,80,000 per year. (Rs. 1,90,000 for women, Rs. 2,50,000 for senior citizens of 60 till 80 yrs (excluding 80) and Rs. 5,00,000 for very senior citizens of 80 yrs and above and must be resident of India) • From 1,80,001 to 5,00,000 : 10% of amount greater than Rs. 1,80,000 (Lower limit changes appropriately for women and senior citizens) • From 5,00,001 to 8,00,000 : 20% of amount greater than Rs. 5,00,000 + 32,000 ( Rs. 31,000 for women and Rs. 25,000 for senior citizens) •

Above 8,00,000 : 30% of amount greater than Rs. 8,00,000 + 92,000 ( Rs. 91,000 for women and Rs. 85,000 for senior citizens) •

Surcharge Surcharge has been abolished for personal income tax in the financial year 2009-10. A 7.5% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1 crore (Rs. 10 million) with effect from 1 June 2009 All taxes in India are subject to an education cess, which is 3% of the total tax payable. With effect from assessment year 2009-10, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of income tax. The education cess is mainly applicable on excise duty and service tax From income tax year 2010-11, education cess would be 3% and no surcharge would be levied. Tax Rate for non-Individuals There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.[10] Refund Status for Salaried tax payers The Income Tax Department has put on its website the list of income tax refunds of all salary tax payers which could not be sent to the concerned persons for want of correct address. (link to check refund)

Salary taxpayers who have not received refunds for assessment years 2003-04 to 2006-07 can click on the link below and query using the PAN number and assessment year whether any refund due to them has been returned undelivered. .[11] 123 Corporate Income tax For companies, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.[12] An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 32.5% for domestic companies and 41.2% for foreign companies. [13] From 2005-06, electronic filing of company returns is mandatory.[14] Tax Penalties The major number of penalties initiated every year as a ritual by I T Authorities is under section 271(1)(c)[15] which is for either concealment of income or for furnishing inaccurate particulars of income. "If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

Classification and Valuation under Central Excise Act and Rules 1. Introduction 1.1 The Central Excise duty (CENVAT) is chargeable at the rates specified in the schedule to the Central Excise Tariff Act, 1985. The said schedule is divided into 20 sections and 96 Chapters. There are no Chapters with numbers 1,6,10,12 and 77. As such effectively there are 91 Chapters. Each Chapter is further divided into headings and sub-headings. In order to determine the applicable rate of duty in respect of a particular item, the positioning of that item under a particular head or subhead is essential. The positioning of an item in the appropriate heading/sub-heading is called classification. The classification of an item is generally decided as per the commercial or trade parlance. However a deviation from this principle is made when the trade meaning or commercial nomenclature does not fit into the scheme of the statute. 2. Interpretative Rules for classification. 2.1 The Central Excise Tariff Act, 1985 incorporates five Rules of interpretation, which together provide necessary guidelines for classification of various products under the schedule. As regards the Interpretative Rules, the classification is to be first tested in the light of Rule 1. Only when it is not possible to resolve the issue byapplying this Rule, recourse is taken to Rules 2,3 & 4 in seriatim. The provision of the individual Rule is as follows: `Rule 1 declares that Section & Chapter titles are for ease of reference only. For legal purposes, the classification of goods are to be determined according to the terms of the headings and relevant Section or Chapter Notes. Assistance from subsequent provisions of the Interpretative Rules are to be sought only if the Section or Chapter notes do not otherwise require. Rule 2(a):-This rule provides for classification of an article referred to in a heading, even if that article is incomplete or unfinished, or is presented in an unassembled or disassembled form. An important condition to be satisfied for classification in this manner is that in its incomplete or unfinished state, the article has the essential character of the complete of finished article. Some of the important aspects which are relevant in this regard are functional aspect, physical aspect and the degree of completion of the product. Rule2(b):-This rule relates to mixture or combination of materials or substances, and goods consisting of two or more materials or substances. According to this rule headings in which there is a reference to materiel or substance also apply to that material or substance mixed or combined with other materials or substances. This rule does not apply where specific provisions exist in the headings or the sections or chapter notes excluding such classification. Rule 3 : This rule lays down three steps for classifying the goods which are, prima facie, classifiable under severalheadings including mixtures or combinations. The sequential order of the steps contemplated are -

(a) most specific description; (b) essential character; and (c) heading which occurs last in numerical order; This rule applies when goods are prima facie classifiable under two or more headings. In the first step, {Rule 3(a)) the general guidelines are that a description by name is more specific than the description by character and a description which identifies the goods clearly and precisely is more specific than the one which is less complete. The second step [Rule 3 (b)1 relates only to mixtures, composite goods consisting of different materials or components and goods put up in sets. This rule finds applicability if rule 3(a) does not help. In all such cases the goods are to be classified as if they consist of material or component which gives them their essential character. When goods cannot be classified with reference to Rules 3(a) and 3(b), they are to be classified in terms of Rule 3(c)- in the heading which occurs last in numerical order among those which equally merit consideration. This is a fall back provision for resolving the matter when no heading can be regarded as providing a more specific description than the others and when it is not possible to identify the material or component which gives the concerned goods their essential character. Rule-4:-When goods cannot be classified in accordance with rules 1,2, & 3, then they are to be classified in a heading of a product, which is most akin to the goods in question. Kinship can, of course, depend on many factors such as description, character, purpose etc. Rule-5:-This rule postulates that the classification of any product under a sub-heading is to be contemplated after the product concerned has been properly classified under its proper four digit Chapter heading. The classification in the sub-heading of a heading is determined mutatis mutandis in accordance with the principles applicable to classification in the four digit headings. 3. Powers of the C.B.E.C. to issue orders of classification of goods. 3.1 Section 37B of the Central Excise Act, 1944 empowers the Central Board of Excise & Customs to issue orders, instructions and directions, for the purpose of uniformity in the classification of goods or with respect to the levy of excise duties on such goods. VALUATION 1. Value under the Central Excise Act, 1944 1.1 Value of the excisable goods has to be necessarily determined when the rate of duty is on ad-valorem basis. Accordingly, tinder the -Central Excise Act, 1944 the following values are relevant for assessment of duty. Transaction value is the most commonly adopted method. (i) Transaction value under Section 4. (ii) Value determined on basis of maximum Retail Sale Price as per Section 4A, if applicable to a given commodity. (iii) Tariff value under Section 3, if applicable.

2. Transaction Value 2.1 Section 4 of the Central Excise Act, as substituted by section 94 of the Finance Act, 2000 (No.10 of 2000),came into force from the 1st day of July, 2000. This section contains the provision for determining the Transaction value of the goods for purpose of assessment of duty. 2.2 For applicability of transaction value in a given case, for assessment purposes, certain essential requirements should be satisfied. If any one of the said requirements is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at under the valuation rules notified for the purpose. The essential conditions for application of a Transaction value are: (i) The goods are sold by an assessee for delivery at the time of place of removal. The term "place of removal" has been defined basically to mean a factory or a warehouse, and will include a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearances from the factory. (ii) The assessee and the buyer of the goods are not related; and (iii) The price is the sole consideration for the sale. 2.3. The system of valuation, that was prevalent before 1.7.2000 was essentially based on the concept of 'Normal Wholesale Price, even though sales were effected at varying prices to different buyers or class of buyers from factory gate or Depots etc. The new Sec.4 introduced with effect from 1.7.2000 makes a fundamental departure from this system. 2.4 The new section 4 essentially seeks to accept different transaction values which may be charged by the assessee to different customers, for assessment purposes so long as these are based upon purely commercial consideration where buyer and the seller have no relationship and price is the sole consideration for sale. Thus, it enables valuation of goods for excise purposes on value charged as per commercial practices rather than looking for a notionally determined value. 2.5 Transaction value would include any amount which is paid or payable by the buyer to or on behalf of the assessee, on account of the factum of sale of goods. In other words, if, for example, an assessee recovers advertising charges or publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim that such charges are not to be included in the transaction value. The law recognizes such payment to be part of the transaction value, that is assessable value for those particular transactions. (1) As per the new Sec.4, transaction value shall include the following receipts / recoveries or charges, incurred or provided for in connection with the manufacturing, marketing, selling of the excisable goods: (a) Advertising or publicity; (b) Marketing and selling organization expenses; (c) Storage; (d) Outward handling; (e) Servicing, warranty; (f) Commission or (g) Any other matter.

The above list is not exhaustive and whatever elements which enrich the value of the goods before their marketing and were held by Hon'ble Supreme Court to be includible in "value" under the erstwhile section 4 would continue to form part of section 4 value even under new section 4 definition. (2) Thus if in addition to the amount charged as price from the buyer, the assessee recovers any other amount by reason of sale or in connection with sale, then such amount shall also form part of the transaction value. Where the assessee includes all their costs incurred in relation to manufacture and marketing while fixing price payable for the goods and bills and collects an all inclusive price –as happens in most cases where sales are to independent customers on commercial consideration the transaction price will generally be the assessable value. However, where the amount charged by an assessee does not reflect the true intrinsic value of goods marketed and total value split up into various elements like special packing charges, warranty charges, service charges etc. it has to be ensured that duty is paid on correct value. The following guidelines in this regard with reference to various receipts / recoveries in connection with the sale are issued: (i) Packing charges: Packing charges shall form part of the assessable value as it is a charge in connection with production and sale of the goods, recovered from the buyer. Under the erstwhile Sec.4, inclusion of cost of packing in the value was related to the nature of packing such as primary or secondary etc. Such issues are not relevant in the new SeT.4 and any charges recovered for packing, whether ordinary or special is includible in the transaction value if the same is not included in the price of the goods. In the case of reusable containers (glass bottles, crates etc.), normally the cost is amortized and included in the cost of the product itself. Therefore, the same is not required to be included in the value of the product unless it is found that the cost of reusable container has not been amortised and included in the value of the product. However, rental charges or cost of maintenance of reusable metal containers like gas cylinders etc. are to be included in the value since the amount has been charged by reason of, or in connection with the sale of goods. Similarly, cost of containers supplied by the buyer will be included in the transaction value of the goods, as the price will not be the sole consideration of the sale and the valuation would be governed by Rule 6 of the Valuation Rules, 2000. (ii) Warranty charges will form part of the transaction value irrespective of whether the warranty is optional or mandatory. (iii) Interest for delayed payments is a normal practice in industry. Interest under a financing arrangement entered between the assessee and the buyer relating to the purchase of excisable goods shall not be regarded as part of the assessable value provided that: (a) the interest charges are clearly distinguished from the price actually paid or payable for the goods; (b) the financing arrangement is made in writing; and (c) where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable. (iv) Discount of any type or description given on any normal price payable for any transaction will not form part of the transaction value for the goods, e.g. quantity discount for goods purchased or cash discount for the prompt payment etc. will therefore not form part of the transaction value: However. it is important to establish that the discount has actually been

passed on to the buyer of the goods. The differential discounts extended as per commercial considerations on different transactions to unrelated buyers if extended is also permissible and different actual prices paid or payable for various transactions are to be accepted. Where the assessee claims that the discount of any description for a transaction is not readily known but would be known only subsequently – as for example, year end discount – the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discount to the department and make a request for provisional assessment. (v) Taxes and duties: The definition of transaction value mentions that whatever amount is actually paid or actually payable to the Government or the relevant statutory authority by way of excise, sales tax and other taxes, such amount shall be excluded from the transaction value. If any excise duty or other tax is paid at a concessional rate for a particular transaction, the amount of excise duty or tax actually paid at the concessional rate shall only be allowed to be deducted from price. As per Board's Circular No.2/94-CX.1 dt.11.1.94 (F.No.6/20/94- CX.1) the sales tax set-off available in respect of inputs is to be ignored while computing the sales tax payable. The Circular dt.11th Jan.1994 was based on the definition of 'duty of excise payable' given in Explanation to the erstwhile Sec.4(4)(d)(ii). The new sec.4 does not incorporate any such Explanation. The "transaction value" will exclude the sales tax actually paid or payable on the goods.. Thus, for example, if the effective sales tax on cum-duty price of Rs.100 is 4% and the assessee is eligible for set-off of sales tax of, say, Rs.10 paid/suffered on the inputs, the actual sales tax paid/payable would be Rs.40-10 = Rs.30 and this will be the amount permissible as deduction from the "transaction value" and not Rs.40/-. State Governments permit deferment of payment of Sales tax for particular period as an incentive. Sales tax is deductible from the wholesale price for determination of assessable value for levy of Central Excise duty even though it may not be deposited immediately with the State Government. Where sales tax is so retained by the assessee, the interest on the money retained, need not be treated as additional consideration in terms of Rule 6 of Central Excise (Valuation) Rules, 2000. As per Rule 5 of the earlier Valuation Rules, 1975 & Rule 6 of Central Excise Valuation {Determination of price of Excisable goods) Rules, 2000, "Additional consideration" should flow directly or indirectly from the buyer to the seller. Therefore interest earned, on deferred sales tax by the manufacturer is not a benefit extended by the buyer to the seller but is an incentive, accruing in pursuance of State Government policy and hence cannot be treated as "additional consideration" under the Central Excise Valuation Rules. (Circular No 679/70 /2002-CX 4th December, 2002 The total amount received by a manufacturer will be deemed to be the, price-cum-duty and the assessable value should be determined accordingly subject to exclusion of sales tax or other taxes. Similar will be the position when additional considerations are received. (Finance Act, 2003) (vi) Erection, installation and commissioning charges: If the final product is not excisable, the question of including these charges in the assessable value of the product does not arise. As for example, since a Steel Plant, as a whole, is an immovable property and therefore not excisable, no duty would be payable on the cost of erection, installation and commissioning of the steel plant. Similarly, if a machine is cleared from a factory on payment of appropriate duty and later on taken to the premises of the buyer for installation/erection and

