Law of Contract 1

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What is Law? Law means a ‘set of rules’ which governs our behaviours and relating
in a civilized society. So there is no need of Law in a uncivilized society. Why
Should One Know Law? One should know the law to which he is subject because
ignorance of law is no excuse. Sources of Mercantile Law in India
English Mercantile
Indian Status Law
Judicial Decisions
Customs and Usages
STUDY NOTE – 1 : INDIAN CONTRACT ACT, 1872

Section 1:Short Title The Indian contract Act 1872 Commencement and
applicability:Extent and Applicable to whole Indian except the state of Jammu &
Kashmir commencement First day of September 1872(1st Sept. 1872)
Prior to this English law of contract was followed in India. It has XI chapter. Law
of contract creates jus in personem and not in jus in rem. The Indian Contract Act
consists of the following two parts: (a) General principals of the Law of Contract.
(b) Special kinds of contracts. ¾ The general principals of the Law of Contract are
contained in Sections 1 to 75 of the Indian Contract Act. These principles apply to
all kinds of contracts irrespective of their nature. ¾ Special contracts are
contained in Sections 124 to 238 of the Indian Contract Act. These special
contracts are Indemnity, Guarantee, Bailment, pledge and Agency. Note: In our
discussion on this part of the book, unless otherwise stated, the sections
mentioned are those of the Indian Contract Act, 1872. Contracts as Defined by
Eminent Jurists 1. “Every agreement and promise enforceable at law is a contract.”
– Pollock 2. “A Contract is an agreement between two or more persons which is
intended to be enforceable at law and is contracted by the acceptance by one party
of an offer made to him by the other party to do or abstain from doing some act.” –
Halsbury 3. “A contract is an agreement creating and defining obligation between
the parties” – Salmond SUJEET JHA 1 9213188188
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DEFINITIONS (Sec 2)
1. Offer(i.e. Proposal) [section 2(a)]:-When one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other person either to such act or abstinence, he is said to make a
proposal. Acceptance 2(b):- When the person to whom the proposal is made, signifies
his assent there to , the proposal is said to be accepted. Promise 2(b) :- A
Proposal when accepted becomes a promise. In simple words, when an offer is
accepted it becomes promise. Promisor and promise 2(c) :- When the proposal is
accepted, the person making the proposal is called as promisor and the person
accepting the proposal is called as promisee. Consideration 2(d):- When at the
desire of the promisor, the promisee or any other person has done or abstained from
doing something or does or abstains from doing something or promises to do or
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.
2. 3. 4.
5.
Price paid by the one party for the promise of the other Technical word meaning
QUIDPRO-QUO i.e. something in return. 6. Agreement 2(e) :- Every promise and set of
promises forming the consideration for each other. In short, agreement = offer +
acceptance.
7. Contract 2(h) :- An agreement enforceable by Law is a contract. 8. Void

agreement 2(g):- An agreement not enforceable by law is void. 9. Voidable contract
2(i):- An agreement is a voidable contract if it is enforceable by Law at the
option of one or more of the parties there to (i.e. the aggrieved party), and it is
not enforceable by Law at the option of the other or others. 10. Void contract :- A
contract which ceases to be enforceable by Law becomes void when it ceases to be
enforceable.
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ESSENTIALS OF A VALID CONTRACT

“All agreements are contracts, if they are made – ¾ by free consent of the parties,
competent to contract, ¾ for a lawful consideration and ¾ with a lawful object, and
¾ not hereby expressly declared to be void.”
ESSENTIALS OF VALID CONTRACT
- Sec.10.
Offer + acceptance = Promise + consideration = Agreement + enforceability By Law
Contract
1. Proper offer and proper acceptance with intention to create legal relationship.
Cases;- A and B agree to go to a movie on coming Sunday. A does not turn in
resulting in loss of B’s time B cannot claim any damages from B since the agreement
to watch a movie is a domestic agreement which does not result in a contract. ¾ In
case of social agreement there is no intention to create legal relationship and
there the is no contract (Balfour v. Balfour) ¾ ¾ 2. 3. In case of commercial
agreements, the law presume that the parties had the intention to create legal
relations. [an agreement of a purely domestic or social nature is not a contract ]
Lawful consideration :- consideration must not be unlawful, immoral or opposed to

the public policy. Capacity:- The parties to a contract must have capacity (legal
ability) to make valid contract. Section 11:- of the Indian contract Act specify
that every person is competent to contract provided. (i) Is of the age of majority
according to the Law which he is subject, and (ii) Who is of sound mind and (iii)
Is not disqualified from contracting by any law to which he is subject. ¾ Person of
unsound mind can enter into a contract during his lucid interval. ¾ An alien enemy,
foreign sovereigns and accredited representative of a foreign state. Insolvents and
convicts are not competent to contract.
4.
Free consent :- consent of the parties must be genuine consent means agreed upon
samething in the same sense i.e. there should be consensus – ad – idem. A consent
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said to be free when it is not caused by coercion, undue influence, fraud,

misrepresentation or mistake. 5. Lawful object • The object of agreement should be
lawful and legal. • Two persons cannot enter into an agreement to do a criminal
act. • Consideration or object of an agreement is unlawful if it (a) is forbidden
by law; or (b) is of such nature that, if permitted, would defeat the provisions of
any law; or (c) is fraudulent; or (d) Involves or implies, injury to person or
property of another; or (e) Court regards it as immoral, or opposed to public
policy. Possibility of performance: • The terms of the agreement should be capable
of performance. • An agreements to do act, impossible in itself cannot be enforced.
Example : A agrees to B to discover treasure by magic. The agreement is void
because the act in itself is impossible to be performed from the very beginning.
The terms of the agreements are certain or are capable of being made certain [29]
Example : A agreed to pay Rs.5 lakh to B for ultra-modern decoration of his drawing
room. The agreement is void because the meaning of the term “ ultra – modern” is
not certain. Not declared Void • The agreement should be such that it should be
capable or being enforced by law. • Certain agreements have been expressly declared
illegal or void by the law. Necessary legal formalities • A contract may be oral or
in writing. • Where a particular type of contract is required by law to be in
writing and registered, it must comply with necessary formalities as to writing,
registration and attestation. • If legal formalities are not carried out then the
contract is not enforceable by law. Example : A promise to pay a time. Barred debt
must be in writing. Agreement is a wider term than contract where as all
contracts are agreements. All agreements are not contracts. All Contracts are
Agreements, but all Agreements are not Contracts The various agreements may be
classified into two categories: Agreement not enforceable by law Agreement
enforceable by law Any essential of a valid contract is not available. All
essentials of a valid contract are available
6.
7.
8.
9.
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Conclusion: Thus we see that an agreement may be or may not be enforceable by law,
and so all agreement are not contract. Only those agreements are contracts, which
are enforceable by law, In short. Contracts = Agreement + Enforceability by Law
Hence, we can conclude “All contracts are agreement, but all agreements are not
contracts.” Basis 1. Section 2. Definition Distinction between Contract & Agreement
Contract Agreement Sec. 2(h) Sec. 2(e) A contract is an agreement Every promise or
every set of enforceable by law. promises forming consideration for each other is
an agreements. Every contract is enforceable Every promise is not enforceable. A
contract includes an agreement. An agreement does not include a contract. The scope
of a contract is limited, as Its scope is relatively wider, as it it includes only
commercial includes both social agreement and agreements. commercial agreements.
Only legal agreements are called An agreement may be both legal contracts. and
illegal. Every contract contains a legal It is not necessary for every obligation.
agreement to have legal obligation.
: :
3. Enforceability : 4. Interrelationship 5. Scope 6. Validity 7. Legal Obligation :

: :
Types of contracts :(1) On the Basis of creation a. b. c. d. e. Express contract

Implied contract Tacit contract Quasi contract E contract (2) On the Basis of
Validity a. b. c. d. (3) On the Basis of execution (4) On the Basis of Liability a.
Bilateral contract b. Unilateral contract
Valid contract a. Executed contract Void contract b. Executed contract Voidable

contract c. Partly executed and Unenforceable party executory contract e. Illegal
contract
(a)
Express contract :- A contract made by word spoken or written. According to sec 9

in so for as the proposal or acceptance of any promise is made in words, the
promise is said to be express. Example : A says to B ‘will you purchase my bike for
Rs.20,000?” B says to A “Yes”. Implied contract:- A contract inferred by The
conduct of person or The circumstances of the case.
(b)
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By implies contract means implied by law (i.e.) the law implied a contract through
parties never intended. According to sec 9 in so for as such proposed or acceptance
is made otherwise than in words, the promise is said to be implied. Example: A
stops a taxi by waving his hand and takes his seat. There is an implied contract
that A will pay the prescribed fare. (c) Tacit contract: - A contract is said to be
tacit when it has to be inferred from the conduct of the parties. Example obtaining
cash through automatic teller machine, sale by fall hammer of an auction sale.
Quasi Contracts are contracts which are created • Neither by word spoken • Nor
written • Nor by the conduct of the parties. • But these are created by the law.
Example: If Mr. A leaves his goods at Mr. B’s shop by mistake, then it is for Mr. B
to return the goods or to compensate the price. In fact, these contracts depend on
the principle that nobody will be allowed to become rich at the expenses of the
other. e – Contract: An e – contract is one, which is entered into between two
parties via the internet.
(d).
(e).
(a) (b)
Valid contract:- An agreement which satisfies all the requirements prescribed by

law On the basis of creation Void contract (2(j)):- a contract which ceases to be
enforceable by law because void when of ceased to be enforceable When both parties
to an agreement are:Under a mistake of facts [20] Consideration or object of an
agreement is unlawful [23] Agreement made without consideration [25] Agreement in
restrain of marriage [26] Restraint of trade [27] Restrain legal proceeding [28].
Agreement by wage of wager [30] Voidable contract 2(i) :- an agreement which is
enforceable by law at the option of one or more the parties but not at the option
of the other or others is a voidable contract. Result of coercion, undue influence,
fraud and misrepresentation. Unenforceable contract: - where a contract is good in
substance but because of some technical defect i.e. absence in writing barred by
imitation etc one or both the parties cannot sue upon but is described as
unenforceable contract. Example: Writing registration or stamping.
(c)
(d)
Example: An agreement which is required to be stamped will be unenforceable if the

same is not stamped at all or is under stamped. SUJEET JHA 6 9213188188
MS EDUCONZ PVT. LTD. (e)
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Illegal contract:- It is a contract which the law forbids to be made. All illegal
agreements are void but all void agreements or contracts are not necessary illegal.
Contract that is immoral or opposed to public policy are illegal in nature.
Unlike illegal agreements there is no punishment to the parties to a void
agreement. Illegal agreements are void from the very beginning agreements are
void from the very beginning but sometimes valid contracts may subsequently becomes
void.
(a)
Executed contract :- A contract in which both the parties have fulfilled their
obligations under the contract. Example: A contracts to buy a car from B by paying
cash, B instantly delivers his car. Executory contract:- A contract in which both
the parties have still to fulfilled their obligations. Example : D agrees to buy
V’s cycle by promising to pay cash on 15th July. V agrees to deliver the cycle on
20th July. Partly executed and partly executory:- A contract in which one of the
parties has fulfilled his obligation but the other party is yet to fulfill his
obligation. Example : A sells his car to B and A has delivered the car but B is yet
to pay the price. For A, it is excuted contract whereas it is executory contract on
the part of B since the price is yet to be paid. On the basis of liability for
performance:-
(b)
(c)
(a)
Bilateral contract:- A contract in which both the parties commit to perform their
respective promises is called a bilateral contract. Example : A offers to sell his
fiat car to B for Rs.1,00,000 on acceptance of A’s offer by B, there is a promise
by A to Sell the car and there is a promise by B to purchase the car there are two
promise.
(b)
Unilateral contract:- A unilateral contract is a one sided contract in which only

one party has to perform his promise or obligation party has to perform his promise
or obligation to do or forbear. Example :- A wants to get his room painted. He
offers Rs.500 to B for this purpose B says to A “ if I have spare time on next
Sunday I will paint your room”. There is a promise by A to pay Rs 500 to B. If B is
able to spare time to paint A’s room. However there is no promise by B to Paint the
house. There is only one promise.
Difference Between Void and Voidable Contract

Matter Definition Voidable contract It means an agreement enforceable by law by one
or more parties. Nature It remains voidable until cancelled by party. Rights or
remedy Aggrieved party has remedy to cancel the contract. Performance of Party
can’t demand performance If aggrieved party does not cancel it contract of contract
within reasonable time, performance SUJEET JHA 7 9213188188 Void contract It means
contract which cease to be enforceable. Valid when made subsequently becomes
unenforceable. No legal remedy.
MS EDUCONZ PVT. LTD. Reason Damages Due to change circumstances Not available in
law
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certain cases.
Difference between Void and illegal Agreement Void agreement Illegal agreement What
Void agreement is not prohibited It is prohibited by law. by law. Effect on
collateral Enforced Not enforced. transaction Punishment No Yes Void ab initio May
not be void ab initio Always void initio Matter Contract of record: It is either a
judgment of a court of a Recognizance. A Judgment is an obligation imposed by a
Court upon one or more persons in favour of another or others. In real sense, it is
not a contract, as it is not based upon any agreement between two parties.
Recognizance is a Bond by which a person undertakes before a Court of Magistrate to
observe some condition e.g. to appear on summons. Contracts of record derive their
binding force from the authority of the Court. Contract under Seal: (a) A contract
under Seal is one which derives its binding force from its form alone. (b) It is in
writing and signed, sealed and delivered by the parties. (c) It is also called a
Deed or a Specialty contract.
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OFFER
Offer(i.e. Proposal) [section 2(a)]:-When one person signifies to another his
willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other person either to such act or abstinence, he is said to make a
proposal. To form an agreement, there must be at least two elements – one offer and
the other acceptance. Thus offer is the foundation of any agreement. “When one
person signifies to another his willingness – • to do or to abstain from doing
anything, • with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.” The person who makes an offer is called
“Offeror” or “ Promisor” and the person to whom the offer is made is called the
Offeree” or “Promisee”. Example Mr. A says to Mr. B, “Will you purchase my car for
Rs.1,00,000?” In this case, Mr. A is making an offer to Mr. B. Here A is the
offeror and B is the offeree.
Essentials elements of an offer:(1) (2) (3) (4) (5) (6) (7) There must be two
parties. The offer must be communicated to the offeree. The offer must show the
willingness of offeror. Mere telling the plan is not offer. The offer must be made
with a view to obtaining the assent of the offeree. A statement made jokingly does
not amount to an offer. An offer may involve a positive act or abstinence by the
offeree. Mere expression of willingness does not constitute an offer. A tells B’
that be desires to marry by the end of 2008, if does not constitute an offer of
marriage by A’ to B’ A further adds will you marry me. Then it become offer.
Legal Rules as to valid offer:1. Offer must be communicated to the offeree: The
offer is completed only when it has been communicated to the offeree. Until the
offer is communicated, it cannot be accepted. Thus, an offer accepted without its
knowledge, does not confer any legal rights on the acceptor. Example: A’s nephew
has absconded from his home. He sent his servant to trace his missing nephew. When
he servant had left, A then announced that anybody who discovered the missing boy,
would be given the reward of Rs.500. The servant discovered the missing boy without
knowing the reward. When the servant came to know about the reward, he brought an
action against A to recover the same. But his action failed. It was held that the 9
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servant was not entitled to the reward because he did not know about the offer when
the discovered the missing boy. [Lalman Shukla v. Gauri Datt (1913) All LJ 489] 2.
The offer must be certain definite and not vague unambiguous and certain. Example:
A offered to sell to B. ‘a hundred tons of oil’. The offer is uncertain as there is
nothing to show what kind of oil is intended to be sold. The offer must be capable
of creating legal relation. A social invitation is not create legal relation.
Example: A invited B to a dinner and B accepted the invitation. It is a mere social
invitation. And A will not be liable if he fails to provide dinner to B. Offer may
be express and implied The offer may be express or implied; An offer may be express
as well as implied. An offer which is expressed by words, written or spoken, is
called an express offer. The offer which is expressed by conduct, is called an
implied offer [Section 9]. Communication of complete offer Example: A offered to
sell his pen to B for Rs.1,000. B replied, “I am ready to pay Rs.950”. On A’s
refusal to sell at this price, B agreed to pay Rs.1,000. held, there was not
contract at the acceptance to buy it for Rs.950 was a counter offer, i.e. rejection
of the offer of A. Subsequent acceptance to pay Rs.1,000 is a fresh offer from B to
which A was not bound go give his acceptance. Counter offer – A counter offer
amounts to rejection of the original offer Cross offer do not conclude a contract
An offer must not thrust the burden of acceptance on the offeree. Example: A made a
contract with B and promised that if he was satisfied as a customer he would
favorably consider his case for the renewal of the contract. The promise is too
vague to create a legal relationship. ¾ The acceptance cannot be presumed from
silence. ¾ Acceptance is valid only if it is communicated to the offeror. Offer
must be distinguished from invitation to offer. Example: Menu card of restaurant is
an invitation to put an offer. Example ; Price – tags attached with the goods
displayed in any showroom or supermarket is also an invitation to proposal. If the
salesman or the cashier does not accept the price, the or the cashier does not
accept the price, the interested buyer cannot compel him to sell, if he wants to
buy it, he must make a proposal. Example: Job or tender advertisement inviting
applications for a job or inviting tenders is an invitation to an offer. Example:
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3.
4.
5.
6. 7. 8.
9.
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An advertisement for auction sale is merely an invitation to make an offer and not
an offer for sale. Therefore, an advertisement of an auction can be withdrawn
without any notice. The persons going to the auction cannot claim for loss of time
and expenses if the advertisement for auction is withdrawn. 10. 11. Offeror should
have an intention to obtain the consent of the offeree. An answer to a question is
not a offer. Offer ¾ Show his readiness to enter into a contract, it is called as
an offer ¾ Purpose of entering contract ¾ Results in a contract Invitation to offer
¾ Person invites offer to make an offer to him. ¾ Purpose of enter offer ¾ Results
in offer.
Example Example Application filled in by a prospective Issue of prospectus by a

Company, an applicable to the Institution, a student seeking education Institution.
admission in educational Institution.
KINDS OF OFFER
Express offer Implied offer Specific offer General offer Cross offer Counter offer
Standing Open and Continuou s offer
I.
Express offer - When the offeror expressly communication the offer the offer is
said to be an express offer the express communication of the offer may be made by
Spoken word Written word Implied offer – when the offer is not communicate
expressly. An offer may be implied from:The conduct of the parties or The
circumstances of the case Specific:- It means an offer made in (a) a particular
person or (b) a group of person: It can be accepted only by that person to whom it
is made communication of acceptance is necessary in case of specific offer. General
offer: - It means on offer which is made to the public in general. • General offer
can be accepted by anyone. • If offeree fulfill the term and condition which is
given in offer then offer is accepted. • Communication of acceptance is not
necessary is case of general offer
II.
III.
IV.
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Example Company advertised that a reward of Rs.100 would be given to any person who
would suffer from influenza after using the medicine (Smoke balls) made by the
company according to the printed directions. One lady, Mrs, Carlill, purchased and
used the medicine according to the printed directions of the company but suffered
from influenza, She filed a suit to recover the reward of Rs.100. The court held
that there was a contract as she had accepted a general offer by using the medicine
in the prescribed manner and as such as entitled to recover the reward from the
company. Carlill v Carbilic Smoke Ball Co. 1893 V. Cross offer:- When two parties
exchange identical offers in ignorance at the time of each other’s offer the
offer’s are called cross offer. Two cross offer does not conclude a contract. Two
offer are said to be cross offer if 1. They are made by the same parties to one
another 2. Each offer made in ignorance of the offer made by the 3. The terms and
conditions contained in both the offers’ are same. Example : A offers by a letter
to sell 100 tons of steel at Rs.1,000 per ton. On the same day, B also writes to A
offering to buy 100 tons of steel at Rs.1,000 per ton. When does a contract come
into existence: - A contract comes into existence when any of the parties, accept
the cross offer made by the other party. VI Counter offer :- when the offeree give
qualified acceptance of the offer subject to modified and variations in the terms
of original offer. Counter offer amounts to rejection of the original offer. Legal
effect of counter offer:(1) Rejection of original offer (2) The original offer is
lapsed (3) A counter offer result is a new offer. In other words an offer made by
the offeree in return of the original offer is called as a counter offer. Example:
A offered to sell his pen to B for Rs.1,000. B replied, “ I am ready to pay
Rs.950.” On A’s refusal to sell at this price, B agreed to pay Rs.1,000. Held,
there was not contract as the acceptance to buy it for Rs.950 was a counter offer,
i.e. rejection of the offer of A. Subsequent acceptance to pay Rs.1,000 is a fresh
offer from B to which A was not bound to give his acceptance. VII Standing, open
and continuous offer:- An offer is allowed to remain open for acceptance over a
period of time is known as standing, open or continually offer. Tender for supply
of goods is a kind of standing offer. Example: When we ask the newspaper vendor to
supply the newspaper daily. In such case, we do not repeat our offer daily and the
newspaper vendor supplies the newspaper to us daily. The offers of such types are
called Standing Offer.
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LAPSE OF AN OFFER
An offer should be accepted before it lapses (i.e. comes to an end). An offer may
come to an end in any of the following ways stated in Section 6 of the Indian
Contract Act: 1. By communication of notice of revocation: An offer may come to an
end by communication of notice of revocation by the offeror. It may be noted that
an offer can be revoked only before its acceptance is complete for the offeror. In
other words, an offeror can revoke his offer at any time before he becomes before
bound by it. Thus, the communication of revocation of offer should reach the
offeree before the acceptance is communicated. By lapse of time; Where time is
fixed for the acceptance of the offer, and it is not acceptance within the fixed
time, the offer comes to an end automatically on the expiry of fixed time. Where no
time for acceptance is prescribed, the offer has to be accepted within reasonable
time. The offer lapses if it is not accepted within that time. The term ‘reasonable
time’ will depend upon the facts and circumstances of each case. By failure to
accept condition precedent: Where, the offer requires that some condition must, be
fulfilled before the acceptance of the offer, the offer lapses, if it is accepted
without fulfilling the condition. By the death or insanity of the offeror: Where,
the offeror dies or becomes, insane, the offer comes to an end if the fact of his
death or insanity comes to the knowledge of the acceptor before he makes his
acceptance. But if the offer is accepted in ignorance of the fact of death or
insanity of the offeror, the acceptance is valied. This will result in a valid
contract, and legal representatives of the deceased offeror shall be bound by the
contract. On the death of offeree before acceptance, the offer also comes to an end
by operation of law. By counter – offer by the offeree: Where, a counter – offer is
made by the offeree, and then the original offer automatically comes to an end, as
the counter – offer amounts to rejections of the original offer. By not accepting
the offer, according to the prescribed or usual mode: Where some manner of
acceptance is prescribed in the offer, the offeror can revoke the offer if it is
not accepted according to the prescribed manner. By rejection of offer by the
offeree: Where, the offeree rejects the offer, the offer comes to an end. Once the
offeree rejects the offer, he cannot revive the offer by subsequently attempting to
accept it. The rejection of offer may be express or implied. By change in law:
Sometimes, there is a change in law which makes the offer illegal or incapable of
performance. In such cases also, the offer comes to an end.
2.
3.
4.
5.
6.
7.
8.
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ACCEPTANCE
Acceptance 2(b):- When the person to whom the proposal is made, signifies his
assent there
to , the proposal is said to be accepted. Legal Rules for the Acceptance 1.
Acceptance must be absolute and unqualified Example: A offers to sell his house to
B for Rs. two lakhs. B accepts the offer and promises to pay the price in four
installments. This is not pay the acceptance as the acceptance is with variation in
the terms of the offer. Acceptance must be communicated: Mere mental acceptance is
no acceptance, But there is no requirement of communication of acceptance of
general offer. Example The manager of Railway Company received a draft agreement
relating to the supply of coal. The manager marked the draft with the words
“Approved” and put the same in the drawer of his table and forgot all about it.
Held, there was no contract between the parties as the acceptance was not
communicated. It may however, be pointed out that the Court construed a conduct to
parties as railway company was accepting the supplies of coal from time to time.
Manner of acceptance General rule say that it must be as per the manner prescribed
by offeror. If no mode is prescribed in which it can be accepted, then it must be
in some usual and reasonable manner. If there is deviation in communication of an
acceptance of offer, offeror may reject such acceptance by sending notice within
reasonable time. If the offeror doesn’t send notice or rejection, he accepted
acceptance of offer. Example: A offers B and indicates that the acceptance be given
by telegram. B sends his acceptance by ordinary post. It is a valid acceptance
unless A insists for acceptance in the prescribed manner. Acceptance of offer must
be made by offeror. Example : A applied for the headmastership of a school. He was
selected by the appointing authority but the decision was not communicated to him.
However, one of members in his individual capacity informed him about the
selection. Subsequently, the appointing authority cancelled its decision. A sued
the school for breach of contract. The Court rejected the A’s action and held that
there was no notice of acceptance. “Information by unauthorized person is as
insufficient as overhearing from behind the door”. Acceptance must be communicated
to offeror Time limit for acceptance • If the offer prescribes the time limit, it
must be accepted within specified time. • If the offer does not prescribe the time
limit, it must be accepted within reasonable time. Example : A applied (offered)
for shares in a company in early June. The allotment (Acceptance) was made in late
November. A refused to take the shares. Held, A was entitled to do so as the
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2.
3.
4.
5.
6. 7.
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Acceptance of offer may be expressly (by words spoken or written); or impliedly (by
acceptance of consideration); or by performance of conditions (e.g.in case of a
general offer) Mere silence is not acceptance of the offer Example A offers to B to
buy his house for Rs.5 lakhs and writes “If I hear no more about it within a week,
I shall presume the house is mine for Rs.5 lakhs. “B does not respond. Here, no
contract is concluded between A and B. However, following are the two exceptions to
the above rule. It means silence amounts as acceptance of offer. • Where offeree
agrees that non – refusal by him within specified time shall amount to acceptance
of offer. • When there is custom or usage of trade which specified that silence
shall amount to acceptance. Acceptance subject to the contract is no acceptance If
the acceptance has been given ‘subject to the contract” or subject to approval by
certain persons, it has not effect at all. Such an acceptance will not create
binding contract until a formal contract is prepared and signed by all the parties.
General Rules as to Communication of Acceptance
9.
10.
11.
1.
In case of acceptance by post Where the acceptance is given by post, the

communication of acceptance is complete as against the proposer when the letter of
acceptance is posted. Thus, mere posting of letter of acceptance is sufficient to
conclude a contract. However, the letter must be properly addressed and stamped.
Delayed or no delivery of letter Where the letter of acceptance is posted by the
acceptor but it never reaches the offeror, or it is delayed in transit, it will not
affect the validity of acceptance. The offeror is bound by the acceptance.
Acceptance by telephones telex or tax If the communication of an acceptance is made
by telephone, tele-printer, telex, fax machines, etc, it completes when the
acceptance is received by the offeror. The contract is concluded as soon as the
offeror receives not hears the acceptance. The place of Contract In case of
acceptance by the post, the place where the letter is posted is the place of
contract. Where the acceptance is given by instantaneous means of communication
(telephone, fax, tele-printer, telex etc.), the contract is made at the place where
the acceptance is received,
2.
3.
4.
The time of Contract In case of acceptance by post, the time of posting the letter
of acceptance to the time of contract. But in case of acceptance by instantaneous
means of communication, the time of contract is the time when the offeror gets the
communication, the time of contract is the time when offeror gets the communication
of acceptance. 6. Communication of acceptance in case of an agent. Where the offer
has been made through an agent, the communication of acceptance is completed when
the acceptance is given either to the agent or to the principal. In such a SUJEET
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5.
LAW& AUDIT
case, if the agent fails to convey the acceptance received from offeree, still the
principal is bound by the acceptance. 7. Acceptance on loudspeakers Acceptance
given on loudspeaker is not a valid a acceptance. Particulars When Communication
complete [Sec.4]
Offer Acceptance • Communication of a • As against the offerer/ is proposal is

complete when Proposer: When it is put in it comes to the knowledge a course of
transmission to of the person to whom it is him so as to be out of the made. power
of the Acceptor. • Example : A proposes by • As against the letter, to sell his
Tonga to B Offeree/Acceptor: When it at Rs.10,000. comes to the knowledge of
Communication of the the Proposer. (See separate proposal is complete when question
above) B receives the letter. When Revocation can • Offer/proposal may be •
Acceptance may be revoked be made [Sec.5] revoked at any time before at any time
before the the communication of its communication of acceptor, acceptance is
complete, as but not afterwards. against the proposer, but • Example: T sends to S
by not afterwards. post, an offer to sell his cycle. S sends his • Example: U sends
a letter to Y proposing to sell his acceptance via post, S could land. Y sends his
revoke his acceptance, upto acceptance by post. U can any time before or at the
revoke the offer at any time moment when he posts his before or at the moment
letter of acceptance, but not when Y posts his letter of afterwards. acceptance,
but not afterwards. When communication • As against the offeror: • As against the
Offeree: of revocation is When it is put into a course When it comes to his
complete [Sec.4] of transmission to the knowledge. person to whom it is made, •
Example : Communication so as to be out of the power of revocation is complete of
the person who makes it. only when H receives the • Example : S proposes to H
telegram. by letter. H sends his • When H revokes his acceptance by letter.
acceptance, it is complete Suddenly, S sends a when he dispatches the telegram
revoking his offer. telegram. Revocation is complete as against S when the telegram
is dispatched; H’s revocation of acceptance is complete when S receives such
telegram. Accepted is lighted match, while offer is a train of gun powder Sir
willian Anson. SUJEET JHA 16 9213188188
LAW& AUDIT
CAPACITY TO CONTRACT
Parties unable to Enter into a contract
Minor A person of unsound mind Lunatic Alien enemy Person disqualified by law
Idiot Drunken and Intoxicated Convict Corporation and Company Insolvent
Foreign Sovereign
1. Who is competent to make a contract:Section 11. Every person is competent to

contract who is of age of majority according to the Law to which he is subject, who
is of sound mind and not is disqualified from contracting by any Law to which he is
subject. Age of majority:- According to section 3 of Indian majority Act-1875 every
person domiciled in Indian attains majority on the completion of 18 years of age.
Exception: - 21 years- in the following cases. a. Where a guardian of a minor’s
person or property is appointed under the Guardian and wards Act, 1890. b. Where
minor’s property has passed under the superintendence of the court of words.
Position of Agreements by Minor:1. Validity: - An agreement with a minor is void-

ab-initio [ Mohoribibee v. Dharmodas Ghose] Example : Mr. D, a minor, mortgaged his
house for Rs.20000 to a money – lender, but the mortgagee, i.e. the money – lender,
paid him a sum of Rs.8000. Subsequently, the minor sued for setting aside the
mortgage. Held that the contract was void, as Mr. D was minor and therefore he is
not liable to pay anything to the lender. A minor’s has received any benefit under
a void contract, he cannot be asked to return the same. If a minor has received any
benefit under a void contract, he cannot be asked to return the same. Fraudulent
representation by a minor- no difference in the status of agreement. The contract
remains void. A minor with the consent of all the partners, be admitted to the
benefits of an existing partnership. Contracts entered into by minors are void-ab-
initio. Hence no specific performance be enforced for such contracts. 17 9213188188
2.
3.
4.
5.
6. can
SUJEET JHA
LAW& AUDIT
7. Minor’s parent/guardians are not liable to a minor’s creditor for the breach of
contract by the minor. 8. 9. fully 10. 11. A minor can act as an agent but not
personally liable. But he cannot be principal. A minor cannot become shareholder of
a the company except when the shares are paid up and transfer by share. A minor
cannot be adjudicated as insolvent. Can enter into contracts of Apprenticeship,
Services, Education, etc: (a) A minor can enter into contract of apprenticeship, or
for training or instruction in a special art, education, etc. (b) These are allowed
because it generates benefits to the Minor. Guarantee for and by minor A contract
of guarantee in favour of a minor is valid. However, a minor cannot be a surety in
a contract of guarantee. This is because, the surety is ultimately liable under a
contract of guarantee whereas a minor can never be held personally liable. Minor as
a trade union member Any person who has attained the age of fifteen years may be a
member for registered trade union, provided the rules of the trade union allow so.
Such a member will enjoy all the rights of a member.
12.
13.
EXCEPTION
• • Contract for the benefit of a minor. Contract by Guardian Benefit of a minor by
his guardian or manager of his estate. a. within the scope of the authority of the
guardian. b. Is for the benefit of the minor. • Contract for supply of Necessaries.
Example : Food, clothes, bed, shelter, shoes, medicines and similar other things
required for the maintenance of his life or for the life of his dependents,
expenses for instruction in grade or arts; expenses for moral religions or
intellectual education, funeral expenses of his deceased family members, marriage
expenses of a dependent female member in the family; expenses incurred in the
protection of his property or personal liberty, Diwali pooja expenses, etc. have
been held by courts to be necessaries of life. However, the things like earrings
for a male, spectacles for a blind person or a wild animal cannot be considered as
necessaries. Liability for tort: A minor is liable for a tort, i.e., civil wrong
committed by him. Example : A, a 14 – year – old boy drives a car carelessly and
injures B. He is liable for the accident i.e., tort.
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A person of unsound mind

Lunatic Idiot Drunken and Intoxicated
Person of Unsound Mind A person who is usually of unsound mind, but occasionally of
sound mind can make a contract when he is of sound mind. Similarly, a person who is
usually of sound mind, but occasionally of unsound mind, may not make a contract
when he is of unsound mind. ⇒ At time of entering into a contract, a person must be
sound mind. Law presumes that every person is of sound mind unless otherwise it is
proved before court. An agreement by a person of unsound mind is void. The
following are categories of a person considered as person of a unsound mind. An
idiot An idiot is a person who is congenital (by birth) unsound mind. His
incapacity is permanent and therefore he can never understand contract and make a
rational judgment as to its effects upon his interest. Consequently, the agreement
of an idiot is absolutely void ab initio. He is not personally liable even for the
payment of necessaries of life supplied to him. Delirious persons A person
delirious from fever is also not capable of understanding the nature and
implications of an agreement. Therefore, he cannot enter into a contract so long as
delirium lasts. Hypnotized persons Hypnotism produces temporary incapacity till a
person is under the effect of artificial induced sleep. Mental decay There may be
mental decay or senile mind the to old age or poor health. When such person is not
capable of understanding the contract and its effect upon his interest, he cannot
enter into contract. Lunatic is not permanently of unsound mined. He can enter into
contract during lucid intervals i.e., during period when he is of sound mind.
Generally of Unsound Mind Sound Mind Occasionally of Sound Mind Capacity to Example
Contract Can enter into a A patient in a lunatic asylum, Contract when he who is at
intervals of sound is of Sound Mind. mind, may contract during those intervals.
Cannot make a A sane man, who is delirious Contract when he from fever or who is so
drunk is of Unsound that he cannot understand terms Mind. of a contract or form a
judgment, cannot contract 19 9213188188
Unsound Mind
SUJEET JHA
LAW& AUDIT while such delirium drunkenness lasts. or
Drunken person An agreement made by intoxicated person is void.
Person Disqualified by law

Alien enemy Foreign Sovereign Convict Corporation and Company Insolvent
Person Disqualified by Law

⇒ Body corporate or company or corporation Contractual capacity of company is
determined by object clause of its memorandum of association. Any act done in
excess of power given is ultra – virus and hence void. Alien enemy • An ‘alien’ is
a person who is a foreigner to the land. He may be either an ‘alien friend’ or an
‘alien enemy. If the sovereign or state of the alien is at peace with the country
of his stay, he is an alien friend. An if a war is declared between the two
countries he is termed as an alien enemy. • During the war, contract can be entered
into with alien enemy with the permission of central government.
(Discuss in class)
Convict can’t enter into a contract while he is undergoing imprisonment. But he can
enter into a contract with permission of central government while undergoing
imprisonment. After the imprisonment is over, be becomes capable of entering into
contract. Thus the incapacity is only during the period of sentence. Insolvent When
any person is declared as an insolvent, his property vests in receiver and
therefore, he can’t enter into contract relating to his property. Again he becomes
capable to enter into contract when he is discharged by court. Foreign sovereigns,
diplomatic staff and representative of foreign staff can enter into valid contract.
However, a suit cannot be filed against them, in the Indian counts without the
prior sanction of the central Government.
Third party to a contract cannot sue or a stranger to a contract cannot sue. Only
those persons, who are parties to a contract, can sue and be sued upon the
contract. This Rule is called “Doctrine of privities of contract.” Exception. i.
Trust:- In case of trust a beneficiary can sue upon the contract. Example: 20
9213188188
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A transferred certain properties to B to be held by him in trust for the benefit of