commissioning into an immovable property, no further duty would be payable. On the other hand if parts/components of a generator are brought to a site and the generator erected/installed and commissioned at the site then, the generator being an excisable commodity, the cost of erection, installation and commissioning charges would be included in its assessable value. In other words if the expenditure on erection, installation and commissioning has been incurred to bring into existence any excisable goods, these charges would be included in the assessable value of the goods. If these costs are incurred to bring into existence some immovable property, they will not be included in the assessable value of such resultant property.[Refer Board's 37B Order No 58/1/2002 – CX dt 15.1.2002] 2.6 Prior to Budget 2003, the term “place of removal” was defined in the same manner as was defined in the erstwhile section 4 prior to its amendment in 1996 i.e. the factory or warehouse. The definition has since been amended to include the depot, premises of consignment agent and any other place to which the goods are removed before sale. In this connection, the Board had issued an order under Sec. 378 (No. 59/1/2003-CX. Dated 3.3.2003) clarifying the position. 2.7 However, ‘time of removal’ in case of excisable goods removed from the place of removal is deemed to be the time of clearance of such goods from the ‘factory’. If, therefore, the assessable value is with reference to delivery at the ‘time and place of removal’, transaction value will be the assessable value. 3. Valuation Rules 3.1 In those cases where any of the three requirements mentioned in para 2 above is missing, (i.e. sale for delivery at the time and place of removal, assessee and buyer are not related and price is the sole consideration) the assessable value shall be determined on the basis of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 notified under Section 4(1)(b) by notification No. 45/2000-CE (NT), dated 30.6.2000. 3.2 Salient features of the new valuation rules are mentioned below: (i) If the assessee and the buyer are not related persons and the price is also the sole consideration for sale but only the delivery of goods is made by the assessee at a place other than the factory/warehouse, the provisions of Rule 5 shall apply. In such cases, the assessable value shall be the “transaction value” without the addition of the cost of transportation from the place of removal (factory/warehouse/depot etc.) upto the place of delivery. For the period prior to 1.3.2003, exclusion of cost of transportation is allowed only for the actual cost of transportation and only if the assessee has shown the same separately in the invoice. After 1.3.2003, ‘cost of transportation’ includes 1. the actual cost of transportation; and 2. where freight is averaged, the cost of transportation calculated in accordance with generally accepted principles of costing. Thus, ‘cost of transportation’ can be excluded even where freight is averaged and also there is no condition that the ‘cost of transportation’ should be shown separately in the invoice. However exclusion of the cost of transportation from the factory to the place of removal, where the factory is not th6 place of removal, shall not be permissible. The cost of transportation will include the cost of insurance also during the transportation of the goods. (ii) If the goods are not sold at the factory gate or at the warehouse but they are transferred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goods cleared from

factory/warehouse shall be the ‘normal transaction value’ of such goods at the depot, etc. at or about the same time on which the goods as being valued are removed from the factory or warehouse (Rule 7.L The expression “Normal transaction value” as defined in the valuation rules basically means the transaction value at which the greatest aggregate quantity of goods from the depots etc. are sold at or about the time of removal of the goods being cleared from the factory/warehouse. The time period for ascertaining the `normal transaction value’ o greatest aggregate quantity’ should be taken as the whole day and the transaction value of the “greatest aggregate quantity” would refer to the price at which the largest quantity of identical goods are sold on a particular day, irrespective of the number of buyers. lf, however, the identical goods are not sold by the assessee from depot/consignment agent’s place on the date of removal from the factory/warehouse, the nearest date on which such goods were sold or would be sold shall be taken into account. In either case ifthere -are series-of sales at or about the same time, the normal transaction value for sale to independent buyers will have to be determined and taken as basis for valuation of goods at the time of removal from factory/warehouse. It follows from the Valuation Rules that in such categories of cases also if the price charged is with reference to delivery at a place other than the depot, etc. then the actual cost of transportation will not be taken to be a part of the transaction value and exclusion of such cost allowed on similar lines as discussed earlier, when sales are effected from factory gate/warehouse. (iii) In cases where price is not the sole consideration for the sale, but the other requirements of clause (a) of sub-section (1) of section 4 of the Central Excise Act are satisfied, the value shall be determined in accordance with the provisions of Rule 6 of the valuation rules. This provides for adding to the transaction value the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. Such additional consideration would include the money value of goods and services provided free or at reduced cost by or on behalf of the buyer to the assessee. The ‘goods and services’ whose value is to be added to the value includes materials including packing materials, components, moulds, tools, dies, drawings, engineering, development, art work, plans and sketches etc. However, where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advances will be added to value unless it is evidenced that the advance has influenced the fixation of sale price by way of charging a lesser price from or offering a special discount to the buyer who has made the advance deposit. An Explanation has been added in the rule from 1.3.2003 only to remove any doubts with respect to its scope. Advertisement and publicity charges borne by the dealers/buyers are to be included in the assessable value. Even where the dealings are on principal to principal basis but .there is an agreement either written or oral that the buyer will incur certain expenditure for advertising the goods Of the assessee, the cost of such advertisement and publicity will be added to the price of the goods to determine the assessable value. In such cases since price would not be so/9, consideration for sale, the transaction value would be covecl3citft’ 6 of the Valuation Rules Court judgments delivered on this issue under the earlier Section 4, or the Rules made there under, will not apply w.e.f. 1.7.2000, in view of the definition of “transaction value” However, where the brand name/copyright owner gets his goods manufactured from outside (on job-work or otherwise), the expenditure incurred by the brand name/copyright owner on advertisement and publicity ‘charges, in respect of the- saidgoods, will not be added to the assessable value, as such expenditure is not incurred on behalf of the manufacturer (assessee). [Also refer Board's Circular 619/10/2002 CX dt 19.2.2002] ]

After sales service and pre delivery inspection (PDI) charges After sales service and pre delivery inspection (PDI) are services provided free by the dealer on behalf of the assessee and the cost towards this is included in the dealer’s margin (or reimbursed to him). This is one of the considerations for sale of the goods (motor vehicles, consumer items etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of Advertisement and Publicity charges. That is, in such cases the after sales service charges and PD1 charges will be included in the assessable value after 1.7.2000, as the judgements of the Apex Court to the contrary were issued in the context of the erstwhile Sec.4 and the Valuation Rules, 1975. The value of these charges are however not includible for transactions relating to the period before 1.7.2000. (Board’s Circular No.681/72/2002CX dated 12.12.2002 & ) (iv)The value of goods which are consumed by the assessee or on his behalf in the manufacture of other articles will be on Cost construction method only (Rule 8). The assessable value of captively consumed goods will be taken at 110% (substituted by 60/2003 (N. T.) 5.10.2003 —prior to that it was 115%) of the cost of manufacture of goods even if identical or comparable goods are manufactured and sold by the same assessee as there have been disputes in adopting values of comparable goods. The concept of deemed profit for notional purposes has also been done away with and a margin of 10% by way of profit etc. is prescribed in the rule itself for ease of assessment of goods used for captive consumption. The cost of production of captively consumed goods will be done strictly in accordance with CAS- 4. Copies of CAS-4 may be obtained from the local Chapter of /CWAI. (Ruth: Circular No. 692/08/2003-CX. dated 13.2.2003). Where goods are transferred to a sister unit or another unit of the same company valuation will be done as per the proviso to rule 9. Valuation of Samples: Since the goods are not sold section 4(1)(a) will not apply and recourse will have to be taken to the Valuation Rules. No specific rule covers such a contingency. Except rule 8 all the other rules cover contingencies where sale is involved in some form or the other. Therefore, the residuary rule 11 will have to be adopted along with the spirit of rule 8. In other words, the assessable value would be 110% of the ‘cost of production or manufacture’ of the goods. (v)Where goods are sold through related persons, the transaction value is not applicable and the assessable value shall be the value at which the-related-person- sells the goods (Rule 9). If-the related- person (foes not sell the goods but uses them in manufacture of other articles, the value shall be 110% of the cost of production. For the purposes of Rule 9, related person means: 1. relatives; 2. buyer is a relative and distributor of the assessee or sub-distributor of such distributor or 3. persons having interest, directly or indirectly, in the business of each other. Similarly, where goods are sold through an inter-connected undertaking, the value at which the goods are sold by such interconnected undertaking shall be the assessable value (Rule 10). However, for such valuation the inter-connected undertaking should also be related in any of the manner described above (Rule 9). If such relationship is absent, ‘Transaction value’ shall be the basis of valuation for sales through inter-connected undertakings

For the purposes of valuation, ‘inter-connected undertakings’ shall have the meaning assigned to it in clause (g) of Sec.2 of the `Monopolies & Restrictive Trade Practices Act, 1969′ and ‘relative’ shall have the meaning assigned to in clause (41) of Sec.2 of the Companies Act, 1956. The relevant extracts of the two Acts are reproduced herein : As per Monopolies & Restrictive Trade Practices Act, 1969 (Extracts) the “Inter-connected undertakings” means two or more undertakings which are inter-connected with each other in any of the following manner, namely :(i) if one owns or controls the other; (ii) where the undertakings are owned by firms, if such firms have one or more common partners; (iii) where the undertakings are owned by bodies corporate, (a) if one body corporate manages the other body corporate, Or (b) if one body corporate is a subsidiary of the other body corporate, or (c) if the bodies corporate are under the same management, or (d) if one body corporate exercises control over the other body corporate in any other manner;] (iv) where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more pal tners of the firm, (a) hold, directly or indirectly not less than fifty per cent of the shares, whether preference or equity, of the body corporate; or (b) exercise control, directly, or indirectly, whether as director or otherwise, over the body corporate. (v) one is owned by a body corporate and the other is owned by a firm having bodies corporate as its partners, if such bodies corporate are under the same management; (vi)if the undertaking are owned or controlled by the same person of the same group; (vii)if one is connected with the other either directly or through any number of undertakings which are inter-connected undertakings within the meaning of one or more of the forgoing sub-clauses. Explanation I.- For the purpose of this Act, two bodies corporate shall be deemed to be under the same management, (i) if one such body corporate exercises control over the other or both are under the control of the same group or any of the constituents of the same group ; or (ii) if the managing director or manger of one such body corporate is there managing director or manager of the other; or (iii) if one such body corporate holds not less than one-third of the equity shares in the other or controls the composition of not less than one-third of the total membership of the board of directors of the other; or