C. In this case, C although not a party to the trust, can sue for the benefits
available to him under the trust. This exception to the rule of Privity of contract
has been recognised in a well known case of khwaja Mohd. Khan v. Hussaini Begum
(1910) 32 All 410. ii. Family settlement / Marriage contract:- In case of family
settlement members who were not originally party to the contract can also sue upon
it. A female members cone force a provision for marriage expenses made on partition
of HUF. Example: H sued her father – in – law K to recover Rs.15,000 being arrears
of allowance called Pin money payable to her by K under an agreement between K and
H’s father, consideration being H’s marriage to K’s son D. Both H and D were minors
at the time of marriage. Held, the promise can be made enforceable by H. Provision
of marriage expenses of female members of a Joint Hindu Family, entitles the female
member to sue for such expenses on a partition between male members., Two brothers,
on partition of family joint properties, agreed to invest in equal shares for their
mother’s maintenance. Held, the mother was entitled to require her sons to make the
investment. iii. Acknowledgement of liability:- Where a person admits his Liability
thereafter if he refused be will be stopped from denying his liability. Example X
receives money from Y for paying it to Z. X admits the receipt of that amount to Z.
Z can recover the amount from X, even though the money is due from Y. Assignment of
contract. Assignee (the person to whom benefits of contract are assigned) can
enforce upon the contract.. Contract entered into through an agent. Covenants
running with land. Stranger to consideration:- “Stranger to contract” must be
distinguished from a stranger to consideration need not necessarily be provided by
the promises if may flow from a third party also such a person is ‘ stranger to
consideration,. ( Chinnaya Vs Ramayya).
iv. v. vi.
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CONSIDERATION
MEANING 1.(a) Consideration is a quid pro quo i,e something in return it may be –
(i) some benefit right, interest, loss or profit that may accrue to one party or,
(ii) some forbearance, detriment, loss or responsibility suffered on undertaken by
the other party [currie V mussa] According to Sir Frederick Pollock, “consideration
is the price for which the promise of the other is bought and the promise thus
given for value is enforceable. Definition [Sec 2(d)]:- when at the desire of the
Promisor, the promise or any other person. (a) has done or abstained from doing ,
or [Past consideration] (b) does or abstains from doing, or [Present consideration]
(c) promises to do or abstain from doing something [Future consideration ] such act
or abstinence or promise is called a consideration for the promise. Example (i) ‘P’
aggress to sell his car to ‘Q’ for Rs.50,000 Here ‘Q’s Promise to pay Rs50,000 is
the consideration for P’s promise and ‘P’s promise to sell the car is the
consideration for ‘Q’s promise to pay Rs.50,000. (ii) ‘A’ promises his debtor ‘B’
not to file a suit against him for one year on ‘A’s agreeing to pay him Rs.10,000
more. Here the abstinence of ‘A’ is the consideration for ‘B’s Promise to pay.
(b) 2.
3.
Legal Rules for valid consideration 1. Consideration must move at the desire of the
promisor. D constructed a market at the instance of District collector. Occupants
of shops promised to pay D a commission on articles sold through their shops. Held,
there was no consideration because money was not spent by Plaintiff at the request
of the Defendants, but at instance of a third person viz. the Collector and, thus
the contract was void. Durga Prasad v. Baldeo Consideration may move from the
promisee or any other person who is not a party to the contract. [Chinnaya’s Vs
Ramayya] A owed Rs.20,000 to B. A persuaded C to sign a Pro Note in favour of B. C
promised B that he would pay the amount. On faith of promise by C, B credited the
amount to A’s account. Held, the discharge of A’s account was consideration for C’s
promise. National Bank of Upper India v. Bansidhar Consideration may be past,
present, Future: • Under English law, Past consideration is no consideration. •
Present consideration :- cash sale 22 9213188188
2.
3.
SUJEET JHA
MS EDUCONZ PVT. LTD. •
LAW& AUDIT
Future or executory consideration:- A Promises to B to deliver him 100 bags of

sugar at a future date . B promise to pay first on delivery.
4.
Consideration should be real and not illusory. Illusory consideration renders the
transaction void consideration is not valid if it is. (i) Physically impossible
(ii) Legally not permissible (iii) Uncertain (iv) illusory (fulfillment of a pre
existing obligation) Must be legal:Consideration must not be unlawful, immoral or
opposed to public policy. consideration need not be adequate. A contract is not
void merely became of the fact that the consideration is inadequate. The law simply
requires that contract should be supported by consideration. So long as
consideration exists and it is of some value, courts are not required to consider
its adequacy. Example: A agreed to sell a watch worth Rs.500 for Rs.20, A’s consent
to the agreement was freely given. The consideration, though inadequate. Will not
affect the validity of the contract. However, the inadequacy of the consideration
can be considered in order to know whether the consent of the promisor was free or
not . [Section 25 Explanation II] The performance of an act what one is legally
bound to perform is not consideration for the contract mean’s something other than
the promisor’s existing obligation –
5.
6.
7.
A contract not supported by consideration is void . Ex. Nudo Pacto non oritur
action, i,e, an agreement without consideration is void. Ex ceptions to the Rule “
No consideration . No contract”. 1. Written and registered agreements arising out
of love and affection:- [25 (1)] • Expressed in writing and registered under law
for the time being in force for registration of document • Natural love and
affection • Between parties standing in a near relation to each other Example:- An
elder brother, on account of natural love and affection, promised to pay the debts
of his younger brother. Agreement was put to writing and registered. Held,
agreement was valid. Exception: - Rajlukhy Dabee Vs Bhootnath Mukharjee Example: A
Hindu husband by a registered document, after referring to quarrels and
disagreements between himself and his wife, promised to pay his wife a sum of money
for her maintenance and separate residence. Held that the promise was unenforceable
since natural love and affection was missing. 2. Promise to compensate [25(2)] •
Promise to compensate wholly or in part • Who has already voluntarily done
something for the promisor 23 9213188188
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LAW& AUDIT
• Something which the promisor was legally compellable to do. Example:- A finds B’s
purse and give to him. B Promise to give A Rs.500. This is a valid contract.
3.
4. 5. 6. 7. 8.
Promise to pay a time – barred debt. [Sec 25(3)] • A debt barred by limitation con
not recovered. Hence, a promise to pay a such a debt is without any consideration.
• Can be enforced only when – in writing and sighed by Debtor or his authorized
agent. Example : A owes B Rs.10,000 but the debt is barred by Limitation Act. A
signs a written promise to pay B Rs.8,000 on account of debt. This is a valid
contract. Completed gift- gift do not require any consideration. Agency (185) –
According to the Indian contract Act. No consideration is necessary to create an
agency. Bailment (148)- consideration is not necessary to effect a valid bailment
of goods. It is Called Gratuitous Bailment. Remission (63). Charity- If a person
promises to contribute to charity and on this faith the promises undertakes a
liability to the extent not exceeding the promised subscription, the contract shall
be valid.
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LAW& AUDIT
FREE CONSENT
According to section 13. Two persons are said to have consented when they agree
upon same thing in the same sense. In English law, this is called ‘consensus – ad –
idem’ Effect of absence of consent: ⇒ When there is no consent at all, the
agreement is void – ab – initio’. It is not enforceable at the option of either
party Example 1:X have two car one Maruti car and one Honda city car. Y does not
know that X has two cars Y offers to buy car at Rs.50,000. Here, there is no
identity of mind in respect of the subject matter. Hence there is no consent at all
and the agreement is void – ab – inito. Example 2:An Illiterate woman signed a gift
deed thinking that it was a power of attorney – no consent at all and the agreement
was void – ab – inito [ Bala Devi V S. Manumdats ] Free consent ⇒ Consent is said
to be free when it is not caused by [ Section 14] (a) coercion [Section 15] (b)
Undue influence [Section 16] (c) Fraud [Section 17] (d) Misrepresentation [ Section
18] (e) Mistake [Section 20, 21,22] Effect of absence of Free Consent :- If consent
coercion, undue influence, fraud , Misrepresentation the contract is voidable at
the option of party whose consent was not free [19, 19A]
Coercion [Section 15]

(a) (b) (c) (d) Committing any act which is forbidden by the IPC Threatening to
commit any act which is forbidden by the IPC. Unlawful detaining of any property or
Threatening to detain any property.
Essential elements of coercion

Above four [a – d] (e) coercion need not necessary proceed from party to contract.
(f) Coercion need not necessary be directed against the other contracting party.
(g) It is immaterial whether the IPC is or is not in force at the time or at the
place where the coercion is employed [Bay of Bengal caption] Effect of threat to
file a suit:- A threat to file a suit (whether civil or court) does not amount to
coercion unless the suit is on false charge. Threat to file a suit on false charge
is an act forbidden by the IPC and thus will amount to an act of coercion. SUJEET
JHA 25 9213188188
LAW& AUDIT
Effect of Threat to commit suicide:- Threat to commit suicide amounted to coercion

and the release deed was example discussed in class. Therefore voidable. [Chikham
Ammiraju v seshama]
Duress V Coercion
English Law - Duress does not include detaining of property or threat to detain
property. - Duress can be employed only by a party to the contract or his agent.
Effect:when coercion is employed to obtain the consent of a party the contract is
voidable at the option of the party where consent was obtained by coercion. A
threat to strike by employees in support of their demands is not regarded as
coercion. This is because the threat to strike is not an offence under the I.P.C.
it is a right given under the Industrial Disputes Act. Detaining property under
mortgage: Detention of property by a mortgage until the payment of loan does not
amount to coercion.
Undue influence [Section 16]

Meaning of undue influence :- dominating the will of the other person to obtain an
unfair advantages over the others. (a) where the relation subsisting between the
parties must be such that one party is in position to dominate the will of the
other. (b) The dominant party use his position. (c) Obtain an unfair advantage over
the other . Presumption of domination of will:Circumstances Examples Where he holds
a real or apparent authority Master and servant, parent and child, Income over the
other Tax officer and assesses principal and a Where he stands in a Trust fiduciary
(benefit) Temporary Teacher. relation to the other Trustee and beneficiary
spiritual Guru and his Mental Capacity of a person is temporarily or disciples,
solicitors and clients. Guardian and permanent effected by reason of age, illness
or wards mental or bodily distress Relationship between medical attendant and ward.
Example :A Poor Hindu widow agreed to pay interest at 100% P. a because she need
the money to established her right of maintenance. It was held that the lender was
in position to dominate the will of widow.
No. Presumption of Domination of will:¾ ¾ ¾ ¾ Landlord and Tenant Creditor and

Debtor Husband and wife (other than Pardanashin) Principal and Agent
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Effect of undue Influence:-[Section 19A]

When consent to an agreement is caused by undue influence, the contract is voidable
at the option of the party whose consent was so caused. Burden of Proof:- A
contract is presumed to be induced by undue influence if the following two
condition:¾ A party has the position to dominate the will of the others ¾ The
transaction is unconscionable (unreasonable) In such a case dominant party is under
the burden to prove the undue influence was not employed. [Unconscionable
transactions:- if transaction appears to unreasonable the dominant party to prove
that there is no undue influence. ] ¾ Any other transaction:- weaker party to prove
the influence was employed] Where some transaction is entered into in the ordinary
course of business, but due to certain contingencies, one party is able to make the
other party agree to certain terms and conditions then it is not undue influence.
Example : A applies to a banker for a loan at a time when there is stringency in
the money market. The banker declines to make the loan except at an unusually high
rate of interest. A accepts the loan on these terms. This is a transaction in the
ordinary course of business, and the contract is not induced by undue influence.
Example : A spiritual guru induced his chela to donate all his property to the
ashram and said that in return of it, he will certainly get salvation. The chela
did the same. Held, that this is a case, of undue influence so it becomes void.
Contract with Pardanashin woman;Induced by undue influence Burden of Proof – Full
disclosure is made to pardanashin women Pardanashin Women - Understand the contract
- Receipt of competent independent advice .
Rebutting presumption:¾ Dominant party – full disclosure ¾ Price was adequate ¾

Receipt of competent independent advice before entering into contract – weaker
party.
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Undue influence Vs Coercion

Similarities: - Voidable at the option of aggrieved party:Coercion (15) Meaning –
using or threat to use physical force - obtain the consent of party (intention) -
Punishment under IPC - Parties – Stranger - Relationship – Immaterial - Voidable at
the option of aggrieved party - Benefit - Back Undue Influence (16) Involves use of
moral force (mental pressure) Obtain an unfair advantage (intention) Not criminally
liable Between the parties to the contract One party dominate the other party
Voidable or court set aside Benefit – order of court – Back
Fraud (17)
⇒ ⇒ The term fraud means a take representation of facts made willfully with a view
to deceive the other party. Sec.17- fraud means any act committed by a party to a
contract or with his connivance or by his agent with intent to deceive another
party there to or his agent or to induce to enter into contract.
Essentials of fraud :(a) By a party to the contract (b) (c) (d) (e) (f) (g) (h)
There must be representation – [an opinion a statement of expression – does not
fraud]. The representation must be false. Before conclusion of contract. The
misrepresentation must be made willfully. The misrepresentation must be made with a
view to deceive the other party. The other party must have actually been deceived.
The other party have suffered a loss.
Fraud – definition include ⇒ The suggestion, as to fact, of that which is not true
by one who does not believe it to be true. ⇒ The active concealment of a fact by
one having knowledge or belief of the fact. Ex. A furniture dealer conceals the
crakes in furniture by polish work. ⇒ A promise made without any intention of
performing it. ⇒ Any other act fitted to deceive. SUJEET JHA 28
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MS EDUCONZ PVT. LTD. ⇒ Ex:-
LAW& AUDIT
Any such act or omission as the law specially declared to be fraudulent. T bought a
cannon from H. It was defective, but H had plugged it. T did not examine the
cannon, but it burst when he used it. Held as the plug had not deceived T, he was
liable to pay for the cannon. Where the representation was true at the time of when
it was made but becomes untrue before the contract is entered into and this fact is
known to the party who made the representation. If must be corrected. If it is not
so corrected it will amount to be fraud.
Ex.:
When the silence amount to fraud:(a) General rule:- Mere (only) Silence as to facts
likely to affect the willingness of a person to enter into a contract is not fraud.
EXCEPTION where the circumstances of the case are such that regarding being had to
them. It is duty of the person keeping silence to speak. Such duty arises in the
following two cases. (1) Duty to speak exists where the parties stand in a
fiduciary relationship, e.g. father and son, guardian and ward, trustee and
beneficiary etc. or where contract is a contract of ubberima fidei (requiring
utmost good faith), e.g. contracts of insurance.
Ex.:- A sells by auction to B a horse which A knows to be unsound. B’ is A’s

daughter and has just come of age. Here the relation between the parties would make
it A’s duty to tell B is the horse is unsound. When silence itself equivalent to
speech. B says to A “ if you do not deny it I shall assume that the horse is
sound”. A say nothing – A’s silence equivalent to speech. A can held liable to
fraud. [Half Truth is worse than a blatant: - Example – company pay dividend – in
class room] (2)
Sec. 19: A contract induced by fraud is voidable at the option of the party
defrauded. Till the exercise of such option, the Contract is valid. 1. 2. 3.
Rescinds of contract Right to insist upon performance Right to claim damages – if
he suffered loss.
Effect of Fraud:-
Exception : The contract is not voidable in the following cases. ¾ ¾ ¾ ¾ ¾ When the
party who consent was caused by silence amount to fraud and be has the means of
discovering the truth with ordinary diligence. [ Ex class room] When the party give
the consent in ignorance of fraud. When the party after become aware of fraud takes
a benefit. When the parties can’t be restored to their original position. Where
interests of third parties intervene before the contract is avoided. 29 9213188188
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Misrepresentation (section 18)

Misrepresentation is when a party (person) asserts something which is not true
though he believes is to be true. In other words misrepresentation is a falls
representation made innocently. An agreement is said to be influenced by
misrepresentation if all the following conditions are satisfied. (a) The party
makes a representation of a fact [The representation by a stranger (By anyone with
his connivance or by agent) to the contract does not affect the validity of the
contract. (b) The misrepresentation was made innocently i.e. if was not made with a
view to deceive the other party. (c) The other party has actually acted believing
the misrepresent to be true. Misrepresentation include:¾ Unjustified statement of
facts – positive assertion – Believe true really not true no basis
misrepresentation ¾ Breach of duty. ¾ Inducing other to make mistake as to qualify
or nature of subject matter. Effect of Misrepresentation:(1) ¾ ¾ ¾ ¾ ¾ (2) Right to
Rescind contract:Can’t do Discovering the truth with ordinary diligence. Give
consent in ignorance of misrepresentation Become aware of misrepresentation takes a
benefit Where an innocent third party before the contract is rescinds acquires
consideration some interest in the property passing under the contract. Where the
parties can’t be restored to their original position. Right to insist upon
performance.
Ex.:- Unlike Fraud he cannot sue for damage. Fraud (17) Meaning :- wrongful
representation is made Willfully to deceive the party. Knowledge of falsehood. The
person making the wrong statement does not believe it to be true. Right to claim
damage Means of discovering of truth In case of fraud the contract is voidable even
though the aggrieved party had the means of discovering the truth with ordinary
diligence. Misrepresentation (18) Meaning - innocently without any intention to
Deceive the other party. The person making the wrong statement believes it to be
true. Can’t claim damage In case of misrepresentation the contract is not voidable
if the aggrieved party had the means of discovering the truth with ordinary
diligence….
Exception :- Silence SUJEET JHA 30 9213188188

LAW& AUDIT
MISTAKE
Mistake Erroneous Belief about some facts Mistake of Fact Unilateral [22] One party
Under Mistake of fact Bilateral [20] Both parties under Mistake of facts Mistake of
Indian Law the contract is valid Mistake of Law [21] Mistake of foreign Law same as
mistake fact void Both parties under
The contract is valid the contract is void [Not voidable and void] mistake
Exception: - Where contract is not valid (void) 1. Identity of persons contract
with
Ex. :- A woman, falsely misrepresenting herself to be wife of a well known Baron

obtained two pearl necklaces from a firm of jewelers on the pretext of showing them
to her husband before buying. She pledged them with a broker who took them in good
faith. Held that there was no contract between jeweler and woman and even an
innocent buyer or a broker did not get a good title. Broker must return necklaces
to jeweler. Jeweler intended to deal not with her but with quite a different
person, i.e., wife of a Baron. 2. as the nature of the contract Ex.:- illiterate
man sign Bill of exchanges by means of false, representation that it was a mere
guarantee. It was held that he was not liable for bill of exchange because never
intended to sign the bill of exchange Bilateral Mistakes:Subject matter Existence
Quantity Quality Prices Identity Title Legal Possibility Physical
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EVERY AGREEMENT OF WHICH THE OBJECT OR CONSIDERATION IS UNLAWFUL IS VOID [SEC 23]
(a) It is forbidden by law – law would also include the rules regulations,
notifications etc. under or issued under the authority given by a statute. Ex.:- A
sold liquor without license to B. The sale is unlawful as the sale of liquor
without license is forbidden by the law, i.e., The Excise Act. Hence, A cannot
recover the price.
Ex.:- a Hindu already married and his wife alive entered into a marriage agreement
with Y an unmarried girl. The agreement is void because the second marriage is
forbidden by Hindu Law. (b) If it defeats the Provisions of any Law. - not directly
prohibited by any Law Ex.:- A’s estate is sold for arrears of revenue under the
provision defaulter is prohibited from purchasing the state upon an understanding
with A becomes the purchaser and agrees to convey the estate to A . Upon receiving
from him the price which B has paid. The agreement is void. (c) Ex.: If it is
Fraudulent Object or consideration of an agreement is fraudulent. An agreement with
such an object or consideration is unlawful and void.
(d) If it involves or Implies injury to a person or property of another. Ex. :-

Where it create injury to a person or to the property of another. An agreement with
such an object or consideration is unlawful and void. (e) If the court regards it
as immoral. ⇒ X gave Rs. 10,000 to Y a married woman to obtain a divorce from her
husband. X agrees to marry when divorce taken. X would not recover the amt.
Partially unlawful Object or consideration [Sec. 24]: An Agreement is void if (a)
any part of a single consideration for one or more objects is unlawful; or (b) any
one or any part of one of several consideration for a single object, is unlawful.
Example: B is a licensed manufactured of permitted chemicals. A promise B to
supervise B’s business and combine it with the production of some contraband items
together with the permitted items. B promises to pay A, Salary of Rs.10,000 p.m.
Agreement is void, object of A’s promise and consideration for B’s promise being
partially unlawful. Lawful Consideration enforceable: When there are several
distinct promises made for one and the same consideration and one or more of them
are of such nature that law will not enforce it, only such of the promises as are
unlawful cannot be enforced. Other which are lawful, can be enforced. Test of
Severability: (a) If illegal part cannot be severed from legal part of a covenant,
contract is altogether void. 32 9213188188
1.
2.
3.
4.
SUJEET JHA
MS EDUCONZ PVT. LTD. (b)
LAW& AUDIT
If it is possible to severe them, whether the illegality be due to Statute or

Common Law, bad part alone may be rejected and good retained.
In case of pre – existing civil liability, the dropping of criminal proceedings

need not necessarily be a consideration for the agreement to satisfy that
liability. Union Carbide Corpn. v. UOI Illegal agreement – Void – ab – intio
Punishable by the criminal Law of the country or by any special legislation
regulation effect of illegal agreement. Collateral transactions – illegal No action
can be taken for the recovery of money paid or property transferred. If illegal
part can’t be separated from the legal part. Whole agreement is altogether illegal.
[Sec.57] If separated Legal part – enforces illegal part – reject. Reciprocal
promises – In respect of reciprocal promises the agreement as to illegal promise is
void.
Agreement opposed to public policy:Alternative promises: where in alternative

promises one part is illegal, only the legal pent can be enforced. [Sec. 58]
Champerty & Maintenance : (Refer Class Note)
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VOID AGREEMENT
2(g)- Void agreement is an agreement which is not enforceable by Law – void – ab –
inito. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Agreement by or with
person’s incompetent to contract [10, 11] Agreement entered into through a mutual
mistake [20] Object or consideration – unlawful [23] Consideration or object
partially, unlawful [24] Without consideration [25] Restraint of marriage [26]
Restraint of trade [27] Legal proceeding [28] Consideration identified [29]
Wagering agreement [30] Impossible agreement [56] An agreement to enter into an
agreement in the future.
Agreement in Restraint of marriage [26]

Every agreement in restraint of marriage of any person other than a minor, is void,
Any restraint of marriage whether total or partial is opposed to public policy. Ex.
Ex. Ex. A promised to marry else except Mr. B, and in default pay her a sum of
Rs.1,00,000. A married someone else and B sued A for recovery of the sum. Held, the
contract was in restraint of marriage, and as such void. The consideration under a
Sale Deed was for marriage expenses of a minor girl aged 12. Held the sale was a
void transaction being opposed to public policy. Two co-widows – agreement – is one
of them remarried – she shout forfeit her eight to her share in the deceased
husband’s property was not void because no restraint was imposed upon either of the
two widows from remarrying. Wife to divorce herself and to claim maintenance from
the husband on his marrying a second wife was not void because no restraint was
impose upon husband from marrying a second wife.
Ex.
Agreement in Restrain of trade [27]

Every agreement by which anyone is restrained from exercised a Lawful profession,
trade or business of any kind is void . Burden for Proof :Party supporting the
contract:- must show that the restraint is reasonably necessary to protect public
interest. Party challenging the contract:- restraints is injurious to the public.
Ex. : In Patna, 29 out of 30 manufacturers of combs agreed with R to supply combs
only to him and not to anyone else. Under the agreements R was free to reject the
goods if he found no market for them. Held, the agreement amounted to restraint of
trade and void.
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Exception to Sec. 27 (1) Sale of goodwill: - Seller of goodwill of a business may

agree with the buyer to restrain from carrying on business. (a) Must relate to same
business (b) Restriction shall apply within specified Local limits. (c) Restriction
shall apply within a reasonable time period (d) The specified local limits –
depends on nature of business. (b) Restriction on existing partner [11(2)] Not
carry on business other than business of the firm till he is partner. Restriction
on outgoing partner [36] Not carry on a similar business after retirement Local
limits + specified period – local limit – nature of business
(a)
(c) Sec. 54: Upon or in anticipation of dissolution of Firm. Partners may agree
that some or all of them will not carry on business similar to that of the Firm
within specified periods or local limits. (d) Sec. 55(2) : Partner may agree with
due buyers of Goodwill, not to use the Firm name or carry on Firm’s business or
solicit clients of the Firm. (e) Sec. 55(3): Upon sale of Firm’s Goodwill, a
partner may agree that he will not carry on any business similar to Firm’s within
specified periods or local limits. Exception under judicial interpretations :(a)
Trade combination. Traders may from associations among them to regulate the
business or to fix prices. Such agreement like opening and closing of business
venture, licensing of traders, supervision and control of dealers, etc. are valid
even if they are in restraint of trade. But, a Combination that tends to create
monopoly; or when two enter into an agreement to avoid competition, they are
against public policy and hence void. Sale dealing agreement: - Agreements to deal
in the products of a single manufacturer or to sell the whole produce to a single
dealer are valid if their terms are reasonable. Ex.: .( Discuss in class)
(b)
Agreement – buyer of goods for Delhi market not to sell them in Chennai is valid. -
Not to sell any other firm – valid. (c) Service agreement. Agreement: Employers may
enter into agreements with employees – (i) not to engage in other work during the
tenure of his employment; or (ii) not to engage in similar work after his
termination. During Employment: The first restraint is always valid, e.g. doctors
may be paid non practicing allowances to avoid practicing when they are employed in
a hospital. After termination of service: The second restraint is valid only is it
is to protect the trade interests or the employer. It may be imposed to prevent the
outgoing 35 9213188188
SUJEET JHA
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employee from using trade secrets he had learnt during his tenure, to the detriment
of his previous employer. Valid Agreements : Requiring employees to serve the
organization for a few years after training leaving; or execution of a bond
requiring employees leaving the organization to pay compensation to the employer
are valid. Use of Personal Skills: The employer cannot prevent the employees from
using his personal skills and knowledge to his benefit; e.g. an employer cannot
restrain an employee to act in theatre plays or in perforating an art.
Agreement in Restraint of legal proceedings [28]

⇒ Agreement restricting enforcement of rights: An agreement by which any party is
restricted absolutely from enforcing his legal rights under any contract is void.
Agreements Limiting period of limitation:- An agreement which limits the time
within which an action way be brought is void. A partial restrain is not void, eg.
Ex. 1: A clause in a contract that any dispute arising between the parties shall be
subject to jurisdiction of a court at a particular place only, is valid. Ex. 2: An
agreement is not void merely because if provides that any dispute arising between
two or prove person shall be referred to arbitration. - That has arises. - Which
may arise - Which has already arisen? Ex. 3: An agreement not to go in appeal to
higher court against the judgment of a lower court not amount to restart of legal
proceeding. An agreement the meaning of which is not certain (Sec 29): 1. 2. An
agreement is called an uncertain agreement when the meaning of that agreement is
not certain or capable of being certain. Such agreements are declared void u/s 29.
Areas of uncertainty: Uncertainty may relate to – (a) Subject Matter of Contract;
or (b) Terms of contract. (a) (b) Subject Matter: There may be uncertainty as
regards – (i) existence; (ii) quantity (iii) quality; (iv) price; or (v) title to
the subject matter. Terms of Contract: There may be uncertainty as regards – (i)
existence (ii) quality; (iv) price; or (v) title and other terms in the contract.
Example: 1. A says to B “I shall sell my house; will you buy?” A says, “Yes, I
shall buy”. Due to uncertainty of price, the agreement is void and unenforceable.
There is binding contract. 2. A agreed to pay a certain sum, when he was able to
pay. Held, the agreement was void for uncertainty. 3. D agrees to sell his white
horse, for Rs.5,000 or Rs.10,000. SUJEET JHA 36 9213188188
LAW& AUDIT
WAGERING AGREEMENT [30] :An agreement between two persons under which money or
money’s worth is payable by one person to another on the happen or non happening of
a future uncertain event is called a wagering agreement. - X promise to pay Rs.
1000 to Y if it is rained on a particular day, and Y promise to pay Rs.1000 to X if
it did not. - Wagering agreement is promise to give money or money’s worth upon the
determination of uncertain event.- Sir Willian Anson.
Essential elements of wagering agreements

(1) (2) The must be a promise to pay money or money’s worth Performance of a
promise must depend upon determination of uncertain event. It might have already
happened but the parties are not aware about it. Mutual chancels of Gains or Loss.
Neither party to have control over the events Neither party should have any other
interest in event. One party is to win and one party is to lose.
(3) (4) (5) (6)
Ex. 1:- Agreement to settle the difference between the contract price and market
price of certain goods or shares on a particular day. Ex. 2: A lottery is wagering
agreement. Therefore, an agreement to buy and sell lottery tickets is a wagering
agreement. Section 294 – A of the Indian Penal Code declares that drawing of
lottery is an offence. However, the government may authorize lotteries. The persons
authorized to conduct lotteries are exempt from the punishment. But, the lotteries
still remain a wagering transaction. Ex. 3: However, if the crossword puzzle prizes
depend upon sameness of the competitor’s solution with a previously prepared
solution kept with the organizer or newspaper editor, is a lottery and, therefore,
a wagering transaction. Ex. 4: However, when any transaction in any commodity or in
shares with an intention of paying or getting difference in price, the agreement is
a wager.
Agreement not held as wagers:⇒ Prize in terms of Prize competition Act, 1955 not
exceeding Rs.1000 is not wagering agreement. ⇒ Horse race [500] – An agreement to
contribute a plate or prize. SUJEET JHA 37 9213188188
LAW& AUDIT
⇒ Contract of insurance utmost in good faith eg. Favour in public policy. ⇒ Share
market transaction A commercial transaction should always be distinguished from a
pure speculative transaction. A commercial transaction is done with an intention of
delivery of goods (commodity or security) and payment of price. Therefore, it is
not wagering agreement. ⇒ Crossword competition involving skill for its solution.
If skill plays an important role in the result of a competition and prize depend
upon the result, the competition is not Involve applications of skill and prizes
are awarded to the participants on the basis of merit of their solutions and not on
chance. Therefore, such competitions are valid and are not wagers. ⇒ Athletic
Competitions also fall in the category of games of skill. Therefore, these are also
not wagers. Example: A and B, two wrestlers, agreed to enter into a wrestling
contest in Ahmedabad on a certain day. They further agreed that a party failing to
appear on the fixed day was to forfeit Rs.500 and the winning party will receive a
sum of Rs.1,000. Held, it was not a wagering agreement. ⇒ Contribution to chit fund
is not wager – contributions made by the members are refunded by draw of lots.
Effects of wagering agreements:⇒ ⇒ ⇒ ⇒ Agreement is void. No suit can be filled for

any recovery of the amount won on any wager. It is not illegal. Any agreement
collateral to wagering agreement is valid. However, it is illegal in state of
Maharashtra and Gujarat.
ILLEGAL AGREEMENT
⇒ ⇒ Agreement which is prohibited by law is illegal agreement. Example Agreement to
commit crime. Effects of illegal agreement: • It is always void. • Any collateral
transaction to illegal agreement is also void. • No action is allowed on illegal
agreement. Void Agreement Not enforceable by Law Illegal agreement Forbidden by any
law
Meaning One in another Reason Punishment Void – ab – initio SUJEET JHA
All void agreement is not All illegal agreement are void illegal 10,29,56 Against
the provisions of law Not liable to punished Party are criminally liable
A valid – collateral – is not Illegal, collateral – illegal void 38 9213188188

LAW& AUDIT
CONTINGENT CONTRACT
MEANING A ‘contingent contract’ is a contract, to do or not to do something. If
some event, collateral to such contract does or does not happen ⇒ A contract to pay
B Rs.10,000 if B house is burnt. ⇒ A promise to pay B Rs.1,00,000 if a certain,
ship does not return within a year. Essential features of a contingent contract :
(a) (b) (c) It is a contract to do or not to do something Dependent on happening or
non happening of an event Such on event is a collateral event (i.e. it is
collateral) to the contract i.e. the event must not depend upon the mere will of
party. The event is uncertain
(d)
Rules regarding contingent contract.
CONTINGENT UPON
Happening of Uncertain Future Event Non – Happening of Uncertain Future Event
Future conduct of a living person Happening of Specified Uncertain Event within
Fixed time Non – Happening of Specified Uncertain Event within Fixed Time
Impossible Events
[Sec. 32] (1)
[Sec. 33]
[Sec. 34]
[Sec.35]
[Sec. 35]
[Sec.36]
Contracts contingent upon the happing of an event enforced – such event has
happened [32] Void – such event because impossible [happening of such event]
Ex.:- A contract to pay B a sum of money when B marries e dies without being
married to B contract – void (2) Non happening of a future event:- [33] Enforced :-
when the happening of such events becomes impossible. Void:- such event has
happened.
Ex.:- A agrees to pay B sum of money if a certain ship does not return. This ship
is sunk. The contract can be enforced when the ship sinks.
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Happening of an event within a specified time [35] Enforce :- when such event has
happened within the specific time. Void :- When the happening of such event because
impossible before the expiry of specified time. When such event has not happened
within specified time. A promise to pay B sum of money if a certain ship return
within a Year. Enforce :- ship returns within the year . Void :- If the ship is
burnt within the year / not come within the year. Non – happening of an event
within a fixed time [35] Enforce :- When the happening of such event because
impossible before the expiry of specified time. ⇒ When such event has not happened
within the specified . Void:- When such event has happened within the specified
period.
(4)
(5)
Future conduct of a living person. [34] Enforced:- When such person acts in the
manner as desired in the contract. Void :- When such person does anything which
makes the desired future conduct of such person – impossible – dependent upon
certain contingency. - A agrees to pay B a sum of money if B marries C . C married
D. The marriage of B to C must now considered impossible, although it is possible
that D may die any that C may afterwards marry B. (6) Impossible events [36] - Such
an agreement can not be enforced since it is void whether the impossibility of the
event was known to the parties or not is immaterial. • A agrees to pay B Rs.1,000
if two parallel straight lines should enclose a space. Agreements are void. • A
agrees to pay B Rs.1,000 if B will marry A’s daughter C and C was dead at the time
of the agreement. Agreement is void. 1. Defined 2. Meaning Wagering agreement Not
defined u/s 30 Promise to give money or money’s with upon the determinative of an
uncertain event. Contingent nature Void No other interest in the subject matter of
the agreement except within of loss of wagering amt. A wagering agreement is
essentially of a contingent nature. Consists of reciprocal promises futures event
is the sole determine factor 40 Contingent agreement Defined o/s 31 To do or not to
do something if some event. Collateral to such contract does or does not happen Not
be a wagering nature Valid Have real interest outcome of the uncertain gain. A
contingent contract the not be a wagering nature. Not consist a reciprocal promises
future event is fully collateral. 9213188188
3. Nature of uncertain event 4. Void / valid.
5. Interest
SUJEET JHA
LAW& AUDIT
PERFORMANCE
Sec 37:- That the parties to a contract must either perform or offer to perform,
their respective promises unless such performance is dispensed with or excused
under the provisions of contract Act, or of any other law. Performance: - Two types
1. 2. Actual performance – actually performed – liability of such a party comes to
an end. Attempted performance or tender of performance refusal to accept offer of
performance by promise [38] Does not Offer Promisor promisee attempted performance
of performance accept
Promisor is not responsible for non performance and they can sue the promisee for
breach of contract – nor he (promisor) thereby lose his rights under the contract.
Essential of Valid tender
Unconditional
At a proper place
For whole obligation
Of exact amount and in legal tender money
At proper time
Reasonable opportunity to Promisee
A.
Tender or offer of performance to be valid must satisfy the following conditions:

(i) It must be unconditional Ex :- ‘X’ offers to ‘Y’ the principal amount of the
loan. This is not a valid tender since the whole amount of principal and interest
is not offered. (ii) It must be made at a proper time and place. Ex:- If the
promisor wants to deliver the goods at 1 am. This is not a valid tender unless it
was so agreed; (iii) Reasonable opportunity to examine goods. Ex:- Delivery of
something to the promise by the promisor promise must have reasonable opportunity
of inspection. (iv) It must be for the whole obligation :- goods and amount. Ex:-
‘X’ a debtor, offer’s to pay ‘Y’ the debt due in installments and tenders the first
installment. This is not a valid tender minor deviation – not invalid [Behari lal v
ram gulam] (v) It must be made to the promise or his duty authorized agent. Ex:- It
must be person who is willing to person his part of performance. (vi) In case of
payment of money, tender must be of the exact amount due and it must be in the
legal tender.
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Type of Tender
Tender of goods and services When a promisor offers to delivery of goods or
service to the promise, it is said to be tender of goods or services, if promisee
does not accept a valid tender, It has the following effects: (i) The promisor is
not responsible for non – performance of the contract. (ii) The promisor is
discharged from his obligation under the contract. Therefore, he need not offer
again. (iii) He does not lose his right under the contract. Therefore, he can sue
the promise. Tender of money Tender of money is an offer to make payment. In case
a valid tender of money is not accepted, it will have the following effects: (i)
The offeror is not discharged from his obligation to pay the amount. (ii) The
offeror is discharged from his liability for payment of interest from the date of
the tender of money. Effect of refusal of party to perform promise Wholly Sec 39.
Promisor – Refuse – Promise – wholly Promisee can put – can end of the contract or
– he can continue the contract if he has given his consent either by words or – by
conducts in its continuance. Result – claim damages. [compensation] Ex:(Refer Class
Notes) Who can demand performance? 1. 2. Promisee – stranger can’t demand
performance of the contract. Legal Representative – legal representative can demand
Exception performance. - contrary intention appears from the contract - contract is
of a personal nature. Third party – Exception to “stranger to a contract” Person by
whom promise is to be performed Sec 40.
3.
[who will perform the contract ]

1. Promisor himself :- include personal skill, taste or art work. Ex:- ‘A’ promises
to paint a picture for ‘B’ as this promise involves personal skill of ‘A’. If must
be performed by ‘A’. 2. Promisor or agent :- [does not involves personal skill] 3.
Legal Representative [does not involve personal skill and taste] SUJEET JHA 42
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4. Third person [Sec 41] :- Acceptance of promise from the third party:If the
promisor accepts performance of a contract by a third party, he can’t after wards
enforce the performance against the promisor although the promisor had neither
authorized not ratified the act of the third party. [In other meaning once the
promise accepts the performe from a third person, he cannot compel the promisor the
perform the contract again] Performance of Joint Promises:Two or more person make a
promise ¾ Performed by all the joint promisor [42] ¾ All the joint promisor –
liable ¾ Thus in India the liability of joint promisors is joint as well as
several.
In England, however the liability of the joint promisors is only joint and not
several and accordingly all the joint promisors must be sued jointly.
¾ Liability of joint promisor [43] 1. Liability – joint as well as several [unless
express A + B + C 900 D. D may compel either A, B or C or any of two of them or all
of them. 2. Where a joint promisor has been compelled to perform the whole promise,
be may compel every other joint promisor to contribute equally with himself to the
performance of the promise (unless a contrary intention appears from the contract).
C – 9000 – D A + B – C 3000 3000 3. If any one of the joint promisors make default
in such contribution, the remaining joint promisors must bear the loss arising from
such default in equal shares (A) – Insolvent B + C = 4500 + 4500 = 9000 Sec 44:-
Release of one joint promisor :- where one of the joint promisors is released other
joint promisors shall continue to be liable. [In English law if one joint promisor
– discharge then all the joint promisors discharge] Sec 45:- Rights to claim
performance of joint [Devolution of joint rights] 1. During their joint lives – all
the joint promisors . 2. After the death of any of them – The representative of
such deceased promise jointly with the surging promise 3. With the representatives
of all jointly. Ex:- ‘A’ in consideration of Rs 50,000 lent to him by ‘B’ and ‘ C’
promises ‘B’ and ‘C’ jointly to replace them that sum with interest on a day
specifies. - ‘B’ dies. The right to claim performance rests with ‘B’
representatives jointly with ‘c’ during ‘C’ life. - And after ‘C’s death with the
representatives of ‘B’ and ‘C’ jointly . SUJEET JHA 43 9213188188 A + B + C – 9000
LAW& AUDIT
Time place and manner of performance [46 – 50]

1. No time is specified for performance [Sec 46] ¾ Time of performance is not
specified + promisor agreed to perform without, a demand from the promise the
performance must be made within a reasonable time. Reasonable time – in each
particulars case – a question of fact. 2. Time specified but hour not mentioned
[47]. Time of performance specified + promisor agreed to perform without
application by the promisee ¾ Performance must perform on the day fixed during the
usual business hours and at the place at which the promise ought to be performed.
3. Where Time is fixed and application to be made [48] ¾ Proper place and within
the usual hour of business ¾ Promisee to apply for performance 4. Performance of
promise where no place is specified and no application is to be made by the promise
[49] ¾ It is the duty of the promisor to apply to the promise to appoint a
reasonable place for the performance and perform it at such appointed place. 5.
Performance in manner or at time prescribed or sanctioned by promise [50] ¾ In such
prescribed manner and ¾ Prescribed time Ex:- ‘A’ desires ‘B’ who owes him Rs 10,000
to send him a promissory note for Rs 10,000 by Post. The debt is discharged as soon
as ‘B’ puts into the post a letter containing the promissory note duly addressed to
‘A’.
Performance of reciprocal promises

Reciprocal Promise :- Promises which form the consideration or part of
consideration for each other as called reciprocal promises. 1. Mutual and
Independent:- Such promises all to be performed by each party independently without
waiting for the other party to perform his promise can’t excuse himself on the
ground of non-performance by the default party. deliver on Paying X Y Y 6th may the
goods 10th may the price Y – Price – non Payment X – goods delivered 2. Mutual and
Dependent:- Sue damage . The performance of promise by one party depended on the
prior performance of the promise by other party. [The party at fault becomes liable
to pay compensation to the other party may sustain by the non performance of the
contract – [54] 3. Mutual and concurrent: - when reciprocal promises are to be
performed simultaneously a promisor need not perform his part unless the promise is
ready and willing to perform [51] SUJEET JHA 44 9213188188
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deliver Pay B the goods The Pr ice
Order of performance of reciprocal promises [52] ¾ Where the order in which

reciprocal promises one to be performed is expressly fixed by the contract – they
must be performed in that order. ¾ Order is not expressly fixed – nature of
transaction requires Ex :- ‘A’ and ‘B’ contract that ‘A’ shall build a house for
‘B’ at a fixed price ‘A’ promise to build the house must be performed before its
promise to pay for it. Sec 53 :- One party preventing – voidable at the option of
the other party so prevented. - Compensation for loss Sec 54 :- Legal and illegal
Legal – valid, illegal – void Sec 58:- alternative promise, one branch being
illegal legal branch alone can be enforced. A – B – 1000 rupees Deliver – rice +
smuggled goods
Time as the essence of the contract (Sec 55):Where time is essence – the concerned
parties must perform their respective promises within the specified time.
Time are fact :- time is specified for the performance of the contract is not by
itself sufficient to prove that time is essence of the contract. - Intention of the
parties.
Time is generally considered to be the essence of the contract :(a) where the
parties have expressly agreed to treat as the essence of the contract. (b) Delay
operates as an injury to the party and (c) Nature and necessities of the contracts
requires it to be performs within the specified time. - Delivery of the goods –
considered – essence of the contract payment of the price – No [However in case of
sale and purchase of an immoral property, the time is presumed to not the essence
of the contract]
Time is essence of the contract – party tails to perform - In time – the contract
becomes voidable at the option the other party. Time is not essence – only claim
damages for delay in performance SUJEET JHA 45 9213188188
LAW& AUDIT
Assignment of contract :- (a) by – operation of law - Death - Insolvency (b) By an

act of parties Assignment is a made of transferring rights. tranfer rights
Assignment another person and int erest Rules regarding assignment
(a) The liabilities or obligations under a contract can’t be assigned (b) The
rights and benefits under a contract which not of a personal nature can be
assigned.
(c) An actionable claim can always be assigned
Meaning Time Voluntary Act Written document Scope
Succession Deceased person - Legal represent On the death of a person Not voluntary
automatic operation of law No. required
Assignment Person – another person
During the life time of a person by Voluntary Required assignment deed Rights
Liability and rights
Appropriation of Payments :- [ Sec 59 – 61] ¾ Appropriation means application of

payments – The question of appropriation of payments arises when a debtor owes
several debts to the same creditor and make a payment that is not sufficient to
discharge the whole indebtness.
1.
Appropriation of Payments Sometimes, a debtor owes several distinct debts to the

same creditor and he makes a payment which is insufficient to satisfy all the
debts. In such a case, a question arises as to which particular debt the payment is
to be appropriated. Section 59 to 61 of the Act lay down following rules as to
appropriation of payments which provide an answer to this question. ⇒ Appropriation
as per express instructions Every debtor who owes several debts to a creditor has a
right to instruct his creditor to which particular debt, the payment is to be
appropriated or adjusted. Therefore, where the debtor expressly states that the
payment is to be applied to the discharge of a particular debt, the payment must be
applied accordingly. Example : A owes B three distinct debts of Rs.2,000, 3,000 and
5,000. A sends Rs.5,000 and instructs B that the payment should be appropriated
against the third debt. He is bound to appropriate the payment against the third
debt only. SUJEET JHA 46 9213188188
LAW& AUDIT
Application of payment where debt to be discharge is not indicated [60] If section

60 is attracted, the creditor shall have the discretion to apply such payment for
any lawful debt which is due to him from the person making the payment. Example: A
owes to B, among other debts, the sum of Rs.520. B writes to A and demands payment
of this sum. A sends to B Rs.520. This payment is to be applied to the discharge of
the debt of which B had demanded payment. Application of payment where neither
party appropriates [61] The payment shall be applied in discharge of the debts in
order of time whether they are or are not based by the limitation Act 1963, if the
debt are of equal standing (i.e. payable on the same date) the payment shall be
applied in discharge of each of these debt proportionately. ¾ First interest then
principle ¾ Director of payer not receiver. ¾ Right primary of the debtor [whatever
is paid, paid according to the intention of paying it] ¾ [Quickquid soivitur ,
sovitur secundum modem solventies] Example: A owes B, the following debts: Amount
of Positions of the debt the debt Rs.2,000 Time barred Rs.1,000 Time barred
Rs.2,000 Due on 10th June Rs.3,000 Due on 20th September A sends Rs. 1,500 in the
month of June. He neither expressly intimates nor circumstance of the case imply as
to which debt the amount is to be applied. Moreover, B also does not appropriate
the payment at his own discretion. Therefore, the payment will be appropriated in
order of time. However, here in this case two debts are of equal standing. The
payment will, therefore, be appropriated in order of time but to all equal standing
debts. In this case, Rs.1,500 will be appropriated towards the first two debts of
equal standing proportionately, i.e. in the ratio of 2:1.
3.
SUJEET JHA
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DISCHARGE OF A CONTRACT
Discharge of a contract means termination of contractual relation between the
parties to a contract in other words a contract is discharged when the rights and
obligations created by it are extinguished (i.e. comes to an end). Mode of
discharge of contract
1. By performance • Actual • Attempted
6. By impossibility of performance
4. By lapse of Time
5. By breach of contract • Actual • Anticipatory
2. By mutual agreement (By implied consent) 1. Novation – Sec 62 2. Rescission –

Sec 62 3. Alteration – Sec 62 4. Remission – Sec 63 5. Waiver 6. Merger
3. By Operation of law 1. Death 2. Merger 3. Insolvency 4. Unauthorized alteration
Discharge by performance
fulfillment of obligations by a party to the contract within the time and in the
manner prescribed in the contract. (a) Actual performance – no party remains liable
under the contract. Both the parties performed.
(b) Attempted performance or tender.:- Promisor offers to perform his obligation
under the contract but the promise refuses to accept the performance. It is called
as attempted performance or tender of performance ¾ But the contract is not
discharged.
SUJEET JHA
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MS EDUCONZ PVT. LTD. Discharge by mutual agreement (a)
LAW& AUDIT
Novation [Sec 62] – Novation means substitution of a new contract in the place of
the original contract new contract entered into in consideration of discharge of
the old contract. The new contract may be. ¾ Between the same parties (by change in
the terms and condition) ¾ Between different parties (the term and condition
remains same or changed)
Following conditions are satisfied :(1) All the parties must consent to novation
(2) The novation must take place before the breach of original contract. (3) The
new contract must be valid and enforceable. Example: o A owes B Rs.50,000. A enters
into an agreements with B and gives B a mortgage of his estate for Rs.40,000 in
place of the debt of Rs.50,000. (Between same parties) o A owes money Rs.50,000 to
B under a contract. It is agreed between A, B & C that B shall henceforth accept C
as his Debtor instead of A for the same amount. Old debt of A is discharged, and a
new debt from C to B is contracted. (Among different parties) (b) Rescission [62]:-
Rescission means cancellation of the contract by any party or all the parties to a
contract. X promises Y to sell and deliver 100 bales of cotton on 1st oct his go
down and Y promises to par for goods on 1st Nov. X does not supply the goods. Y may
rescind the contract. Alteration [62] :- Alteration means a change in one or more
of the terms of a contracts with mutual consent of parties the parties of new
contracts remains the same. Ex:- X Promises to sell and delivers 100 bales of
cotton on 1st oct. and Y promises to pay for goods on 1st Nov. Afterwards X and Y
mutually decide that the goods shall be delivered in five equal installments at is
godown . Here original contract has been discharged and a new contract has come
into effect. Remission [63]:- Remission means accepting a lesser consideration than
agreed in the contract. No consideration is necessary for remission. Remission
takes place when a Promisee(a) (b) (c) (d)
(c)
(d)
dispense with (wholly or part) the performance of a promise made to him. Extends
the time for performance due by the promisors Accept a lesser sum instead of sum
due under the contract Accept any other consideration that agreed in the contract
¾ A promise to paint a pictured for B. B after words for him to do so. A is no

longer bound to perform the promise. (e) Waiver:- Intentional relinquishment of a
night under the contract. SUJEET JHA 49 9213188188
LAW& AUDIT
(f) Merger :- conversion of an inferior right into a superior right is called as

merger. (Inferior right end) Basis
1. Meaning 2. Change in parties
3. New Contract 4. Performance
Novation Alteration It is substitution of an existing It is alteration to some of

the contract with new one. terms and conditions of the original Contract. It is
made by – (a) change in Terms of the contract may be the terms of the contract or
(b) altered by mutual agreements change in the Contracting by the same contracting
parties. So, there is no change Parties. in the parties. A New Contract comes into
It is not essential to substitute existence in place of the old a new contract in
place of the old contract. one. Old contract need not be Old contract as per the
altered performed New contract must terms shall be performed. be performed.
Discharge by operation of law
(a)
Death :- involving the personal skill or ability, knowledge of the deceased party
one discharged automatically. In other contract the rights and liability passed to
legal represent. Example : A promises to perform a dance in B’s theatre. A dies.
The contract comes to an end. Insolvency:- when a person is declared insolvent. He
is discharged from his liability up to the date of insolvency. Example: A contracts
to sell 100 bags of sugar to B. Due to heavy loss by a major fire which leaves
nothing to sell, A applies for insolvency and is adjudged insolvent. Contract is
discharged. By unauthorized material alteration – without the approval of other
party – comes to an end – nature of contract substance or legal effect. Example : A
agrees upon a Promissory Note to pay Rs.5,000 to B. B the amount as Rs.50,000. A is
liable to pay only Rs.5,000. Merger: When an inferior right accruing to a party in
a contract mergers into a superior right accruing to the same party, then the
contract conferring inferior right is discharged. Example: A took a land on lease
from B. Subsequently, A purchases that land. A becomes owner of the land and
ownership rights being superior to rights of a lessee, the earlier contract of
lease stands terminated.
(b)
(c)
(d)
5.
Rights and liabilities vest in the same person: Where the rights and liabilities
under a Contract vest in the same person, the contract is discharged. Example: A
Bill of Exchange which was accepted by A, reaches A’s hands after being negotiated
and endorsed through 4 other parties. The contract is discharged.
SUJEET JHA
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MS EDUCONZ PVT. LTD. Discharge by Lapse of time
LAW& AUDIT
Where a party fails to take action against the other party within the time
prescribe under the limitation Act, 1963. All his rights to come end. Recover a
debt – 3 Years recover an immovable property – 12 years Ex.:- On 1st July 20X1 X
sold goods to Y to Rs 1,00,000 and Y had made no payment till August 20X4. state
the legal position on 1st Aug 20X4 (a) If no. credit period allowed Ans. (Refer
Classroom) (b) If 2 month credit period allowed.
Discharge by Breach of contract

Failure of a party to perform his part of contract
(a) Anticipatory Breach of contract :- Anticipatory breach of contract occurs when
the part declares his intention of not performing the contract before the
performance is due . (i) Express repudiation: - 5 agrees to supply B 100 tunes of
specified category of iron on 15.01.2006 on 31.12.2005. 5 express his unwillingness
to supply the iron to B. (ii) Party disables himself: - Implied by conduct. Ex.:- 5
agrees to sell his fiat car to B on 15.01.2006 on 31.12.05 5 sells his fiat car to
T. (b) Actual Breach of contract :- If party fails or neglects or refuses to
perform his obligation on the due date of performance or during performance. It is
called as actual breach. During performance – party has performed a part of the
contact. Consequences of Breach of contract:- The aggrieved party (i.e. the party
not at face it ) is discharged from his obligation and get rights to proceed
against the party at fault. The various remedial available to an aggrieved party.
Discharge by Impossibility performance

(a) Effect of Initial Impossibility (b) Effect of supervening. Impossibility (a)
Initial Impossibility – at the time of making contract ¾ Both parties know – put
life into deed body – void . ¾ Both don’t know – void. ¾ One know – compensate to
other party (b) Effect of super vanity Impossibility:¾ Where an act becomes
impossible after the contract is made – void ¾ Becomes unlawful, beyond the control
of promisor – void ¾ Promisor alone knows about the Impossibility – compensate
loss. ¾ When an agreement is discovered to be void or where a contract becomes void
SUJEET JHA 51 9213188188
LAW& AUDIT
Benefit must refund X
Sing Y. y Ad .1000
Cases when a contract is discharged on the group of super vent Impossible (a)
Distraction of subject matter - Failure of the ultimate purpose of contract – king
coronate process. (b) Death of personal Incapacity Example : (Refer Classroom)
(c) Declaration of war (d) change of Law
Example : (Refer Classroom) Example : (Refer Classroom)
(e) Non existence or Non occurrence of a particular state of thing necessary for
performance. Example : (Refer Classroom)
No Super Impossibility – does not become void

¾ ¾ ¾ ¾ ¾
Difficulty of performance – coal – transport Commercial Impossibility Default of a

third party Strikes, knockout and civil disturbance. Partial Impossibility –
coronation of king and to sailing around the lake by boat.
SUJEET JHA
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REMEDIES FOR THE BREACH OF CONTRACT

Remedy means course of action available to an aggrieved party when other party
breaches the contract. Remedies for Breach of contract
1. Rescission of contract
2.Suit for damage
3.Suit for specific performance
4.Suit for Injunction
5.Quantum Meruit
RESCISSION OF CONTRACT – SEC 39 ⇒ ⇒
It means right to party to cancel contract. In case of breach of contract, other

party may rescind contract.
Effect of Rescission of Contract ⇒ ⇒ ⇒
Aggrieved party is not required to perform his part of obligation under contract.
Aggrieved party claims compensation for any loss. Party is liable to restore
benefit, if any.
When can Court Grant Rescind Contract? Court can rescind the contract in the
following situation: Contract is voidable. ⇒ ⇒ Contract is unlawful. SUIT FOR
DAMAGES
⇒ ⇒ ⇒
It means monetary compensation allowed for loss. Purpose is to compensate aggrieved

party and not to punish party as fault.
In India, rules relating to damages are based on English judgment of Hadley vs

Baxendale. The facts of case were – H’s mill was stopped due to the breakdown of
the shaft. He delivered the shaft to common carrier to repair it and agree to pay
certain sum of repair it and agree to pay certain sum of money for doing this work.
H has informed to B that delay would result into loss of profit. B delivered the
shaft after reasonable time after repair. H filed suit for loss of profit. It was
held that B is not liable for loss of profit. The court laid down rule that damage
can be recovered if party has breach of contract.
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KINDS OF DAMAGES The following are the different kinds of damages: ⇒ Ordinary
damages These are the damages which are payable for the loss arising naturally and
directly as result of breach of contract. It is also known as proximate damage or
natural damage. ⇒ Special damages
These are damages which are payable for loss arising due to some special
circumstances. It can be recovered only if special circumstances which result in
special loss in case of breach of contract and party have notice of such damage.
Example: A sends sample of his products for exhibition to an agent of a railway
company for carriage to “New Delhi” for an exhibition. The consignment note stated:
“Must be at New Delhi, Monday Certain.” Due to negligence of the company, the goods
reached only after the exhibition was over. Held, the company was liable for the
loss caused by late arrival of the products because the company’s agent was aware
of the special circumstances. ⇒ Exemplary or punitive or vindictive damages
These damages are allowed not to compensate party but as mean of punishment to
defaulting party. The court may award these damages in the case of: • Breach of
contract to marry – loss based on mental injury. • Wrongful dishonor of cheque –
smaller amount, larger the damage.
⇒ Nominal damages Where party suffers no loss, the court may allow nominal damages
simply to establish that party has proved his case and won. Nominal damage is very
small in amount. Damages for inconvenience
If party has suffered physical inconvenience, discomfort for mental agony as result
of breach of contract, party can recover the damage for such inconvenience.
Example: A photographer agreed to take photographs at a wedding ceremony but failed
to do so. The bride brought an action for the breach of contract. Held, she was
entitled to damages for her injured feelings.
⇒ Liquidated damages and penalty Party may specify amount at the time of entering
into contract. The amount so specified may be (a) liquidated damage, or (b)
penalty.
If specified sum represent, fair and genuine pre – estimate damages likely to
result due to breach, it is called liquidated damage. But if specified sum is
disproportionate to the damages, it is called as penalty. As regard the payment of
liquidated damages and penalty court can’t’ increase amount of damages beyond the
amount specified in the contract. SUJEET JHA 54 9213188188
LAW& AUDIT
Example : A gives B, a bond for the repayment of Rs.1,000 with interest at 12 per
cent, at the end of six months, with a stipulation that, in case of default, the
interest shall be payable at the rate of 75 per cent, from the date of default.
This is a stipulation by way of penalty, and B is only entitled to recover from A
such compensation as the Court considers reasonable. ⇒ Forfeiture of security
deposit Any clause in contract entitling the aggrieved party to forfeit security
deposit in the nature of penalty and court may award reasonable compensation.
Payment of interest • It is permissible. • If interest is in nature of penalty,
court may grant relief. • If no rate of interest is specified in contract party
shall be liable to pay as per the law in force or as per custom or usage of trade.
Cost of suit or decree The court has also discretion to award cost of suit for
damages in addition to the damages for breach of contract. Suit for Specific
Performance
It means, demanding an order from court that promise agreed in contract shall be
carried out.
⇒ When is specific performance allowed? • Where actual damages arising from breach
is not measurable. • Where monetary compensation is not adequate remedy. When
specific performance is not allowed? • When damages are an adequate remedy. • Where
performance of contract requires numbers of minute details and therefore not
possible for court to supervise. • Where contract is of personal in nature. • Where
contract made by company beyond its power. (ultra – vires) • Where one party to
contract is minor • Where contract is inequitable to either party. Example : A
agree to sell B, an artist painting for Rs.30,000. Later on, he refused to sell it.
Here B can file suit against A for specific performance of the contract. Suit for
Injunction ⇒ ⇒
It means stay order granted by court. This order prohibits a person to do

particular act. Where there is breach of contract by one party and order, of
specific performance is not granted by court, injunction may be granted. Example:
Film actress agreed to act exclusively for W for a year and for no one else. During
the year she contracted to act for Z.
55 9213188188
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LAW& AUDIT
QUASI CONTRACT
[Contracts implied in law or implied contract]
It means a contract which lacks one or more of the essentials of a contract. Quasi
contract are declared by law as valid contracts on the basis of principles of
equity i.e. no person shall be allowed to enrich himself at the expense of another
the legal obligations of parties remains same.
Nature of Quasi contracts:(a) A quasi contract does not arise from any formal
agreement but is imposed by law. (b) Every quasi contract based upon the principle
of equity and good conscience. (c) A quasi contract is always a right to money and
generally though not always to a liquidated sum of money. (d) A suit for its breach
may be filed in the same way as in case of a complete contract. (e) The right
grouted to a party under a quasi contract is not available to him against the whole
world but against particular person(s) only. (f) A suit for breach of a quasi
contract may be filed in the same way as in case of an ordinary contract (g)
Although there is no contract between the parties under a quasi contracts, yet they
are put in the same position as if he were a contract between them . Provisions
relating to various quasi contracts are contained in section 68 to sec 72 of the
contract Act, 1872.
TYPES OF QUASI CONTRACTS

Sec. 68 Supply of Necessaries Sec. 69 Sec. 70 Reimbursement Obligation to pay for
of money due benefit out of non – gratuitous act Sec. 71 Responsibility of Finder
of Goods Sec.72 Person receiving goods are money by mistake
Sec. 68: If a person, incapable of entering into a contract, or anyone whom he is

legally
bound to support, is supplied by another person, with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person. 1. Meaning of Necessaries:
(a) Necessaries normally include articles required to maintain a particular person
in the state, degree and station in life in which he is. (b) They are essentials to
run a life.
56 9213188188
SUJEET JHA
LAW& AUDIT
(c) (d) (e)

2.
An item will not be considered necessary, if a person already has sufficient supply
of things of such kind. Necessaries include Services rendered to a person. What
constitutes necessaries depends on the circumstances of each case.
Only property liable: person not liable: (a) It is only the property (movable and
immovable) of the incapable person they shall be liable. (b) He cannot be held
liable personally. (c) Where he doesn’t own any property, nothing shall be payable.
Example: (i) A supplies B, a lunatic, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B’s property. (ii) A who supplies the
wife and children of B, a lunatic, with necessaries suitable to their condition in
life, is entitled to be reimbursed from B’s Property.
3.
Payment By a person who is interested in a transaction [69] Condition of section

[69] Sec. 69; A person, who is interested in the payment of money and pays such
money, which another is bound by low to pay, is entitled to be reimbursed by the
other.
(a) (b) (c) (d)
one party is legally bound to make a payment Some other persons make such payment
The person making such payment is not legally bound to make such payment The person
making such payment is interested in paying such amount
Legal effect of sec 69.:- If all the conditions of sec 69 are satisfy the person
who is interested in paying such amount shall be entitled to recover the payment
made by him. Ex.:- The goods belonging to A were wrongfully attached in order to
realize arrears of Government revenue due by G. A paid the amount to save the goods
from sale at was held that A was entitled to recover the amount from G. Obligation
of person enjoying benefit of non-gratuitous act [70] Conditions of section 70.
Sec.70 : Where a person, lawfully does anything for another person, or delivers
anything to him; not intending to do so gratuitously, and such other person enjoys
the benefits thereof, then he is bound to make compensation to the other in respect
of, or to restore the thing so done or delivered. (a) A person has lawfully done
something for another person or delivered something to another person. (b) Such
person must have acted voluntarily and non – gratuitously. (c) The other person has
enjoyed the benefit of the act done for him or the thing delivered to him.
Legal effect of sec 70. SUJEET JHA 57 9213188188
MS EDUCONZ PVT. LTD. ¾ ¾
LAW& AUDIT
If the conditions of sec70 are satisfied, there will be quasi contract between the
parties. Consequently, the party who has done something or delivered a thing shall
be entitled to recover its value from the person who obtained the benefit of the
same. Ex.:- A a trades man leaves goods at B’s house by mistake, B treat the goods
as his own, He is bound to pay A for them.
¾
A saves B’s property from fire. A is not entitled to compensation from B if the
circumstances show that be intended to act gratuitously.
Finder of Goods [71]

A person who finds goods belonging to another and takes them into custody, is
subject to the same responsibility as a Bailee. A finder of goods has same rights
and duties at that of bailee. ¾ Duty to take reasonable care of the goods ¾ Duty
not to use the goods for his own purpose. ¾ Duty not to mix the goods with own
goods Right to recover expenses, reward, sell the goods
Ex.:- X a guest found a diamond ring at a birthday party of Y. X told Y and other
guests about it. He has performed his duty to find the own. If he is not able to
find the owner he can retain the ring as bales. Money paid under a mistake or
conversion [72]
Sec. 72: A person to whom money has been paid, or anything delivered by mistake or
under coercion, must repay or return it. Conditions of Sec. 72 (a) A person has (i)
paid money to another person or (ii) Delivered something to another person (b) Such
person must have acted ¾ Under a mistake or under coercion.
Legal effect – quasi contract, recover its value from the person who obtained the
benefit of same. Example: (i) A and B jointly owe Rs.1,000 to C.A alone pays the
full amount to C and B not knowing this fact, pays Rs.1,000 again to C.C is bound
to repay the amount to B. (ii) A Railway Company refuses to deliver certain goods
to the Consignee except upon payment of an illegal charge for carriage. The
Consignee pays the sum charged in order to take delivery of goods. He is entitled
to recover so much of the charge as was illegally excessive.
(c) A + B . – 100 – A – 100, B – 100, B – return.

Compensation for failure to discharge obligation created by quasi contract [73]
When an obligation created by quasi contract is not discharged the injured party is
entitled to reline the same compensation from the party in default as if such
person had, contracted to discharge is and broken his contract.
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Quantum meruit: - [as much as is earned]

One party preventing the other:- If a party prevents the other party from
completing his obligation under the contract the aggrieved party may claim payment
on quantum merit for the part of contract already performed by him. (a) In case of
void agreement or contract that becomes ¾ Any person who has received any advantage
under such agreement or contract is bound to restore if or to make compensation for
it, to the person from who received it. Ex.:(1)- A – B – 10000 – to marry c (A’s
daughter) – C – death of the time of performance of contract – B must repay A Rs
1000. Ex.(2):- A – B decline 250 quince of rice before the 1st of May. A delivers
130 qu. Only before that day and none after. B retains the 130 qu. after the first
of May. He is bound to pay A for them. Ex(3):-A singer – two nights in every week
during the next two month and B any ages to pay her Rs 100 for each night’s
performance on the sixth night, A willfully absent perfect. B must pay a for the
five night on which she had sung. (b) In case of Act preventing the completing of
contract:-
If a party does not complete the contract or prevents the other party to complete
the contract the aggrieved party can sue or quantum meruit. Ex.c:- owner – P write
a book to be published as series in his magazine. After a few series were published
the publication of the magazine was stopped. It was held that P could claim payment
on quantum meruit for the part already published.
(c) In case of divisible contract :(1) If the contract is divisible and (2) If the
party not at default has enjoyed benefit of the point performance. (3) the contract
is party performed
If the above condition an satisfied, the party at fault may claim on payment on
quantum meruit for the part of contract performed by him be con recover such
proportion of the contract price as the work done, by him bears to the work under
the contracts.
(d) ¾ ¾ ¾ ¾ In case of indivisible contract performed completely but Badly.
Contract is indivisible Lump sum consideration Completely performed Performed badly
The party at fault may recover the contract price (Lump sum price) less the
deduction made for done badly.
Ex.:- X agreed to decorate Y’s flat for a lump sum of Rs20,000. X did the complete
work but Y complained of faulty work man stop. It costs Y another Rs3000 to remedy
the defect. X could recover only Rs 17000 from Y. SUJEET JHA 59 9213188188
MS EDUCONZ PVT. LTD. (e) In case of Non – gratuitous Act – Three condition
LAW& AUDIT
(i) The thing must have been done or delivered lawfully. (ii) The person who has
done or delivered the thing must not have intended to do so gratuitously And (iii)
The person from whom the act is done must have enjoyed the benefit of the act.
Ex.:- A, a tradesman leaves goods at B’s shop be mistake B treats the good as his
own. He is bound to pay A for them. Difference between Quasi Contract and Contract
Matter Intentionally Form Quasi – contract It is not intentionally formed but law
imposes upon the parties. A quasi – contract does not possess all the essential of
a valid contract. Obligations are implied upon by the law. It is founded upon the
principle of equity. Contract It is intentionally formed by parties.
Essentials of contract Obligations Foundation
A contract possesses all the essentials of a valid contract. Obligations are

mutually created by the parties. It is founded upon general principal of law of
contracts.
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SPECIAL CONTRACT Contract of Indemnity

1. INTRODUCTION TO CONTRACT OF INDEMNITY ¾ Indemnity Meaning – • To make good the
loss incurred by another person • To compensate the party who has suffered some
loss • To protect a party from incurring a loss ¾ ‘Contract of indemnity Definition
A contract is called as a ‘contract of indemnity’ if – One party promises to save
the other from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person. ¾ Modes of contract of indemnity Expressed: When a
person expressly promises to compensate the other from loss. Implied : When the
contract is to be inferred from the conduct of the parties or from the
circumstances of the case. ¾ Essential elements of a contract of indemnity Contract
: All the essentials of a valid contract must also be present in the contract of
indemnity Example:- X asks Y to beat Z and promises to indemnify Y against the
consequences. Y beats Z and is fined Rs.1,000. Y cannot claim this amount from X
because the object of the agreement was unlawful. Loss to one party A person can
indemnify another person only if such other person incurs some loss or it has
become certain that he will incur some loss. Indemnity by the promisor The purpose
of contract of indemnity is to protect the indemnity holder from any loss that may
be caused to the indemnity holder. Reason for loss The contract of indemnity must
specify that indemnity holder shall be protected from the loss caused due to – •
Action of the promisor himself; or • Action of any other person; or • Any act,
event or accident which is not in the control of the parties. 2. RIGHTS OF
INDEMNITY HOLDER (Sec. 125)
¾ Right to recover damages The indemnity holder has the right to recover all the
damages which he is compelled to pay in any suit in respect of any matter covered
by the contract of indemnity. ¾ Right to recover costs SUJEET JHA 61 9213188188
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The indemnity holder has the right to recover all the costs which he is compelled
to pay in bringing or defending such suit. Condition: (a) The indemnifier
authorised him to bring or defend the suit; or (b) The indemnity holder did not
contravene the orders of the indemnifier; and The indemnity holder acted as it
would have been prudent for him to act in the absence of any contract of indemnity.
¾ Right to recover sums paid The indemnity holder has the right to recover all the
sums which he has paid under the terms of a compromise of such suit. (a) The
indemnifier authorised him to compromise the suit; or (b) The indemnifier holder
did not contravene the orders of the indemnifier; and the indemnity holder acted as
it would have been prudent for him to act in the absence of any contract of
indemnity.
Contract of guarantee
3. MEANING OF CERAIN TERMS ¾ Meaning of ‘contract of guarantee’ A ‘contract of
guarantee’ is a contract to – • Perform the promise; or • Discharge the liability,
of a third person in case of his default. ¾ Meaning of ‘surety’ The person who
gives the guarantee is called as ‘surety’ ¾ Meaning of ‘principal debtor’ The
person in respect of whose default the guarantee is given is called as ‘principal
debtor’. ¾ Meaning of ‘creditor’ The person to whom the guarantee is given is
called as ‘creditor’. GUARANTEE (Sec. 126)
ON MONEY ON PERSON Nature of payment

Specific/Simple Guarantee Guarantee is for a single transaction. It ends when debt
is discharged or promise is performed. SUJEET JHA
Effective time of payment

Fidelity Guarantee Guarantee is on the good conduct or honesty of a person employed
in a particular organizations.
Continuing Retrospective Prospective Guarantee Guarantee Guarantee Guarantee is for

Guarantee is for Guarantee is for a series of an existing debt a future debt or
obligation. or obligation. transactions. Liability extends till the revocation of
guarantee. 62
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4. ESSENTIALS AND LEGAL RULES FOR A VALID CONTRACT OF GUARANTEE. ¾ Must have all
the essentials of a valid contract • All the essentials of a valid contract must be
present in the contract of guarantee. • Exceptions: (a) Consideration received by
the principal debtor is a sufficient consideration to the surety for giving the
guarantee. (b) Even if principal debtor is incompetent to contract, the guarantee
is valid. But, if surety is incompetent to contract, the guarantee is void. ¾
Primary liability of some person • The principal debtor must be primarily liable.
However, even if the principal debtor is incompetent to contract the guarantee is
valid. • The debt must be legally enforceable. • The debt must not be a time barred
debt. ¾ The contract must be conditional • The liability of surety is secondary and
conditional. • The liability of surety arises only if the principal debtor makes a
default. ¾ No misrepresentation • The creditor should disclose all the facts which
are likely to affect the surety’s liability. • There must not be any concealment of
facts. ¾ Form of contract A contract of guarantee may be either oral or written. ¾
Joining of other co-sureties The guarantee by a surety is not valid if – • A
condition is imposed by a surety that some other person must also join as a
cosurety; but • Such other person does not join as a co-surety. 5. NATURE AND
EXTENT OF SURETY’S LIABILITY ¾ Surety’s liability is coextensive with liability of
principal debtor General rule – • Surety is liable for all the debts payable by the
principal debtor to the creditor. • Accordingly, interest, damages, costs etc. may
also be recovered from the surety. Exception:The contract of guarantee may provide
otherwise. ¾ Commencement of surety’s liability • The liability of surety arises
immediately on default by the principal debtor. • The creditor is not required to –
(a) first sue the principal debtor; or (b) first give a notice to the principal
debtor. ¾ Surety’s liability may be limited SUJEET JHA 63 9213188188
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The surety may fix a limit on his liability up to which the guarantee shall remain
effective.
¾ Surety’s liability may be continuous • The surety may agree to become liable for
a series of transactions of continuous nature. • However, the surety may fix – - a
limit on his liability upto which the guarantee shall remain effective; - a time
period during which the guarantee shall remain effective. ¾ Surety’s liability may
be conditional The surety may impose certain conditions in the contract of
guarantee. Until those conditions are met, the surety shall not be liable. 6.
CONTINUING GUARANTEE ¾ Meaning A guarantee which extends to a series of
transactions is called as continuing guarantee. ¾ Revocation (Sec.130) Continuing
guarantee may be revoked, at anytime, by the surety by giving a notice to the
creditor. However, revocations shall be effective only in respect of future
transactions (i.e. the liability of the surety with regard to previous transactions
remains unaffected) ¾ Death of surety (sec. 131) Death of the surety operates as a
revocation of a continuing guarantee as to future transaction. 7. RIGHTS OF SURETY
(Sec.140, 141, 145, 146 and 147)
I. Rights against principal debtor ¾ Right of indemnity • There is an implied

promise by the principal debtor to indemnity the surety. • The surety is entitled
to claim from the principal debtor all the sums which he has rightfully paid. • The
surety cannot recover such sums, which the he has paid wrongfully. ¾ Right of
subrogation On payment of a debt, the surety shall be entitled to all the rights
which the creditor could claim against the principal debtor. II. Rights against the
creditor ¾ Right of subrogation • The surety can claim all the securities which the
creditor had at the time of giving of guarantee • It is immaterial as to whether
the surety had knowledge of such securities or not. • If the securities are
returned by the creditor to the principal debtor the surety is discharged to the
extent of value of the securities so returned. ¾ Right of set off • Any amount
recoverable by the principal debtor may be claimed as deduction. • Any amount
recoverable by the surety may be claimed as deduction. SUJEET JHA 64 9213188188
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¾ Rights to share reduction If the principal debtor becomes insolvent, the surety
may claim proportionate reduction in his liability. III. Rights against co-sureties
¾ Rights to contribution General Rule All the co-sureties shall contribute equally
Exceptions • Under the contract of guarantee, the co-sureties may fix limits on
their respective liabilities. Even in such a case, the co-sureties shall contribute
equally, subject to maximum limit fixed by the co-sureties. • The contract of
guarantee may provide that the co-sureties shall contribute in some other
proportion. ¾ Right to share benefit of securities If one co-surety receives any
security, all the other co-sureties are entitled to share the benefit of such
security. 8. DISTINCTION BETWEEN INDEMNITY AND GUARANTEE Basis Meaning Contract of
indemnity A contract by which one party promises to save the other from loss caused
to him is called as a contract of indemnity. There are only two parties, viz, the
indemnifier and the indemnity holder. The liability of the indemnifier is primary
and independent. In a contract of indemnity there is only one contract. Contract of
guarantee A contract of guarantee is a contract to perform the promise, or
discharge the liability of a third person in case of his default. There are three
parties, viz., the principal debtor, creditor and the surety. The liability of the
surety is secondary and conditional. In the contract of guarantee, there are three
contracts; first between principal debtors and creditor, second between creditor
and surety, and third between surety and principal debtor. The contract of
indemnity is for the The contract of guarantee is for the security of the creditor.
reimbursement of the loss. (Sec.130 to 144)
Parties Nature of liability Number of contract
Nature of contract
9.
DISCHARGE OF SURETY FROM LIABILITY DISCHARGE OF SURETY
Revocation of contract of guarantee
Invalidation of contract of guarantee
Conduct of Creditor
¾ Notice of revocation by surety • Specific guarantee A specific guarantee can be

revoked only if liability of principal debtor has not arisen. • Continuing
guarantee SUJEET JHA 65 9213188188
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A continuing guarantee can be revoked only in respect of future transactions.

¾ ¾ ¾ Death of surety In case of death of surety, a continuing guarantee is
automatically revoked in respect of future transactions. ¾ Variance in terms If – •
Any variation is made subsequent to formation of contact of guarantee; and • Such
variation is made without the consent of surety; Then – • The surety shall be
released for such transactions as take place after such variation. ¾ Release or
discharge of principal debtor If – • The creditor makes a fresh contract with the
principal debtor whereby the principal debtor is relieved from his liability; or –
• The creditor does any act or omission resulting in discharge of the principal
debtor; Then – The surety is discharged. ¾ Composition with principal debtor The
surety is discharged if the creditor makes a composition with the principal debtor
without obtaining the consent of surety. ¾ Giving extension of time to principal
debtor The surety is discharged if the creditor extends the time for repayment of
the debt by the principal debtor without obtaining the consent of the surety. ¾
Loss of security by a creditor The surety is discharged to the extent of security
lost by the creditor.
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BAILMENT
10. MEANING OF CONTRACT OF BAILMENT (Sec. 148)
A ‘bailment’ is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
BAILMENT Based on Benefit Exclusive benefit of Bailor J, neighbour of K, agrees to
look after K’s per while he is out of station. K is benefited. Exclusive Mutual
Benefit benefit of Bailee of both Z lends a book to A hires furniture B, by Y for
reading. Y from payment of hire is benefited. charges, Both A and B are benefited.
Based on Reward Gratuitous Bailment Neither Bailor nor Bailee gets any
remuneration, e.g. A lends his book to his are friend. Non gratuitous Bailment
Bailor or Bailee gets remuneration e.g. G gives his television set for repair to H,
a technician. H gets paid for the job. (Sec.148)
11.
ESSENTIALS OF A VALID CONTRACT OF BAILEMENT ¾ Contract • There must be a contract.

• The contract may be expressed or implied. ¾ Goods Bailment can be made of goods
only. ¾ Delivery There must be delivery of goods by one person to another person. ¾
Purpose of delivery • The goods must be delivered for some purpose. • The purpose
may be expressed or implied.
¾ Return or disposal of goods • The delivery of goods must be conditional • The

condition shall be that the goods shall be – - returned (either in original form or
in any altered from); or - disposed of according to the directions of the bailor,
when the purpose is accomplished. 12. MODES OF DELIVERY 67 (Sec.149) 9213188188
SUJEET JHA
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¾ Actual delivery Transfer of physical possession of goods from one person to

another . ¾ Symbolic delivery • Physical possession of goods is not actually
transferred. • A person does some act resulting in transfer of possession to any
other person. Examples: (a) Delivery of keys of a car to a friend (b) Delivery of a
railway receipt. ¾ Constructive delivery If – • A person is already in possession
of goods of owner. • Such person contracts to hold the goods as a bailee for a
third person. Then – Such person becomes the bailee, and the third person becomes
the bailor. 13. CLASSIFICATION OF BAILMENT ¾ Gratuitous bailment ¾ Bailment without
any charges or reward, i.e. – • No hire charges are paid by bailee; and • No
custody charges are paid by bailor. ¾ Non – gratuitous bailment Bailment for some
charges or reward, i.e.• Hire charges are paid by bailee; or • Custody charges are
paid by bailor. 14. DUTIES OF A BAILOR (Sec. 150, 158, 159 and 164)
¾ Disclose faults in goods [Sec. 150]: Bailor is bound to disclose to Bailee,

faults in the goods bailed, of which he has knowledge. He should also disclose such
information which – (a) materially interferes with the use of goods, or (b) expose
the Bailee to extraordinary risk. Liability for Defects in Goods In case of
Gratuitous bailment In case of Non – Gratuitous Bailment Bailor is liable only for
those losses Bailor is liable for damages whether or not which arise due to non –
disclosed risks. he was aware of the existence of faults. Example: A owning a
motorcycle, allows B, his friend, to take it for a joy ride. A knows that its
brakes were not proper but does not disclose it to B. B meets with an accident. A
is liable to compensate B for damages. But when A had lent the motorcycle on hire,
he is liable to B even if he did not know of the failure of his brakes. ¾ Bear
expenses [Sec.158] Expenses of Bailment In case of Gratuitous bailment In case of
Non – Gratuitous Bailment Bailor shall repay to Bailee, all Bailor is liable to
repay only extra – necessary expenses incurred by him for ordinary expenses, and
not the ordinary SUJEET JHA 68 9213188188
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the purpose of Bailment.
expenses.
Example: M lends his car to N and it runs out of petrol. N can recover the amount
paid for refueling (ordinary expenses). If in case, the car suffers a breakdown, N
can recover such charges as are paid by him in bringing it back to condition (extra
– ordinary expenses). He M hired the car to N, he shall be liable only for the
repair charges, being extra ordinary expenses. ¾ Indemnify the bailee for defective
title The bailor shall indemnify the bailee for any loss caused to bailee due to
defective title of bailor. ¾ Indemnify the bailee for premature termination If – -
the bailment is gratuitous ; and - for a specific period. Then – (a) the bailor may
compel the bailee to return the goods before expiry of the peiod of bailment; but
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee. ¾
Receive back the goods • It is the duty of the bailor to receive back the goods,
when returned by bailee. • If the bailor wrongfully refuses to receive back the
goods, he shall be liable to pay ordinary expenses of custody of goods incurred by
the bailee.
15.
DUTIES OF A BAILEE
(Sec.151 to 157)
¾ Take reasonable care • The bailee must take such case of goods as a man of
ordinary prudence would take care of his own goods. • The bailee shall not be
liable for any loss or destruction of goods, if – (a) he is not negligent; or (b)
the loss was caused due to an act of God or other unavoidable reasons. ¾ Not to
make unauthorized use of goods • The bailee must not make any unauthorized use of
the goods. • If the bailee makes any unauthorized use of goods, then – (a) the
bailment becomes voidable at the option of the bailor; and (b) the bailee shall be
liable for any loss or damage even if such loss is caused due to an act of God or
other unavoidable reasons. ¾ Not to mix goods Goods are mixed with bailor’s consent
The parties shall have a proportionate interest in such mixture. Goods are mixed
without bailor’s consent, but the goods are separable • The bailee shall pay the
expenses of separation. • The bailee shall pay damage incurred by the bailor.
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Goods are mixed without bailor’s consent, and goods are not separable The bailee
shall compensate the bailor for any loss caused to him. ¾ Return the goods • The
bailee must return the goods, without waiting for demand from bailor, if – (a) the
time specified in the contract has expired ; or (b) the purpose specified in the
contract is accomplished. • If the goods are not so returned, then – (a) the goods
shall be at the risk of the bailee; (b) the bailee shall be liable for any loss or
damage, even if such loss is caused without any fault or negligence of the bailee
or due to an act of God or other unavoidable reasons. ¾ Return accretion to goods
The bailee must return to the bailor any accretion (i.e., addition) to the goods
bailed. ¾ Not to set up an adverse title The bailee has no right to allege that the
bailor had no authority to bail the goods. 16. RIGHTS OF A BAILOR (Sec. 153, 159,
163, 180, 181)
¾ Terminate the bailment If – The bailee does any act inconsistent with the terms
and conditions of the contract of bailment. Then – The bailment becomes voidable at
the option of the bailor. ¾ Demand back the goods If – The bailment is gratuitous;
and For a specific period. Then – (a) the bailor may compel the bailee to return
the goods before expiry of the period of bailment; and (b) the bailor shall
indemnify the bailee for any loss incurred by the bailee. ¾ File suit against
wrongdoer The bailor has the right to sue – • A third party who does any damages to
the goods; or • A third party who deprives the bailee from using the goods ¾ Sue
the bailee The bailor may sue the bailee to enforce his duties. 17. RIGHTS OF A
BAILEE (Sec. 165, 166, 167, 170, 180)
¾ Right to compensation The bailee has the right to be indemnified by the bailor,
if – • The bailor has no title to the goods; and • As a consequence, the bailee
suffers some loss. SUJEET JHA 70 9213188188
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¾ Return the goods • It is the duty as well as the right of the bailee to return
the goods to the bailor. • In case of joint bailor, the goods may be returned to
any of joint bailors. ¾ Recover charges incurred Extra ordinary expenses • The
bailor is liable to pay the extraordinary expenses. • The bailee may recover the
extraordinary expenses paid by him. Ordinary expenses If the bailment is
gratuitous, the bailor is liable to pay the ordinary necessary expenses, i.e., the
bailee has the right to recover the ordinary necessary expenses incurred by him. ¾
Suit for deciding the title The bailee may apply to the Court for deciding the
title to goods, if a person other than the bailor claims that the goods belong to
him. ¾ File suit against wrongdoer The bailee has the right to sue – • A third
party who does any damages to the goods; or • A third party who deprives the bailee
from using the goods. ¾ Right of lien The bailee has the right to retain the goods
delivered to him until the charges due to him are paid by the bailor. 18.
DISTINCTION BETWEEN BAILEE’S PARTICULAR AND GENERAL LIEN Basis of distinction 1.
Natural of right Bailee’s particular lien Particular lien gives right to retain
only such goods in respect of which charges due remain unpaid. Particular lien can
be exercised only when some labour or skill has been expended on the goods,
resulting in an increase in value of goods. Every bailee is entitled to particular
lien. Bailee’s general lien General lien gives right to retain any goods belonging
to another person for any amount due from him. General lien may be exercised even
though no labour or skill has been expended on the goods.
2. Condition for exercising lien
3. Right to whom?
General lien can be exercised by only such persons as are specified u/s 171. e.g.,
bankers, factors, wharfingers, Attomeys of High Court, policy brokers. Any other
bailee may exercise general lien if there is an agreement to this effect.
(Sec.153, 159 and 162)
19.
TERMINATION OF BAILMENT
Situation 1. Expiry of specified SUJEET JHA
Explanation Example When bailment is for specific Z lends a moped to Y for a 71

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period, it terminates on the period of 3 months April – expiry of the specified

period. June. The Bailment terminates by the end of June. 2. Accomplishment Where
bailment is for a G hires tables and chairs, of specified purpose specified
purpose, it utensils, etc. from H for his son’s terminates when such purpose
organizing engagement. G shall return is accomplished. them once the engagement
functions are over. When bailee does some act J gives his car to K keeping it 3.
Bailee’s act which is inconsistent with the in K’s garage. K gives it to his
inconsistent with terms and conditions of son for racing. J can terminate
conditions bailment, the Bailor may the bailment. terminate the bailment. 4.
Destruction of When goods bailed are K hires a cycle from L. When subject matter
destroyed, Bailment comes to the cycle is damaged beyond repair in an accident,
bailment an end. ends. 5. Gratuitous Where premature • Gratuitous Bailment can
Note: Bailment termination of bailment by the be terminated at any time. • Also, a
Gratuitous Bailor, causes loss to the Bailment ends by the Bailee exceeding the
benefits death of either Bailor or derived by him, the Bailor shall indemnify the
Bailee. Bailee. (Sec162)
period
20.
FINDER OF GOODS
(Sec. 71, 168 and 169)
¾ Finder of lost goods [Sec 71] A person, who finds goods belonging to another and
takes them into his custody, is subject to the same responsibility as a Bailee. ¾
Implied Agreement There is an agreement, implied by law between finder and owner of
goods. ¾ Duties of Finder A finder of lost goods is treated as Bailee of goods
found. His duties are – (a) To take initiative to find the real owner of the goods,
(b) To take reasonable care of the goods found, (c) Not to put the goods found for
his personal use, and (d) Not to mix the goods found with his own goods. ¾ Rights
of Finder: Suit for specific reward [Sec.168] Finder of goods is not entitled to
sue that owner for compensation for trouble and expenses voluntarily incurred in –
(a) preserving the goods, or (b) finding out the owner. However, he is entitled to
– SUJEET JHA 72 Right of Sale [Sec.169] If a thing which is commonly the subject of
sale is lost, and • Owner cannot be found with reasonable diligence, [or] • Owner,
if found, does not pay the lawful charges of the Finder. 9213188188
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(a) Lien: Retain the goods against the Then, Finder of Goods is entitled to sell
the owner till he receives such same when – compensation (a) the thing is in danger
of perishing, or (b) Suit: Sue the owner for payment (b) the thing is in danger of
losing the of any specific reward offered by greater part of its value, or the
owner for the return of goods (c) The lawful charges of finder, amount to lost, and
retains the goods till 2/3rd of the value of the thing lost and payment of such
reward. found.
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PLEDGE
21. MEANING OF ‘PLEDGE’, ‘PAWNOR’, ‘PAWNEE’ (Sec.172) ¾ ‘Pledge’ The bailment of
goods as security for payment of a debt or performance of promise is called
‘pledge’. ¾ ‘Pawnor’ The bailor in case of a pledge is called as ‘pawnor’. ¾
‘Pawnee’ The bailee in case of pledge is called as ‘pawnee’. 22. ESSENTIALS A VALID
CONTRACT OF PLEDGE ¾ Contract • There must be a contract • The contract may be
expressed or implied. ¾ Goods Pledge can be made of goods only. ¾ Delivery There
must be delivery of goods by one person to another person. ¾ Purpose of delivery •
The goods must be delivered for some purpose. • The purpose must be to deliver the
goods as security for (a) payment of a debt; or (b) performance of a promise. ¾
Return of goods • The delivery of goods must be conditional • The condition shall
be that the goods shall be – - returned (either in original form or in altered
form); or - Disposed of according to the directions of the pawnor when the purpose
is accomplished. 23. RIGHTS OF PAWNEE (Sec.173 and 176) (Sec.172)
¾ Right of Retainer [Sec.173] Pawnee may retain the goods pledged for – (a) payment
of the debt or the performance of promise, (b) any interest due on the debt; and
(c) all necessary expenses incurred by him with respect to possession or for
preservation of goods pledged. ¾ Retainer for subsequent advances [Sec.174]
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(a) Where the Pawnee lends money to the Pawnor subsequently, after the date of
pledge, it shall be presumed that the he has a right of retainer over the goods
already pledged in respect of the subsequent lending also. (b) This presumption can
be made invalid only by an expenses provision to that effect. ¾ Reimbursement of
Expenses [Sec.175] Where the Pawnee incurs extraordinary expenses to preserve the
goods pledged with him, he is entitled to receive such amount from the Pawnor. ¾
Rights in case of default by Pawnor [Sec.176] (a) Suit: Pawnee may institute a suit
against Pawnor when there is a default in payment of debt or performance of promise
at the stipulated time. (b) Retention / Sale of goods: Pawnee may – (a) retain the
goods pledged as collateral security, or (b) sell the goods pledged by giving a
reasonable notice to the Pawnor. (c) Surplus / Deficit on Sale : When there is a
surplus on sale, Pawnee shall pay the excess to the Pawnor. In case of deficit,
Pawnor shall be liable for the balance amount. (d) No Notice: Where the Pawnee does
not give a reasonable notice to the Pawnor, the sale is valid, but Pawnee is liable
to pay damages to Pawnor.
¾ Right against true owner of goods [Sec.178A] (a) Where the Pawnor has acquired
possession of pledged goods, under a voidable contract u/s 19 or 19A but contract
has not been rescinded at the time of pledge, the Pawnee acquires a good title to
the goods, against the true owner. (b) The title of Pawnee is good only where – (a)
he had no notice of the Pawnor’s defect in title and (b) he acts in good faith.
Reasonable notice u/s 176 means that a notice of intended sale of the security by
the Creditor within a certain date, so as to afford an opportunity to the Debtor to
pay the amount within the time mentioned in the notice. Notice of sale is essential
and a clause in the agreement excluding the requirement of Notice is inconsistent
with the Act & is void and unenforceable.
24. DUTIES OF A PAWNOR
Prabhat Bank Ltd. vs Babu Ram
(Sec.175)
¾ Pay the debt The pawnor is liable to pay the debt or perform his promise as the
case may be. ¾ Pay deficit on sale If the pawnee sells the goods due to default by
the pawnor, the pawnor must pay the deficit. ¾ Pay extra – ordinary expenses The
pawnor is liable to pay to the pawnee any extraordinary expenses incurred by the
pawnee for preservation of goods. ¾ Disclose faults in goods The pawnor is liable
to disclose all the faults which – SUJEET JHA 75 9213188188
MS EDUCONZ PVT. LTD. (a) are material for use of the goods; or (b) may put the
pawnee to extraordinary risks.
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¾ Indemnify the pawnee If loss is caused to the pawnee due to defect in pawnor’s
title to the goods, the pawnor must indemnify the pawnee. 25. DUTIES OF PAWNEE ¾
Not to use the goods • The pawnee has no right to use the goods • However, he may
use the goods, if he has been so authorised by the pawnor. ¾ Return the goods The
pawnee must return the goods if the pawnor pays the debt or performs his promise. ¾
Take reasonable care The pawnee must take such care of goods pledged as a man of
ordinary prudence would take care of his own goods. ¾ Not to mix goods The pawnee
must not mix his own goods with the goods pledged. ¾ Return increase in goods The
pawnee must return to the pawnor any accretion to the goods pledged with him. 26.
RIGHTS OF A PAWNOR (Sec.177)
¾ Redeem the goods pledged Meaning of redemption Right to recover back the goods by
making payment of the debt or performance of promise. Time for redemption Where
time of redemption is fixed, the pawnor may exercise redemption – (a) within the
time so fixed; or (b) even after expiry of time so fixed, provided – • the pawnee
has not sold the good; and • the pawnee pays the pawnee all expenses arising on
account of his default. ¾ Enforce pawnee’s duties The pawnor has the right to
enforce the duties of pawnee, if the pawnee fails to fulfill his duties. ¾ Receive
increase in goods The pawnor has the right to recover from pawnee any increase in
goods pledged. ¾ Right to receive notice of sale In case of default by the pawnor
to pay the debt or perform his promise, the pawnee has the right to sell the goods,
after giving a reasonable notice to the pawnor. If the pawnee fails to give notice,
the pawnor has the right to recover the loss incurred by him. Basis SUJEET JHA
Pledge 76 Bailment 9213188188
LAW& AUDIT
1. Purpose
Pledge is bailment of goods for a specific purpose, i.e. to provide a security for
a loan or fulfillment of an obligation. Pawnee, i.e. Pledgee has a right of sale of
goods pledged on default of Pawnor. He can do so by giving a notice to the pawnor.
Pledgee has no right of using goods pledged.
2. Sale of Goods
3. Use of Goods
Bailment may be for purpose other than by way of providing security for a loan or
fulfillment of an obligation. It may be for purpose like repairs, safe custody,
etc. There is no right of sale to the Bailee. Bailee may either – (a) retain goods,
or (b) sue the Bailor for non – payment of his dues. Bailee can use the goods
bailed as per terms of contract.
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AGENCY
27. INTRODUCTION TO CONTRACT OF AGENCY ¾ Meaning of ‘agent’ An ‘agent’ is a person
employed to – • Do any act for another; or • Represent another in dealings with
third persons. ¾ Meaning of ‘principal’ ‘Principal’ is the person – • For whom an
act is done by the agent; or • Who is represented by the agent in respect of
dealing with third persons. ¾ Test of agency Where a person has the capacity to – •
Create contractual relations between the principal and a third party; • Bind the
principal by his own acts, there exists a relationship of agency. CREATION OF
AGENCY (Sec.182)
By Operation of Law
28.
By Express Agreement
By Implied Agreement By Ratification of acts (a) Estoppel, (b) Holding Out, (c)
Necessity
(Sec. 183, 184, 185 and 226)
SALIENT FEATURES OF AGENCY
¾ Principal is liable for the acts of agent • The principal is liable for all the
acts of an agent which are lawful and within the scope of agent’s authority. • The
contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself. ¾ Who may
employ an agent? Any person may employ an agent if – • He is of the age of
majority; and • He is of sound mind. ¾ Who can be an agent? • Any person may become
an agent. • Even a minor or a person of unsound mind can become an agent ¾
Liability of agent • Generally an agent is liable to the principal • An agent is
not liable to the principal if he is a minor or is of unsound mind. ¾ Requirement
of consideration No consideration is necessary for creating an agency.
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MS EDUCONZ PVT. LTD. 29. MODES OF CREATION OF AGANCY
LAW& AUDIT (Sec.187, 189, 196, 214 and 237)
¾ Express agreement • A person may employ another person as his agent by entering
into an express agreement with him. • The agreement may be either oral or written.
¾ Implied agreement Agency by estoppel If – - a person makes a representation (by
his words or conduct) to a third person that a certain person is his agent; and -
the third party believing such representation to be true, enters into a contract
with the pretended agent. Then – - the person making the representation is
prevented from denying the truth of agency. He may be held liable as a principal by
such third party. Agency of holding out Such an agency comes into existence when a
person by his affirmative or positive conduct leads third persons to believe that
person doing some act on his behalf is doing with authority. ¾ Agency by necessity
– Conditions (i) There was an actual and definite necessity for acting on behalf of
the principal. (ii) The agent was not in a position to communicate with the
principal. (iii) The act was done for the purpose of protecting the interest of his
principal. (iv) The agent has exercised such reasonable care as a man of ordinary
prudence would have exercised in his own case. (v) The act was done bonafide. ¾
Agency by operation of law Agency by operation of law arises where the law treats
one person as an agent of another. ¾ Agency by ratification Meaning If – - a person
(viz., pretended agent) acts on behalf of another person (viz, the principal) - the
pretended agent acts without the knowledge or consent of the principal; and -
Afterwards, the principal accepts such act. Then – - Agency by ratification comes
into existence. Effects of ratification • The principal is bound by the acts
ratified by him as if such acts had been performed by his authority. • Ratification
relates back to the actual date of the act that is ratified and not from the date
when the act ratified.
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30.
ESSENTIALS OF A VALID RATIFICATION
(Sec. 197 to 200)
¾ Full knowledge No valid ratification can be made by a person whose knowledge of

the facts of the case is materially defective. In other words, the principal must
have full knowledge of all the material facts. ¾ Whole transaction It must be done
for whole transaction in fact; ratification of the part of a transaction operates
as a ratification of the whole transaction. ¾ Act on behalf of another person The
acts done by a person (i.e. pretended agent) on behalf of another person (i.e.
pretended principal) can only be ratified. ¾ By the principal Ratification can be
made by only such person for whom the act was done. ¾ Existence of principal The
principal must be in existence at the time when the act was done in his name ¾
Contractual capacity The principal must have contractual capacity both at the time
of entering into the contract and at the time of ratification. ¾ Lawful acts. Only
those acts which are lawful can be ratified. Void, illegal, or ultra vires acts
cannot be ratified. ¾ Acts within principal’s power Ratification can be made only
for such acts which principal had the power to do. ¾ Communication Ratification
must be communicated to the third party so as to bind him ¾ Within reasonable time
Ratification must be made within reasonable time of the act purported to be
ratified. 31. KINDS OF AGENTS.
A. Based on Authority 1. Special Agent 2. General Agent 3. Universal Agent (a)

Appointed to perform a (a) Appointed to do all acts (a) Appointed to do all acts
for particular transaction, e.g. connected with a the Principal. sale of a house
property. particular trade, business (b) Authority is unlimited or employment. (b)
Agent has limited (c) All acts of Agent bind his authority Principal provided that
his (b) Authority is wide and acts are legal and agreeable continues till agency is
(c) Agent cannot bind as per law of land. terminated. Principal for acts other
SUJEET JHA 80 9213188188
LAW& AUDIT (c) Principal may limit his authority. (d) Principal is bound by all
acts unless it is beyond authority of Agent.
than for which he is employed.
B. Based on Nature of work 1. Commercial or Mercantile Agents 2. Non – Mercantile

Agents. (a) One who is authorised to sell goods or (a) Not engaged in business of
selling or consign goods for the purpose of sale buying goods, but act in their or
to buy gods or to raise money on the respective professional capacities. i.e.
security of goods. render professional services for their Principal (b) Includes
Banker, Factor, Auctioneer, Broker, Commission Agent, & Del (b) Includes
Solicitors, Attorneys, C & F Credere Agent. Agents, Insurance Agents, etc. 32. 1.
2. 3. 4. 5. DUTIES OF AN AGENT (Sec. 209 to 218)
6. 7. 8. 9. 10. 33. 1. 2. 3. 4. 5.
To conduct the business in accordance with the directions given by the principal To
work with reasonable diligence, care and skill. To render proper accounts to the
principal on demand. To communicate with his principal in case of difficulty and
seek his instructions. Not to deal on his own account unless all the material facts
have been disclosed to the principal and consent of the principal has been
obtained. If the agent, without the knowledge of the principal, deals in the
business of agency on his own account, the principal has the following rights: (a)
He may repudiate the transaction, if the agent dishonestly conceals any material
facts or the dealings of the agent prove to be disadvantageous to him. (b) He may
claim from the agent the agency business other than the agreed remuneration. Not to
make any secret profit out of the agency business other than the agreed
remuneration To remit to the principal all the sums received in the principal’s
accounts in accordance with the terms and conditions of contract of agency. Not to
delegate authority or appoint sub – agent. To protect and preserve the interest on
behalf of the principal’s representative in case of his death or insolvency of the
principal. Not to use information obtained in the course of the agency against the
principal.
RIGHTS OF AN AGENT (Sec. 217 to 225)
To retain money out of the sums received in agency business for advances made or
expenses incurred and remuneration due to him. To receive the agreed remuneration.
If the remuneration is not fixed, then he has the right to recover such
remuneration as is usual and customary in such business. Right of lien on
principal’s goods, papers and other property until the amount due to him in respect
of the same is paid. An agent has the right to be indemnified by the principal
against the consequences of all lawful acts done in exercise of the authority
conferred on him. An agent has the right to be indemnified by the principal against
consequences of acts done in good faith that caused an injury to third person.
81 9213188188
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LAW& AUDIT
To claim compensation for injury caused because of principal’s neglect or want of

skill.
34.
WHEN AN AGENT IS PERSONALLY LIABLE?
(Sec. 230 and 231)
¾ General Rule – No personal liability [ Sec.230] In the absence of contract to

contrary, an Agent cannot – (a) personally enforce contracts entered into by him,
on behalf of his Principal, (b) be held personally liable for them. This is because
the Agent merely acts on behalf of his Principal. Thus, he enjoys immunity from
being personally sued. Exceptions, i.e. Agent personally as well as Joint &
Severally Liable The Agent is personally liable in the following cases – 1. Foreign
Principal [Sec.230] : Where the contract is made by an Agent for the sale or
purchase of goods for a merchant resident abroad. 2. Undisclosed Principal
[Sec.230]: Where the Agent does not disclose the name of his Principal. 3.
Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot
be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of
agent. 4. Acting for a Principal not in existence: Where the Agent acts for a
Principal who is not in existence at the time of making contracts, he shall be
personally held liable e.g. contracts entered into by Promoters before
incorporation of a Company are made in their personal capacity and hence personally
liable. 5. Agency coupled with interest [Sec.202] : Where the Agent has an interest
in the subject matter of agency. 6. Agent guilty of Fraud [Sec.238] : Where an
Agent is guilty of fraud or misrepresentation in matters that are outside the scope
of his authority, he is personally liable, and do not affect his Principal. 7.
Agent exceeds authority & act not ratified: Where an Agent acts either without any
authority or exceeds his authority, he shall be held personally liable when the
principal does not ratify his acts. 8. Agent receives or pays money: Where an Agent
receives or pays money by mistake or fraud to a third party, he shall be personally
liable to such third party. Also ha can personally sue the third party if the fraud
or mistake is accountable to such third party. 9. Express Agreement for personal
liability: Where an Agent expressly aggress to be personally bound. 10. Execution
of Contract in his own name: Where an Agent executes a contract in his own name,
without disclosing that he is acting as Agent for a Principal, he shall be
personally liable, e.g. An Agent signs a Negotiable Instrument without making it
clear that he is signing it as an Agent only, he shall be held personally liable on
the same. He would be personally liable as Maker of P/N, even though he may be
described as Agent. 11. Trade custom or usage: Where trade usage or custom makes an
Agent personally liable. 12. Agent with special interest: An Agent with special
interest or with a beneficial interest, e.g. a Factor or Auctioneer, can sue and be
sued personally. [Subramanya vs Narayana] SUJEET JHA 82 9213188188
LAW& AUDIT
13. Action against Agent or Principal [Sec 233] : Where the Agent is personally
liable, a person dealing with him may hold - (a) either him or (b) his Principal or
(c) both of them liable. The liability of Principal and Agent is “joint and
several”. 14. Exclusive liability [Sec. 234] Where a person has made a contract
with an Such Third person cannot later on, shift the liability on to – Agent and –
• Induces such Agent to act upon it in the • The Agent, or belief that only his
principal would be • The principal, respectively. held liable, • Induces the
principal to act upon it in the belief that only his Agent would be held liable.
35. • • • • • 36. AGENCY COUPLED WITH INTERST (Sec 202)
When agency is created for securing some benefit to the agent over and above his
remuneration as an agent, it is called as agency coupled with interest. The
interest should exist at the time of creation of agency. If the interest arises
after the creation of agency then it would not be called as agency coupled with
interest. Agency coupled with interest cannot be terminated to the prejudice of
such interest. Agency coupled with interest does not terminate even on the death or
insanity of the principal. Thus, such agency is irrevocable to the extent of such
interest.
IRREVOCABLE AGENCY (Sec.202 and 204)
¾ Agency coupled with interest Such agency cannot be terminated to the extend of
such interest ¾ Part exercise of authority by the agent Where the agent has partly
exercised the authority, the principle cannot revoke the authority so far as regard
such acts and obligation as arise from already done in the agency ¾ Personal
liability incurred by agent Where the agent has incurred personal liability, the
agency is irrevocable 37. DELEGATION OF AUTHORITY (Sec.190)
¾ General rule The general rule is that an agent cannot lawfully employ another
act, which he has expressly or impliedly undertaken to perform personally. ¾
Exceptions (a) There is a custom or usage of trade to that effect. (b) Where power
of the agent to delegate can be inferred from the conduct of the both the principle
and the agent. (c) When the principal is aware of the intention of the agent to
appoint sub agent by the does not object to it. (d) When principle permits
appointment of a sub-agent. (e) If the nature of the agency is such that the sub-
agent is necessary. SUJEET JHA 83 9213188188
LAW& AUDIT
(f) (g)
Where the acts to be done is purely ministerial not involving confidence or use of
discretion. Where unforeseen emergencies arise rendering appointment of a sub-agent
necessary.
38.
LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND AGENT (Sec.190, 192 and
193) ¾ If sub-agent is properly appointment (a) Principal is bound to the third
parties for the acts of sub-agent. (b) The agent is responsible to the principal
for the acts of sub-agent. (c) The sub-agent is responsible to the agent for the
acts done by him. (d) The sub – agent is not responsible to the principle, except
in case of fraud or willful wrong. ¾ (a) (b) (c) (d) If sub – agent is not properly
appointed. Principal is not bound to the third parties for the acts of sub – agent.
The agent is responsible to the principle and third parties for the acts of sub –
agent. The sub – agent is responsible to the agent for the acts done by him. The
sub – agent is not responsible to the principle. LIABILITY OF PRINCIPAL TO THIRD
PARTIES FOR THE ACTS OF AGENT (Sec. 226 to 228) ¾ Principal is liable for the acts
of agent • The principal is liable for all the acts of an agent which are lawful
and within the scope of agent’s authority. • The contracts entered into by the
agent on behalf of the principal have the same legal consequences as if these
contracts were made by the principal himself. ¾ When agent exceeds his authority
Whether the acts done within the authority are separable from the acts done beyond
authority. If yes – The principal is not bound for excess acts done by the agent.
If no – The principal is not bound by the transaction and the principal can
repudiate the whole transaction.
39.
40.
TERMINATION OF AGENCY
(Sec.201 to 210)
A. By the acts of parties ¾ By agreement The principal and the agent may mutually
agree to terminate the agency, at anytime. ¾ By revocation • When the agency is
coupled with interest, the principal cannot revoke the agency to the prejudice of
such interest. • The principal can revoke the authority at anytime before, the
authority has been exercised so as to bind the principal. • The principal cannot
revoke the authority given to his agent after the authority has been partly
exercised. SUJEET JHA 84 9213188188
MS EDUCONZ PVT. LTD. • •
LAW& AUDIT
When agency if for fixed period, the principal must make compensation to the agent
for premature revocation of agency without sufficient cause. Revocation may be
expressed or implied from the conduct of the principal
¾ By the agent renouncing the business of agency • Renunciation may be expressed or

implied from the conduct of the agent. • When agency is for fixed period, the agent
must make compensation to the principal for premature renunciation of agency
without sufficient cause. B. By operation of law 1. Completion of business of
agency 2. Death or insanity of the principal or agent 3. Where the principal or the
agent, being a company is dissolved 4. Destruction of subject matter of agency 5.
Principal becoming insolvent 6. Expiration of period where agency was for a fixed
period.
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STUDY NOTE – 2 : THE SALE OF GOODS ACT, 1930