(iv) if one or more directors or one such body corporate constitute, or at any time within a period of six months immediately preceding the day when the question arises as to whether such bodies corporate are under the same management constituted, whether independently or together with relatives of such directors of the employees of the first mentioned body corporate one fourth of the directors of the other; or (v) if the same individual or individuals belonging to a group, while holding, whether by themselves or together with their relatives not less than one fourth of the equit, shares in one such body corporate also hold, whether by themselves oar together with their relatives not less than, one-fourth of the equity shares in the other ; (vi) if the same body corporate or bodies corporate belonging to a group holding, whether independently or along with its or their subsidiary or not less than one-fourth of the equity shares in one body corporate, also hold not less than, one fourth of the equity shares in the other; or {vii) if -not tess-ttian-, one-fourth of the total voting power in relation to each of the two bodies corporate is exercised or controlled by the same individual whether independently or together with his relatives or the same body corporate, whether independently or together with its subsidiaries; or (viii) if not less than one-fourth of the total voting power in relation to each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group or by the same bodies corporate belonging to a group, or jointly by such individual or individuals and one or more of such bodies corporate; or (ix) if the directors of the one such body corporate are accustomed to act in accordance with the directions or instructions of one or more of the directors of the other or if the directors of both the bodies corporate are accustomed to act in accordance with the directions or instructions of an individual, whether belonging to a group or not. Explanation II. – If a group exercises control over a body corporate, that body corporate and every other body corporate, which is constituent of, or controlled by, the group shall be deemed to be under the same management. Explanation III. – If two or more bodies corporate under the same management hold, in the aggregate, not less than onefourth equity share capital in any other body corporate, such other body corporate shall be deemed to be under the same management as the first-mentioned bodies corporate. Explanation IV. – In determining whether or not two or more bodies corporate are under the same management, the shares held by financial institutions in such bodies corporate shall not be taken into account. Illustration Undertaking B is inter-connected with undertaking A and undertaking C is inter-connected with undertaking B. Undertaking C is inter-connected with undertaking A; if undertaking D is inter-connected with undertaking C, undertaking D will be interconnected with undertaking B and consequently with undertaking A; and so on. As per Companies Act, 196 (Extracts [Act No, 1 of 19561 the Meaning of "relative".- A person shall be deer led to be a relative of other if, and only if, (a) they are members of a Hindu Undivided family; or

(b) they are husband and wife; or ( c) the one is related to the other in the manner as indicated in the following list. List of Relatives 1. Father 2. Mother (including step-mother) 3. Sons (including step-son) 4. Son's wife 5. Daughter (including step-daughter) 6. Father's father 7. Father's mother 8. Mother's mother 10. Son's son 9. Mother's father 11. Son's son's wife 12. Son's daughter 13. Son's daughter's husband 14. Daughter's husband 15. Daughter's son 16. Daughter's son's wife. 17. Daughter's daughter 18. Daughter's daughter's husband 19. Brother (including step-brother) 20. Brother's wife 21. Sister (including step-sister) 22. Sister's husband

Where goods are sold partly to related persons and partly to independent buyers, there is no specific rule covering such a contingency. Transaction value in respect of sales to unrelated buyers cannot be adopted for sales to related buyers since as per section 4(1) transaction value is to be determined for each removal. For sales to unrelated buyers valuation will be done as per section 4(1)(a) and for sale of the same goods to related buyers recourse will have to be taken to the residuary rule 11 read with rule 9 (or 10). Rule 9 cannot be applied in such cases directly since it covers only those cases where all the sales are to be related to buyers only. 3.3. Some important circulars issued on Valuation covering specific situations are reproduced for reference: (i) Valuation of goods manufactured on lob-work basis: (Circular No.619/10/2002-CX 19th February, 2002) Under the provisions of the earlier section 4 and the Rules made thereunder this matter has been finally decided by the Apex Court in the case of Ujagar Print Ltd41989(039)ELT0493(SCIand the case of Pawan Biscuits Co. Pvt Ltd [2000(120)ELT0024(SC)]. It was clearly held that liv-raspect of goods manufactured on job-work basis, assessable value would be the job charges (including the profit of the job-worker if not already included in the job-charges) plus the cost of the materials used in the manufacture of the item (including the cost of the materials supplied free of cost to the job-worker). The assessable value in such cases will not include the profit or the expenses (like advertisement and publicity, overheads etc) incurred by the buyer (or the supplier of the raw materials), where the dealing between the two are on principal to principal basis. The mere fact that the buyer is supplying some raw materials free of cost to the job-worker, will not be sufficient ground to contend that the dealings between the two are not at arms length. Goods manufactured on job-work were earlier assessed under the residuary Rule 7 of the erstwhile valuation Rules of 1975 read with rule 6(b) read with the Apex Court decisions referred to above. Under the new valuation provisions, introduced with effect from 1.7.2000, there is no departure from the principles laid down by the Apex Court in the above two decisions, in respect of goods manufactured on job-work basis. In other words goods manufactured on job-work basis after 1.7.2000 will continue to be valued in the same manner as they were being valued before 1.7.2000. Since the buyer (raw-material supplier) supplies some items free of cost, price is not the sole consideration for the transaction between the copyright owner and the job-worker. Therefore, after 1.7.2000, in respect of goods manufactured on job-work basis, valuation would be governed by Rule 11 of the new valuation Rules of 2000 read with rule 6 read with the above two decisions of the Apex Court. As for example, problems have been reported in the case of recorded CD(Compact Disc) manufactured on job-work basis. The practice in most cases in the CD industry is that a music or a film company acquires the copyright of some songs or movie on payment of a lump sum amount of royalty to the artiste/producer and sends the master copy of the musical score or movie either in the form of a digital audio tape (DAT) or a cinematograph reel or a CD to a job-worker for making CDs on payment of job charges. The job worker is provided, in most cases, the inlay cards, jackets and the jewel box (plastic cover) to pack the CDs and return the same to the copyright owner. The -Copyright owner then -sells the CDs in the wholesale market through its dealers, distributors or consignment agents. The copyright is perpetual in nature and the copyright owner can give repeat orders to the job worker. Thus even if the cost of obtaining the copyright is known, problems arise in apportioning this cost the CDs manufactured on job work because it is not possible to ascertain the number of CDs which

would get manufactured over a period of time (which may extend to even 20 or 30 years). Further, the copyright acquired covers audio cassettes also. The expenses incurred by the copyright owner towards advertisements and overheads cannot be included in the assessable value of the CDs since the job worker (manufacturer) has no connection with these expenses and these costs are not incurred at the instance or on behalf of the -nrarTufacturer -(fCb- workeiAT Since the job-worker receives some items free of cost from the copyright owner, price is not the sole consideration for the transaction between the copyright owner and the jobworker. Therefore, resort will have to be taken to the Central Excise Valuation Rules. No specific rule covers such a contingency. Resort will therefore have to be taken to rule 11 of the valuation rules read with rule 6, read with the Apex Court decisions cited above. The money value of the additional consideration will have to be added to the job-charges. The cost elements which have to be included are the cost of the items supplied free by the music company to the job worker, namely inlay cards, jackets, jewel boxes and the DAT/disc. The DAT/discs contains the original recorded music/movie. Its cost would include the royalty amount paid/payable by the music company for acquiring exclusive rights for the music/movie and the cost incurred in getting the original score recorded in a studio (if this has been incurred by the copyright owner). In such cases the most reasonable method would be to ascertain the royalty amount and studio hire charges contained in the wholesale price of the CDs at which the copy right owner sells, to its dealers, at arms length. This could be done by determining the royalty amount plus the studio hire charges as a percentage of the net sale value (gross: sale minus central excise duty element) of the music company or copyright owner in respect of the recorded media. In case the company also sells audio cassettes of the same music, there would be no need to break up the sale value. for CD’s and cassettes separately for determining the percentage since the royalty amount would cover rights for both. The figures of net sales and royalty payments are normally available in the balance sheets of these companies. This percentage will be used to determine the element of royalty cost attributable to each CD. Duty will have to be paid by the job-worker on the royalty amount also. As an illustration, if the ratio of the royalty amount plus studio hire charges, to net sales of a music company is, say, 9.41% and the whole sale price of a recorded CD of the music company is, say, Rs 100/- and the job-charges charged by the job-worker is Rs 25/-, then the value on which duty will have to be paid by the job-worker would be Rs 25 + 9.41% of Rs 100 = Rs 25 + Rs 9.41= Rs 34.41. In case the music company has also supplied to the job worker, free of cost, inlay cards, jackets, jewel box or any other material/input, their cost should also be added to the job-charges. If the job worker has purchased some raw materials (e.g. poly carbonate) or inputs, their value will also be added. For this it will be necessary for the Music Company to supply to the job-worker the data relating to royalty payment and the wholesale price of each CD, the cost of the inlay cards jacket, jewel box and other material supplied free of cost. Since net sales value and total royalty payment for the current year will not be available with the music company, duty should be determined on the basis of figures for the previous year. Till the figures for the previous year are provided assessments should be done provisionally. Assessments should be finalized immediately after the figures for the previous year are made available.

Care should be taken to ascertain the correct amount of expenditure involved in a year on royalty/copyright. Some companies capitalize part of this amount and the expenditure may also be reflected under the head “assets”. In that case depreciation taken/shown during the relevant year under this head would be added to the expenditure incurred on royalty/copyright during the said year. Some companies sell part of their acquired copyrights to other companies and the income on this may be shown under the head license fees. In that case total expenditure on royalty/copyright during a year would be the gross amount spent under this head in a year minus the amount received for sale of part of the rights during the same year. (ii) Circular No. 644/35/2002-CX 12th July, 2002. Doubts have been raised regarding the valuation of computer systems sold along with software. The software can be of two types. One is the ‘systems software’ or ‘operating software’ which is designed to control the operation of the computer system. The other software is the application software which is developed for specified applications only. There is also 8 third category of software, called the “firm software” or “basic software” which is generally burnt into the hardware itself. The “basic software” enables a computer to read into itself from peripheral devices and includes vocabulary of basic. instructions such as add, subtract, increment, document, etc. So far as the period prior to 1.7.2000 is concerned, the Supreme Court has clearly held, in the case of PSI Data System Ltd. Vs. CCE [1997(89)ELT3(SC)j that the value of computers under heading 84.71 of the Central Excise Tariff, will not include the value of the software supplied, in the form of floppies, discs, tapes, along with the computer. The question whether the software etched on the hard disc of the computer would form a part of the assessable value of the Computer or not, was not decided by the Apex Court in this case since this aspect`had already been accepted by the appellants i.e. PSI Data Systems Ltd. (reference paras 2 & 11 of the judgment). However, by implication it can be said that the Supreme Court approved the inclusion of the etched software in the value of the computer system (the Head Notes of this judgment brought out in the above citation does not bring out the gist of the judgment correctly as the Head Notes make an assertion which is not found anywhere in the judgment, that the cost of firm software etched into the computer is also not includible in the value of the computer). It may be noted that in para 3 of the judgment, the Apex Court has clarified that the term ‘software’ used in the judgment refers to tangible software only in the nature of discs, floppies and CD Roms. The Apex Court did not discuss cases where computers were cleared loaded with any software, other than “firm software As ne’ Centr9′ Excise Law, valuation of goods is to be done in the form in which it is cleared. It, therefore, emerges that for the period prior to 1.7.2000 computer systems will be valued by including the value of the software already etched or burnt or loaded on the hard disc of the system. No distinction should be made between an ‘operating software’ or an ‘application software’ in this regard. If the computer is sold loaded with a software, the value of the software-will-be-included in the value of the =Muter. Any floppy, disc or tape containing any software supplied along with the computer system will, however, be assessed separately. The introduction of the “transaction value” concept w.e.f. 1.7.2000 does not effect this basic principle. In other words, for the period 1.7.2000 onwards also the same system of valuation of computer system is to be adopted so far as inclusion (or exclusion) of software is concerned. (iii) Circular No. 671 /62/2002-CX. Dated 9.10.2002: It is clarified that ‘Dharmada’ collected by the assessee from the buyers is includible in the assessable value of the goods. It is observed that assessees charge and collect sales tax from their buyers at rates notified by the State Government for different commodities. For manufacture of excisable goods, assessees procure raw materials, in some States, by paying

sales tax/purchase tax on them (in some States, like New Delhi, raw materials are purchased against forms ST-1/ST-35 without .paying any tax). While depositing sales tax with the Sales Tax Department (on a monthly or quarterly basis), the assessee deposits only the net amount of sales tax after deducting set-off/rebate admissible, either in full or in part, on the sales tax/purchase tax paid on the raw materials during the said month/quarter. The sales tax set-off in such cases, therefore, does not work like the central excise set-off notifications where one-to-one relationship is to be established between the finished product and the raw materials and the assessee is allowed to charge only the net central excise duty from the buyer in the invoice. The difference between the set-off operating in respect of central excise duty and that for sales tax can be best illustrated through an example. If the sales tax on a product ‘A’ of value Rs.100/- is, say, 5% and the set off available in respect of the purchase tax/sales tax paid on inputs going into the manufacture of the product is, say, Rs.1/-, then the sales tax law permits the assessee to recover sales tax of Rs.5/- . But, while paying to the sales tax department he deposits an amount of Rs.5-1= Rs 4 only. On the central excise side, under similar circumstances, the central excise duty payable would have been Rs.5-1 =Rs 4, in view of the set-off notification, and the assessee would recover an amount of Rs 4 only from the buyer as Central excise duty. Thus, it is seen that the set-off scheme in respect of sales tax operates in these cases somewhat like the CENVAT scheme which does not have the effect of changing the rate of duty payable on the finished product. Therefore, since the set-off scheme of sales tax does not change the rate of sales tax payable/chargeable on the finished goods, the set-off is not to be taken into account for calculating the amount of sales tax permissible as abatement for arriving at the assessable value ln, other words only that amount of sales tax will be permissible as deduction under section 4 as is equal to the amount legally permissible under the local sales tax laws to be charged/billed from the customer/buyer. In case some States require the set-off to be adjusted consignment-wise, (on the lines of set-off notifications on the central excise side) the net sales tax (i.e. the amount permissible to be billed) will on1T be eligible for abatement. 4. Valuation of Petroleum Products 4.1, Omitted 5. Tariff Value 5.1 For certain items the Government may fix a tariff value as per provisions of Section 3(2) of the Central Excise Act, 1944. In such cases the assessment of duty shall be on the basis of the tariff value. As on date Tariff Value has been fixed for Pan Masala (Ch.2106) in retail packages (not exceeding two grams, two grams to four grams and four grams to ten grams) vide Notification No.16/98-CE (NT) dated 2.6.98, as amended and for Articles of apparel falling under sub-heading No.6101.00 or 6201.00 vide Notification No.20/2001-CE (NT) dated 30.4.2001, as amended. 5.2. Clarification issued on Levy of excise duty on readymade garments on the basis of Retail Sale Price (RSP) vide Circular No.737/53/2003-CX. 19th August, 2003) Doubts have been raised as to whether readymade garments should be assessed to duty on the basis of RSP or on the basis of transaction value. The provisions of Section 4A do no apply to the readymade garments, as they have not been notified under that section. But under notification No. 20/2001-C.E. (N.T.) dated 30.4.2001, tariff value (at the rate of 60% of the retail sale price declared or required to be declared) was fixed on readymade garments and other articles of apparel. Vide Board’s

letter F. No. B.3/4/2003, dated 01.04.2003, it was clarified that for valuation, the provision of section 4 i.e. transaction value, would apply in case the RSP is not required to be declared and is not declared. Section 39 of the Standards of Weights & Measures Act, 1976 applies to commodities, which are cleared, sold, distributed etc. in packed condition. In terms of Rule 1 (I) of the Standards of Weights & Measures (Package Commodity) Rules, 1977, a ‘pre-packaged commodity’ means a commodity, which, without the purchaser being present, is placed in a package so that the quantity of goods contained therein, has a pre-determined value and such value cannot be altered without opening the package. Further, in terms of the said Rules, the term ‘package’ is to be construed as package containing such pre-packed commodity. Therefore, only when such pre-packed commodities are sold in retail packages, the provisions of Standards of Weights & Measures Act and rules regarding declaration of the retail sale price (and consequently valuation of the goods based on such RSP) arises. Many a times garments are cleared in bulk where the manufacturer neither packs _the same nor-declares-the retail sale price therein. Such garments are ultimately displayed in the retailer’s outlets, which may or may not attach a price tag thereto. Some times the dealer/retailer packs, re-packs, labels or re-labels the goods, which may result in such goods fall within the purview of Standards of Weights and Measures (Packaged Commodity) Rules. However, in such cases central excise valuation is not important, as such activities undertaken on duty paid goods are fully exempt vide notification No. 38/2003-CE dated 30.04.2003. Thus, it is clear that in such cases, the manufacturer of the garments is under no legal obligations to declare the retail sale price while clearing the garments from his factory in bulk and in unpacked condition. 6. Value on basis of Maximum Retail Sale Price 6.1 The value is based on maximum retail sale price in terms of Section 4A of the Central Excise Act, 1944. This is applicable to notified commodities. The notification issued in this regard indicates the extent of abatement to be allowed for arriving at the assessable value for determination of amount of duty. Where any goods specified under notification issued under Section 4A are excisable goods and the manufacturer (a) removes such goods from the place of manufacture, without declaring the retail sale price of such goods on the packages or declares a retail sale price which is not the retail sale price as required to be declared under the provisions of the Act, rules or other law as referred to in Section 4A(1); or (b) tampers with, obliterates or alters the retail sale price declared on the package of such goods after their removal from the place of manufacture, then, such goods shall be liable to confiscation and the retail sale price of such goods shall be ascertained in the prescribed manner and such price shall be deemed to be the retail sale price for the purpose of Section 4 A . “Retail Sale Price” means the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight , transport charges, commission payment to dealers, and all charges towards advertisement, delivery . packing forwarding and the like and the price is sole consideration for the sale. In case the retail sale price is shown on the package excluding any taxes, local or otherwise the retail price shall be construed accordingly. Where on the package of any excisable goods more than one retail sale price is declared , the maximum of such retail sale price shall be deemed to -be -the retail-sale price -declared on the packagao-f any excisable goods at the time of its

clearance from the place of manufacture, is altered to increase the retail sale price, such altered retail sale price shall be deemed to be the retail sale price, Where different retail sale prices are declared on different packages for the sale of any excisable goods in packaged form in different areas, each such retail sale price shall be the retail sale price for the purposes of valuation of the excisable goods intended to be sold in the area to which the retail sale price relates. 6.2 Certain Clarifications regarding Section 4A of the Central Excise Act. (a) In respect of commodities notified under Section 4A of the Central Excise Act, 1944 goods are sold only against refundable deposits or against deposit of an empty bottle, container or jar. As for example in the case of sale of soft drinks the soft drink bottle is being sold at the printed MRP only if the buyer leaves some cash deposit for safe return of the bottle or he deposits before hand an empty bottle of the particular brand. Similar cases have been reported in respect of sale of mineral water. In such instances, it can be said that the MRP is not the sole consideration for sale and, therefore, the cash value of the additional consideration (the cash deposit or deposit of the empty bottle) has to be added to the MRP and the assessable value re-determined for payment of duty. If the cost of reusable containers (glass bottles, crates, etc) is amortised and included in the cost of the product itself, the question of adding any further amount towards this account does not arise, except where audit of accounts reveals that the cost of the reusable container has not been amortised and included in the value of product. Clarification issued vide Serial No.4 of Board’s Circular No.643/34/2002-CX dated 1.7.2002 will apply to goods assessed under Section 4A also. Circular No. 697/13/2003-CX 27th February, 2003 (b) In cases where the MRP on a retail package is scored out, (even if it remains visible) and another MRP printed on the package, it could not be said that the package has two MRPs printed on it, since the scored out MRP could not be considered as an MRP either by the seller or by the consumer. Hence the scored out MRP is to be ignored. Circular No 673164/2002-CX. 28th Oct, 2002 (c) For valuing multi-piece packages consisting of 2 or more consumer items of the same kind, with MRP printed both on the individual items and the multi-pack it is clarified that (I) if the individual items comprising the multi-pack have clear markings that they are not to be sold separately or are packed in such a way that they cannot be sold separately, then the MRP indicated on the multi-pack would be considered for payment of duty u/s. 4A. (II) if the itidiVidual items do not contain any such inscription that they are not be sold separately) and are capable of being sold separately at the MRP printed on the individual pieces, then the aggregate of the MRP’s of the pieces comprising the multi-pack would be considered for payment of duty on the multi-pack under section 4A. This clause will apply to only those multi-packs where the MRPs, both on the multi-pack and each of the individual items comprising the multi-pack, are clearly visible (e.g. soaps, powders, tooth pastes etc.). Only then can Explanation 2 (a) to section 4A apply. (III) if the individual items have MRP’s printed on them but are scored out, then the MRP printed on the multi-pack will be taken for purposes of valuation under section 4A.

(IV) if an individual item is supplied free in the multi-pack and has no MRP printed on it, the MRP printed on the multi-pack will be taken for purposes of valuation under section 4A. “Multi-piece package” has been defined in Rule 2(j) of “The Standards of Weights and Measures (Packaged Commodities) Rules, 1977″. Rule 17 of the said Rules mentions the additional declaration required to be made on multi- piece packages. Circular No 673/64/2002-CX. 28th Oct, 2002 (d) There are instances where commodities notified under Sec.4A are partly sold with the retail price printed on the packages and partly sold without printing the retail prices on the other packages. Some of the situations, where MRP cannot be printed on the notified item, are mentioned below: 1. Bulk Supplies for personal as well as industrial use 2. Supplies in bulk against contracts to DGS&D, Govt. Departments., restaurants/hotels etc 3. Supplies to canteen stores depots (CSD) of the defense services 4. Items supplied free with another consumer items as marketing strategy. Example, one soap free with one box of Detergent. 5. Items supplied free as marketing strategy or for gauging the market response. Example physician samples, bubble gums etc 6. Items meant for export, etc. Sec.4A of the Central Excise Act, 1944 is applicable in respect of those cases only where the manufacturer is legally obliged to print the MRP on the packages of the goods, under the provisions of the Standards of Weights and Measures Act, 1976 or the rules made there under or any other law for the time being in force. In respect of telephones falling under heading 85.17 and notified urs 4A, the manufacturers also make bulk supplies of telephone instruments to the Department of Telecommunication (DOT) and the MTNL, who in turn provide these instruments, on rental basis, to the telephone subscribers. The ownership of the telephone instruments remains with the telephone Department and there is, therefore, no retail sale involved. The manufacturers also sell the instruments in the open market on which MRP is printed. The issue, therefore, was how to value the telephone sets which were sold by the manufacturer in bulk to the telephone department The matter was referred to the Ministry of Law, who have opined that valuation of telephone instruments supplied in bulk to telephone department will be done as per sec.4 of the C.E. Act, 1944 and the instruments sold in the market, with printed MRP, would be assessed u/s 4A of the Act. The Ministry has accepted the opinion of the Law Ministry. The basic issue, therefore, is to determine the circumstances in which sec.4A of the C.E. Act can be applied. The wording of Sec.4A(1) makes it very clear that it will apply only to such goods ” in relation to which it is required, under the provisions of the Standards ofWeights and Measures Act,1976, or the rules made there under or under any other law for the time being in force, to declare on the package thereof the retail sale price of such goods….”. In other words, if there is no statutory requirement under the provisions of Weights and Measures Act to declare

the retail sale price on the packages, Sec.4A will not apply. As for example, in respect of bulk sale of ice-cream to hotels/restaurants which are not meant for retail sales as such, the provisions of the Weights and Measures Act will not apply. Chapter V of the Weights & Measures (Packaged Commodity) Rules, 1977 mentions the instances where MRP is not required to be printed on the packages. Thus, in these cases valuation will have to be done under sec.4 of the C.E. Act, 1944. A somewhat similar issue was examined by the Board earlier vide letter F.No.341/64/97-TRU dt.11.8.97. This clarification was issued in the context of certain assessees printing MRP on packages even where there was no statutory requirement to do so under the Standards of Weights & Measures Act, 1976. It was clarified that in such cases duty will be charged u!s.4 of C.E. Act, 1944 and not uis,4A (the clarification dt.11.6.97 did not. however, specifically mention whether the disputed goods were notified uts.4A oF not and /nether it covered only non-notified goods). In respect of all goods (whether notified u/s.4A or not) which are not statutorily required to print/declare the retail sale price on the packages under the provisions of the Standards of Weight & Measures Act, 1976, or the rules made there under or any other law for the time being in force, valuation will be done u/s.4 of the C.E. Act, 1944 (or under section 3(2) of the Central Excise Act,14944, ff tariff values ave teen fixed for the commodity). Thus, there could be instances where the same notified commodity would be partly assessed on the basis of MRP u/s.4A and partly on the basis of normal price (prior to 1.7.2000) or transaction value (from 1.7.2000), u/s.4 of the C.E. Act, 1944. The Standards of Weights & Measures Act, 1976, and the rules made there under, are administered by the State Governments. Instances of dispute could arise between the department and the assessee as to whether, in respect of a particular commodity/transaction, the assessee is exempted from declaring the retail price or not. In case of such doubt a clarification may be obtained from the concerned Department (generally the Metrology Department) of the State Government. if an assessee does not declare or print the retail sale price in respect of a notified commodity, which it is statutorily required to do under the provisions of the Weights & Measures Act, or any other law for the time being in force, the goods, on removal, will be liable to confiscation u/s. 4A(4) of the C.E. Act, 1944. Circular No. 625 /16 /2002 — CX dated 28th February, 2002 Related posts: Valuation of Physician samples manufactured and distributed as free samples under Central Excise Valuation Rules, 1975 Amends Central Excise (Third Amendment )Rules, 2002 vide Notification No 19 /2011-Central Excise (N.T.) Amends Central Excise Rules, 2002 (Fourth Amendment) thereby making e-filing of Central Excise returns mandatory in ACES Amends Central Excise Rules, 2002 – Notification No. 32/2011-Central Excise (N.T.) Central Excise (Amendment) Rules, 2011 – Amendment in view of levy of excise on ready made garments