SECTION 1:
COMMENCEMENT AND APPLICABLE

APPLICABILITY OF THE ACT ⇒ ⇒ ⇒ ⇒ ⇒ ⇒
This act extends to whole of India, except the State of Jammu and Kashmir. This act
came into force w.e.f. 1 July 1930. The ‘contract of sale’ includes both a sale as
sell as an agreement to sell. The word Indian was omitted the title of the Act in
1963 (22 sept.) This Act does not deal with the sale of immovable property. The
transaction relating to immovable properties, e.g., the sale, lease, gifts, etc.,
are governed by a separate Act known as ‘Transfer of Property Act, 1882’. This Act
is beyond the scope of this book.
DEFINITIONS (Sec. 2)
Buyer – Sec 2 (1) ⇒ A person, who buys or agrees to buy the goods. Delivery Sec (2)
It means voluntary transfer of possession from one person to another. ⇒ Delivery
State Sec 2(3) Goods are said to be in delivered state, when they are in such state
that the Buyer would be bound to take the delivery of them in accordance with the
contract. Documents of title to Goods 2(4) A document of the title to goods may be
described as any document used as proof of the possession or control of goods,
authorizing or purporting to authorize, either by endorsement or by delivery, the
possessor of the document to transfer or receive goods thereby represented. Section
2(4) of the Sale of Goods Act, 1930 recognizes the following as documents of title
to goods:
(i) Bill of lading, (ii) Dock warrant, (iii) Warehousekeeper’s certificate, (iv)
Wharfinger’s certificate, (v) Railway receipt, (vi) Multi – modal transport
document, (vii) Warrant or order for the delivery of goods, and
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LAW& AUDIT
(viii) Any other document used in the ordinary course of business as document of
title (as described in the preceding paragraph).
Document of Title v. Document showing the title :
A document of title enables a person named therein to transfer the property by mere
endorsement and delivery, whereas a document showing title does not confer any
right to transfer by way of endorsement and delivery.
For example, a share certificate shows that the person named therein is entitled to
the shares represented by it, but does not allow transfer of the shares by mere
endorsement and delivery of the certificate.
Goods – Sec 2 (7)

⇒ ⇒ ⇒ ⇒
Goods mean every kind of movable property. Other than actionable claims and money,
and it includes. stock and shares, growing crops, grass and things attached to or
forming part of land which are agreed to be severed before sale or under the
contract of sale. You may notice that ‘money’ and ‘actionable claims’ have been
expressly excluded from the term ‘goods’. ‘Money’ means the legal tender. ‘Money’
does not include old coins and foreign currency. They can, therefore, be sold or
bought as goods. Sale and purchase of foreign currency is, however, also regulated
by the foreign Exchange Management Act, ‘Actionable claims’, like debts, are things
which a person cannot make use of, but which can be claimed by him by means of a
legal action. Actionable claims cannot be sold or purchased like goods, they can
only be assigned, as per the provisions of Transfer of property Act. Grass, growing
crops, trees to be cut and their log wood to be delivered, malba of a building to
be demolished, etc. are goods. Similarly, things like goodwill, copyright, trade
mark, patents, water, gas electricity are all goods and may be the subject matter
of a contract of sale.
Seller – Sec 2 (13) ⇒ A person, who sells or agrees to sell the goods,. Agreement
to sell ⇒ Where transfer of property in goods takes place at future date. Sale ⇒
Where transfer of property in goods takes place at the time of contract.
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ESSENTIAL ELEMENTS OF VALID CONTRACT OF SALES The following are the essentials of
valid contract of sale: ⇒ There must be two parties, one seller and other buyer. •
Seller and buyer must be different. • •
Part owner can sell goods to another part owner. Partners are not regarded as
separate persons for the purpose of sale of the partnership property. They are the
joint owners of the goods and as such they cannot be both sellers and buyers [State
of Gujarat v. Ramanlal S & W. (1965)]. But, a partner may buy goods from the firm
or sell goods to the firm.
⇒ ⇒ ⇒
There must be movable goods as subject matter of contract. There must be a transfer
of property in goods. It means general property. (i.e. ownership) There must be
price involved. Price means money consideration for sale of goods. • Exchange of
goods for goods is barter. • If Exchange is for partly goods and partly for money
it is sale. All essential elements of valid contract must be observed. The contract
of sale can be entered into, expressly or impliedly.
⇒ ⇒
Formation. The contract of sale may provide for any of the following methods. •
Immediate delivery of goods. • Immediate payment of price but delivery at some
future date. • Immediate payment of price and immediate delivery of goods. •
Delivery or payment or both made in installments. • Delivery or payment or both
will be made at future date.
TRANSFER OF “PROPERTY IN GOODS” ⇒ ⇒
Property means general property in goods and not merely special property in goods.
It means ownership of goods. Special property in goods means possession of goods.
Cases where property in goods is not transferred: • Bailment • Creating charge or
pledge
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Difference Between Sale and Agreement to Sell
Immediate transfer of ownership to buyer It is executed contract It creates right

in rem for buyer Seller can use for price – if not buyer Risk passes to buyer Buyer
can get goods even if seller has becomes insolvent Delivery to receiver if buyer
becomes insolvent before the payment of price
Ownership remains with the seller It is an executory contract It provides right in

personam for buyer and seller Seller can sue for damages Risk doesn’t passes to
buyer Buyer can get proportionate share in money but can’t get goods Delivery can
be refused by seller if buyer becomes insolvent.
Difference between Sale and Hire Purchase
Metter Meaning
Sale Hire Purchase Property in goods is transferred Agreement where hirer uses
goods from seller to buyer immediately by paying regular installment and having
option to purchase goods on payment of last installment
Applicable Act Parties How it made? Transfer of ownership Risk of loss Return of
goods Legal effect Installment Sale tax
Ownership not transferred hire vendor is liable Anytime terminate agreement and
Buyer can’t return goods return of Buyer remain liable to pay Each installment paid
is treated as hire charges unpaid installment only When all installment is paid
Payable immediately
Difference between Sale and Bailment
Sale of goods Act, 1930 Buyer and seller Orally or in writing Immediately buyer
becomes owner of goods Risk of loss passes to buyer
Hire Purchase Act, 1972 Hirer and Hire vendor Only in writing – Valid When hirer
paid last installment
Sale Transfer of property in goods for price Property is transferred Consideration

is in form of price, i.e., money
SUJEET JHA 89
Bailment Delivery of goods for specific purpose that it will be returned to bailor
or disposed of as per his direction It remains with bailor. Gratuitous bailment is
possible
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LAW& AUDIT
Goods not returned to seller
Goods returned to bailor purpose of bailment is over

CONTRACT FOR WORK AND SKILL
⇒ ⇒
Some contract involves use of both service and goods. This type of contract is
considered as contract for work and skill. This kind of contract involves exercise
of skill and labour by one party on some goods or materials supplied by other party
or supplied by party who exercise skill and labour for price. It is immaterial who
supply material. Alternatively, it can be said that in this kind of contract, main
purpose is to exercise work and skill. Supply of own goods is only subsidiary.
Intension of parties is to transfer goods only after exercise of some skill and
labour. As it is not falling within categories of contract for Sale no sales tax is
payable. Example: (1) A dentist agreed to supply a set of artificial teeth to a
patient. The material was wholly found by the dentist. Held, it was a contract for
the sale of goods. (2) An artist was asked to paint a portrait. The material was
supplied by the party and not by the painter. It was held to be a contract for work
and labour and not of sale.
CLASSIFICATION OF GOODS GOODS Existing Future Contingent
Specific
Ascertained Unascertained
Types of Goods
The goods may be classified into following categories:

Existing goods •
Existing goods are the goods, which are owned and possessed by the seller at the
time of sale. Existing goods may be of three types;
(a) Specific Goods: • The goods, which are identified and agreed upon by the
parties at the time of contract of sale. • It should be noted that the goods must
be both identified and agreed upon. (b) Unascertained Goods: • These are the goods,
are not identified and agreed upon at the time of the contract of sale. SUJEET JHA
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These goods are merely described by the parties at the time of contract of sale.
(c) Ascertained Goods: • There are the goods, which are identified after the
formation of contract of sale. When the un-ascertained goods are identified and
agreed upon by the parties, the goods are known as ascertained goods. Future Goods
⇒ ⇒ ⇒
Future goods are those goods, which do not exist at the time of the contract of
sale. These goods are to be manufactured or acquired by the seller after the making
of the contract of sale. Future goods cannot be sold, but there can only be an
agreement to sell.
Example: A, a manufacturer agrees to sell 5 tables and 50 chairs to B at Rs.10,000.
B agrees to purchase it. However, tables and chairs are yet to manufactured by A.
Contingent goods
⇒ ⇒
It is a kind of future goods. It is goods, the acquisition of which is contingent

upon the happening or non –happening of an uncertain event.
Example: A agrees to sell the goods loaded on the ship “Titanic”, which is coming
from London to Bombay. The ship may or may not arrive. So, these goods will be
called as contingent goods. Basis Futures Goods Contingent Goods 1. Meaning Goods
that are yet to be Goods, the acquisition of which by the manufactured produced or
acquired Seller depends upon a contingency, by the Seller after making contract of
which may or may not happen. sale. 2. Element of Acquisition of Future Goods does
The procurement of Contingent Goods uncertainty not depend upon and uncertainty. is
dependent upon an uncertain event. 3. Scope Future Goods do not include They are
wider in scope, it includes contingent Goods because of the future Goods. element
of certainty. 4. Effect of Where by a contract of Sale, the There may be a
“Contract for Sale” of Contract Seller purports to effect a present Goods, the
acquisition of which by the sale of future Goods, the contract Seller depends upon
a contingency operates as an “agreement to sell” which may or may not happen [Sec.6
(2)] the Goods[Sec.6(3)] 5. Example B agrees to buy the entire crop of A agrees to
sell to B a certain painting wheat that would yield in S’s farm, only if C, its
present owner, sells it to him. The sale is contingent upon the at the rate of
Rs.1000 per quintal. sale by C. SUJEET JHA 91 9213188188
MS EDUCONZ PVT. LTD. Price of Goods – Sec 9 – 10 Price means the money
consideration for a sale of a Goods 2(10)
LAW& AUDIT
The following are the modes of determining price: [Sec. 9]

⇒ ⇒
Price is specified under the contract. It is the most common method of determining
the price. Here, parties decide the price in advance. Price may be determined as
per the method specified in contract. Example : Delivery of rice on 1st December
2008 at the rate prevailing on that day. Price may be determined in accordance to
custom and usage of trade. This method is applicable if parties regularly trade.
Where the price is not fixed as above, the buyer shall pay the seller a reasonable
price. ‘What is a reasonable price is a question of fact and circumstances.
⇒ ⇒
Fixation of price by third party. (Sec. 10)

If it is so, contract shall specify name of third party. If third party fails to
specify, contract is void but if goods are delivered to buyer and used by him, he
is required to pay reasonable price. If the third party is prevented from fixing
price, defaulting party is liable for the damages.
Consequences of Destruction of Specific Goods – Sec 7 – 8
The consequences of destruction of specific goods can be discussed under the

following three heads: ⇒ If goods perish before making the contract • Contract is
void – ab – initio, due to mistake as to existence of subject matter. • It is to be
noted that if the seller has knowledge about the destruction of goods, even then
the enters into the contract of sale with buyer, then seller is bound to compensate
to the buyer.
⇒ Where a part of the goods is perished before making contract • If the goods was
divisible, then the contract can be enforced party and if the goods was
indivisible, then the contract becomes void – ab – inito. Example: A contracted to
sell one wagon containing 700 bags of groundnut to B. Unknown to A, 109 bags had
been stolen at the time of sale, Therefore, A made a delivery of 591 bags. Held,
the sale was void.
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If goods perish after the “Agreement to sell; but before’ Sale [Sec. 8]
The contract is void if subsequently the goods have perished, and there is no fault
on the part of the buyer or seller in perishing the goods.
Example: A horse was delivered upon trial for 8 days. However, the horse died
within 8 days, without the fault of buyer or seller. Held, the seller must bear the
loss, as the contract was void.
However, parties to the contract may provide otherwise also.

Section 7 and 8 are applicable only in case of specific goods.
Therefore, if unascertained goods are destroyed either before or after making the
agreement, the contract shall not become void. Thus, in an agreement to sell
unascertained goods, even if the entire stock of goods is destroyed, the contract
that not become void and the seller will have to perform his promise.
Example ‘A’ agreed to sell to ‘B’ 100 bags of wheat from his stock of 1,000 bags in
his go down. The entire stock was destroyed by fire. ‘A’ is bound to deliver 100
bags of wheat or else he will be liable for damages. If the contract does not
otherwise provide, then – ⇒ Stipulation as to time of payment is not deemed to be
essence of contract. ⇒ Stipulation as to time of delivery is deemed to be essence
of contract.
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CONDITIONS AND WARRANTIES

⇒
Generally, at the time of sale, the seller makes some representation, statements of
stipulations for the praise of his goods. Some of representations are in nature of
opinion others are in nature of facts. Representation as to fact which becomes a
part of contract of sale is called as stipulation. Stipulation may be condition or
warranty depends upon its importance in relation to contract. Stipulation which is
essential to the main purpose of contract is known as condition. Breach of
condition gives the aggrieved party right to terminate the contract. Stipulation
which is collateral to the main purpose of the contract is warranty. Breach of
warranty gives rise to the aggrieved party right to claim damages but contract
cannot be terminated. The conditions and warranties may be express or implied.
Express conditions and warranties are those, which the parties agree expressly,
i.e. orally or in writing. Implied conditions are those, which are implied by the
law in the absence of any agreement to the contrary.
⇒ ⇒ ⇒
⇒ ⇒ ⇒
IMPLIED CONDITIONS
The following are the implied conditions which are contained in the Sales of Goods
Act: Conditions as to title – sec 14(a) ⇒
There is an implied condition on the part of the seller that • In the case of sale,
the seller has a right to sell the goods, and • In the agreement to sell, the
seller will have a right to sell the goods at the time of passing of ownership in
goods. If the title of seller out to be defective, the buyer must return the goods
to the true owner and recover the price from the seller.
Conditions as to description – Sec 15 ⇒
Where the goods are sold by description, there is an implied condition that the
goods shall correspond to the description.
Example;
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A machine was sold. The buyer has not been the machine, but the seller described it
as a new one. However, it was found to be a very old one. Held, the machine was not
according to the description.
Sale by sample – Sec 17 ⇒
Where the goods are sold by sample, the following are implied conditions. • The
bulk shall correspond to sample in quality. • The buyer shall be given a reasonable
opportunity to compare the goods with the sample. • The goods shall be free from
any defect, rendering them un – merchantable. It is to be noted that this implied
condition applies only in the case of latent defects, i.e. those defects which
cannot be discovered by ordinary inspection. In fact, such defects are discovered
when the goods are put to use or by examination in laboratories. The seller is not
liable for apparent or visible defects which can be discovered by examination.
Sale by description as well as sample – Sec 15
If the sale is by sample as well as description, both conditions shall be

satisfied. Goods must correspond with sample as well as description.
Example : A agreed to sell to C some oil described as “Foreign refined oil” and
warranted only equal to sample. The goods supplied were equal to sample, but
contained a mixture to hemp oil. Held, C could reject the goods. Conditions as to
quality and fitness for buyer’s purpose – Sec 16
Where the buyer, expressly or impliedly, tells the seller the particular purpose
for which he needs the goods and relies on the skill or judgment of the seller,
there is an implied condition that the goods shall be reasonably fit for such
purpose. When the article can be used only for one particular purpose, the buyer
need not inform the seller the purpose for which the goods are required.
Example: A purchased a hot water bottle from a chemist. While the bottle was being
used by A’s wife, it burst and injured A’s wife. Held, the seller was liable for
damages as the bottle was not fit for the purpose for which it was meant – Priest
vs Last. Exceptions to the implied condition as to quality or fitness
The condition as to quality or fitness’ well not apply, if the buyer is suffering
from an abnormality, which renders the goods unsuitable for a particular purpose
and the buyer does not inform the seller about that abnormally.
Example
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A purchased a coat. He had abnormally sensitive skin, By wearing the coat, he got
skin complaint. Held, there was no breach of condition, as he had not disclosed the
abnormally of his skin.
⇒
Where the goods can be used for a number of purposes, the buyer should inform the
particular purpose for which such goods were required. If the does not disclose,
there is no such conditions of quality or fitness.
Conditions as to merchantability
Where goods are bought by description from a seller, who deals in goods of that
description, there is an implied conditions that the goods shall be of merchantable
quality. ‘Merchantability’ means that there is no defect in the goods, which
renders them unfit for sale. Thus, a watch that will not keep time and a pen that
will not write cannot be regarded as merchantable.
Example: A radio set was sold to a layman. The set was defective. It did not work
in spite of repairs, Held, the buyer could return the set and claim refund.
Condition as to wholesomeness
In the case of eatable and food – stuff, there is an implied condition that the
goods shall be wholesomeness, i.e., free from any defect which renders them unfit
for human consumption.
Example: A Purchased milk from B, a milk dealer. The milk contained typhoid germs.
A’s wife on taking the milk got infected and died. Held, A was entitled to get
damages – Frost vs Aylesbury Dairy Co. Ltd.
IMPLIED WARRANTIES
The following are the implied warranties which are contained in the Sales of Goods
Act: Warranty as to quiet possession – Sec 14 ⇒
In the absence to any contract showing contrary intention, there is an implied

warranty that the buyer shall have and enjoy quiet possession of the goods. If the
buyer is disturbed in the enjoyment of the goods, he can claim damages from the
seller.
Warranty against encumbrances – Sec 14 ⇒
Unless the circumstances of the case are such as to show a contrary intension,
there is an implied warranty that the goods shall be free from any charge or
encumbrance in SUJEET JHA 96 9213188188
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favour of any party not declared to the buyer before or at the time contract is
made. However, there will not be any such warranty if charge is declared to buyer
at the time of sale.
Warranty as to quality and fitness by usage of Trade – Sec 16 ⇒
An implied warranty as to quality or fitness for a particular purpose may be

annexed by the usage of trade.
Warranty to disclose the dangerous nature of goods ⇒
In case of sale of dangerous goods, the seller is under an obligations to warn the
buyer about the probable danger. Failure to do so will make the seller liable to
pay damages.
Example : A sold a tin of disinfectant to B, knowing that it was likely to be
dangerous to the tin, whereupon disinfectant powder went into her eyes, causing her
injury. Held, A was liable in damages to B, as he failed to warn B of the probable
danger. Difference between Condition and Warranty
Matter Stipulation
Condition Essential to main purpose of contract
If breach? Treatment
Warranty Collateral (subsidiary) to main purpose of contract. Buyer has no right to

cancel the contract . Buyer has right to cancel contract Can claim damages Breach
of condition may be treated as Breach of warranty can’t be treated as breach of
condition breach of warranty
DOCTRINE OF CAVEAT EMPTOR

⇒ ⇒
The doctrine of ‘Caveat Emptor’ means “let the buyer beware”.

It means that the buyer while purchasing goods must act with a “third eye and ear”,
i.e., He should be careful to see that the goods purchased will serve his purpose
well. • • If the buyer is not careful and he finds later on that the goods do not
serve his purpose, he cannot hold the seller liable for it. • The seller is under
no obligation to tell the defects of his articles.
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However, in the following exceptions Doctrine of caveat emptor is not applicable: •

• •
Implied conditions as to quality or fitness. It means when buyer has specified his
purpose and relied on skill of seller, the doctrine of caveat emptor is not
applicable. When goods are sold by description, it should be of merchantable
quality. In such case, doctrine of caveat emptor is not applicable. In case of
edible items, implied condition of wholesomeness is applicable and goods should are
not fit for human consumption then buyer is not liable but seller will be liable.
Usage or custom of trade. When the consent of buyer is obtained by fraud, the
provision of doctrine of caveat emptor is not applicable.
• •
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TRANSFER OF OWNERSHIP
Transfer of property from seller to Buyer 20-22
Unascertained Goods Ascertained Goods i.e. Specific Goods Sale on approval (24)
(a) Goods are Ascertained (b) Appropriation of Goods Deliverable Unconditionally

state Price determined
Deliverable State Price not determined
Non – deliverable State After completion of process to make it deliverable
(a) On approval. (b) Adopting the transactions. (c) Retains without notice of
rejection for a long time.
After At the time when contract determination of price is made
Ownership is transferred immediately at the time of making the contract if all the
following conditions are satisfied: • • •
Contract is for specific goods. Goods are in deliverable state. Goods are not
required to be weighed or measured for determining price.
Example : A sold to B, 100 bales of cotton lying in his godown. Before the bales
could be identified and separated, all bales were destroyed in fire. Here, seller
is liable for damage because ownership is not transferred. Section 21 ⇒ If the
goods are not ready in deliverable state at the time of making contract of sale,
ownership of goods is transferred after formation of contract of sale when
following conditions are satisfied; • Contract is for specific goods. • Goods are
put in deliverable state by seller. • Fact that the goods are put into deliverable
state has come to knowledge to the buyer. Example : Certain quantity of oil was
purchased by A. The oil was to be filled in tins. B filled up some of the tins and
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the entire quantity of oil. Held, A will bear the loss of the oil which was filed
in the tins and the seller must bear the loss of the balances.
Section 22 ⇒ If the goods are not weight or measured at the time of making contract
of sale, ownership of goods is transferred after the formation of contract of sale
when the following conditions are satisfied. • Contract is for specific goods • At
the time of formation, price is not determined. It is determined later by weighed
or measurement. • Goods are put in deliverable state by the seller. • Fact that the
goods have been weighed or measured in order to determine price has come to
knowledge of buyer. Example A sold 10 kg wheat. The wheat was to be weighed. Before
the wheat was weighed, it was carried away by the flood. Held, the ownership of the
wheat left with the seller and it did not pass to the buyer. Transfer of ownership
in the case of unascertained goods – Sec 18 and 23 ⇒ ⇒
In the case of unascertained goods, when both parties come to know which particular
goods shall be delivered, ownership is transferred. The following conditions must
be satisfied to transfer the ownership: • Ascertainment is first step in transfer
of ownership. It means process of identification and setting aside goods from a
huge mass of goods. • Generally, it is made by seller, (unilateral act).
Appropriation :
For property to pass u/s 23, the following conditions must be satisfied –
(a) (b) (c)
Goods of the description mentioned in the contract must be produced or obtained.

The must be in a deliverable state, i.e. the Goods are in such state that the Buyer
would, under the contract, be bound to take delivery of them. They must be
unconditionally appropriated to the contract, Unconditional appropriation is where,
in pursuance of the contract, Seller – (i) Delivers the Goods to Buyer or a carrier
or other bailee for their transmission to Buyer and (ii) does not reserve the right
of disposal. [Sec. 23(2)] The assent of the parties may be given expressly or
impliedly and can be given either before or after the appropriation.
(d) (e)
Example: A having a quantity of sugar in bulk, more than sufficient to fill 20

bags, contracts to sell to B 20 bags of it. After the contract A fills 20 bags with
the sugar, given notice to B that the bags are ready and requires him to take them
away. B says he will SUJEET JHA 100 9213188188
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take them as soon as he can. By this appropriation by A, and assent by B, property

in the sugar passes to B.
⇒
Contract to sell unascertained goods is not complete sell, it is agreement to sell.

Example : 20 bags of sugar out of a bulk were agreed to be sold. 4 bags of sugar
were filled up and taken away by the buyer. Subsequently, the seller filled up 16
bags and informed the buyer. The buyer replied that he will take delivery as soon
as possible. However, before the buyer could take their delivery. Goods were lost.
Held, the buyer was responsible as the ownership had passed to the buyer.
Transfer of ownership in Case of Goods Sent on Approval or on sale or Return Basis

– Sec. 24 ⇒
It means buyer has the option either to return goods. Here, property in goods
doesn’t pass from seller to buyer:
When ownership transferred Approval or acceptance is communicated to seller When
act of adoption is done.
Case When the buyer given his approval or acceptance. When the buyer does some act
of adopting the transaction When the buyer fails to return the goods. (a) If time
is fixed for return of goods. (b) If no time is fixed
On expiry of the fixed time On expiry of the reasonable time.
Example Certain jewellery was delivered to a buyer on sale or return basis. The
buyer pledged the jewellery. Held, the buyer had adopted the transaction and as
such property had passed and the seller could not recover the jewellery from the
Pawnee. Right to disposal of Goods Sec. 25 ⇒
Where the railway receipt or the bill of landing is in the name of the buyer, but
is sent through the bank with the instructions that the same is to be delivered
against the acceptance of the bill or payment of the price, the property in the
goods shall not pass.
Deemed right of reservation Sec. 25 The seller may reserve the right of disposal
under the following modes – Reservation of right of disposal Shipment or Railway
delivery Drawing of B/E on buyer
By making the Goods deliverable to the order of the Seller or his agent.
By Seller drawing a bill for the price and making it acceptable by the Buyer.
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Passing of Risk Sec. 26 ⇒
The general rule is that risk passes with ownership. We can say that risk and
ownership and ownership to together. However, express agreement between parties may
provide otherwise. Possession of goods is immaterial for risk. When delivery is
delayed because of fault of any party, he is liable for risk. Sometime, risk is
based upon custom or usage of trade. Where the delivery of goods has been delayed
due to the fault of buyer/seller, goods are at the risk of the party in fault.
Sale by Non – Owners or Transfer of Title by Non – Owners – Sec 27 – 30
⇒ ⇒ ⇒ ⇒
The general rule is expressed by maxim ‘Namodat quod non habet’ which means no one
can give what he does not himself posses. If seller’s title is defective, then
buyer’s title will be defective. Alternatively, we can say that the seller can’t
give a better title to the buyer than be himself has.
The following are the exceptions to the above general rule:
Sale of Estoppel [Sec. 27]:
Where the owner by his conduct or by his act leads the buyer to believe that the
seller has the authority to sell and induces the buyer to buy the goods, he shall
be estopped from denying the fact that seller had no right to sell the goods.
Example : (Refer Classroom Notes Hira Sweets)
⇒ Sale by mercantile agent Sec. 27 Agent of seller can transfer the title if
following conditions are satisfied : • Agent must be in possession of goods or
documents of title. • Agent has sold goods in ordinary course of business. • Buyer
has acted in good faith. • Buyer has no knowledge that seller had no authority to
sell. Example A entrusted his car to a mercantile agent to receive offers and not
to sell. A also delivered signed documents to the agent. On the basis of these
documents, the agent pretended to the buyer that he had authority to sell the car
and thus, the car was sold. Held, the owner was estopped from denying buyers title.
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A mercantile agent means an agent having in the customary course of business as

such agent authority either to sell goods, or to consign goods for the purpose of
sale, or to buy goods, or to raise money on the security of goods [Section 2(9)].
⇒ Sale by one of the joint owners – Sec 28 One of the joint owners can sale goods
if following condition are satisfied. • Goods are in sole possession of one of the
joint owner. • Buyer has acted in good faith. • Buyer has no knowledge that seller
had no authority to sell.
Example A and B Jointly purchased a car. The car was in the possession of A with
the consent of B. Later on A sold the car to an innocent purchaser. The purchaser
will get a good title. ⇒ Sale by person in possession under voidable contract •
Seller must be in possession of goods under contract voidable. • Goods must have
been sold before contract is rescinded. • Buyer has no knowledge that seller had no
authority to sell. Example A purchased a watch from B under fraud. A sold the watch
to C, who bought it in good faith. C gets goods title. ⇒ Sale by seller in
possession after sale – Sec 30 • Ownership of goods has been passed to buyer. •
Seller continuous to be in possession of goods even after sale. • Seller resells
goods to new buyer. • New buyer buys without notice to prior sell. Example A sells
certain goods to B and promises to deliver the goods the next day. Before the
delivery, A sells and delivers the goods to C, who buys them in good faith and
without notice of the prior sale to B, C gets a good title to the goods, not with
standing that the property had, before he purchased, passed to B. ⇒ ⇒ ⇒ Sale by
unpaid seller Sec. 54 After exercise of his right of lien or right of stoppage
goods in transit. If the owner of goods has declared insolvent and his goods, is
sold by official receiver or assignee or liquidator. Sale by finder of goods
(Sec.169 of IC Act 1872). • The owner can’t be found or found but refuse to pay
lawful charges to finder. • The Goods are perishable in nature or in danger. To
save goods from loss, finder can sale it. • Lawful charges of finder amount as 2/3
of its original value. Sale by pawnee or pledge(Sec.176 of IC Act 1872). • If there
is default on part of payment of price or performance within time. Reasonable
notice is given by pawnee or pledge. 103 9213188188
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PERFORMANCE OF A CONTACT OF SALE

1. Meaning Sec.2(2): Delivery means voluntary transfer of possession from one
person to another. Duty of Seller Sec. 31: It is the duty of the Seller to deliver
the goods and of the buyer to accept and pay for them in accordance with the
contract of Sale. Mode of delivery : Sec. 33: Delivery of Goods sold may be made by
–
2.
3.
(a) (b)
doing anything which the parties agree shall be treated as delivery ; or which has
the effect of putting the Goods in the possession of the Buyer or of any person
authorized to hold them on his behalf.
TYPES OF DELIVERY
Actual Delivery Symbolic Delivery Constructive Delivery
It is a delivery where goods are handed over to the buyer or his authorized agent.
It means goods are physically put in possession of the buyer.
When goods are not physically delivered to the buyer but some symbol of the real
possession or control over goods is handed over to buyer.
Example Delivery of key of the car.
Where the third party who is in possession of goods, acknowledge to hold goods on
behalf of the buyer is known as construction delivery.
Example: A sells 100 bags of cement lying in B’s godown. B agrees to hold the 100
bags of cement on behalf of A.
Forward Delivery
Where delivery is to be made in future, and not at the time contract is entered
into.
RULES REGARDING DELIVERY Payment and delivery are concurrent Sec 32. ⇒
General rule suggest that the delivery of goods and payment of price are concurrent
conditions. However, parties may provide otherwise.
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MS EDUCONZ PVT. LTD. Part Delivery Sec34.
LAW& AUDIT
A delivery of part of goods with an intention of giving the delivery of the whole
amounts to the delivery of the whole for the purpose of transfer of ownership of
goods but a delivery of part of goods with an intention of separating it from the
whole lot does not amount to the delivery of the whole of the goods.
Buyer’s duty to Demand the Goods Sec. 35
⇒ ⇒
It is seller’s duty to be ready and willing to deliver the goods to the buyer. But
he is not bound to deliver goods unless the buyer makes a demand for delivery of
the goods. If the buyer fails to demand the delivery of goods, the seller is not
liable for breach; Buyer must demand delivery within a reasonable time. However,
contract may provide otherwise.
Rules as to Delivery [Sec. 36]
Place of delivery: Situation Place where goods are to be delivered If contract

specified the place of delivery At the place specified Contract does not specify
the place of At the place at which goods are at the time of sale delivery;
In case of sale In case of agreement of sell (i) In respect of existing goods (ii)
In respect of future goods
Time of Delivery ⇒ ⇒
At the place at which goods are at the time of agreement of sell. At the place at
which goods are manufacture, produce or acquire
If the contract specified time of delivery, goods shall be delivered within such
time. If no time is specified in contract as to time of delivery of goods, it
should be delivered within reasonable time.
Delivery when the Goods in Possession of third party 36(3):
Unless and until such third person acknowledge to the buyer that the holds the
goods on his behalf However this provision shall not affect the operation of the
issue or transfer of any documents of the title of the goods.
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Time is tender of delivery
Demand or tender of delivery may be treat is reasonable unless made at reasonable

hour. That is reasonable hour is a question affects.
Expenses of delivery ⇒ ⇒ ⇒
All expenses of making delivery of goods shall be paid by seller Buyer shall be the
expense for receipt of goods. unless otherwise agreed.
Delivery of Wrong quantity Sec 37 ⇒ If the seller has delivered excess quantity,
the buyer has the following options: • To accept the whole of the goods delivered
to him. • To reject the whole of the goods delivered of him. • To accept contracted
quantity and reject the excess. Seller has delivered short quantity, buyer has
following options. To accept the goods delivered to him. • • To reject whole
quantity delivered to him. Right to reject the goods in excess of the contract does
not apply where the variation is negligible. Further, the right to reject the goods
is not similar to the right to cancel the contract. If the buyer rejects the goods
(either because they are less than or in excess of the quantity contracted for),
the seller has a right to tender again the contract quantity and the buyer is bound
to accept the same.
⇒ ⇒
Delivery of Mixed Quality – Quantity ⇒ The seller is bound to deliver goods of

exact quality – quantity otherwise buyer may: • Reject the whole. • Reject the
goods not complying with quality or quantity and accept the rest. [Contract is not
repudiated] – means subsisting Delivery by Installment Sec 38 ⇒
Delivery by installment is not valid except when the contract provides so or buyer
accepts the delivery in installment.
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MS EDUCONZ PVT. LTD. Delivery to Carrier or Wharfinger – Sec 39 ⇒
LAW& AUDIT
Delivery to carrier or wharfinger amounts as delivery to buyer if the following

conditions satisfy: • Buyer has made reasonable contract with carrier. • Seller is
required to give notice to buyer to enable him to insure goods. If not to do then
his risk. If seller makes valid delivery of goods, buyer has following duties: • To
accept the goods. • To pay the unpaid price. Where goods are sent by sea route,
seller shall give notice to buyer to insure goods other wise he will be liable for
loss.
Risk where goods are delivered at distant place Sec 40
⇒ ⇒
Where the seller agrees to deliver the Goods at his own risk at a place other than
at which they are sold, the Buyer shall bear the risk of deterioration necessarily
incident to the course of transit, unless otherwise agreed.
Buyer’s right to examining goods Sec 41
Delivered to buyer – not previously examined reasonable opportunity. Seller is

bound on request to afforded the buyer a reasonable opportunity of examine the
good.
Acceptance of Delivery – Sec 42 ⇒
Delivery doesn’t mean acceptance of goods, Buyer has deemed to have accepted the
goods under the following circumstances: • When he intimates the seller about
acceptance of goods. • After receipt of goods, he does some act of affirmation. •
When he doesn’t inform seller about rejection of goods within a reasonable time.
Buyer’s not bound to return the rejected good Sec 43.
He is required to intimate the seller about rejection. (Buyer’s not bound to return
the rejected goods)
Liability of the Buyer for refusal of delivery of goods Sec 44 ⇒
If the buyer wrongfully refuses to take delivery of goods, he is liable for damages
and expenses like storage cost and transportation cost to the seller.
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UNPAID SELLER
Section 45
A seller of goods is deemed to be unpaid in the following cases: The price must be
due but not paid. (When the whole of the price has not been paid • or tendered) • •
• •
A negotiable instrument, like cheque, bill of exchange etc., was received, but the
same has been dishonored. Seller who has obtained a decree for the price of the
goods will also be an unpaid seller, if the decree has not been satisfied. When the
seller has been paid the large amount but small portion of payment remains to be
paid. Seller must have an immediate right of action for the price.
Right of an Unpaid Seller Unpaid seller has the right against goods as well as
against the buyer: ⇒ Rights of unpaid seller against the goods: •
Where ownership is transferred 9 Right of lien – Sec 47 – 49 9 Right to stoppage in