CENTRAL BOARD OF EXCISE AND CUSTOMS CENVAT Credi t Rul es, 2004

Notification No. 23/2004 - Central Excise (N.T.), dated 10/09/2004 - In exercise of the powers conferred by section 37 of the Central Excise Act, 1944 (1 of 1944) and section 94 of the Finance Act, 1994 (32 of 1994) and in supersession of the CENVAT Credit Rules, 2002 and the Service Tax Credit Rules, 2002, except as respects things done or omitted to be done before such supersession, the Central Government hereby makes the following rules, namely:1. (1) These rules may be called the CENVAT Credit (Fifth Amendment) Rules, 2006. (2) They shall come into force on the 1st day of May, 2006. (Above rule 1 has been amended vide Notification No. 10/2006 - Central Excise (N.T.), dated 25/04/2006) 2. Definitions. - In these rules, unless the context otherwise requires,(a) "capital goods" means:(A) the following goods, namely:(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.05 grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act; (ii) pollution control equipment; (iii) components, spares and accessories of the goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof; and (vii) storage tank, used(1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or (2) for providing output service; (B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in subclauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act; (b) "Customs Tariff Act" means the Customs Tariff Act, 1975 (51 of 1975); (c) "Excise Act" means the Central Excise Act, 1944 (1 of 1944); (d) "exempted goods" means excisable goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to "Nil" rate of duty; (e) "exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act; (f) "Excise Tariff Act" means the Central Excise Tariff Act, 1985 (5 of 1986); (g) "Finance Act" means the Finance Act, 1994 (32 of 1994); (h) "final products" means excisable goods manufactured or produced from input, or using input service; (ij) "first stage dealer" means a dealer, who purchases the goods directly from,(i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the consignment agent of the importer, under cover of an invoice; (k) "input" means(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production; (ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service; Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; (l) "input service" means any service,(i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and

clearance of final products upto the place of removal, (This clause has been amended vide Notification 10/2008 C.E. (N.T.) - dated 01-03-2008) and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal; (m) "input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be; (n) "job work" means processing or working upon of raw material or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for aforesaid process and the _expression "job worker" shall be construed accordingly; (na) "large taxpayer" shall have the meaning assigned to it in the Central Excise Rules, 2002. (Clause (na) has been inserted vide Notification No. 19/2006 - Central Excise (N.T.), dated 30/09/2006) (naa) “manufacturer” or “producer” in relation to articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, includes a person who is liable to pay duty of excise leviable on such goods under sub-rule (1) of rule 12AA of the Central Excise Rules, 2002; (Clause (naa) has been inserted vide Notification No. 13/2005 - Central Excise (N.T.), dated 01/03/2005 and renumbered vide Notification No. 19/2006 - Central Excise (N.T.), dated 30/09/2006) (o) "notification" means the notification published in the Official Gazette; (p) "output service" means any taxable service, excluding the taxable service referred to in sub-clause (zzp) of clause (105) of section 65 of the Finance Act, provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions ‘provider’ and ‘provided’ shall be construed accordingly; (Substituted vide Notification No. Notification 10/2008 C.E. (N.T.) - dated 01-03-2008 w.e.t. 01-03-2008) [ OMITTEDExplanation.- For the removal of doubts it is hereby clarified that if a person liable for paying service tax does not provide any taxable service or does not manufacture final products, the service for which he is liable to pay service tax shall be deemed to be the output service. ] (Above explanation has been omitted vide Notification No. 08/2006 - Central Excise (N.T.), dated 19/04/2006) (q) "person liable for paying service tax" has the meaning as assigned to it in clause (d) of sub-rule (1) of rule 2 of the Service Tax Rules, 1994; (r) "provider of taxable service" include a person liable for paying service tax; (s) "second stage dealer" means a dealer who purchases the goods from a first stage dealer; (t) words and expressions used in these rules and not defined but defined in the Excise Act or the Finance Act shall have the meanings respectively assigned to them in those Acts.

3. CENVAT credit. (1) A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit

(hereinafter referred to as the CENVAT credit) of (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act; (ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the Excise Act; (iii) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); (iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); (v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (via) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007); [ Substituted vide Notification No. 27/2007-Central Excise (N.T.) dated 12-05-2007 ] (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) (vi) and (via); [Substituted vide Notification No. 10/2007-Central Excise (N.T.) dated 01-032007 ] (viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, [OMITTED- as substituted by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law ]: (In clause (viia), portion beginning with the words and figures "as substituted by clause 72" and ending with the words "the force of law" has been omitted vide Notification No. 22/2005 -Central Excise (N.T.), dated 13/05/2005) Provided that a provider of taxable service shall not be eligible to take credit of such additional duty; (Clause (viia) has been inserted vide Notification No. 13/2005 - Central Excise (N.T.), dated 01/03/2005) (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; and (x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004), “(xa) the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007); and (xi) the additional duty of excise leviable under section 85 of Finance Act, 2005 (18 of 2005 ) (In clause (xi), the words and figures "section 85 of Finance Act, 2005 (18 of 2005 )" has been substituted vide Notification No. 22/2005 -Central Excise (N.T.), dated 13/05/2005) (Clause (xi) has been inserted vide Notification No. 13/2005 - Central Excise (N.T.), dated 01/03/2005) paid on(i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,

including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004. Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products and the provider of output service shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the Customs Tariff Act. (2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of final products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock on the date on which any goods manufactured by the said manufacturer or producer cease to be exempted goods or any goods become excisable. (3) Notwithstanding anything contained in sub-rule (1), in relation to a service which ceases to be an exempted service, the provider of the output service shall be allowed to take CENVAT credit of the duty paid on the inputs received on and after the 10th day of September, 2004 and lying in stock on the date on which any service ceases to be an exempted service and used for providing such service. (4) The CENVAT credit may be utilized for payment of – (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or (e) service tax on any output service: Provided that while paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be: Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs, or input services, used in the manufacture of final products cleared after availing of the exemption under the following notifications of Government of India in the Ministry of Finance (Department of Revenue),Provided also that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, [OMITTED-as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law], shall be utilised for payment of service tax on any output service: [ Portion beginning with the words and figures "as substituted by clause 72" and ending with the words "the force of law," has been omitted vide Notification No. 22/2005 -Central Excise (N.T.), dated 13/05/2005 ] Provided also that the CENVAT credit of any duty specified in sub-rule (1), except the National Calamity Contingent duty in item (v) thereof, shall not be utilized for payment of the said National Calamity Contingent duty on goods falling under tariff items 8517 12 10 and 8517 12 90 respectively of the First Schedule of the Central Excise Tariff:”; [ Inserted vide Notification No. 10/2008 -Central Excise (N.T.), dated 01/03/2008) Provided also that the CENVAT credit of any duty mentioned in sub-rule (1), other than credit of additional duty of excise leviable under section 85 of Finance Act, 2005 (18 of 2005 ), shall not be utilised for payment of said additional duty of

excise on final products: (The words, figures and brackets "section 85 of Finance Act, 2005 (18 of 2005 )" has been substituted vide Notification No. 22/2005 -Central Excise (N.T.), dated 13/05/2005) (Above 3rd & 4th provisos has been inserted vide Notification No. 13/2005 - Central Excise (N.T.), dated 01/03/2005) (i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; (ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003], shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of. (5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9: Provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service: Amended vide Notification No. 10/2008 -Central Excise (N.T.), dated 01/03/2008) Provided further that such payment shall not be required to be made when any capital goods are removed outside the premises of the provider of output service for providing the output service and the capital goods are brought back to the premises within 180 days, or such extended period not exceeding 180 days as may be permitted by the jurisdictional Deputy Commissioner of Central Excise, or Assistant Commissioner of Central Excise, as the case may be, of their removal. [ Omitted vide Notification No. 10/2008 -Central Excise (N.T.), dated 01/03/2008 ] Provided also that if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit;”. [ Inserted vide Notification No. 39/2007 -Central Excise (N.T.), dated 13/11/2007 ] (5A) If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value. (Above sub-rule (5A) has been inserted vide Notification No.27/2005 - C.E.(N.T.), dated 16/05/2005) (5B). If the value of any, (i) input, or (ii) capital goods before being put to use, on which CENVAT Credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods:

Provided that if the said input or capital goods is subsequently used in the manufacture of final products, the manufacturer shall be entitled to take the credit of the amount equivalent to the CENVAT Credit paid earlier subject to the other provisions of these rules.

[ Inserted vide Notification No. 26/2007 -Central Excise (N.T.), dated 11/05/2007 ] (5C).- Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods shall be reversed. [ Inserted vide Notification No. 33/2007 -Central Excise (N.T.), dated 07/09/2007 ]

(6) The amount paid under sub-rule (5) and sub-rule (5A) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (5) and sub-rule (5A). (In sub-rule (6), words, brackets and figure, "sub-rule (5) and sub-rule (5A)" has been substituted vide Notification No. 27/2005-CE(N.T.), dated 16/05/2005) (7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4),(a) CENVAT credit in respect of inputs or capital goods produced or manufactured, by a hundred per cent. exportoriented undertaking or by a unit in an Electronic Hardware Technology Park or in a Software Technology Park other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3,5, 6 and 7 of notification No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003] and used in the manufacture of the final products or in providing an output service, in any other place in India, in case the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st March, 2003], shall be admissible equivalent to the amount calculated in the following manner, namely:Fifty per cent. of [X multiplied by {(1+BCD/100) multiplied by (CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. Provided that the CENVAT credit in respect of inputs and capital goods cleared on or after 1st March, 2006 from an export oriented undertaking or by a unit in Electronic Hardware Technology Park or in a Software Technology Park, as the case may be, on which such unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-Central Excise dated 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003] shall be equal to X multiplied by {(1+BCD/400) multiplied by (CVD/100)}. (Above proviso has been inserted vide Notification No. 06/2006-CE(N.T.), dated 20/03/2006) (b) CENVAT credit in respect of (i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); (ii)

the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001);

(iii) the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (iiia) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007); [ Substituted vide Notification No. 27/2007-CE(N.T.), dated 12/05/2007 ] (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under

items (i), (ii) and (iii) above; (v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (vi) the education cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004); (via) the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007); [Inserted vide Notification No. 27/2007-CE(N.T.), dated 12/05/2007 ] and (vii) the additional duty of excise leviable under section 85 of Finance Act, 2005 (18 of 2005 ), shall be utilised towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), or the education cess on excisable goods leviable under section 91 read with section 93 of the said Finance (No.2) Act, 2004 (23 of 2004), or the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007) or the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003), or the education cess on taxable services leviable under section 91 read with section 95 of the said Finance (No.2) Act, 2004 (23 of 2004), or the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007), or the additional duty of excise leviable under section 85 of the Finance Act, 2005 (18 of 2005) respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service [Amended vide Notification Nos. 22/2005-CE(N.T.), dated 13/05/2005 and 27/2007-CE(N.T.), dated 12/05/2007 ] Provided that the credit of the education cess on excisable goods and the education cess on taxable services can be utilized, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services: Provided further that the credit of the Secondary and Higher Education Cess on excisable goods and the Secondary and Higher Education Cess on taxable services can be utilized, either for payment of the Secondary and Higher Education Cess on excisable goods or for the payment of the Secondary and Higher Education Cess on taxable services [ Provisos substituted vide Notification No. 27/2007-CE(N.T.), dated 12/05/2007 ]

Explanation.- For the removal of doubts, it is hereby declared that the credit of the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) paid on or after the 1st day of April, 2000, may be utilised towards payment of duty of excise leviable under the First Schedule or the Second Schedule to the Excise Tariff Act;

(c) the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falling under tariff items 2515 12 20 and 2515 12 90 respectively of the First Schedule to the Excise Tariff Act shall be allowed to the extent of thirty rupees per square meter; [ Above clause amended vide Notification No. 07/2007, dated 21-02-2007 ] Explanation.- Where the provisions of any other rule or notification provide for grant of whole or part exemption on condition of non-availability of credit of duty paid on any input or capital goods, or of service tax paid on input service, the provisions of such other rule or notification shall prevail over the provisions of these rules. 4. Conditions for allowing CENVAT credit. (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service:

Provided that in respect of final products, namely, articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker. (Above proviso has been inserted vide Notification No. 13/2005-CE(N.T.), dated 01/03/2005) (2) (a) The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year: Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared as such in the same financial year. Provided further that the CENVAT credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, [OMITTED- as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law ], in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of a manufacturer. (In above proviso the portion beginning with the words and figure "as amended by clause 72" and ending with the words "the force of law," has been omitted vide Notification No. 22/2005-CE(N.T.), dated 13/05/2005) (Above 2nd proviso has been inserted vide Notification No. 13/2005-CE(N.T.), dated 01/03/2005) (b) The balance of CENVAT credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer, or in the premises of the provider of output service, if the capital goods, other than components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of output service in such subsequent years. [ Above clause amended vide Notification No. 07/2007, dated 21-02-2007 ] Illustration.- A manufacturer received machinery on the 16th day of April, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years.. (3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961). (5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning, or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer or provider of output service can take the CENVAT credit again when the inputs or capital goods are received back in his factory or in the premises of the provider of output service (In clause (a), words ",or for the manufacture of intermediate goods necessary for the manufacture of final products" has been inserted vide Notification No. 27/2005-CE(N.T.), dated 16/05/2005) (b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications.

(6) The Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of the manufacturer of the final products who has sent the input or partially processed inputs outside his factory to a job-worker may, by an order, which shall be valid for a financial year, in respect of removal of such input or partially processed input, and subject to such conditions as he may impose in the interest of revenue including the manner in which duty, if leviable, is to be paid, allow final products to be cleared from the premises of the job-worker. (In sub-rule (6), words "Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be," has been substituted vide Notification No. 27/2005-CE(N.T.), dated 16/05/2005) (7) The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9. 5. Refund of CENVAT credit. Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of, (i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or (ii) service tax on output service, and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification: Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Service Rules, 2005 in respect of such tax. Provided further that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service. Explanation: For the purposes of this rule, the words 'output service which is exported' means the output service exported in accordance with the Export of Services Rules, 2005. (Above rule 5 has been amended vide Notification No. 04/2006 - CE (N.T.), dated 14/03/2006)

5A. Refund of CENVAT credit to units in specified areas.Notwithstanding anything contrary contained in these rules, where a manufacturer has cleared final products in terms of notification of the Government of India in the Ministry of Finance (Department of Revenue) No.20/2007-Central Excise, dated the 25th April, 2007 and is unable to utilize the CENVAT credit of duty taken on inputs required for manufacture of final products specified in the said notification, other than final products which are exempt or subject to nil rate of duty, for payment of duties of excise on said final products, then the Central Government may allow the refund of such credit subject to such procedure, conditions and limitations, as may be specified by notification. Explanation: For the purposes of this rule, “duty” means the duties specified in sub-rule (1) of rule 3 of these rules. [ Rule 5A. is inserted vide Notification No. 24/2007 - CE (NT), dated 25-04-2007 ]

6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.-

(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).[Amended vide Notification No. 10/2008 - CE (N.T.), dated 01-03-2008 ] Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule. (Above 2nd proviso has been inserted vide Notification No. 13/2005-CE(N.T.), dated 01/03/2005) (2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, [OMITTED- except inputs intended to be used as fuel,] and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (In sub-rule (2), the words "except inputs intended to be used as fuel," has been omitted vide Notification No. 27/2005CE(N.T.), dated 16/05/2005) (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:(i) the manufacturer of goods shall pay an amount equal to ten per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to eight per cent. of value of the exempted services; or (ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A). Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year. Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service. (3A) For determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:(i) name, address and registration No. of the manufacturer of goods or provider of output service; (ii) date from which the option under this clause is exercised or proposed to be exercised; (iii) description of dutiable goods or taxable services; (iv) description of exempted goods or exempted services; (v) CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition; (b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,(i) the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A; (ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C

denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A; (iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month; (c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:(i) the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H; (ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H; (iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where L denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year, M denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and N denotes total CENVAT credit taken on input services during the financial year; (d) the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid; (e) the manufacturer of goods or the provider of output service, shall, in addition to the amount short-paid, be liable to pay interest at the rate of twenty-four per cent. per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date; (f) where the amount determined as per condition (c) is less than the amount determined and paid as per condition (b), the said manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount; (g) the manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, as per condition (d) and (f) respectively, the following particulars, namely:(i) details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally as per condition (b), (ii) CENVAT credit attributable to exempted goods and exempted services for the whole financial year, determined as per condition (c), (iii) amount short paid determined as per condition (d), alongwith the date of payment of the amount short-paid, (iv) interest payable and paid, if any, on the amount short-paid, determined as per condition (e), and (v) credit taken on account of excess payment, if any, determined as per condition (f); (h) where the amount equivalent to CENVAT credit attributable to exempted goods or exempted services cannot be determined provisionally, as prescribed in condition (b), due to reasons that no dutiable goods were manufactured and no taxable service was provided in the preceding financial year, then the manufacturer of goods or the provider of output service is not required to determine and pay such amount provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in condition (c) and pay the amount so calculated on or before 30th June of the succeeding financial year. (i) where the amount determined under condition (h) is not paid within the said due date, i.e., the 30th June, the

manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest at the rate of twenty four per cent. per annum from the due date till the date of payment. Explanation I.- “Value” for the purpose of sub-rules (3) and (3A) shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made thereunder. Explanation II.-The amount mentioned in sub-rules (3) and (3A), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March. Explanation III.- If the manufacturer of goods or the provider of output service fails to pay the amount payable under subrule (3) or as the case may be sub-rule (3A), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken. (4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year. (5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. (6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either(i) cleared to a unit in a special economic zone; or (ii) cleared to a hundred per cent. export-oriented undertaking; or (iii) cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or (iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or (v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or (vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting; or. (vii) all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under section 3 of the said Customs Tariff Act when imported into India and supplied against International Competitive Bidding in terms of notification No. 6/2002-Central Excise dated the 1 st March, 2002 or notification No. 6/2006-Central Excise dated the 1 st March, 2006, as the case may be (In clause (vii) the words and figures "notification No. 6/2002-Central Excise dated the 1 st March, 2002 or notification No. 6/2006-Central Excise dated the 1 st March, 2006, as the case may be" has been substituted vide Notification No. 09/2006-CE(N.T.), dated 21/04/2006) (In Above item (vi), the words "zinc by smelting; or" substituted vide & item (vii) has been added vide Notification No. 03/2005-CE(N.T.), dated 28/01/2005) 7. Manner of distribution of credit by input service distributor. The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon;

or (b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed.

7A. Distribution of credit on inputs by the office or any other premises of output service provider.(1) A provider of output service shall be allowed to take credit on inputs and capital goods received, on the basis of an invoice or a bill or a challan issued by an office or premises of the said provider of output service, which receives invoices, issued in terms of the provisions of the Central Excise Rules, 2002, towards the purchase of inputs and capital goods. (2) The provisions of these rules or any other rules made under the Central Excise Act, 1944, as made applicable to a first stage dealer or a second stage dealer, shall mutatis mutandis apply to such office or premises of the provider of output service. [ Rule 7A. inserted vide Notification 10/2008 - dated 01-03-2008 ]

8. Storage of input outside the factory of the manufacturer.The Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of a manufacturer of the final products may, in exceptional circumstances having regard to the nature of the goods and shortage of storage space at the premises of such manufacturer, by an order, permit such manufacturer to store the input in respect of which CENVAT credit has been taken, outside such factory, subject to such limitations and conditions as he may specify: Provided that where such input is not used in the manner specified in these rules for any reason whatsoever, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such input. 9. Documents and accounts.(1) The CENVAT credit shall be taken by the manufacturer or the provider of output service or input service distributor, as the case may be, on the basis of any of the following documents, namely :(a) an invoice issued by(i) a manufacturer for clearance of (I) inputs or capital goods from his factory or depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer; (II) inputs or capital goods as such; (ii) an importer; (iii) an importer from his depot or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002; (iv) a first stage dealer or a second stage dealer, as the case may be, in terms of the provisions of Central Excise Rules, 2002; or (b) a supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in terms of the provisions of Central Excise Rules, 2002 from his factory or depot or from the premises of the consignment agent of the said manufacturer or importer or from any other premises from where the goods are sold by, or on behalf of, the said manufacturer or importer, in case additional amount of excise duties or additional duty leviable under section 3 of the Customs Tariff Act, has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non-levy or short-levy by reason of fraud, collusion or any wilful misstatement or suppression of facts or contravention of any provisions of the Excise Act, or of the Customs Act, 1962 (52 of 1962) or the rules made there under with intent to evade payment of duty. Explanation.- For removal of doubts, it is clarified that supplementary invoice shall also include challan or any other similar document evidencing payment of additional amount of additional duty leviable under section 3 of the Customs Tariff Act; or

(c) a bill of entry; or (d) a certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office; or (e) a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994; or (In clause (e) the words, brackets and figures "sub-clauses (iii), (iv), (v) and (vii)" has been amended vide Notification No. 10/2006-CE(N.T.), dated 25/04/2006) (In clause (e) words ", (iv) and (v)" has been substituted vide Notification No. 28/2005-CE(N.T.), dated 07/06/2005) (f) an invoice, a bill or challan issued by a provider of input service on or after the 10th day of, September, 2004; or (g) an invoice, bill or challan issued by an input service distributor under rule 4A of the Service Tax Rules, 1994. Provided that the credit of additional duty of customs levied under sub-section (5) of section 3 of the Customs Tariff Act, 1975 (51 of 1975) shall not be allowed if the invoice or the supplementary invoice, as the case may be, bears an indication to the effect that no credit of the said additional duty shall be admissible; [ inserted vide Notification No. 35/2007 - CE(NT), dated 14-09-2007 ] (2) No CENVAT credit under sub-rule(1) shall be taken unless all the particulars as prescribed under the Central Excise Rules, 2002 or the Service Tax Rules, 1994, as the case may be, are contained in the said document: Provided that if the said document does not contain all the particulars but contains the details of duty or service tax payable, description of the goods or taxable service, assessable value, Central Excise or Service tax Registration number of the person issuing the invoice, as the case may be, name and address of the factory or warehouse or premises of first or second stage dealers or provider of taxable service, and the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, is satisfied that the goods or services covered by the said document have been received and accounted for in the books of the account of the receiver, he may allow the CENVAT credit; [ Amended vide Notification Nos. 10/2007 - CE(NT), dated 01-03-2007 and 19/2007 CE(NT) - dated 09-03-2007] (3) The manufacturer or producer of excisable goods or provider of output service taking CENVAT credit on input or capital goods or input service, or the input service distributor distributing CENVAT credit on input service shall take all reasonable steps to ensure that the input or capital goods or input service in respect of which he has taken the CENVAT credit are goods or services on which the appropriate duty of excise or service tax as indicated in the documents accompanying the goods or relating to input service, has been paid. Explanation.- The manufacturer or producer of excisable goods or provider of output service taking CENVAT credit on input or capital goods or input service or the input service distributor distributing CENVAT credit on input service on the basis of, invoice, bill or, as the case may be, challan received by him for distribution of input service credit shall be deemed to have taken reasonable steps if he satisfies himself about the identity and address of the manufacturer or supplier or provider of input service, as the case may be, issuing the documents specified in sub-rule (1), evidencing the payment of excise duty or the additional duty of customs or service tax, as the case may be, either(a) from his personal knowledge; or (b) on the basis of a certificate given by a person with whose handwriting or signature he is familiar; or (c) on the basis of a certificate issued to the manufacturer or the supplier or, as the case may be, the provider of input service by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or such supplier or provider of output service has his place of business or where the provider of input service has paid the service tax, and where the identity and address of the manufacturer or the supplier or the provider of input service is satisfied on the basis of a certificate, the manufacturer or producer or provider of output service taking the CENVAT credit or input service distributor distributing CENVAT credit shall retain such certificate for production before the Central Excise Officer