transit – Sec 50 – 52 9 Right to resale of the goods 9 Where ownership is not
transferred to the buyer, seller has the right to with hold delivery of goods.
Right of an unpaid seller against the goods Sec 46
The ownership has not been transferred. Conditions Unpaid Seller + ownership not
transferred. Consequences Lawfully refuse to deliver the goods to the buyer until
he is paid the price. Buyer cannot hold the seller liable for now delivery of
goods.
Seller’s Lien Sec.47 Condition for exercising lien Condition – Unpaid seller –
actual possession Buyer not paid the price of the good. The unpaid seller can
exercise lien even through. The property is goods has passed to the buyer He is in
the possession of the goods as an agent or bailee for the buyer. Right of Lien ⇒ It
means the right to retain the possession of goods until full price is received. ⇒
Seller can exercise his right of lien on the following two conditions: SUJEET JHA
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MS EDUCONZ PVT. LTD. • He must be in possession of the goods. • He is the unpaid
seller. If buyer becomes insolvent, lien can be exercised by unpaid seller.
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In the following circumstances, unpaid seller’s lien is lost: Sec 49 • • • • •
When the seller waives his right of lien. When the buyer disposes off the goods by
sale with consent of seller. When the goods are delivered off the buyer or his
agent. When price is paid by the buyer. The right of lien cannot be exercised,
where the right of lien has been expressly excluded. • By delivery of goods to
carrier. Without reserving the right of disposal of goods,. • By Estoppels i.e.
where the seller so conducts himself that be leads third parties to believe that
the lien does not exist. Lien is not lost merely become the unpaid seller has
obtained a decree for the price of the goods
Part delivery Sec. 48
Part delivery of goods does not disentitle the unpaid seller from exist lien on the
remainder goods.
Right of Stoppage in Transit – Sec 50 to 52 Right of stoppage goods in transit Sec
50 ⇒ The right of stoppage in transit is an extension of the right of lien. ⇒ The
right of lien is a right to retain possession, whereas right of stoppage in transit
is a right to regain possession. ⇒ The right of stoppages in transit can be
exercised, if the goods are in transit, and the buyer has become insolvent in the
meantime. Conditions : unpaid Seller + possession of goods with carrier
(independent) + insolvent buyer Duration of transit – Sec 51 ⇒
⇒ ⇒
Carrier may hold the goods in three capacities: • As Seller’s Agent : In this case,
the seller has lien on the goods, so question of right of stoppage in transit does
not arise. • As Buyer’s Agent: In this case, the seller cannot exercise the right
of stoppage in transit. • In an Independent Capacity: In this case, sit from the
time they are delivered to a carrier for the purpose of transmission to the buyer,
until the buyer or his agent takes their delivery. Goods are deemed to be in course
of transit from the time they are delivered to a carrier for the purpose of
transmission to the buyer, until the buyer or his agent takes their delivery. The
goods are in transit, even if the buyer asks the carrier to take them to some other
destination until they are delivered to the buyer at some other destination.
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If the goods are rejected by the buyer and the goods are in the possession of the
carrier, the transit is not at an end, even if the seller has refused to take them
back.
How Stoppage in transit is effected Sec 52
Right of Stoppage of Goods in Transit can be exercised either: • By taking actual

possession of the goods, or • By giving notice of his claim to the carrier, who
holds the goods
Effect of sub – sale or pledge by the buyer Sec.53
Sub sale of pledge by the buyer
Effect on unpaid seller’s right
The unpaid seller’s right of lien or stoppage in transit is not affected by any
further sale or other disposition of goods by the buyer.
Exception o When seller has given his assent to such mortgage or other disposition
of goods made by the buyer. o When a document of title has been transferred to the
buyer and the buyer transfer the document to a person who has brought the goods in
good faith for value.
Distinction Between Lien and Stoppage – in – Transit
1. 2. 3. 4. 5.
Lien The goods are in actual possession of the seller. This right can be exercised
even when the buyer is solvent but fails or refuses to pay the price. This right
comes to an end when the seller parts with the goods. This is a right to retain
possession over the goods. This right can be exercised by the seller himself.
Stoppage – in – Transit 1. The goods are in possession of an independent carrier or

bailes. 2. This right can be exercised only when the buyer becomes insolvent. 3.
This right commences only when the seller delivers the goods to a carrier. This is
a right to regain possession o the goods. 4. This right can be exercised by the
seller through the carrier or the bailee in whose possession the goods are.
Right of Resale Sec 54 ⇒
In case of perishable goods, unpaid seller can resale the goods if following
conditions satisfied. • Buyer fails to pay the price within reasonable time. •
Seller is not required to give notice of re – sale. In case of other goods (not
perishable) unpaid, the seller can resale goods if the following conditions are
satisfied:
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Seller has exercised his right of lien or stoppage of goods in transit. Seller has
given notice to buyer to pay the price within reasonable time and buyer fails to
pay the price. Following will be effect of resale:
Rights In case of resale after notice Available Not available Available In case of
resale without notice No Available Available Available
Unpaid seller’s right to recover loss on sale Original buyers’ right to recover
profit on goods New buyer’s right to acquire good title.
Right to Withhold Delivery of Goods ⇒ ⇒
It means seller refuses to deliver goods to buyer. The following conditions must be
satisfied to exercise right to withhold delivery of goods: • Seller is unpaid
seller • Ownership of goods has not been passed.
Right of unpaid seller against buyer:
Suit for price [sec 55] 55 (1) – Property has passed to the buyer - Buyer
wrongfully neglector refuses to pay price of goods 55 (2) - property has not passed
to the buyer - price is payable on a particular date irrespective of delivery. -
Buyer wrongfully neglects or refuses to pay price of goods Suit for damages for non
acceptance (56) When buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may sue him for damages for non acceptance. Suit for damages for
Breach (60) Repudiation of contract before due date: Where the contract is
repudiated by the buyer before the date of delivery the seller may treat the
contract as rescind and sue for damage for the breach. Suit for interest [61(2)
(d)] Specific agreement between seller and buyer as to interest on price of goods
from the date on which payment becomes due the seller may recover the interest from
the buyer. ⇒
This right is in addition to other remedies available to the seller.

Rights of buyer/Buyers remedies against seller
Suit for damage for non – delivery JHA SUJEET
Suit for Specific performance
Repudiation of contract
111
Suit for Breach of warranty
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Buyer’s right against the seller or remedies against seller
The buyer has following remedies against the seller:

⇒ Suit for damage for non – delivery Sec 57 Buyer is ready and willing the take
delivery of goods but seller wrongfully neglects or refuses delivery of goods,
buyer may sue seller. Suit for specific performance Sec 58 Where seller wrongfully
refuses to deliver specific or ascertained goods, court may direct specific
performance order. Suit for breach of warranty Sec 59 If there is breach of
warranty, buyer may claim damages from the seller. Buyer may deduct the amount of
damage from price payable if price is not paid. Buyer may recover the damages if
price paid. Right to repudiate the contract If the seller declares his intention of
non – delivery of goods, buyer may repudiate the contract and immediately sue for
damages. Suit for Interest • In the absence of any contract to the contrary no
interest shall be payable by the buyer on the delay payment. If , there is no such
agreement, the seller may give notice to the buyer of his intention to charge
interest on delayed payment. Delivery to Carrier ⇒ ⇒
It means transporter or bailee to whom goods are delivered by the seller for
transportation to buyer. When goods are delivered to a carrier, it is deemed
delivery of goods to the buyer if following conditions are satisfied: • Seller
delivers exactly same goods as per contract. • The Buyer has informed carrier name,
address and goods required to be delivered. • The seller delivers goods for the
purpose of delivery.
Auction Sale – Sec 64
⇒ ⇒
It means public sale. The seller invites the interested parties by advertisement to
offer the price. (i.e. bid) The seller may hire service of auctioneer. An
auctioneer is an agent of seller.
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Advertisement of auction sale is not offer but an invitation to make an offer and
therefore if an auction sale is not held on appointed day, bidder can’t sue
auctioneer. Every bid amounts as offer and acceptance is given by auctioneer by
some usual mode of acceptance e.g., fall of hammer, going – going gone or one – two
– three. Auction sale starts with placing of bids. Auctioneer accepts the highest
bids but he may accept lower bid without giving any reason. When bid accepted,
valid contract is formed. Bid once made can be withdrawn before fall of hammer even
if expressly prohibit. Seller can bid at auction sale if bidders are informed of
fact. (pretended bidding) If the seller makes use of pretended bidding to raise the
price, the sale is voidable at the option of the buyer. The bid is said to be
pretended when it is made by the seller or some one on his behalf. Only one person
can be appointed for bidding.(called puffer) Auctioneer may set reserve price or
upset price. Bid lower that which is invalid. ‘In the case of Knockout agreement,
the buyers joint their hands to eliminate competition among themselves at an raise
the bid against each other and only one of them will bid at the auction. When the
profit. Prima facie, a knockout agreement is not illegal. However, if the intention
of the parties to the agreement is to defraud a third party, this will be illegal.
Damping is illegal, it includes; • •
⇒ ⇒ ⇒
Pointing out defects in the goods, or Misleading the purchaser or doing any other
act so that he may not participate in the auction. It empowers the auctioneer to
with draw the property from the auction.
Sale in lots :
When the goods are put up for sale in lots, each lot is deemed, prima facie, to be
the subject – matter of a separate contract of sale.
Delivery of Goods in Contract by Sea Route
It includes following three categories of contracts: ⇒ CIF Contract • It means

‘cost, insurance and freight; • Here, the price of goods includes the cost of
goods, insurance and freight expenses. • In CIF contract, buyer pays insurance and
freight expenses. • The essential of CIF contract is that seller shall deliver
shipping documents to the buyer usually through the bank. If the seller fails to
deliver the documents within reasonable time, he is liable for breach of contract.
• Ownership of goods is transferred to the buyer, when he pays the price of goods
while receiving shipping documents. If buyer refuses to pay the price, the seller
can claim damages for breach of contract.
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FOB Contract • It means free on board. Here, seller is required to put the goods on
board of ship at his expense. • Buyer is liable for all the expenses and risk one
goods are loaded on ship. • The ownership of goods is transferred to the buyer as
soon as goods are loaded to ship. Ex – Ship Contract • It means contract in which
the seller has to deliver the goods to the buyer at the port of destination. • All
the freight charges and risk during voyage for goods remain with seller. •
Ownership of the goods is transferred to the buyer when goods are actually
delivered at the port of destination.
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STUDY NOTES – 3 : INDUSTRIAL LAWS

3.1 FACTORIES ACT, 1948
Introduction
Factories Act is one of the earliest labour welfare legislations. The object of the
act is to secure health, safely, welfare, proper working hours, and other benefits
to workers. The Act requires that workers should work in healthy and sanitary
conditions and for that purposes. It provides that precaution should be taken for
safety of workers and prevention of accidents.
Meaning of Factory
Factory means any premises, including the precincts thereof, in any part of which
manufacturing process is carried on with or without the aid of power, provided that
at least 10 or 20 persons respectively are employed or were employed on any day of
the preceding 12 months. The Act is applicable to all the factories.
Meaning of occupier of factory
Occupier of factory means a person who has ultimate control over affairs of
factory. It includes a partner in case of a firm and director in case of a company.
It may be noted that if a factory is run by a company, then only the director of
the company can be treated as occupier. The occupier shall ensure, as far as
possible health, safety, and welfare of workers while they are working in a
factory. The name of the occupier of the factory is required to be informed to the
Chief Inspector of Factories. The occupier will be held responsible if the
provisions of the Factories Act, 1948 are not complied with.
Facilities and Conveniences
1) 2) 3) 4) 5) 6) 7) 8)
Factory should be kept clean. There should be arrangement to dispose off wastes and
effluents. Ventilation should be adequate. Reasonable temperature for comfort of
employees should be maintained. Dust and fumes should be controlled below
permissible limits. Artificial humidification should be at prescribed limits. Over
crowding should be avoided. Adequate lighting, drinking water, toilets, and
spittoons should be provided.
Additional facilities in case of large factories.
1) Ambulance room, if 500 or more workers are employed. 2) Canteen, if 250 or more
workers are employed. 3) Rest rooms/ Centers with drinking facility, if 150 or more
workers are employed. 4) Creshes, if 30 or more women workers are employed. 5) Full
time Welfare Officer, if 500 or more workers are employed. SUJEET JHA 115
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6)
Safety Officer, if 1000 or more workers are employed.
Welfare Measures
1) 2) 3) 4) 5) 6) 7) 8)
All machines should be properly fenced to protect workers when machinery is in

motion. Hoist and lifts should be in good condition and tested periodically.
Pressure Plant should be checked as per the rules. Floor, stairs and means of
access should be of sound construction and free from obstructions. Safety
appliances for eyes, dangerous dust, gas, fumes should be provided. In case of
hazardous substance additional safety measures have to be taken. Adequate
firefighting equipment should be available. Safety Officer should be appointed if
number of workers in factory is 1000 or more.
Working Hours
A worker cannot be employed for more than 48 hours in a week. Weekly holiday is
compulsory. If the worker is asked to work on weekly holiday, he should avail the
holiday on one of the 3 days immediately after the normal day of holiday. A worker
cannot be employed for more than 9 hours in a day. At least ½ hour rest should be
provided after every 5 hours. Total period of work including rest interval cannot
be more than 10 ½ hours.
Overtime Wages
If a worker works beyond 9 hours a day and 48 hours a week, overtime wages are paid
at double the rate of normal wages. However, overtime wages are not payable on
tour. Total working hours including overtime should not exceed 60 hours in a week
and total overtime hours in a quarter should not exceed 50 hours.
Leave
Worker is entitled in every calendar year annual leave with wages at the rate of 1
day for every 20 days of work performed in the previous calendar year provided that
he had worked for 240 days or more in the previous calendar year. Child worker (who
is 14 years and above but less than 15 years) is entitled to 1 day leave with wages
for every 15 days. While calculating 240 days earned leave, maternity leave up to
12 weeks and lay off days will be considered but leave shall not be earned on those
days. Leave can be accumulated up to 30 days in the case of an adult and 40 days in
the case of al child. Leave admissible is exclusive of holidays occurring during or
at either end of leave period. Leave cannot be taken for more than 3 times in a
year. It may be noted that above – mentioned benefit are the minimum benefits.
Employer can of course provide additional or higher benefits.
Employment of Women
A women worker cannot be employed beyond 6 a.m. to 7 p.m. State Government can
grant exemption to any factory from such provisions but in no case a woman can be
permitted to work during 10 p.m. to 5 a.m. Shift change can be done only after
weekly or other holiday and not in between.
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Employment of Children
Children below 14 years of age cannot be employed. A child of age 14 years but
below 15 years can be employed for only 4.5 hours per day. He should be certified
fit by certifying surgeon. He cannot be employed during night from 10 p.m. to 6
a.m. A person of 15 years of age but below 18 years of age is termed as adolescent.
He can be employed as an adult if he certificate of fitness for a full day’s work
from a certifying surgeon. An adolescent is not permitted to work between 7 p.m. to
6 a.m.
Display on Notice Board.
A Notice containing an abstract of the Factories Act, 1948 and the rules made there
under in English and local language shall be displayed by employer. The name and
address of Inspector of factories and Certifying Surgeon shall also be displayed on
the Notice Board.
Punishment to Welfare Officer
No punishment can be imposed on Welfare Officer without prior sanction of Chief

Commissioner of Factories. However, simple order of termination as per terms of
appointment is not punishment and such termination order is valid. [Arun Kumar Bali
v. Government, NCT of Delhi]
It means any process for—

Manufacturing process [Sec.2 (k)]. (i) Making, altering, repairing, ornamenting,
finishing, packing, online, washing , cleaning. Breaking, up, demolishing, or
otherwise treating or adapting any article or substance with a view to its use,
sale, transport, delivery or disposal, or (ii) Pumping oil, water. Sewage, or any
other substance, or (iii) Generating, transforming or transmitting power, or (iv)
composing types for printing, printing by letter press, lithography, photogravure
or other similar process or book-binding, or (v) Constructing, reconstructing,
repairing, refitting, finishing, breaking-up ship or “vessels, or (vi) Preserving
or storing any article in cold storage. Some of the processes which have been held
to be manufacturing processes are as follows: (a) Bidi making [Chintaman Rao
v.State of M.P.,(1962) S.C.J.388]. (b) Molding and transformation of raw
cinematography films into a finished product [Gemini Studio v. State, (1952-53) 4
F.J.R. 329]. (c) Work done in a salt work which consists of converting sea-water
into salt [Ardeshir H. Bhiwandiwala v.State of Bombay, A.I.R. (1962) S.C.29.] (d)
Use of a refrigerator for treating or adapting any article with a view to its sale
[New Taj Mahal café Ltd. V. Inspector of Factories, (1956) 1 L.L.J.273]. (e) Work
of compositions in printing business [V.K. Press v. Authority, A.I.R. (1955) all.
702]. SUJEET JHA 117 9213188188
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(f) Use of electric motor for the purpose of lifting or pumping water [Syed Moosa
Kazimi v. K.M. Sheriff, A.I.R. (1959) Mad. 542]. (g) Process of moistening,
stripping and packing of tobacco leaves [V.P. Gopala Rao v. Public Prosecutor,
A.I.R. (1970) S.C. 66]. (h) Activities of a petrol pump [Gateway Auto services v.
Regional director, E.S.I. Corpn., (1981) Lab. I.C. 49].
In deciding whether a particular business is a manufacturing process or not, regard

must be had to the circumstances of each particular case. To constitute a
manufacturing process, there must be some transformation, i.e., the article must
become commercially known as something different from which it acquires its
existence
General duties of the occupier (Sec. 7-A) A new Sec. 7-A has been introduced by the
Amendment Act of 1987, prescribing the general duties of the occupier in regard to
the health, safety and welfare of the workers in his factory. According to it,
every occupier shall ensure, so far as is reasonably practicable, the health,
safety and welfare of all workers while they are at work in the factory [Sec. 7-A
(1)]. Sec. 7-A (2) enumerates the matters in regard to health, safety and welfare
of the workers. These matters include— (a) the provision and maintenance of plant
and systems of work in the factory that are safe and without risks to health; (b)
the arrangements in the factory for ensuring safety and absence of risks to health
in connection with the use, handling, storage and transport of articles and
substances; (c) the provision of such information, instruction, training and
supervision as are necessary to ensure the health and safety of all workers at
work; (d) (i) the maintenance of all places of work in the factory in a condition
that is safe and without risks to health, and (II) the provision and maintenance of
such means of access to and egress from such places as are safe and without such
risks; (e) the provision, maintenance or monitoring of such working environment in
the factory for the workers that is (i) safe, (ii) without risks to health, and
(iii) adequate as regards facilities and arrangements for their welfare at work
[Sec. 7A (2)]. In addition to the above duties, every occupier shall also— (a)
prepare, and, as often as may be appropriate, revise, a written statement of his
general policy with respect to (i) the health and safety of the workers at work,
and (ii) the organisation and arrangements for the time being in force for carrying
out that policy, and (b) bring the statement and any revision thereof to the notice
of all the workers. In some cases as may be prescribed an occupier may be exempted
from this duty [Sec. 7-A (3)]. Powers of inspectors (Sec. 9). An Inspector may,
within the local limits for which he is appointed,-(a) enter, with assistant who
are in the service of the Government or any local or other public authority or with
an expert, the premises of a factory; (b) make examination of the premises, plant,
machinery, article or substance;
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(c) inquire into any accident or dangerous occurrence, whether resulting in bodily
injury, disability or not, and take on the spot or otherwise statements of any
person which he may consider necessary for such inquiry; (d) require the production
of any prescribed register or any other document relating to the factory; (e)
seize, or take copies of, any register, record or other document or any portion
thereof, as he may consider necessary in respect of any offence under this Act,
which he has reason to believe, has been committed: (f) direct the occupier that
any premises or any part thereof, or anything lying therein, shall be left
undisputed (whether generally or in particular respects) for so long as in
necessary for the purpose of any examination under Clause (b) : (g) take
measurements and photographs and make such recordings as he considers necessary for
the purpose of any examination under Clause (b) taking with him any necessary
instrument or equipment: (h) in case of any article or substance found in any
premised, being an article or substance which appears to him as having caused or is
likely to cause danger to the health or safety of the workers, direct it to be
dismantled or subject it to any process of test (but not so as to damage or destroy
it unless the same is necessary for carrying out the purposes of the Act.) Further,
he may take possession of any such article or substance or a part thereof, and
detain it for so long as is necessary for such examination; and (i) Exercise such
other powers as may be prescribed. The above powers of an inspector are subject to
any rules which may be made by the State Government in this behalf.
Certifying surgeons (Sec. 10.) Appointment. ¾ The State Government may appoint
qualified medical practitioners to be certifying surgeons for specified local
limits or factories [sec. 10 (1)]. ¾ A certifying surgeon may, with the approval of
the State Government, authorise any qualified medical practitioner to exercise any
of his powers [sec.10. (2)] But no person shall be appointed a certifying surgeon
who is or becomes the occupier of a factory or is or becomes directly or indirectly
interested therein [sec. 10(3)]. ¾ The State Government may exempt any person or
class of persons from the provisions of Sec. 10(3) in respect of any factory or
class or description of factories (Proviso to Sec 10(3)]. ¾ The exemption shall
however be made by order in writing and subject to such conditions as may be
specified in the order. Duties of certifying surgeons. The certifying surgeon shall
carry out such duties as may be prescribed in connection with— (a) the examination
and certification of young person’s ; (b) the examination of persons engaged in
factories in dangerous occupations or processes; and (c) the exercising of such
medical supervision as may be prescribed for any factory where— (i) cases of
illness have occurred which it is reasonable to believe are due to the nature of
the manufacturing process carried on, or other conditions of work prevailing,
therein; (ii) by reason of any change in the manufacturing process carried on or in
the substances used therein, there is a likelihood of injury to health of worker
employed it that manufacturing process; (iii) young persons are, or about to be,
employed in any work which I likely to cause injury to their health [Sec. 10 (4)].
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Cleanliness (Sec.11). (1) Factory to be kept clean and fee from effluvia and dirt.
¾ Every factory shall be kept clean and fee from effluvia arising from any drain,
privy, or other nuisance. ¾ Accumulation of dirt and refuse shall be removed daily
be some effective method. ¾ The floor of every work-room shall be cleaned at least
once in every week by washing, using disinfectants, where necessary, or by some
effective method. (2) Effective means of drainage. Where a floor is liable to
become wet ion the course of any manufacturing process to such an extent as is
capable of being drained, effective means of drainage shall be provided. (3) Use of
disinfectants, etc., painting and varnishing. Use of disinfectants, detergents,
painting, repainting and varnishing, revarnishing, whitewashing or colourwashing
shall be restored to. 2. Disposal of wastes and effluents (sec.12). (1) Treatment
of wastes and effluents and their disposal. Effective arrangements shall be made in
every factory for the treatment of wastes and effluents due to the manufacturing
process a carried on therein, so as to render them innocuous, and for their
disposal [Sec. 12 (1)]. (2) Rules by the state Government prescribing arrangements.
The state government may make rules prescribing the arrangements to be made in this
regard. It may also require that such arrangements shall be approved by such
authority as may be prescribed [Sec. 12 (2)]. 3. Ventilation and temperature (Sec.
13.) (1) Maintenance of adequate ventilation and temperature. Effective and
suitable provision shall be made in every factory for securing and maintaining in
every workroom— (a) Adequate ventilation by the circulation of fresh air, and (b)
Such a temperature as will secure to workers therein reasonable conditions of
comfort and prevent injury to health. (2) Process producing high temperature to be
separated. The walls and roofs shall be of such materials and so designed that the
temperature shall not be exceeded but kept as low as practicable. The process which
produces high temperatures shall be separated from the workroom, by insulating the
hot parts or by other effective means [Sec. 13 (1)]. 4. Dust and fume (Sec. 14).
(1) Measures for prevention of inhalation or accumulation of dust and fume. ¾ Where
dust or fume or impurity of such a nature as is likely to be injurious or offensive
to the workers is given off as a result of the manufacturing process being carried
on in a factory, effective measures shall be taken in the factory for prevention of
inhalation or accumulation of dust and fumes in workrooms. ¾ If for such a purpose
any exhaust appliance is necessary, it shall be applied as near as possible to the
point of origin of the dust, fume or other impurity and such point shall be
enclosed so far as possible [Sec. 14 (1)].
(2) Exhaust for internal combustion engine. A stationary internal combustion engine
shall not be operated unless the exhaust is conducted into the open air. Other
internal combustion engines shall not be operated in any room unless effective
measures have been taken to prevent accumulation of fumes therefrom which are
injurious [Sec. 14 (2)]. SUJEET JHA 120 9213188188
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5. Artificial humidification (Sec. 15). (1) Prescription of standards of

humidification—ventilation and cooling of air. In respect of all factories in which
the humidity of the air is artificially increased, the State Government may make
rules prescribing standards of humidification. It may also make rules regulating
the methods used for artificially increasing the humidity of the air. It may
further make rules prescribing methods to be adopted for securing adequate
ventilation and cooling of the air in the workrooms [Sec. 15 (1)]. (2) Water used
for artificial humidification to be clean. In any factory in which the humidity of
the air is artificially increased, the water used for the purpose shall be taken
from a public supply or other source of drinking water, or shall be effectively
purified before it is so used [Sec. 15 (2)]. 6. Overcrowding (Sec. 16). (1)
Overcrowding injurious to health of workers to be avoided. There shall not be
overcrowding in any room of the factory so as to be injurious to the health of the
workers employed therein [Sec. 16 (1)].
(2) 9.9/14.2 cubic meters of space per worker.

¾ There shall be at least 9.9 cubic meters (for the factories in
existence at the time of the commencement of the Act) and 14.2 cubic
meters (for the factories built after the
commencement of the Act) of space for every worker. ¾ In calculating the
space of 9.9 or 14.2 cubic meters, no account shall be taken of any
space
which is more than 4.2 meters above the level of the floor of the room [Sec. 16 (2)
].
(3) Notice of maximum of workers to be employed in a workroom. If the Chief

Inspector by order in writing so requires, there shall be posted in each workroom
of the factory a notice specifying the maximum number of workers who may be
employed in the workroom [Sec. 16 (3)].
7. Lighting (Sec. 17). (1) Sufficient and suitable lighting in every part of
factory. In every part of a factory where workers are working or passing there
shall be provided and maintained sufficient and suitable lighting, natural or
artificial, or both [Sec. 17 (1)].
(2) Glazed windows and skylights to be kept clean. All glazed windows and skylights
used for the lighting of the workrooms shall be kept clean on both the inner and
outer surfaces and free from obstruction [Sec. 17 (2)]. (3) Measures for prevention
of glare and formation of shadows. Effective provision shall also be made for the
prevention of (a) glare, either directly from a source of light or by reflection
from a smooth or polished surface; and (b) the formation of shadows to such an
extent as to cause eye strain or the risk of accident to any worker [Sec. 17 (3)].
(4) Prescription of standards of sufficient and suitable lighting. The State
Government may prescribe standards of sufficient and suitable lighting for
factories or for any class or description of factories or for any manufacturing
process [Sec. 17 (4)].
8. Drinking water (Sec. 18). (1) Suitable points for wholesome drinking water.
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In every factory, effective arrangements shall be made to provide and maintain at

suitable points conveniently situated for all workers employed therein a sufficient
supply of wholesome drinking water [sec. 18 (1)]. (2) Cooling of drinking water
where more than 250 workers employed. In every factory wherein more than 250
workers are ordinarily employed, provision shall be made for cooling drinking water
during hot weather by effective means and for distribution thereof [Sec. 18(3)].
9. Hoists and lifts (Sec. 28). ¾ Hoists and lifts to be of good mechanical
construction and to be properly maintained and examined once in every 6 months. In
every factory every hoists and lift shall be of good mechanical construction, sound
material, and adequate strength. ¾ Further it shall be sufficiently protected by
enclosures fitted with gates. It shall also be properly maintained and shall be
thoroughly examined by a competent person at least once in every 6 months. ¾ A
register containing the prescribed particulars of every such examination shall be
kept. The maximum safe working load shall also be plainly marked on every hoist or
lift, and no load greater than such load shall be carried thereon. ¾ The cage of
every hoist or lift used for carrying persons shall be fitted with a gate on each
side from which access is afforded to a landing. ¾ The gate shall be fitted with
interlocking or other efficient device to secure that the cage cannot be moved
unless the gate is closed.
For the purposes of Sec. 28, no lifting machine or appliance shall be deemed to be
a hoist or lift unless it has a platform or cage, the direction or movement of
which is restricted by a guide or guides (Expl. to Sec. 28 added by the Amendment
Act of 1987).
12. Floors, stairs and means of access (Sec. 32). In every factory— (a) all floors,
steps, stairs, passages and gangways shall be of sound construction and properly
maintained. Further they shall be kept free from obstructions and substances likely
to cause persons to skip and handrails shall be provided where necessary; (b) there
shall, so far as is reasonably practicable, be provided and maintained safe means
of access to every place at which any person is at any time required to work; and
(c) when any person has to work at a height from where he is likely to fall,
provision shall be made, so far as is reasonably practicable, by fencing or
otherwise, to ensure the safety of the person so working. This restriction is not
applicable if the place provides secure foothold and, where necessary, secure
handhold. 13. Safety Officers (Sec. 40-B). In every factory (i) wherein 1,000 or
more workers are ordinarily employed, or (ii) wherein, in the opinion of the State
Government, any manufacturing process or operation is carried on, which process or
operation involves any risk of bodily injury, poisoning or disease, or any other
hazard to health, to the persons employed in the factory, the occupier shall, if so
required by the State Government by notification in the Official Gazette, employ
such number of Safety Officers as may be specified in that notification [Sec. 40-B)
(1)]. The duties, qualifications and conditions of service of Safety Offices shall
be such as may be prescribed by the State Government [Sec. 40-B (2)]. WELFARE
Chapter V (Secs. 42 to 50) of the Act deals with facilities for the welfare of
workers. The various provisions in this regard are as follows: 1. Washing
facilities (Sec. 42). In every factory (a) adequate and suitable facilities
(separately and adequately screened for the use of male and female workers ) shall
be SUJEET JHA 122 9213188188
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provided and maintained for the use of the workers therein; and (b) such facilities
shall be conveniently accessibly and shall be kept clean. 2. Facilities for storing
and drying clothing (Sec. 43). The State Government may make rules requiring the
provision of suitable places for keeping clothing of workers not worn during
working hours and for the drying of wet clothing in respect of any factory or class
of factories. 3. Facilities for sitting (Sec. 44). (1) Provision of sitting
arrangement for workers obliged to work in a standing position. In every factory,
suitable arrangements for sitting shall be provided and maintained for all workers
who are obliged to work in a standing position. This has been done in order that
the workers may take advantage of any opportunities for rest which may occur in the
course of their work [Sec. 44 (1)]. (2) Provision of seating arrangement for
workers doing work which can be done in a sitting position. If the workers in any
factory engaged in a particular manufacturing process or working in a particular
room are able to do their work efficiently in a sitting position, the Chief
Inspector may require the occupier of the factory to provide such seating
arrangements as may be practicable [Sec. 44 (20]. (3) Exemption. The State
Government may, by notification in the Official Gazette, exempt any factory or
class of factories or manufacturing process from the application of the provisions
of Sec. 44 [Sec. 44 (3)].
4. First-aid appliances (Sec. 45). (1) At least one first-aid box with prescribed
contents for every 150 workers. There shall in every factory be provided and
maintained so as to be readily accessible during all working hours, first-aid boxes
or cupboards with the prescribed contents. There shall be at least one such box for
every 150 workers ordinarily employed at any one time in the factory [Sec. 45 (1)].
(2) First-aid box to have prescribed contents. Only the prescribed contents shall
be kept in a first-aid box or cupboard [Sec. 45 (2)]. (3) First-aid box to be in
the charge of responsible person. Each first-aid box or cupboard shall be kept in
the charge of a separate responsible person who holds a certificate in the first-
aid treatment recognized by the State Government. Further, such person shall always
be readily available during the working hours of the factory [Sec. 45 (3)]. (4)
Ambulance room in a factory employing more than 500 workers. In every factory
wherein more than 500 workers are ordinarily employed there shall be provided and
maintained an ambulance room containing the prescribed equipment. The room shall be
in the charge of such medical and nursing staff as may be prescribed and those
facilities shall always be made readily available during the working hours of the
factory [Sec. 45 (4)].
5. Canteens (Sec. 46) (1) Canteen in factory employing more than 250 workers—the
State Government may make rules. The State Government may make rules requiring that
in any specified factory wherein more than 250 workers are ordinarily employed, a
canteen or canteens shall be provided and maintained by the occupier for the use of
the workers [Sec. 46 (1)].
(2) Provisions in rules. The rules made by the State Government as to canteens may
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(a) The date by which canteen shall be provided, (b) The standards in respect of
construction, accommodation, furniture and other equipment of the canteen, (c) The
foodstuffs to be served therein and the charges which may be made thereof, (d) The
constitution of a managing committee for the canteen and representation of the
workers in the management of the canteen, (e) The items of expenditure in the
running of the canteen which are not to be taken into account in fixing the cost of
foodstuffs and which shall be borne by the employer, and (f) The delegation to the
Chief Inspector, subject to such conditions as may be prescribed, of the power to
make rules under Clause (c) [Sec. 46 (2)].
6. Shelters, rest rooms and lunch rooms (Sec. 47). (1) Provision for shelters, rest
rooms, lunch rooms in factories employing more than 150 workers. ¾ In every factory
wherein more than150 workers are ordinarily employed, there shall be a provision
for shelters, rest rooms and a suitable lunch room where workers can eat meals
brought by them with provision for drinking water. ¾ However, any canteen
maintained in accordance with the provisions of Sec. 46 shall be regarded as part
of this requirement. Where a lunch room exists, no worker shall eat any food in the
workroom [Sec. 47 (1)].
(2) Shelters, etc. to be sufficiently lighted, ventilated and cooled. The shelters
or rest rooms or lunch rooms shall be sufficiently lighted and ventilated and shall
be maintained in a cool and clean condition [Sec. 47 (2)].
7. Crèches (Sec. 48). (1) Provision of crèches in factories employing more than 30
women workers. In every factory wherein more than 30 women workers are ordinarily
employed, there shall be provided and maintained a suitable room or rooms for use
of children under the age of 6 years of such women [Sec. 48 (1)].
(2) Crèches to be adequately lighted and ventilated and to be under the charge of
trained women. Rooms for use of children shall provide adequate accommodation,
shall be adequately lighted and ventilated. Further they shall be maintained in a
clean and sanitary condition and shall be under the charge of women trained in the
care of children and infants [Sec. 48 (2)]. (3) Prescription of rules by the State
Government. The State Government may make rules prescribing the location and the
standards in respect of construction, accommodation, furniture and other equipment
of rooms for use of children. It may also make rules for the provision of
additional facilities for the care of children belonging to women workers,
including suitable provision of facilities (a) For washing and changing their
clothing, (b) Of free milk or refreshment or both for the children, and (c) For the
mothers of children to feed them at the necessary intervals. [Sec. 48 (3)]. 8.
Welfare officers (Sec. 49). (1) Employment of welfare officers in factories
employing 500 or more workers. In every factory wherein 500 or more workers are
ordinarily employed the occupier shall employ in the factory such number of welfare
officers as may be prescribed [Sec. 49 (1)].
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(2) Duties, qualifications and conditions of service to be prescribed by the State