on demand. [ OMITTED vide Notification No. 10/2007 - CE (N.T.), dated 01-03-2007] (4) The CENVAT credit in respect of input or capital goods purchased from a first stage dealer or second stage dealer shall be allowed only if such first stage dealer or second stage dealer, as the case may be, has maintained records indicating the fact that the input or capital goods was supplied from the stock on which duty was paid by the producer of such input or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him. (5) The manufacturer of final products or the provider of output service shall maintain proper records for the receipt, disposal, consumption and inventory of the input and capital goods in which the relevant information regarding the value, duty paid, CENVAT credit taken and utilized, the person from whom the input or capital goods have been procured is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit. (6) The manufacturer of final products or the provider of output service shall maintain proper records for the receipt and consumption of the input services in which the relevant information regarding the value, tax paid, CENVAT credit taken and utilized, the person from whom the input service has been procured is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit. (7) The manufacturer of final products shall submit within ten days from the close of each month to the Superintendent of Central Excise, a monthly return in the form specified, by notification, by the Board: Provided that where a manufacturer is availing exemption under a notification based on the value or quantity of clearances in a financial year, he shall file a quarterly return in the form specified, by notification, by the Board within twenty days after the close of the quarter to which the return relates. (8) A first stage dealer or a second stage dealer, as the case may be, shall submit within fifteen days from the close of each quarter of a year to the Superintendent of Central Excise, a return in the form specified, by notification, by the Board. (9) The provider of output service availing CENVAT credit, shall submit a half yearly return in form specified, by notification, by the Board to the Superintendent of Central Excise, by the end of the month following the particular quarter or half year. (10) The input service distributor, shall furnish a half yearly return in such form as may be specified, by notification, by the Board, giving the details of credit received and distributed during the said half year to the jurisdictional Superintendent of Central Excise, not later than the last day of the month following the half year period. (Sub-rule (10) has been substituted vide Notification No. 28/2005-CE(N.T.), dated 07/06/2005) (11) The provider of output service, availing CENVAT credit referred to in sub-rule (9) or the input service distributor referred to in sub-rule (10), as the case may be, may submit a revised return to correct a mistake or omission within a period of sixty days from the date of submission of the return under sub-rule (9) or sub-rule (10), as the case may be. [Inserted vide Notification Nos. 10/2007 - CE(NT), dated 01-03-2007 ] 9A. – Information relating to principal inputs. (1) A manufacturer of final products shall furnish to the Superintendent of Central Excise, annually by 30th April of each Financial Year, a declaration in the Form specified, by a notification, by the Board, in respect of each of the excisable goods manufactured or to be manufactured by him, the principal inputs and the quantity of such principal inputs required for use in the manufacture of unit quantity of such final products: Provided that for the year 2004-05, such information shall be furnished latest by 31st December, 2004. (2) If a manufacturer of final products intends to make any alteration in the information so furnished under sub-rule (1), he shall furnish information to the Superintendent of Central Excise together with the reasons for such alteration before the proposed change or within 15 days of such change in the Form specified by the Board under sub-rule (1). (3) A manufacturer of final products shall submit, within ten days from the close of each month, to the Superintendent of Central Excise, a monthly return in the Form specified, by a notification, by the Board, in respect of information regarding

the receipt and consumption of each principal inputs with reference to the quantity of final products manufactured by him. (4) The Central Government may, by notification and subject to such conditions or limitations, as may be specified in such notification, specify manufacturers or class of manufacturers who may not be required to furnish declaration mentioned in sub-rule (1) or monthly return mentioned in sub-rule (3). Explanation: For the purposes of this rule, “principal inputs”, means any input which is used in the manufacture of final products where the cost of such input constitutes not less than 10% of the total cost of raw-materials for the manufacture of unit quantity of a given final products. (Above rule 9A. has been added vide Notification No. 38/2004-CE(N.T.), dated 25/11/2004) (Please refer Notification No. 39/2004-CE(N.T.), dated 25/11/2004 for Class of manufacturers, of final products who manufacture excisable goods) (Please refer Notification No. 40/2004-CE(N.T.), dated 25/11/2004 for FORM ER - 5) (Please refer Notification No. 41/2004-CE(N.T.), dated 25/11/2004 for FORM ER - 6) 10. Transfer of CENVAT credit. (1) If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory. (2) If a provider of output service shifts or transfers his business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business, then, the provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated business. (3) The transfer of the CENVAT credit under sub-rules (1) and (2) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central Excise or, as the case may be, the Assistant Commissioner of Central Excise. 11. Transitional provision.(1) Any amount of credit earned by a manufacturer under the CENVAT Credit Rules, 2002, as they existed prior to the 10th day of September, 2004 or by a provider of output service under the Service Tax Credit Rules, 2002, as they existed prior to the 10th day of September, 2004, and remaining unutilized on that day shall be allowed as CENVAT credit to such manufacturer or provider of output service under these rules, and be allowed to be utilized in accordance with these rules. (2) A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking CENVAT credit on inputs or input services before such option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export. (3) A manufacturer or producer of a final product shall be required to pay an amount equivalent to the CENVAT credit, if any, taken by him in respect of inputs received for use in the manufacture of the said final product and is lying in stock or in process or is contained in the final product lying in stock, if,(i) he opts for exemption from whole of the duty of excise leviable on the said final product manufactured or produced by him under a notification issued under section 5A of the Act; or

(ii) the said final product has been exempted absolutely under section 5A of the Act, and after deducting the said amount from the balance of CENVAT credit, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any other final product whether cleared for home consumption or for export, or for payment of service tax on any output service, whether provided in India or exported. (4) A provider of output service shall be required to pay an amount equivalent to the CENVAT credit, if any, taken by him in respect of inputs received for providing the said service and is lying in stock or is contained in the taxable service pending to be provided, when he opts for exemption from payment of whole of the service tax leviable on such taxable service under a notification issued under section 93 of the Finance Act, 1994(32 of 1994) and after deducting the said amount from the balance of CENVAT credit, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export or for payment of service tax on any other output service, whether provided in India or exported. [Inserted vide Notification Nos. 10/2007 - CE(NT), dated 01-03-2007 ]

12. Special dispensation in respect of inputs manufactured in factories located in specified areas of North East region, Kutch district of Gujarat, State of Jammu and Kashmir and State of Sikkim. Notwithstanding anything contained in these rules, where a manufacturer has cleared any inputs or capital goods, in terms of notifications of the Government of India in the Ministry of Finance (Department of Revenue) No. 32/99- Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated the 8th July, 1999] or No. 33/99- Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated the 8th July, 1999] or No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565(E), dated the 31st July, 2001] or notification of the Government of India in the erstwhile Ministry of Finance and Company Affairs (Department of Revenue) No.56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated 14th November, 2002]or No.57/2002-Central Excise, dated the 14th November, 2002 [ GSR 765(E), dated the 14th November, 2002] or notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003] or 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R.717 (E), dated the 9th September, 2003, or No.20/2007-Central Excise, dated the 25th April, 2007 [ GSR 307 (E), dated the 25th April, 2007] the CENVAT credit on such inputs or capital goods shall be admissible as if no portion of the duty paid on such inputs or capital goods was exempted under any of the said notifications. [Amended vide Notification Nos. 32/2007 - CE(NT), dated 03-08-2007 ] 12A. Procedure and facilities for large taxpayer.Notwithstanding anything contained in these rules, the following procedure shall apply to a large taxpayer,(1) A large taxpayer may remove inputs, except motor spirit, commonly known as petrol, high speed diesel and light diesel oil or capital goods, as such, on which CENVAT credit has been taken, without payment of an amount specified in sub-rule (5) of rule 3 of these rules, under the cover of a transfer challan or invoice, from any of his registered premises (hereinafter referred to as the sender premises) to his other registered premises, other than a premises of a first or second stage dealer (hereinafter referred to as the recipient premises), for further use in the manufacture or production of final products in recipient premises subject to condition that the final products are manufactured or produced using the said inputs and cleared on payment of appropriate duties of excise leviable thereon within a period of six months, from the date of receipt of the inputs in the recipient premises; or the final products are manufactured or produced using the said inputs and exported out of India, under bond or letter of undertaking within a period of six months, from the date of receipt of the input goods in the recipient premises, and that any other conditions prescribed by the Commissioner of Central Excise, Large Taxpayer Unit in this regard are satisfied: Explanation 1 The transfer challan or invoice shall be serially numbered and shall contain the registration number, name, address of the large taxpayer, description, classification, time and date of removal, mode of transport and vehicle registration number, quantity of the goods and registration number and name of the consignee: Provided that if the final products manufactured or produced using the said inputs are not cleared on payment of appropriate duties of excise leviable thereon or are not exported out of India within the said period of six months from the date of receipt of the input goods in the recipient premises, or such inputs are cleared as such from the recipient premises, an amount equal to the credit taken in respect of such inputs by the sender premises shall be paid by the

recipient premises with interest in the manner and rate specified under rule 14 of these rules: Provided further that if such capital goods are used exclusively in the manufacture of exempted goods, or such capital goods are cleared as such from the recipient premises, an amount equal to the credit taken in respect of such capital goods by the sender premises shall be paid by the recipient premises with interest in the manner and rate specified under rule 14 of these rules: Explanation 2 If a large taxpayer fails to pay any amount due in terms of the first and second proviso, it shall be recovered along with interest in the manner as provided under rule 14 of these rules: Provided also that nothing contained in this sub-rule shall be applicable if the recipient premises is availing following notifications of Government of India in the Ministry of Finance (Department of Revenue), (i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; (ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003]; (viii) No.20/2007-Central Excise, dated the 25th April, 2007 [ GSR 307 (E), dated the 25th April, 2007];[ Inserted vide Notification No. 32/2007 CE (NT), dated 03-08-2007] Provided also that nothing contained in this sub-rule shall be applicable to a export oriented unit or a unit located in a Electronic Hardware Technology Park or Software Technology Park. (2 The first recipient premises may take CENVAT credit of the amount paid under first proviso to sub-rule(1) as if it was ) a duty paid by the sender premises who removed such goods on the basis of a document showing payment of such duties. (3 CENVAT credit of the specified duties taken by a sender premises shall not be denied or varied in respect of any ) inputs or capital goods, removed as such under sub-rule (1) on the ground that the said inputs or the capital goods have been removed without payment of an amount specified in sub-rule (5) of rule 3 of these rules; or on the ground that the said inputs or capital goods have been used in the manufacture of any intermediate goods removed without payment of duty under sub-rule (1) of rule 12BB of Central Excise Rules, 2002. Explanation : For the purpose of this sub-rule, ' intermediate goods ' shall have the same meaning assigned to it in sub-rule (1) of rule 12BB of the Central Excise Rules, 2002. (4 A large taxpayer may transfer, CENVAT credit available with one of his registered manufacturing premises or ) premises providing taxable service to his other such registered premises by,(i) making an entry for such transfer in the record maintained under rule 9; issuing a transfer challan containing registration number, name and address of the registered premises transferring the credit as well as receiving such credit, the amount of credit transferred and the particulars of such entry as mentioned in clause (i), and such recipient premises can take CENVAT credit on the basis of such transfer challan as mentioned in clause (ii): Provided that such transfer or utilisation of CENVAT credit shall be subject to the limitations prescribed under clause (b) of sub-rule (7) of rule 3. Provided further that nothing contained in this sub-rule shall be applicable if the registered manufacturing premises is availing following notifications of Government of India in the Ministry of Finance (Department of Revenue), (i) (ii) (iii) (iv) (v) (vi)

No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and

(vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003]; (viii) No.20/2007-Central Excise, dated the 25th April, 2007 [ GSR 307 (E), dated the 25th April, 2007]; [ Inserted vide Notification No. 32/2007 CE (NT), dated 03-08-2007] (5 A large taxpayer shall submit a monthly return, as prescribed under these rules, for each of the registered premises. ) Any notice issued but not adjudged by any of the Central Excise officer administering the Act or rules made (6 thereunder immediately before the date of grant of acceptance by the Chief Commissioner of Central Excise, Large ) Taxpayer Unit, shall be deemed to have been issued by Central Excise officers of the said Unit (7 Provisions of these rules, in so far as they are not inconsistent with the provisions of this rule shall mutatis mutandis ) apply in case of a large taxpayer. [ Inserted vide Notification No. 19/2006 CE (NT), dated 30-09-2006]

12AA. Power to impose restrictions in certain types of cases.Notwithstanding anything contained in these rules, where the Central Government, having regard to the extent of misuse of CENVAT credit, nature and type of such misuse and such other factors as may be relevant, is of the opinion that in order to prevent the misuse of the provisions of CENVAT credit as specified in these rules, it is necessary in the public interest to provide for certain measures including restrictions on a manufacturer, first stage and second stage dealer or an exporter, may by a notification in the Official Gazette, specify nature of restrictions including restrictions on utilization of CENVAT credit and suspension of registration in case of a dealer and type of facilities to be withdrawn and procedure for issue of such order by an officer authorized by the Board. [ Inserted vide Notification No. 31/2006 CE (NT), dated 3012-2006] 13. Power of Central Government to notify goods for deemed CENVAT credit.Notwithstanding anything contained in rule 3, the Central Government may, by notification, declare the input or input service on which the duties of excise, or additional duty of customs or service tax paid, shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in that notification and allow CENVAT credit of such duty or tax deemed to have been paid in such manner and subject to such conditions as may be specified in that notification even if, in the case of input, the declared input, or in the case of input service, the declared input service, as the case may be, is not used directly by the manufacturer of final products, or as the case may be, by the provider of taxable service, declared in that notification, but contained in the said final products, or as the case may be, used in providing the taxable service. 14. Recovery of CENVAT credit wrongly taken or erroneously refunded.Where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries. 15. Confiscation and penalty.(1) If any person, takes CENVAT credit in respect of input or capital goods, wrongly or in contravention of any of the provisions of these rules in respect of any input or capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or two thousand rupees, whichever is greater. (2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act. (3) If any person, takes CENVAT credit in respect of input services, wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person, shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees.