Government. The State Government may prescribe the duties, qualifications and
conditions of service of welfare officers [Sec. 49 (2)]. Even if a factory (say, a
sugar factory) employs over 500 workers only for a few months in the year and not
continuously, the occupier shall employ the prescribed number of welfare officers
[Employers’ Assn. of Northern India v. Secretary of Labour, A.I.R. (1952) All.
109].
Restriction on double employment (sec. 60) No adult worker shall be required or
allowed to work in any factory on any day on which he has already been working in
any other factory save in such circumstances as may be prescribed. Working hours
and notice of periods of work for children (Secs. 71 and 72). (1) Working hours
limited to 4-1/2. No child shall be employed or permitted to work in any factory—
(a) for more than 4-1/2 hours in any day; (b) during the night [Sec. 71 (1)].
‘Night’ means a period of at least 12 consecutive hours which shall include the4
interval between 10 P.M. and A.M. [Expl. to Sec. 71 (1)]. (2) Period of work of
children limited to 2 shifts. The period of work of all children employed in a
factory shall be limited to 2 shifts. These shifts shall not overlap or spread over
more than 5 hours each. Each child shall be employed in only one of the relays
which shall not, except with the previous permission in writing of the Chief
Inspector, be changed more frequently than once in a period of 30 days [Sec. 71
(2)]. (3) Child workers entitled to weekly holidays. The provisions of weekly
holidays |(Sec. 52) shall apply also to child workers and no exemption from these
provisions may be granted in respect of any child [Sec. 71 (3)]. (4) Prohibition if
the child worker has already been working in another factory. No child shall be
required or allowed to work in any factory on any day on which he has already been
working in another factory [Sec. 71 (4)]. (5) Female child to work only between 8
A.M. to 7 P.M. No female child shall be required or allowed to work in any factory
except between 8 A.M. and 7 P.M. [Sec. 71 (5) as introduced by the Amendment Act of
1987]. (6) Display of notice of work of child-workers. There shall be displayed and
correctly maintained in every factory in which children are employed a notice of
periods of work for children showing clearly for every day the periods during which
children may be required or allowed to work [Sec. 72 (1)]. The provisions of Sec.
61(8), (9) and (10) (discussed earlier) also apply to the notice required under
Sec. 72 (1) [Sec. 72 (3)]. (7) Fixation of periods of work beforehand. The periods
shown in the notice shall be fixed beforehand in accordance with the method laid
down for adult workers [Sec. 72 (2)].
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5. Restriction on employment of women (Se3c. 66). A woman shall be required or

allowed to work in a factory only between the hours of 6 A.M. and 7 P.M. The State
Government may, by notification in the Official Gazette in respect of any factory
or group or class or description of factories, vary these limits. But no such
variation shall authorise the employment of any woman between the hours of 10 P.M.
and 5 P.M. Again there shall be no change of shifts in the case of women workers in
a factory except after a weekly or any other holiday [Sec. 66 (1)].
The State Government may make rules providing for the exemption from the
restrictions imposed by Sec. 66 (1) in case of women working in fish-curing or
fish-canning factories, where the employment of women beyond the specified hours is
necessary to prevent damage to, or deterioration in, any raw material [Sec. 66
(3)].
Wages during leave period (Sec. 80). For the leave allowed to a worker he shall be
entitled to wages at a rate equal to the daily average of his total full time
earnings for the days on which he actually worked during the month immediately
preceding his leave. The full time earnings shall be exclusive of any overtime and
bonus but inclusive of dearness allowance and the cash equivalent of the advantage
accruing through the concessional sale to the worker of foodgrains and other
articles [Sec. 80 (1)]. Important Points 1) The Supreme Court held that salt
manufacture from sea water by employing different processes is a manufacturing
process and the workers engaged in this work are workers within the meaning of
Factories Act. [Ardeshir H. Bhiwandiwala v. State of Bombay]
2)
The Supreme Court held that sun cured tobacco leaves subjected to processes of
moistening, stripping, breaking up, packing with the view to transport them to
Company’s main Factory for their use in manufacturing Cigarette is a manufacturing
process under the Factories Act. [Ardehir H. Bhiwandiwala v. State of Bombay] The
cutting of the woods or converting the wood into planks is a part of the
manufacturing activity. [Bharati Udyog v. Regional Director ESI Corpn.]
Construction of railway, use of materials like sleepers, bolts, loose rails etc, to
adaptation their use for ultimately for laying down railways line amounts to
manufacturing process. [Lal Mohmd. v. Indian Railway Construction Co. Ltd.] The
process undertaken in zonal and sub –stations and electricity generating stations,
transforming and transmitting electricity generated at the power station does not
fall within the definitions of manufacturing process. [Workmen of Delhi Electric
Supply Undertaking v. Management of DESU] Piece – rate workers can be workers
within the definition of worker in the Act, but they must be regular workers and
not workers who come and work according to their will, [Shankar Balaji Wale v.
State of Maharashtra] All persons employed in or in connection with a factory
whether or not employed as workers are entitled to the benefits of the Act. [Union
of India v. G.M. Kokil] If a factory is being run by a Company, then only a
director of that Company can be the occupier for the purpose of the Act.[ J.K.
Industries Ltd. v. Chief Inspector of Factories]
126 9213188188
3. 4)
5)
6)
7) 8)
SUJEET JHA
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9.
Employees working in canteens in industrial establishment runs by Managing

Committee are not employers of the Managing Committee, but are employees of
occupier. [Kanpur Suraksha karamchari Union v. Union of India] Preparation of food
and beverage and its sale to members of a club is a manufacturing process. [CCI v.
ESIC] Receiving products in bulk and packing as per clients requirements amounts to
manufacture. A person is said to be employed in the factory if his duties are
connected with the business of the factory, no matter whether he stands outside the
factory premises or inside it. [Shinde v. Bombay Telephones] It was held the
definition of worker includes employees who are entrusted solely with the clerical
duties. [Works Manager, Central Rly. Workshop Jhansi v. Vishwanath and others]
10) 11. 12.
13.
Powers of Inspectors
An inspector may exercise any of the following powers within the local limits for
which he is appointed: 1. He can enter any place which is used or which, he has
reasons to believe, is used as factory. 2. He can make examination of the premises,
plant, machinery etc. 3. He can require the production of any prescribed register
or any other document relating to the factory. 4. Take measurement and photographs
and make such recordings as the considers necessary for the purpose of any
examination.
Processes Special Provisions relating to Hazardous
Special provisions relating to hazardous processes have been envisaged under

Chapter IV. A of the Factories Act, 1948. This chapter was inserted by the
Factories (Amendment) Act, 1987 and Consists of Sections 41 A to 41 H. These
sections are as follows:
Constitution of Site Appraisal Committees [Section 41A]: A Committee under the name
Site Appraisal Committee shall be constituted by the State Government to advise the
Government in the matter of examination of application for establishment of
factories involving hazardous processes. The constitution of the site appraisal
committee consisting of committee has been specified therein.
The Site Appraisal Committee shall examine an application for the establishment of
a factory involving hazardous process and make its recommendation to the State
Government within a period of ninety days in the prescribed from.
Compulsory disclosure of information by the occupier [Section 41B]: It is
compulsory on the part of the occupier of every factory involving a hazardous
process to disclose all information regarding dangers, including health hazards to
the workers employed in the factory, the Chief Inspector, the local authority
within whose jurisdiction the factory is situated and the general public in the
vicinity. SUJEET JHA 127 9213188188
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Specified responsibility of the occupier in relation to hazardous processes

[Section 41C]: Accurate and up to date health records or medical records of the
workers of the factory who are exposed to any chemical toxic or any other harmful
substances which are manufactured, stored, handled or transported and such records
shall be maintained by the occupier of a factory involving any hazardous process.
Inquiry Committee [Section 41D]: In the event of occurrence of an extraordinary
situation, the Central Government may appoint an Inquiry Committee to inquire into
the standards of health and safety observed in the factory with a view to finding
out the causes of any failure or neglect in the adoption of any measures prescribed
for the health and safety of the workers or the general public. Emergency standards
[Section 41E]: The director – General of Factory Advice Service and Labour
Institutes may be directed by the Central Government to lay down emergency
standards in respect of hazardous process. Permissible limits of exposure of
chemical and toxic substances (Section 41F): The second Schedule added to the Act,
indicates maximum permissible threshold limits of exposure of chemical and toxic
substances in manufacturing processes in any factory. Workers Participation in
safety management (Section 41G): The occupier in every factory shall set up a
safety committee consisting of equal number of representatives of workers and
management to promote co – operating between the workers and the management in
maintaining proper safety and health at work and to review periodically the measure
taken in that behalf where hazardous process is involved. Warning about imminent
danger (Section 41H): If there is reasonable apprehension regarding likelihood of
imminent danger to the lives or health of the workers employed in a factory, they
may bring the same to the notice of the occupier, agent, manager, etc.
SUJEET JHA
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3.2 INDUSTRIAL DISPUTES ACT, 1947

Introduction
The object of Industrial Disputes Act, 1947 is to make provisions for investigation
and settlement of industrial disputes. The purpose is to bring the conflict between
the employer and the employees to an amicable settlement. The Act also provides
machinery for settlement of disputes, if dispute cannot be resolved through
collective bargaining. In additions to above, the Act also makes other provision in
respect of lay – off, retrenchment, strike, lock – out, etc.
Extent of the Act The act extends to the whole of the India [Sec. 1 (2)]. It
applies to all industries whether they are carried on by private owners or by the
Government [Western India automobile Assn. v. Industrial Tribunal, Bombay, A.I.R.
(1949) F.C.111].
The act has been amended from time to time. The latest amendment to the Act was
made in august, 1984.
OBJECTS OF THE ACT The main objects of the Act are: To secure industrial peace— (a)
by preventing and settling industrial disputes between the employers and workmen,
(b) by securing and preserving amity and good relations between the employers and
workmen through an internal Works committee and (c) by promoting good relations
through an external machinery of conciliation, Courts of inquiry, Labour Courts,
Industrial Tribunals and National Tribunals. (1) To ameliorate the condition of
work men in industry— (a) by redressal of grievances of workmen through a statutory
machinery; and (b) by providing job security [S.N.Rai v.Vishwanath Lal, A.I.R.
(1960) Pat. 10.] What is included in the term ‘Industry’? ‘Industry’ includes— (a)
Any activity of the Dock Labour board established under Sec. 5-A of the Dock
workers (regulation of Employment) Act, 1948; (b) Any activity relating to the
promotion of sales or business or both carried on by and establishment. What is not
included in the term ‘industry’? ‘Industry’ does not includes— (1) Any agriculture
operation except where such agricultural operation is carried on in an integrated
manner with any other systematic activity and such other activity is the
predominant one; or
(2) (3) (4) (5)
‘Agricultural operation’ does not include any activity carried on in a plantation

as defined in Sec. 2 (f) of the Plantations Labour Act, 1951. Hospitals or
dispensaries; or Educational, scientific, research or training institutions; or
Institutions owned or managed by organizations wholly or sub-stantially engaged in
any charitable, social or philanthropic service; or Khadi or village industries; or
According to new clause (kka) as introduced in Sec.2 by the amendment Act of 1982,
‘khadi’ has the meaning assigned to it in Sec. 2(d0 of the Khadi and Village
industries commission Act, 1956.
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(6) Any activity of the Government relatable to the sovereign functions of the
Government including all the activities carried on by the departments of the
Central government dealing with defense research, atomic energy and space; or (7)
Any domestic service; or (8) Any activity, being a pr4ofession practiced by an
individual or body of individuals. If the number of persons employed in relation to
such profession is less than 10; or (9) Any activity, being an activity carried on
by a co-operative society or a club or any other like body of individuals, if the
number of persons employed in relation to such activity is less than 10.
Employees covered under the Industrial Dispute Act
Every person employed in an establishment for hire or reward, to do any manual,

clerical skilled unskilled technical operational or supervisory work is covered
under the Act. 1) 2) 3) Persons employed mainly in a managerial or administrative
capacity. Person employed in a supervisory capacity and drawing wages exceeding
Rs.1,600/p.m. or exercising functions mainly of managerial nature: Persons subject
to Army Act, Air force Act, Navy Act or those employed in the police service or as
an officer or employee of a prison.
The Act provides for constitution of Works Committee in factories employing 100 or
more workers. First of all, the works Committee will try to settle the dispute. If
the dispute is not settles it will be referred to the Conciliation Officer. The
Conciliation Officer will try to arrive at fair and amicable settlement acceptable
to both the parties. If he is unable to do so, he will send the report to the
Central Government. The Government may then refer the industrial dispute to the
Board of Conciliation. It may be noted that here the employer and the employees can
voluntarily refer the matter to arbitration. If no settlement is arrived at then
there is arrived that three – tier system of adjudication i.e., Labour Court,
Industrial Tribunal and National Tribunal.
Award means an interim or final determination of any industrial dispute or of any
question relating thereto by any Labour Court, Industrial Tribunal, or National
Tribunal. The term award also includes arbitration award. The award is required to
be published by the Central Government or State Government within 30 days from the
date it is made. The award becomes effectives only after 30 days of its
publication. Generally the validity period of its publication. Generally the
validity period of an award is 1 year. Settlement means a settlement arrived at in
the course of conciliation proceedings. It includes a written agreement between the
employer and workman arrived at otherwise than in the course of conciliation
proceedings.
The settlement arrived in the course of conciliation and arbitration award and
Labour Court award or the Industrial or National Tribunal Award binds all parties
to industrial dispute, including present and future workman and all parties who are
summoned to appear in the proceedings. If settlement is arrived at otherwise in the
course of conciliation proceeding, it binds only those who are actually parties to
the agreement; generally, the settlement is valid for 6 months. Lay off means
failure refusal or inability of the employer to give employment to a workman
because of any of the following reasons: 1) Shortage of coal, power or raw
materials,
SUJEET JHA 130 9213188188
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2) 3) 4) 5)
Accumulation of stock; Breakdown of machinery Natural calamity: Any other similar

or analogous reason.
Lay off means not giving employment within 2 hours after reporting to work.. Lay
off can be for half day also wherein the worker shall be asked to come in the
second half of the shift.
A factory employing 50 or more but less than 100 employees can lay off its workman
who have completed 1 year of service by paying compensation equal to 50% of the
salary / wages. A factory employing more than 100 employees can lay off its workman
with the previous approval of Central Govt, However the approval of Central Govt.
is not required in case lay off is done on account of shortage of power or due to
natural calamity. Employer can offer him alternate employment if alternate
employment does not call for any special skill or previous experience. In such a
case lay off compensation will not be payable if the employee refuses to accept the
alternate employment.
Retrenchment means the termination of service of a workman by the employer for any
reason other than as a punishment inflicted by a disciplinary action. In addition,
retrenchment does not include voluntary retirement or retirement on reaching the
age of superannuation or termination on account of non – renewal of contract or
termination of contract itself or termination due to continued ill – health of
workman.
Retrenchment means discharge of surplus labour or staff of the employer. It is not

be way of punishment. The retrenchment shall be done on LIFO basis in respect of
each category. A workman who has completed one year of service can be retrenched by
giving one month’s notice or one month’s salary and retrenchment compensation.
Retrenchment compensation is calculated at the rate of 15 days’ average wages for
every completed year of service or any part thereof in excess of 6 months. Average
Wages means average of the wages payable for the proceeding 3 complete calendar
months. For the purpose of retrenchment compensation, one day wage shall be
calculated by dividing monthly wage by 30.
Strike means a cessation of work by a body of persons, employed in any industry,
acting in combination or a concerted refusal, or a refusal under a common
understanding of any number of persons who are or have been so employed to continue
to work or to accept employment.
1) 2) 3) 4)
During pendency of conciliation proceedings and 7 days thereafter; During pendency

of proceedings before Labour court or Industrial Tribunal or National Tribunal :
During period of arbitration proceedings: During period when settlement or award is
in operation in respect of the matters covered by the award or settlement.
In case of public utility services (hospital, railways, ports, docks, telephone,

transport etc.), employees have to give at least 14 days’ notice for strike. The
notice is valid only if strike commences within 6 weeks otherwise fresh notice is
required. If such notice is received by any employer, Government authorities should
be informed within 5 days of the receipt of notice.
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Wages during strike period are payable only if strike is both legal and justified.
[Syndicate Bank v. Umesh Naik] Strike in violation of above provisions is illegal.
In Such a case, the workman shall be punishable with fine, which may extend to
Rs.50/- per day and with imprisonment, which may extend to 1 month.
Important Points 1) Principals governing Domestic Enquiry
In all such cases, the workmen after taking their seats, refuse to do work. Go slow
does not amount to strike, but it is a serious case of misconduct. Cessation of
work in the support of the demands of workmen belonging to other employer. Some
workers may resort to fast on or near the place of work or residence of the
employer. Since there is no cessation of work, it does not constitute a strike.
Lock out means temporary closing of a place of employment or the suspensions of
work or the refusal by the employer to continue to employ any number of persons
employed by him. Employer cannot go for lock – out in the following cases: 1)
During pendency of conciliation proceedings and 7 days thereafter. 2) During
pendency of proceeding before Labour Court or Industrial Tribunal or National
Tribunal: 3) During period of arbitration proceedings: 4) During period when
settlement or award is in operation in respect of the matters covered by the award
or settlement. In HAL. Employees Union v. Presiding Officer. It was held that when
lock out by employer is legal and justified, workmen are not entitled to
compensation and wages for the period during which lock out continue. In case of
illegal lock out, the employer can be punished with fine may extend to Rs.1,000/-
and with imprisonment, which may extend to 1 month. 1) 1. The enquiry should be
conducted by an unbiased person. 2. The enquiry officer should conduct the enquiry
in an objective and fair manner. 3. The employee should be given a fair opportunity
to defend himself. 4. proper procedure, rules, regulations etc. should be followed
white conducting enquiry. 2) It has been held that if on the death of a fellow
worker, the workmen acting in combination refuse to resume work, it amounts
tostrike. [National Textiles Workers Union v. Meenakshi Mills] 3) Certain gardeners
were appointed to look after the bungalow provided to the MD of the Company. The
gardeners were supposed to mark their attendance in the Company Register and their
salaries were being paid directly by the company. It was held that since the
gardeners are working directly under the control of the company, they are workmen
under the Industrial Dispute Act. [J.K. Cotton Spinning v. Weaving Mills Co. Ltd.]
4) The Supreme Court held that the teachers employed by the Educational
Institutions cannot be considered as workmen within the Industrial Dispute Act, as
imparting of SUJEET JHA 132 9213188188
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5)
6)
7)
8)
9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21)
education which is the main function of the teacher cannot be considered as skilled
or unskilled manual work or supervisory work or technical work. [Sunderambal v.
Government of Goa] Unfair Labour Practices means any of the practices specified in
the Vth Schedule to the industrial Disputes Act. This Schedule declares certain
labour practices as unfair on the part of the employees and their trade unions and
on the part of the workmen and their trade unions. Industrial Disputes Act
prohibits commission of any unfair labour practice by Employers & Workmen. The
Supreme Court held that termination of services of a bus driver on the ground of
weak eyesight does not amount to retrenchment under the Industrial Disputes Act
because here the employees is being terminated on the ground of continued ill
health and not because of surplus labour. [Anand Bihari v. Rajasthan State Road
Transport] It was held that a car driver engaged by area manager of a bank for
which allowance was given to him was not a workman of the bank under Industrial
Dispute Act, eventhough the car was maintained at the bank’s expenses, as the
control of the driver was not into the hands of the bank. [PNB v. Ghulam Dastagi]
An Industrial Dispute exists only when the same has been raised by the workman with
the employer. A mere demand to the appropriate government without a dispute being
raised by the workman with their employer, cannot become an industrial dispute.
[Sindhu Resettlement Corporation ltd. v. Industrial Tribunal] A workmen’s case
sponsored by a body of workmen either acting through their union or otherwise,
would amount to an Industrial Dispute. [Newspaper Ltd., Allahabad v. Industrial
Tribunal] The term ‘employment or non – employment’ is concerned with the
employees’ failure or refusal to employ a workman. [Western India Automobile
Association v. Industrial] A Salesman, whose duties included manual as well as
clerical work such as to attend to the customer, prepare cash memos, to assist
manager in daily routine is a workman. [Carona Sahu Co. Ltd. v. Labour Court]
Refusal to do work which the employer has no right to ask for performance, such a
refusal does not constitute a strike. [Northbrooke Jute Co. Ltd. v. Their Workman]
Where in pursuance of a common understanding the employees entered the premises of
the Bank and refused to take their pens in their hands, it was held to be strike.
[Punjab National Bank Ltd. v. all India Punjab National Bank Employees’ Federation]
Go – slow does not amount to strike. [Bharat Sugar Mills Ltd. v. Jai Singh] Where
the strike was resorted to by using violence or acts of sabotage or for any
ulterior purpose, then the strike will be illegal. [ Gujarat Steel Tubes Ltd. v.
Gujarat Steel Tubes Majdoor Sabha] When the workmen and the management are equally
to be blamed for the strike, the Court normally awards half of the wages. [India
Marine Service Pvt. Ltd. v. their Workmen] A closure of a place of business for a
short duration of 30 days in retaliation to certain acts of workmen was held to be
a lockout. [Lord Krishna Sugar Mills Ltd. v. State of U.P] Retrenchment does not
include disengagement from service of persons employed for working on daily wages.
[U.P. v. Labour court, Haldwani] if the termination of an employees’ service is a
punishment inflicted by way of disciplinary action, such termination would not
amount to retrenchment. [SBI v. Employees of SB] Termination of service of casual
workers after their work is over, is not a retrenchment. [Tapan Kumar Jana, v. The
General Manager, Calcutta Telephones] Where the services of an employee irregularly
appointed were terminated, it was held to be a case of retrenchment. [Prabhudayal
Jat v. Alwar Sehkari Bhumi Vikas Bank Ltd]
133 9213188188
SUJEET JHA
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22) 23)
The use of force or violence or acts of sabotage resorted to by the workmen during
a strike disentitles them to wages for the strike period. [Crompton Greaves Ltd. v.
Workmen, Syndicate Bank v. Umesh Naik] The Government employees have to fundamental
right to resort to strike and they cannot take the society at ransom by going on
strike, even if there is injustice to some extent. [T.K. Rangarajan v. Govt. of
Tamil Nadu & Others]
Under Difference between lock-out and lay-off. lock-out the employer refuses to
give employment because of closing of a place of employment or suspension of work.
Under lay-off the employer refuses to give employment because of shortage of coal,
power or raw material or the accumulation of stocks or the breakdown of machinery
or natural calamity or for any other reason to give employment. (2) Lock-out is
resorted to by the employer to coerce or pressurize the workmen to accept his
demands; lay-off is for trade reason beyond the control of the employer. (3) Lock-
out is due to an industrial dispute and continues during the period of dispute;
lay-off is not concerned with a dispute with the workmen. Difference between lock-
out and closure. Lock-out and closure of a business are often confused. This is
because cessation of work is common to both.
Closure is a fundamental right and if it is not a lock-out, the workers cannot

grudge [J.K. Hosiery Factory v. Labour Appellate Tribunal, A.I.R. (1956) All. 498].
The State cannot compel an employer to carry on his business because several
employees may be thrown out of employment if it is closed. The grounds for closure
of a business may be actual loss or apprehended loss. It may also be disinclination
to run the risk of running the business [Indian Metal & Metallurgical Corpn. V.
Industrial Tribunal, Madras, 3 F. J.R. 420 High Court, Madras].
The points of difference between a lock-out and closure are as follows: (1) In the
case of lock-out it is only the place of business which is closed (and not the
business itself), while in the case of closure of a business not only the place of
business but the business itself is closed [Express Newspapers (Pvt.) Ltd. V. Their
Workmen, A.I.R. (1963) S.C. 569]. The closure of a business indicates the final and
irrevocable termination of the business itself. Lock-out, on the other hand,
indicates the closure of the place of business or the place of employment and not
the closure of the business itself. (2) Lock-out is a weapon of coercion in the
hands of employer; closure is generally for trade reasons. (3) In closure there is
severance of employment relationship whereas in lock-out there is no severance but
only suspension of such relationship. (4) A lock-out is caused by the existence or
apprehension of an industrial dispute whereas a closure need not be in consequence
of an industrial dispute. National Tribunal [Sec. 2 (n)]. It means— any railway a
National Industrial Tribunal constituted under Sec. 7-B. Public utility service
[Sec.2 (n)]. It means— (i) Any railway service or any transport service for the
carriage of passengers or goods by air; (ii) Any service in , or in connection with
the working of , any major port or dock; (iii) Any section of an industrial
establishment, on the working of which the safety of the establishment or the
workmen employed therein depends; (iv) Any postal, telegraph, or telephone service;
SUJEET JHA 134 9213188188
LAW& AUDIT
(v) Any industry which supplies power, light or water to the public; (vi) Any
system of public conservancy or sanitation; (vii) Any industry specified in the
First Schedule. The appropriate Government may, if satisfied that public emergency
or interest so requires, by notification in the Official gazette, declare any
industry specified in the First Schedule to be public utility service for the
purposes of the Industrial disputes Act for such period as may be specified in the
notification. The period so specified shall not, in the first instance, exceed 6
month. But it may, by a like notification, be extended from time to time by any
period not exceeding 6 month at any time if in the opinion of the appropriate
government, public emergency or public interest requires such extension. The first
schedule is reproduced below.
Difference between ‘retrenchment’ and ‘closure’. The important points of difference
between ‘retrenchment’ and ‘closure’ may be enumerated as follows; (1) Retrenchment
is the termination by the employer of the service of the workman for any reason
whatsoever, otherwise than as punishment inflicted by way of disciplinary action.
It affects only some of the workmen. Closure, on the other hand, means closing down
of the business of trade reasons and it affects all the workmen. (2) In case of
retrenchment the services of workmen are terminated on account of surplus labour;
while in case of closure it is on account of total closure of work by an employer.
(3) In retrenchment the trade or business remains uninterrupted as it continues;
while in closure the business itself is discontinued. (4) The compensation payable
to a workman on retrenchment either on account of surplus labour or closure, shall
be equivalent to 15 days’ average pay for every completed year of continuous
service or any part thereof in excess of 6 months. Retrenchment as a result of bona
fide closure of business does not entail any compensation beyond average pay for 3
months. Difference between lock-out and retrenchment. (1) Lock-out is temporary;
retrenchment is permanent. Retrenchment results in complete severance of industrial
relationship between an employer and an employee while lockout keeps this
relationship alive even during the cessation of work. The former results in
severance of relationship between the employer and employee while the latter
amounts to only suspension of the relationship. (2) Lock-out is with a motive to
coerce the workmen to accept the demands of the employer retrenchment is resorted
to dispense with surplus labour. (3) Lock-out is due to and during an industrial
dispute; there is no such dispute in case of retrenchment.
SUJEET JHA
135
9213188188
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3.3 WORKMEN’S COMPENSATION ACT 1923

Introduction This Act provides social security to workmen. Under this Act, a
workman who dies or suffers disablement, partial or total, due to an accident is
entitled to get compensation from his employer. Applicability of the Act A workman
covered under ESI Act, 1948 is not entitled to get compensation under Workmen’s
Compensation Act. 1923. Thus, Act is applicable to those factories, mines,
transport establishment, construction works, etc. Which are not covered under ESI
Act, 1948. Meaning of Workman Workman means the following: (i) Railway servant”
(ii) Crew of ship; (iii)Crew of aircraft; (iv) Driver, cleaner, helper or mechanic
of motor vehicles; (v) Workman recruited abroad; (vi) Person employed in activities
like manufacturing process, explosive, mines, shop loading/ unloading,
construction, electricity generation and distribution, drivers, horticulture,
circus. (vii) Persons employed in cultivation of land, fishing, rearing of
livestock. If the number of persons employed there is more than 25. Every employee
including those employed through contractor who is engaged for the purpose of
employer’s business is eligible for workman’s compensation. However, casuals
employees and employees engaged in clerical capacity neither are nor covered.
In case of contract labour, the principle employer is liable to pay compensation in

the same manner, as he is liable for his departmental labour, However, he is
entitled to be indemnified by the contractor for such compensation. [Managing
Director, Orissa State Warehousing Corporation V. Smt, Geetarani]
Employer’s Liability for Compensation
An employer is liable to pay compensation if personal injury is caused to a workman

ny accident arising out of and in the course of his employment. However, an
employer is not liable in the following. (1) Injury which results in total or
partial disablement of workman up to 3 days; (2) Injury caused by an accident
directly attributable to the following: (a) Workman working under the influence of
drinks or drugs; (b) Willful disobedience of express order of safety; (c) Willful
removal of safety guards or devices. However in a such cases, if the workman does
or suffers permanent total disablement the employer will be liable. Further, an
employer is liable to a workman, if a workman contract any specified occupational
disease while he is in the service of the employer for at least 6 months. If may be
noted that compensation is payable even when there is no fault of the employer;
except the aforesaid cases where the compensation is not payable./ The compensation
is payable even if it is found that the employee did not take proper precaution or
he was careless or negligible in the performance of his work. SUJEET JHA 136
9213188188
LAW& AUDIT
Amount of compensation payable Compensation is payable to workman in case of

partial or total disablement. It is payable to dependants of workman in case of
death. It maybe be noted that compensation is an amount equal to 50% of monthly
wages deceased workman multiplied by a factor depending on the age of the workman
(more than age, lower the compensation), subject to a minimum compensation of Rs.
80,000/-. In addition to this funeral expenses of Rs. 2,500/- are also paid. In
case of permanent of total disablement, compensation payable is an amount equal to
60% of monthly wages o disabled workman multiplied by a factor depending on the age
of the workman (more the age, lo9wer the compensation), subject to a minimum
compensation of Rs. 90,000/In case of permanent partial disablement, compensation
is paid based on percentage of loss of earning capacity.
Accident arising out of and in the course of employment.
Accident arising out of employment: An accident arising out of employment implies a

proximate and direct connection between the accidental injury and the employment.
In this case, the compensation will be payable if the accident has occurred at the
place where the workman was performing his duties. Accident in the course of
employment: An accident in the course of employment implies a casual connection
between the accidental injury and the employment. In this case, for the payment of
compensation it is not necessary that the accident occurred at the place where the
workman was performing his duties, Further, it is also not necessary that the
workman must be actually working at the time of his death. It is well established
that there must be some casual connection between the death of the worker and his
employment. If the workman dies, as a natural result of the disease from which he
was suffering then it will be considered that he has died .of that disease as a
wear and tear of his employment and hence no liability would be fixed upon the
employer. However, if the employment is contributory cause or has accelerated the
death, or if the reason of the death is not only the disease but also the disease
coupled with the employment then it could be said that the . death arose in the
course of the employment and the employer would be liable.
Employer's liability when contractor is engaged

Section 12 makes the employer liable for compensation to such workmen hired by the
contractor under following circumstances: (a) The contractor is engaged to do a
work which is part of the trade or business of the employer( called principal); (b)
The workmen were engaged in the course of or for the purpose of his trade or
business; and (c) The accident occurred in or about the premises on which the
principal employer has undertaken or undertakes to execute the work concerned. The
amount of compensation shall be calculated with reference to the wages of the
workman under the employer by whom he is immediately employed.
SUJEET JHA 137 9213188188
MS EDUCONZ PVT. LTD. Important Points
LAW& AUDIT
1)
A workman who was on duty had gone to the canteen to take tea where he died. It has
been held that the accidental injury arose in the course of employment and the
period of recess did not disrupt the continuity of employment. [Regional Director
v. Batul Bibi] A factory worker suffering from a heart disease while coming out of
the factory died inside the factory premises. The stress and strain of work were
the accelerating factors to death and therefore the employer was liable to pay the
compensation. [D.N.K Project v. Smt. D. Buchitalli] A workman .died on duty by
heart attack after receiving continuous threats on his life from thieves who he
prevented successfully. It has been held that his widow will be entitled to
compensation under this Act. [Smt. A. Seetharamma v. G.M., SouthEastern Railways]
Where an employee was under a contractual obligation to use only a particular means
of transport, the area or field of employment would stand extended to the course of
the said transport. Accident sustained by transport staff while traveling between
depot and residence or vice versa must be treated arising in the course of
employment. [BEST Undertaking v. Mrs. Agnes] Where the deceased workman was
standing in the queue waiting for the bus provided by the employer for reaching the
place of work and was run over by the bus by which he was to travel it was held
that the workman has died as result of employment injury. [ESIC v. Sayeeda Khatoon
Dannawal] It has been held that an employer will be liable to pay compensation if
workman meets with an accident while proceeding to his workplace on a bicycle.
[Indian Rare Earth Ltd. v, Surinder Beevi] Where a mill worker was stabbed in a
communal riot while he was returning home sometime after midnight after the night
shift and died just at a short distance from the mill, . it was held that the case
clearly falls within the meaning of employment injury. [Ahmed Khan Pathan v. ESIC]
If a workman suffers as a result of an injury from a physical defect which does not
infact reduce his capacity to work but at the same time makes his labour unsaleable
in any market. he can establish a right to compensation provided he proves that he
had been turned away by a reasonable number of likely employers on account of such
defect. [Sukhai v. Hukam Chand Jute Mills Ltd.] . If after the accident a worker
has become disabled. and cannot do a particular job but the employer offers him
another kind of job, the worker is entitled to compensation for partial
disablement. [General Manager, G.I.P. Rly. v. Shankar] If due to any physical
defect, a workman is unable to get any work which a workman of his class ordinarily
performs, and has thus lost the power to earn, he is entitled to compensation for
total disablement. [Ball v. William Hunt & Sons Ltd.] In a case permanent partial
disability caused to a workman in accident while working on ship, it was held that
workman can be said to have lost his earning capacity even though
138 9213188188
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
SUJEET JHA
LAW& AUDIT
getting same amount of wages as before. [Mangru Palji v. Robinsons] 12) Where a
carpenter had amputated his left ann from elbow while working in the factory, it
was held to be a case of total disablement. [Pratap Narain Singh Deo v. Sriniwas
Sabata] Where an electrician who had to go frequently to a heating room from a
cooling plant, contracted pneumonia resulting in his death, it was held that the
injury caused by an accident is not confined to physical injury and includes
nervous shock or break down or mental strain. [Indian News Chronicle v. Mrs.
Lazarus] Where a workman suffers from heart disease and dies on account of strain
of work by keeping continuously standing or working, it was held that the accident
arose out of employment. [Laxmibai Atmaram v. Bomba}' Port Trust] A workman while
returning home after duty was murdered within the premises of the employer. It was
held that there was a close and proximate connection between the accident and the
employment and hence his wife was entitled to compensation. [Naima Bibi v. Lodhne
Colliery Ltd.]. Where the workman, a state employee, received injury while
performing the electrification work of the town entrusted to state employees by the
Municipal Board, it was held that the state and not the board was liable to pay
compensation because execution of electrical project was not the ordinary, business
of the Municipal Board . Where the cartman engaged by a Rice Mill to carry rice
bags from mill to railway station met with an accident on a public road while
returning back from railway station resulting in his death, it was held that the
Mill Owner was liable to pay compensation. . . The Supreme Court held that there
should be some connection, casual or direct, between the injury/accident and the
employment in order to get the compensation under Workmen's Compensation Act. Where
a workman has exposed himself to an added peril by his own imprudent act, then the
employee will not be eligible for compensation. [Machenzie v. I.M .. Issak]
13)
14)
15)
16
17)
18)
SUJEET JHA
139
9213188188
LAW& AUDIT
3.4 PAYMENT OF WAGES ACT, 1936