(4) In a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act. (5) Any order under sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule (4) shall be issued by the Central Excise Officer following the principles of natural justice. [Amended by Notification No. 10/2007 -CE (NT), dated 01-03-2007 ]

15A. General penalty.- Whoever contravenes the provisions of these rules for which no penalty has been provided in the rules, he shall be liable to a penalty which may extend to five thousand rupees. [ Inserted vide 10/2008 - dated 01-03-2008]

16. Supplementary provision. (1) Any notification, circular, instruction, standing order, trade notice or other order issued under the CENVAT Credit Rules, 2002 or the Service Tax Credit Rules, 2002, by the Central Government, the Central Board of Excise and Customs, the Chief Commissioner of Central Excise or the Commissioner of Central Excise, and in force at the commencement of these rules, shall, to the extent it is relevant and consistent with these rules, be deemed to be valid and issued under the corresponding provisions of these rules. (2) References in any rule, notification, circular, instruction, standing order, trade notice or other order to the CENVAT Credit Rules, 2002 and any provision thereof or, as the case may be, the Service Tax Credit Rules, 2002 and any provision thereof shall, on the commencement of these rules, be construed as references to the CENVAT Credit Rules, 2004 and any corresponding provision thereof. (Above sub-rule (2) has been inserted vide Notification 24/2004 - Central Excise (N.T.), dated 17/09/2004

MVAT

MAHARASHTRA VALUE ADDED TAX ACT, 2002 INTRODUCTION WHAT IS VALUE ADDED TAX (VAT) ? VAT (Value Added Tax) is a multistage tax system for collection of sales tax. The system envisages levy of tax on the sale at each stage and contemplates allowing of set off of tax paid on purchases. Thus, tax is getting paid on the value addition in the hands of each intermediatory vendor. The process covers whole chain of distribution i.e. from manufacturers till retailers.

Prior to 1-4-2005, the system for levy of tax in Maharashtra was, in general, single point tax system. As a consequence to national consensus for introduction VAT, the earlier Bombay Sales Tax Act, 1959 is replaced by Maharashtra Value Added Tax Act, 2002. The Act has come into force with effect from 14-2005. Thus, from 1-4-2005, sales tax is being collected under VAT system in Maharashtra. Salient features of this Act are mentioned hereunder:

(I) DEFINITIONS Section 2 gives definitions of various terms. The definitions are almost at par with earlier law i.e. Bombay Sales Tax Act, 1959. Some of the important definitions: • Section 2 (4) – “Business” – The definition of Business includes in its scope any service, trade, commerce, manufacture or any adventure or concern in the nature of such service, trade, commerce or manufacture, whether carried on with or without profit motive and whether actual profit is earned or not. Further, it also includes any transaction which is incidental or ancillary to such trade, commerce, manufacture, adventure, concern or service and also includes any transaction which is incidental or ancillary to commencement or closure of such trade, commerce, manufacture, service etc. The purchase of any goods the price of which is debited to business is also be deemed to be the purchase effected in the course of business. Similarly sale of any goods, the proceeds of which are credited to the business is also deemed to be the sale effected in the course of business. Though service is also included in the definition of business, as per Section 2(34) only notified services are to be included in the scope of the definition. As on today no such services are notified and as such at present no service gets covered under the definition of business. • Section 2(12) – “Goods” means every kind of movable property. The definition specifically includes live stocks, growing crop, grass and tree, plants including produce thereof under given circumstances. However, it excludes newspapers, money, stocks, shares, securities, lottery tickets and actionable claims. • Section 2(8)- “Dealer” - Definition of Dealer includes any person who buys or sells goods in the state for commission, remuneration or otherwise. It also includes, among others, by an Explaination, public charitable trust, government departments, societies, State Government, Central Government, shipping companies, airlines, advertising agencies etc. • Section 2(13) : “Importer” means a dealer who brings any goods into the State or to whom any goods are dispatched from outside the state, which will include import out of India also. Section 2(24) – “Sale” — Sale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge. Ordinarily sale means transfer of property to buyer in goods for cash or deferred payment or other valuable consideration. A sale within the State includes a sale determined to be inside the State

CENTRAL SALES TAX ACT U/s 14 - CST on Declared Goods to be @ 5% from 01-04-2011 It has been proposed in the Budget 2011-12 to increase the ceiling of 4% on declared goods under section 14 of CST Act to 5%. Currently State Governments cannot levy VAT more than 4% on declared goods. Consequently all the goods in Schedule C of MVAT Act 2002 shall be taxable @ 5% from 01-04-2011 (as requisite amendment is done in MVAT Act 2002 through Maharashtra Finance Budget proposal announced on 23-03-2011). Declared goods are those goods which are of special importance and have been defined u/s 14 of CST Act 1956. This increase has been made in view of recent increase in the VAT slab rate of 4% to 5% by many states. This proposed amendment has been prescribed in clause 74 of the Finance Bill 2011-12 which runs as under: 74. "In section 15 of the Central Sales Tax Act, 1956, in clause (a), for the words "four per cent.", the words "five per cent." shall be substituted" The relevant notes on clause 74 runs as under: "Clause 74 of the bill seeks to amend section 15 of Central Sales Tax Act, 1956, so as to increase the ceiling imposed through the Central sales tax on the power of the States to levy VAT on the "declared goods" from 4 per cent to 5 per cent." Basic Scheme of the CST Act The objects of the Act, as stated in preamble of the CST Act are -

To formulate principles for determining (a) when a sale or purchase takes place in the course of inter-state trade or commerce (b) When a sale or purchase takes place outside a State (c) When a sale or purchase takes place in the course of imports into or export from India To provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce To declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on sale or purchase of such goods of special importance (called as declared goods) shall be subject. CST Act imposes the tax on inter state sales and states the principles and restrictions as per the powers conferred by Constitution. Basic scheme of the CST Act - The basic scheme of the CST Act is as follows. SALES TAX REVENUE TO STATES - The CST Act provides for levy on Inter-State sales and also defines what is ‘InterState Sale’. However, the concept that revenue from sales tax should be collected by States has been retained. Thus, though it is called Central Sales Tax Act, the tax collected under the Act in each State is kept by that State only. This is provided in Article 269(1)(g) of Constitution of India. - - CST in each State is administered by local sales tax authorities of each State. TAX COLLECTED IN THE STATE WHERE MOVEMENT OF GOODS COMMENCES - The scheme of CST Act is that Central Sales Tax is payable in the State from which movement of goods commences (i.e. from which goods are sold). The tax collected is retained by the State in which it is collected. CST Act is administered by Sales Tax authorities of each State. Thus, the State Government Sales Tax officer who collects and assesses local (State) sales tax also collects and assesses Central Sales Tax. TAX ON INTER STATE SALE OF GOODS - CST is tax on inter State sale of goods. Sale is Inter-State when (a) sale occasions movement of goods from one State to another or (b) is effected by transfer of documents during their movement from one State to another. STATE SALES TAX LAW APPLICABLE IN MANY ASPECTS - CST Act makes provisions for very few procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions of General Sales Tax law of the State applies. CST ACT DEFINES SOME CONCEPTS - Under the authority of Constitution, the CST Act defines concepts of ‘Sale Outside the State’ and ‘sale during the course of import/import’. DECLARED GOODS - Some goods are declared as goods of special importance and restrictions are placed on power of State Governments to levy tax on such goods. Inter-State and Intra-State Sale - Entry 92A of List I - Union List reads : ‘Taxes on the sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of Inter-state trade or commerce’. Entry 54 of list II - State List - reads : ‘Tax on sale or purchase of goods other than newspapers except tax on Inter State sale or purchase’. Thus, sale within the State (Intra-State sale) is within the authority of State Government, while sale outside State (Inter-State sale) is within the authority of Central Government. Sale where both buyer and seller are from same State is Intra-State sale e.g. from * Mumbai to Pune or * Ahmedabad to Surat * Howrah to Kolkata * Mysore to Bangalore etc. These are Intra-State sales. However, when buyer and seller are in different States, it is Inter-state sales. e.g. : Chennai (Tamil Nadu) to Trivandrum (Kerala) * Allahabad (UP) to Hyderabad (Andhra Pradesh) * Bhubaneshwar (Orissa) to Daman (Union Territory) etc. NEWSPAPER SPECIFICALLY EXCLUDED - It can be seen that ‘newspapers’ are specifically excluded from purview of both Union as well as State list. The obvious reason is that newspapers have a very vital role to play in a democratic society. Freedom of speech and free flow of information is the backbone of democracy and hence newspapers have been excluded from tax. [Otherwise, ‘newspaper’ are ‘goods’, but for the exclusion]. TAXABLE EVENT IN SALES TAX - In re Sea Customs Act - AIR 1963 STC 437= (1964) 3 SCR 827 (SC 9 member bench), it was held that in case of sales tax, taxable event is the act of sale. It is not a tax directly on goods. Categories of Sales - Sales can be broadly classified in three categories. (a) Inter-State Sale (b) Sale during import/export (c) Intra-State (i.e. within the State) sale. If sale or purchase to Marketing Agency is in same State, it will be an Intra-State sale even if goods are despatched outside

the state as per instructions of the marketing agency. - ACC v. CST - AIR 1991 SC 1122. Tax on Inter-State sale is levied by Union (i.e. Central) Government while tax on Intra-State sale is levied by State Government of the State in which sale takes place. No tax is levied on sales during import or export. SALE WITHIN THE STATE IS ‘RESIDUARY SALE’ – As we will see later, ‘sale within State’ is residuary sale. Thus, first we have to decide if sale is ‘Inter State’. If not, we have to find if it is ‘Sale during export or import’. If not, then the sale is ‘Intra State’. Thus, if a sale is Inter State of during export or import, it cannot be ‘Sale within the State’. MODE OF A SALES TRANSACTION - Initially, buyer places an order on seller for supply of goods, called ‘Purchase Order’. After the goods ordered are ready, the buyer may come to the business place (godown, factory or warehouse) of seller and obtain delivery of goods. This will be ‘Sale within the State’. Alternatively, buyer may ask seller to send the goods by transport. In such cases, the seller will book the consignment by rail, road, ship or air as per requirement of buyer to the destination where buyer requires the goods. In such a case, generally, (a) if buyer and seller are in the same State, it is Intra-State sale (b) if they are in different States, it is Inter-State sale (c) if buyer is outside India, it is sale during export (d) if seller is outside India, it is sale during import. Background of CST Sales Tax is one of the most important Indirect Tax for purpose of taxation by State Governments. Revenue from CST goes to State from which movement of goods commences. Total CST revenue in 98-99 was Rs 8,538 Crores. Revenue of some major States was - Maharashtra - Rs 1,442 Crores. Tamilnadu - Rs 934 Crores. West Bengal - Rs 799 Crores. Gujarat - Rs 787 Crores, Haryana - Rs 739 Crores. [ET, Bom 21.7.2000]. CST is proving to be a hindrance in introducing VAT. CST has been reduced to 3% (from 4%) w.e.f. 1-4-2007. It is announced that it will be reduced by 1% every year and made Nil by 1-4-2010. Recent Changes – Following are recent change in CST Law. 1-3-2006 – Appeal to CST Appellate Authority will lie only against highest Appellate Authority of the State [During 17-32005 to 28-2-2006, appeal was to be filed with CST Appellate Authority directly against order of assessing authority]. 18-4-2006 – LPG (liquid petroleum gas) for domestic use is added to list of ‘declared goods’ u/s 14 of CST Act to maintain tax rates at reasonable level. 1-4-2007 - CST rate reduced to 3%. 'D' form abolished. Tobacco products removed from list of declared goods. 1-6-2008 - CST rate reduced to 2%.