Extent of the Act The Act extends to the whole of India [Sec. 1 (2). It was
extended to Jammu and Kashmir by the Central Labour Laws (Extension to Jammu and
Kashmir) Act, 1970. Application of the Act ¾ The Act applies to the payment of
wages to persons employed in any factory, to persons employed (otherwise than in a
factory) upon any railway by a railway administration and to an industrial or other
establishment specified in Clauses (a) to (g) of Sec. 2 (ii) (which defines
industrial or other establishment). ¾ The persons employed upon a railway by a
railway administration may have been employed either directly or through a sub-
contractor by a person fulfilling a contract with a railway administration [Sec. 1
(4)]. ¾ The State Government may after giving 3 months’ notice extend the
provisions of the Act to the payment of wages to any class of persons employed in
any industrial establishment or class of establishments specified by the Central
Government or a State Government under Clause (h) of Sec. 2 (ii) [Sec. 1 (5)]. ¾ In
case of industrial establishments owned by the Central government, such
notification can be issued with the concurrence of the Central Government [Proviso
to Sec. 1 (5)].
In various States the Act has been extended to shops and establishments also. The
Act does not apply to persons whose wages exceed Rs. 6,500 per month [Sec. 1 (6)].
This limit was raised from Rs. 1,600 to Rs. 6,500 by the Payment of Wages
(Amendment) Act, 2005.
Reference to Sections in this Chapter. Reference to Sections in this Chapter, un
less otherwise indicated, is to the Payment of Wages Act, 1936. Industrial or other
establishment [Sec. 2 (ii)]. It means any— (a) Tramway service, or motor transport
service engaged in carrying passengers or goods or both by road for hire or reward;
(b) (c) (d) (e) (f) (g)
(aa) air transport service other than such service belonging to or exclusively
employed in the military, naval or air force of the Union or the Civil Aviation
Department of the Government of India; dock, wharf or jetty; inland vessel,
mechanically propelled; mine, quarry or oilfield; plantation; workshop or other
establishment in which articles are produced, adapted or manufactured, with a view
to their use, transport or sale; establishment in which any work relating to the
construction, development or maintenance of buildings, roads, bridges or canals, or
relating to operations connected with navigation, irrigation or supply of water or
relating to the transmission or distribution of electricity or any other form of
power is being carried on;
Wages [Sec. 2 (vi)]. “Wages’ means all remuneration (whether by way of salary,
allowances or otherwise) expressed in terms of money or capable of being so
expressed which would, if the terms of employment, express or implied, were
fulfilled, be payable to a person employed in respect of his employment or of work
done in such employment. Simply stated, ‘wages’ means all remuneration due to any
SUJEET JHA 140 9213188188
LAW& AUDIT
worker or employee if the terms of contract of employment are fulfilled. The

definition of expression ‘wages’ is made sufficiently wide by including within the
expression: (a) any remuneration payable under any award or settlement between the
parties or order of a Court; (b) any remuneration to which the person employed is
entitled in respect of overtime work or holidays or any leave period: (c) any
additional remuneration payable under the terms of employment (whether called a
bonus or by any other name); (d) any sum which by reason of the termination of
employment of the person employed is payable under any law, contract or instrument
which provides for the payment of such sum, whether with or without deductions, but
does not provide for the time within which the payment is to be made; (e) any sum
to which the person employed is entitled under any scheme framed under any law for
the time being in force.
The expression ‘wages’ does not include: (1) any bonus (whether under a scheme of
profit-sharing or otherwise) which does not form part of the remuneration payable
under the terms of employment or which is not payable under any award or settlement
between the parties or order of a Court; (2) the value of any house accommodation,
or of the supply of light, water, medical attendance or other amenity or of any
service excluded from the computation of wages by a general or special order of the
State Government; (3) any contribution paid by the employer to any pension or
provident fund, and the interest which may have accrued thereon; (4) any travelling
allowance or the value of any travelling concession; (5) any sum paid to the
employed person to defray special expenses entailed on him by the nature of his
employment; and (6) any gratuity payable on the termination of employment in cases
other than those specified in Clause (d) above. The definition of the expression
‘wages’ comprises 3 parts: The first part declares that ‘wages’ means all
remunerations which would, if the terms of the contract of employment, exp0ress or
implied, were fulfilled, be payable to a person employed, in respect of his
employment. This clause presents no difficulty whatsoever for it declares in an
unambiguous language that an employee is entitled to receive wages in accordance
with the terms of his contract. The second part says that the expression ‘wages’
shall include any bonus or other remuneration of the nature aforesaid which would
be so payable, i.e., payable in accordance with the terms of the contract. The
third part declares that the expression ‘wages’ shall include ‘any sum’ payable to
such person by reason of the termination of his employment. The language of this
clause is wide enough to embrace not only a sum payable to an employee under the
terms of a contract but also a sum payable to him under the provisions of any law.
Fixation of wage-periods (Sec. 4) Every person responsible for the payment of wages
under Sec. 3 shall fix periods, known as wage-periods, in respect of which such
wages shall be payable [Sec. 4 (1)]. A wage-period shall not exceed one month [Sec.
4 (2)]. SUJEET JHA 141 9213188188
LAW& AUDIT
Time of payments of wages (Sec. 5) The rules relating to time of payment of wages
are as follows: Wages to be paid before 7th or 10th day. ¾ The wages of every
person employed upon or in any railway, factory or industrial or other
establishment upon or in which less than 1,000 persons are employed, shall be paid
before the expiry of 7th day of the following wage-period. ¾ In case the number of
workers exceeds 1,000, the wages shall be paid before the expiry of the 10th day of
the following wage-period [Sec. 5 (1)]. ¾ In the case of persons employed on a
clock, wharf or jetty or in a mine, the balance of wages due on completion of the
final tonnage account of the ship or wagons loaded or unloaded, as the case may be,
shall be paid before the expiry of the 7th day from the day of such completion
[Proviso to Sec. 5 (1)]. Deductions which may be made from wages (Sec. 7) Kinds of
deductions 1. Deductions for fines [Secs. 7 (2) (a) and 8] 2. Deductions for
absence from duty [Secs. 7 (2) (b) and 9] 3. Deductions for damage or loss [Secs. 7
(2) (c), (m), (n) and (o) and 10] 4. Deductions for services [Secs. 7 (2) (d), (e)
and 11] 5. Deductions for recovery of advances [Secs. 7 (2) (f) and 12] 6.
Deductions for recovery of loans [Secs. 7 (2) (fff) and 12-A) 7. Deductions for
payments to co-operative societies and insurance schemes [Secs. 7 (2) (i) and (k)
and 13] Other deductions Deductions made, with the written authorization of the
employed person, for contribution to the Prime Minister’s National Relief Fund or
to such other Fund as may be specified by the appropriate Government [Sec. 7 (2)
(p). [This Clause was added by the Payment of Wages (Amendment) Act, 1976]; and
Limit on deductions [Sec. 7 (3)] ¾ The total amount of deductions which may be made
under the above heads [Sec. 7 (2)] in a wage-period from the wages of any employed
person shall not exceed 75 per cent of such wages in cases where such deductions
are wholly or partly made for payments to co-operative societies under Sec. 7 (2)
(i). ¾ In any other case, they shall not exceed 50 per cent of such wages [Sec. 7
(3)]. ¾ Where the total deductions authorised under Sec. 7 (2) exceed 75 per cent,
or as the case may be, 50 per cent of the wages, the excess may be recovered in
such manner as may be prescribed [Proviso to Sec. 7 (3|)]. MAINTENANCE OF REGISTERS
AND RECORDS Who may file application? An application for claims arising under the
Act may be filed by— (a) the person employed himself, or (b) any legal
practitioner, or (c) any official of a registered trade union authorised in writing
to act on his behalf, or (d) any Inspector under the Act, or (e) any other person
acting with the permission of the Authority appointed under Sec. 15 (1) [Sec. 15
(2)].
SUJEET JHA
142
9213188188
LAW& AUDIT
Application to be filed within 12 months. ¾ Every application for claims under the
Act shall be presented within 12 months from the date on which the deduction from
the wages was made or from the date on which the payment of the wages was due to is
made [Proviso 1 to Sec. 15 (2)]. ¾ An application may also be admitted after 12
months if the applicant satisfies the Authority that there was a sufficient cause
for not making the application within 12 months [Proviso 2 to Sec. 15 (2)].
Procedure. ¾ When any application for claims under the Act is entertained, the
Authority shall hear the applicant and the employer or other persons responsible
for the payment of wages under Sec. 3, or give them an opportunity of being heard.
¾ The Authority shall make such further inquiry as may be necessary. It may direct
the refund to be made to the employed person of the amount deducted or the payment
of the delayed wages, together with such compensation as it may think fit. ¾ The
compensation shall not exceed 10 times the amount improperly deducted, and not
exceeding Rs. 3,000 but not less than Rs. 1,500 in case of delayed wages. ¾ Even
where the deducted or delayed wages are paid before the disposal of the
application, the Authority may direct the payment of such compensation as it may
think fit. ¾ This amount of compensation shall however not exceeds Rs. 2,000 [Sec.
15 (3)]. Appeal (Sec. 17) An appeal may be preferred in a Presidency-town before
the Court of Small Causes and elsewhere before the District Court against— (i) an
order dismissing either wholly or in part an application made under Sec. 15 (2), or
(ii) a direction made under Sec. 15 (3) by the Authority to refund to the employed
person the amount deducted from wages or under Sec. 15 (4) by the Authority for
payment of penalty to the employer. The appeal may be preferred within 30 days of
the date on which the order or direction was made [Sec. 17 (1)]. The Court may, if
it thinks fit, submit any question of law for the decision of the High Court and,
if it so does, shall decide the question in conformity with such decision [Sec. 17
(4)].
SUJEET JHA
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3.5 MINIMUM WAGES ACT, 1948

The object of the Act is to secure the welfare of the workers in a competitive
market by `fixing the minimum rates of wages in certain employments. The
Legislature undoubtedly intended to apply the Act to those industries or localities
in which, by reason of causes such as unorganized labour or absence of machinery
for regulation of wages, wages paid to workers were, in the light of the general
level of wages and subsistence level, inadequate [Bhikusa Yamasa Kshatriya v.
Sangammer Akola Taluka, Bidi Kamgar Union, A.I.R. (1963) S.C. 806]. The Minimum
Wages Act was passed in 1948 enabling the Central and State Governments to fix
minimum rates of wages payable to employees in a selected number of ‘sweated’
industries. The Act applies to the whole of India.
Wages [Sec. 2 (h)]. ‘Wages’ means all remuneration, capable of being expressed in
terms of money, which would, if the terms of the contract of employment, express or
implied, were fulfilled, be payable to a person employed in respect of his
employment or work done in such employment. It includes house rent allowance but
does not include— (i) The value of— (a) Any house accommodation, supply of light,
water, medical attendance, or (b) Any other amenity or any service excluded by
general or special order of the appropriate Government; (ii) Any contribution paid
by the employer to any Pension Fund or Provident Fund or under any scheme of social
insurance; (iii) Any travelling allowance or the value of any travelling
concession; (iv) Any sum paid to the person employed to defray special expenses
entailed on him by the nature of his employment; or (v) Any gratuity payable on
discharge. Fixing of minimum rates of wages (Sec. 3) The responsibility for fixing
the minimum rates of wages is that of the appropriate Government. Sec. 3 provides
that the appropriate Government— (a) shall fix the minimum rates of wages payable
to employees employed in an employment specified in Part I or part II of the
Schedule (reproduced earlier) and in an employment added to either Part by
notification in the Official Gazette [Sec. 3 (1) (a)]; (b) may, in respect of
employees employed in an employment specified in Part II of the Schedule, instead
of fixing minimum rates of wages for the whole State, fix such rates for a part of
the State or for any specified class or classes of such employment in the whole
State or part thereof [Proviso to Sec. 3 (1) (a)]; (c) shall review at such
intervals not exceeding 5 years, the minimum rates of wages so fixed and revise the
minimum rates if necessary [Sec. 3 (1) (b)]. Minimum number of employees. ¾ The
appropriate Government may refrain from fixing minimum rates of wages in respect of
any scheduled employment in which there are in the whole State less than 1,000
employees engaged in such employment. ¾ But if at any time, the appropriate
Government comes to a finding after an inquiry that the number of employees in any
scheduled employment has risen to 1,000 or more, it shall fix minimum rates of
wages payable as soon as may be after such finding [Sec. 3 (1-A)]. SUJEET JHA 144
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Minimum rates. The appropriate Government may fix— (a) a minimum rate of wages for
time work (referred to as ‘a minimum time rate’); (b) a minimum rate of wages for
piece work (referred to as ‘a minimum piece rate’); (c) a minimum rate of
remuneration to apply in the case of such employees employed on piece work for
purpose of securing to such employees a minimum rate of wages on a time work basis
(referred to as ‘a guaranteed time rate’); (d) a minimum rate (whether a time rate
or a piece rate) to apply in substitution for the minimum rate which would
otherwise be applicable, in respect of overtime work done by employees (referred to
as ‘overtime rate’) [Sec. 3 (2)]. Advisory Board (Sec. 7) For the purpose of
coordinating the work of committees and sub-committees appointed under Sec. 5 and
advising the appropriate Government generally in the matter of fixing and revising
minimum rates of wages, the appropriate Government shall appoint an Advisory Board
(Sec. 7).
No procedure is prescribed in the Act for the Advisory Board to function. It can
devise its own procedure [State of Rajasthan v. Hari Ram Nathwani, A.I.R. (1976)
S.C. 277].
Composition of Committees and Advisory Board (Sec. 9).
Each of the committees, sub-committees and the Advisory Board shall consist of
persons to be nominated by the appropriate Government representing employers and
employees in the scheduled employments, who shall be equal in number, and
independent persons not exceeding 1/3rd of its total number of members. One of the
independent persons shall be appointed the Chairman by the appropriate Government.
Wages in kind (Sec. 11) ¾ Minimum wages payable under the Act shall be paid in cash
[Sec. 11 (1)]. But where it has been the custom to pay wages wholly or partly in
kind, the appropriate Government may, by notification in the Official Gazette,
authorise the payment of minimum wages either wholly or partly in kind [Sec. 11
(2)]. ¾ The appropriate Government may also by notification in the Official Gazette
authorise the provision of the supply of essential commodities at concessional
rates [Sec. 11 (3)]. ¾ The cash value of wages in kind [under Sec. 11 (2)] and of
concession in respect of supplies of essential commodities at concessional rates
authorised under Sec. 11 (2) and (3) shall be estimated in the prescribed manner
[Sec. 11 (4)].
Payment of minimum rate of wages (Sec. 12) ¾ Where in respect of any scheduled
employment minimum wages have been fixed, the employer shall pay to every employee
wages at a rate not less than the minimum rate of wages fixed for that class of
employees in the employment. ¾ Such wages shall be paid without any deductions
except as may be authorised. Where the contract rate of wages is higher, the
statutory obligation does not come into play [Sec. 12 (1)].
Sec. 12 does not affect the provisions of the Payment of Wages Act, 1936 [Sec. 12
(2)].
Fixing hours for a normal working day, etc. (Sec. 13) In regard to any scheduled
employment where minimum rates of wages have been fixed, the appropriate Government
may— (a) fix the number of hours of work which constitute a normal working day,
inclusive of one or more specified intervals; SUJEET JHA 145 9213188188
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(b) provide for a day of rest in every period of 7 days and for payment of
remuneration in respect of such day of rest; (c) provide for payment for work on a
day of rest at a rate not less than the overtime rate [Sec. 13 (1)].
Provisions of Sec. 13 (1) to apply subject to conditions. In relation to the
following classes of employees, the provisions of Sec. 13 (1) shall apply only to
such extent and subject to such conditions as may be prescribed; (a) employees
engaged on urgent work, or in any emergency which could not have been foreseen or
prevented; (b) employees engaged in work in the nature of preparatory or
complementary work which must necessarily be carried on outside the limits laid
down for the general working in the employment concerned; (c) employees whose
employment is essentially intermittent; (d) employees engaged in any work which for
technical reasons has to be completed before the duty is over; (e) employees
engaged in work which could not be carried on except at times dependent on the
irregular action of natural forces [Sec. 13 (2)]. Intermittent employment. The
employment of an employee is essentially intermittent when it is declared to be so
by the appropriate Government. The appropriate Government declares an employment as
intermittent on the ground that the daily hours of duty of the employee normally
include periods of inaction during which the employee may be on duty but is not
called upon to display either physical activity or sustained attention [Sec. 13.
(3)]. Rates of overtime (Sec. 14) Where an employee, whose minimum rate of wages is
fixed under this Act, by the hour, by the day or by such longer wage-period as may
be prescribed, works overtime, the employer shall pay him for every hour or for
part of an hour so worked in excess, wages at the rates fixed for overtime work
under the Act or under any law of the appropriate Government in force, whichever is
higher [Sec. 14 (1)].
The provisions of the minimum Wages Act, 1948 do not prejudice the operation of the
provisions of Sec. 59 of the Factories Act, 1948 in any case where those provisions
are applicable [sec .14 (2)].
Wages of worker who works for less than normal working day (Sec. 15) Sometimes an
employee whose minimum rate of wages has been fixed by the day may work on any day
on which he was employed for as period less than the requisite number of hours
constituting a normal working day. In that case he is entitled to receive wages in
respect of work done by him on that day as if he had worked for a full normal
working day except— (1) where his failure to work is cause by his unwillingness to
work and not by omission of the employer to provide him with work, and (2) in such
other cases and circumstances as may be prescribed. Wages for two or more classes
of work (Sec.16) Where an employee does two or more classes of work to each of
which a different minimum rate of wages is applicable, the employer shall pay to
such employee in respect of the time respectively occupied in each such class of
work, wages at not less than the minimum rate in force in respect of each such
class. Minimum time rate wages for piece work (Sec.17) SUJEET JHA 146 9213188188
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Where an employee is employed on piece work for which minimum time rate and not a
minimum piece rate has been fixed under the Act, the employer shall pay to such
employee wages at not less than the minimum time rate. Maintenance of registers and
records (Sec. 18) ¾ Every employer shall maintain registers and records giving
particulars of employees employed by him, the work performed by them and such other
particulars and in such form as may be prescribed [Sec. 18 (1)]. ¾ He shall also
keep exhibited notices in the prescribed form containing prescribed particulars in
the prescribed manner in the factory, workshop or place where the employees in the
schedule employment may be employed. ¾ In the case of out-workers, he shall keep
these notices exhibited in such factory, workshop or place as may be used for
giving out-work to them [sec. 18. (2)]. ¾ The appropriate Government may, by rules
made under the Act, provide for the issue of wages books or wage slips to employees
employed in any scheduled employment in respect of which minimum rates of wages
have been fixed. ¾ It may also prescribe the manner in which entries shall be made
and authenticated in such wage books or wage slips by the employer or his agent
[sec. 18 (3)].
ENFORCEMENT OF THE ACT (Secs. 19 TO 21) Powers of Inspectors. An Inspector May— (a)
enter at all reasonable hours, with such assistants as he thinks fit, any premises
or place where employees are employed or work is given out to out-workers in any
scheduled employment in respect of which minimum rate of wages have been fixed, for
the purpose of examining any register, record of wages or notices required to be
kept or exhibited by or under the Act or rules made there under, and required the
production thereof for inspection; (b) examine any person whom he finds in any such
premises or place and who, he has reasonable cause to believe, is an employee
employed therein or an employee to whom out-work is given; (c) require any person
giving out-work and any out-workers, to give any information, which is in his power
to give, with respect to the names and addresses of the persons to, for and from
whom the work is given out or received, and with respect to the payments to be made
for the work; (d) seize or take copies of such register, record of wages or notices
as he may consider relevant in respect of an offence under the Act which he has
reason to believe has been committed by and employer; and exercise such other
powers as may be prescribed [sec. 19
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3.6 THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISION ACT, 1952
APPLICABILITY OF PE ACT [Sec. 1]
¾ Factory 1. every establishment which is a factory engaged in any industry

specified in schedule I and in which 20 or more persons are employed on any single
day, and 2. any other establishment employing 20 or more persons or class of such
establishments which the Central Government may, by notification in the Official
Gazette, specify in this behalf. ¾ Extension The Central Government by notification
in the Official Gazette – (a) add to Schedule I any other industry, where it is of
the opinion that a Provident fund scheme should be framed under this Act.[Sec. 4]
(b) may extend the provisions of this act to an establishment employing less than
20 persons after giving not less than 2 months notice of its intention. ¾
Voluntary: The central PF Commissioner may apply of this Act on an application
received from employer and majority of employees by notification in the Office
Gazette. ¾ Established to include all departments and branches [Sec. 2A]: If
established consists of different departments of branches, whether situated in the
same place or in different places, they shall be treated as part of the same
establishment ¾ Composite Factories: Composite Factories engaged in more than one
industry, which may include activities covered in Schedule I as well as other
activities. The test for determining the applicability of the Act is whether the
activity falling in Schedule I is its primary and domination activity. NON –
APPLICABLE OF PF ACT [Sec. 16]
¾ Co-operative Society An establishment fulfilling the following conditions: (a)

The establishment has been registered under the Co-operative Societies Act. (b) It
employs less than 50 persons. (c) It is working without the aid of power ¾
Government Undertaking Any establishment fulfilling the following conditions: (a)
It belongs to the CG or SG, or is under the control of CG or SG. (b) The employees
of the establishment are entitled to benefit of contributory provident fund or old
age pension. ¾ Undertaking constituted under an Act Any establishment fulfilling
the following conditions: (a) It has been set up under any Central or State or
provincial Act. SUJEET JHA 148 9213188188
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(b) The employees of the establishment are entitled to benefit of contributory

provident fund or old age pension.
¾ Power of Central Government to exempt certain Establishments [Sec. 16(2)] (a) The
Central Government may exempt certain establishments / class of establishments from
the applicability of this Act by way of a notification in the Official Gazette. (b)
The exemption is granted taking into consideration – - the financial position or -
other circumstances of the case and - on the opinion of the Central Government that
is expedient as specified, either prospectively or retrospectively. DEFINITIONS
[Sec. 2]
¾ Appropriate Government [Sec. 2(a)] • AG means CG in the following cases: (i) In

relation to an establishment belonging to, or under the control of, CG. (ii) In
relation to an establishment connected with a railway company, a major port, a mine
or an oil field or a controlled industry. (iii)In relation to an establishment
having departments or branches in more than one State. • In relation to any other
establishment, AG means SG. ¾ Authorized officer [Sec. 2(aa)] • Central Provident
Fund Commissioner • Additional Provident Fund Commissioner • Deputy Provident Fund
Commissioner • Regional Provident Fund Commissioner • Such other officer as may be
authorized by CG, by notification in Official Gazette. ¾ Basic wages [Sec. 2(b)] •
‘Basic wages’ means – - all emoluments - Which are earned by an employee - In
accordance with the terms of the contract of employment - Which are paid or payable
in cash to him - While (a) on duty; or (b) while on leave with wages; or (c) while
on holidays with wages. • ‘Basic wages’ does not include – (a) the cash value of
any food concession (b) any dearness allowance (i.e., all cash payments by whatever
name called, paid to an employee on account of a rise in the cost of living) (c)
house – rent allowance, overtime allowance ¾ Employer [Sec. 2(e)] • In relation to
an establishment which is a factory, employer means(a) the owner or occupier of the
factory (Occupier means the person who has ultimate control over the affairs of the
factory); (b) the agent of such owner or occupier, SUJEET JHA 149 9213188188
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(c) the legal representative of a deceased owner or occupier (d) Person named as a
manager of the factory under the Factories Act. In relation to any other
establishment, employer means – (a) the person having the ultimate control over the
affairs of the establishment; (b) the manager or the managing director to whom the
affairs of the establishment are entrusted.
¾ Employee • Employee means any person – - who is employed for wages - in any kind
of work, whether manual or otherwise, - in or in connection with the work of an
establishment - who gets his wages directly or indirectly from the employer. •
Employee includes any person – (i) employed by or through a contractor in or in
connection with the work of establishment (ii) engaged as an apprentice (not being
an apprentice under the Apprentices Act, 1961or under the standing order of the
established) ¾ Factory [Sec.2(g)] Factory means – - any premises including the
precincts thereof - in any of which a manufacturing process is being carried on or
is ordinary so carried on, - whether with the aid of power or without the aid of
power ¾ Exempted employee [Sec.2(ff)] Exempted employee means an employee to whom
the Scheme does not apply by reason of exemption granted u/s 17¾ Exempted [Sec.
2(e) M 95, M 07 • In relation to – An establishment which is a Factory - The owner
or occupier of the factory, including agent of such owner or occupier, - The legal
representative of a deceased owner or occupier, and - Where a person has been named
as a manager of the factory u/s 7 of the factories Act, the person so named. • Any
other Establishment - The person, who, or the Authority which, has the ultimate
control over the affairs of the establishment, and - Where the said affairs are
entrusted to a manager, managing director or managing Agent, then such manager,
managing director or managing agent. ¾ Manufacture or manufacturing process [Sec.
2(ic)] Manufacture or manufacturing process means any process for making, altering
repairing ornamenting finishing, packing, oiling, washing cleaning breaking up,
demolishing or otherwise treating or adapting any article or substance with a view
to its use, sale, transport, delivery or disposal ¾ Industry [Sec. 2(i)] Industry
means any Industry specified in Schedule I, and includes any other industry added
to the Schedule by notification u/s 4. SUJEET JHA 150 9213188188
LAW& AUDIT
The following have been held to be “Industries” – (a) A Company doing business in
renewing and reconditioning worn – out machine parts. (b) A Company carrying on the
work of repair and servicing of Motor Cars. (c) Sugar Factory, Confectionery, and
Distillery located within one compound is one Factory. (d) A Laundry in which
mechanical power was used for driving machines used in the aid of the work of
washing clothes. (e) Department of publications and press run by a University.
THE CENTRAL BOARD (Sec. 5A)
Both Central Board of Trustees and Executive Committee under the EPF Act, are
constituted by the Central Government by Notification in the Official Gazette. The
following are the comparative points of composition etc –
¾ Administration of fund • The fund vests in and is administered by Central Board
of Trustees, i.e. Board of Trustees or simply the Board. • The Central Board is
formed by CG by notification in the Official Gazette. • In other words, Central
Board shall administer the following funds: (a) The Employees Provident Fund (b)
The Employees Pension Fund (c) The Employees Deposit Linked Insurance Fund. ¾ Board
is a body corporate The Board of Trustees is a body corporate having perpetual
succession and common seal. ¾ Composition of Board 1 Chairman
1 1 Maximum officials Maximum officials 10 persons 10 persons
Vice Chairman Central Provident fund commissioner 5 Representing CG 15 Representing

SG Representing employers Representing employees - appointed by CG in consultation
with association of employers - appointed by CG in consultation with organization
of employees.
¾ Function of Central Board Rights / Function Duties 1. Administration of the Fund:

Rights to 1. Maintenance of Proper Accounts: administer the fund subject to Sec. 6A
To maintain proper accounts of and 6C in such manner as specified in Income and
expenditure in such the scheme. from and manner as the Central 2. Performing Other
Functions: Perform Government may specify. such other functions as required of it
2. Audit of Accounts: To get the SUJEET JHA 151 9213188188
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under the Provident Fund Scheme, Family Pension Scheme and Insurance 3. Scheme. 3.
Appointment of Officers: Central Board shall appoint Additional, Deputy, Regional
or Assistant Provident Fund commissioners and other staff as may be considered
necessary for efficient administration of 4. the Scheme. 4. Delegation of
Functions: Central Board shall delegate in powers and functions to any of its
officers as it may deem necessary for efficient administration.
EXECUTIVE COMMITTEE
accounts audited annually by the C & AG of India. Forwarding Audit Report to

Central Government: To forward the audited accounts together with explanations, if
any, on any remarks of the Audit Report of the C & AG to the Central Government.
Submission of Annual Report: To submit to the Central Government an Annual Report
of its work and activities.
(Sec. 5AA)
¾ Composition of the committee • Executive Committee is constituted by CG by

notification in the Official Gazette. • Executive committee shall consist of 13
members. • The members of the Executive Committee are selected out of the members
of the Central Board. • The Executive Committee consists of the following members:
Chairman - From amongst the members of the Central - appointed by CG. Board 2
persons - From amongst the representatives of CG elected to the Central Board 3
persons - From amongst the representatives of SG elected to the Central Board 3
persons - From amongst the representatives of - elected by the employers elected to
the Central Board Central Board 3 persons - from amongst the representatives of
Employees elected to the Central Board. Central Provident Fund Commissioner ¾
Purpose of constitution of Executive committee • The purpose of executive committee
is to assist the Central Board in its function. • The Scheme shall provide for –
(a) Terms and conditions subject to which a member of the Central Board may be
appointed or elected to the Executive Committee. (b) The time, place and procedure
of the meetings of the Executive Committee RECOVERY OF MONEY FROM EMPLOYER (Sec.
8B)
¾ Issue of certificate to recovery officer The authorized officer is required to

issue a certificate to Recovery Officer specifying the amount due from the
employer. ¾ Which recovery officer The recovery certificate shall be sent to the
Recovery Officer within whose jurisdiction – SUJEET JHA 152 9213188188
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(a) the business or profession is situated; or (b) employer resides; or (c) Any
immovable or movable property of establishment or employer is situated.
¾ Mode of recovery (a) Attachment and sale of the movable or immovable property of
the establishment. If amount so recovered is insufficient for recovering the whole
of the amount of arrears specified in the certificate, the movable and immovable
property of the employer may also be attached and sold. (b) Arrest of the employer
and his detention in prison. (c) Appointing a receiver for the management of the
movable or immovable properties of the establishment or the employer. ¾ Stay of
proceeding • The authorised officer may grant time for the payment of the amount,
and thereupon the Recovery Officer shall stay the proceeding until the expiry of
the time so granted. • The stay of proceedings may be granted notwithstanding that
a certificate has been issued to the Recovery Officer for the recovery of any
amount. TRANSFER OF ACCOUNTS (Sec.17A)
¾ If the new establishment is covered under PF Act If - an employer who is a member

of PF, leaves an establishment - he obtains re-employment in another establishment
- the new establishment is also covered under PF Act Then - the amount standing to
his credit will be transferred to his account in the new establishment (i.e. the
establishment where he is re – employed) ¾ If the new establishment is not covered
under PF Act If - an employee who is a member of PF, leaves an establishment - he
obtains re-employment in another establishment - the new establishment is not
covered under PF Act - the new establishment has a Provident Fund of its own - the
rules of such provident fund permit such transfer Then - at the request of employee
- within such time as be specified CG - the amount standing to his credit will be
transferred to his account in the new establishment ¾ If the old establishment was
not covered under PF Act If - an employee is employed in an establishment to which
the provisions of the PF Act do not apply - such establishment has its own
Provident Fund - the rules of such provident fund permit such transfer - the
employee leaves such establishment - he obtains re – employment in another
establishment SUJEET JHA 153 9213188188
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Then
the new establishment is covered under PF Act at the request of employee the amount
standing to his credit will be transferred to his account in the new establishment
(Sec. 10)
PROTECTION AGAINST ATTACHMENT
¾ Nature of protections The amount standing to the credit of any member in the fund
– (a) shall not in anyway be capable of being assigned or charged: (b) shall not be
liable to attachment under any decree or order of any court in respect of any debt
or liability; (c) shall not be capable of being claimed by the official assignee or
the official receiver: (d) Shall be free from debt or other liability (in the hands
of the nominee) incurred by the deceased member. ¾ No protection The employee
cannot claim any protection in respect of the money which has been withdrawn him
from the PF Account. LIABILITY OF EMPLOYER IN CASE OF TRANSFER OF ESTABLISHMENT
(Sec. 17B) ¾ Contribution due upto the date of transfer If an employer transfer
(whether by way of gift, sale, lease or any other mode) an establishment, he as
well as transferee of the establishment shall be jointly and severally responsible
for contributions and other sums due upto the date of transfer of establishment. ¾
Limitation on liability Liability of transferor The liability of transferor shall
be limited with respect to the period upto the date of transfer. Liability of
transferee The liability of transferee shall be limited to the assets obtained by
him by way of transfer of establishment. INSPECTORS (Sec. 13)
¾ Appointment • AG is empowered to appoint the inspectors for the purpose of EPF

Act, EPF Scheme, pension Scheme, and Insurance Scheme. The appointment of inspector
shall be made by issue of a notification in the Official Gazette. • The respective
jurisdiction of the inspectors shall be specified by shall Appropriate Government.
• The inspector is a ‘public servant’ within the meaning of Sec. 21 or IPC. ¾
Powers of inspector (a) To call such information from the employer or contractor as
he considers necessary. SUJEET JHA 154 9213188188
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(b) To enter into any establishment and require production of any books, registers
and documents. (c) To examine the employer, his agent or servants. (d) To make
copies and take extracts of any book, register or other document. (e) To seize the
books, registers or other documents as he considers necessary if he has reason to
believe that any offence under this Act has been committed by an employer. (f) To
exercise such other powers as may be provided in PF Scheme. Pension Scheme or
Insurance Scheme.
17. SCHEMES COVERED UNDER THE ACT Schemes under EPF Act
Employees Provident Fund Scheme

A.
Employee’s Pension Scheme
Employee’s Deposit Linked Insurance Scheme
EMPLOYEES PROVIDENT FUND SCHEME ¾ Quantum of contribution Employer’s contribution -

10% of pay (i.e., basic wages plus dearness allowance plus retaining allowance) –
Employer’s contribution - 10% of pay. - Employee may voluntarily contribute a
higher amount. Rounding off The contribution has to be rounded off to nearest
rupee. ‘Dearness allowance’ Dearness allowance includes cash value of any food
concession allowed to the employee. ‘Retaining allowance’ Retaining allowance means
an allowance payable to an employee during any period during which the
establishment is not working for retaining his services. ¾ Increase in rate of
contribution - CG is empowered to increase the rate of contribution to 12%. - The
power shall be exercise by way of a notification in the Official Gazette. ¾
Employee earning more than Rs.6,500 If the pay of an employee exceeds Rs.6,500, the
Employer’s contribution shall be 10% 12% of Rs.6,500. ¾ Diversion to Employees’
Pension Scheme Out of employer’s contribution of 10%/ 12%, the Employer’s
contribution of 8.33% shall be diverted to Employees’ Pension Scheme. ¾ Investment
of the contributions - The Board of Trustees is responsible for managing the Fund.
- The moneys of the Fund shall be invested by the Board of Trustees as per the
investment plans approved by the Central Government. - Members (i.e. Employees) get
interest on the money standing to their credit at a rate recommended by the
Government.
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¾ Advances and withdrawals Employees are allowed to withdraw from their account for
specific purposes. B. EMPLOYEES PENSION SCHEME FROUDED BY (Sec. 6A)
¾ Quantum of contribution - Employer’s contribution of 8.33% shall be diverted to

Employer’s Pension Scheme. - CG can contribute to the pension fund, as approved by
the parliament. ¾ Benefit under the scheme (a) Members will get pension – - on
superannuation; or - on retirement from service; or - upon permanent total
disablement during employment. (b) Pension, will be available to widow/widower for
life or till he/she remarries. (c) Children will be entitled to pension, upto 25
years of their age. Benefit of pension to children is restricted only for 2
children. (d) Orphans will be entitled to pension at enhanced rate. Benefit of
pension to orphans is restricted only for 2 orphans. (e) If the person is unmarried
or has no family, pension is available to nominee for a specified period. (f) Funds
managed by 6A(4) : Central Board of Trustees constituted u/s 5A. (g) Scheme
provides for 6A(5): All or any of the matters specified in Schedule III. (h) Period
of effect of Scheme 6A(6): Prospectively, or : Retrospectively from such date as
may be specified C. EMPLOYEE’S DEPOSIT LINKED INSURANCE SCHEME ¾ Quantum of
contribution Employer The employer is required to pay contribution which cannot be
more than 1% of pay of employee. Presently, the rate of contribution is 0.5%.
Employee The employees do not contribute any amount to the scheme. CG CG also
contributes to the – Insurance Fund at the rate of 0.25% of pay of every employee.
Administration charges Employer is also required to pay administration charges for
the Insurance Scheme, which shall not be more than 0.25% of pay of employee.
Presently, the rate of contribution is 0.01% of pay of employee subject to a
minimum of Rs.2 per month per member. ¾ Exemption from the scheme - Exemption from
the scheme can be obtained if LIC Group Gratuity scheme is adopted by employer. -
If exemption is granted, only inspection charges of 0.005% of pay are payable to PF
authorities.
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3.7 THE PAYMENT OF BONUS ACT, 1965

1. APPLICABILITY OF THE ACT ¾ Factories The Act applies to every factory ¾
Establishment employing 20 or more persons The Act applies to every establishment
in which 20 or more persons are employed on any day of the AY.
¾ Establishment employing less than 20 persons
(Sec. 1)
The Act applies to every other establishment or class of establishments if –

• • •
It employs to 10 or more persons (i.e. it employs persons between 10 and 19 in
number);
The provisions of the Act are made applicable to it by way of a Notification in the
Official Gazette by AG; and
Before issuing such notification, at least 2 months’ notice was given to the
establishment by AG.
¾ Once applicable forever applicable - If the Act becomes applicable to an

establishment in any AY. - It shall continue to be applicable to the establishment
- Even if the number of persons employed by it falls below the minimum number of
person as required for the applicability of the Act. 2. NON – APPLICABILITY OF THE
ACT Sec.32
1. 2. 3. 4. 5. 6. 7. 8.
3.
Employees employed by (a) General insurance companies (b) LIC Seamen as defined
under merchant shipping Act, 1958 Employees registered under any scheme made under
the Dock Workers (Regulation of Employment) Act, 1948 and employed by registered or
listed employers. Employees employed by Inland Water Transport Establishments
operating on routes passing through any other country. Employees employed by RBI,
CG, SG or a local authority. Employees employed by Indian Red Cross Society,
universities or other educational institutions, institutions established not for
purpose of profit. Employees employed by SFC, NHB, NABARD, IFCI, IDBI, SIDBI, UTI.
Any other financial institution notified in the Official Gazette.
ACCOUNTING YEAR [(Sec.2(1)]
¾ In relation to a corporation The year ending on the day on which the books and
accounts of the corporation are to be closed and balanced. ¾ In relation to a
company The period in respect of which P & L Account of the company is prepared. ¾
In any other case (a) The year commencing on the 1st April and ending on following
31st March; SUJEET JHA 157 9213188188
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(b) However, the employer has an option to close and balance the accounts of the
establishment on any day other 31st day of March. In such a case, AY shall end on
the day on which the accounts are so closed and balanced. In other words, the
employer may exercise the option to close and balance the accounts on any
particular day every year. But such option can be exercised only once.
(c)
Further exercise of option shall require the previous permission in writing of the
prescribed
authority and compliance of conditions as specified by the prescribed authority.
4.
MEANING OF ESTABLISHMENT
Any unit, undertaking or place of business in which – • Any commercial activity or

business is carried on; or • Services are rendered, Under any form of business
organization.
5. ESTABLISHMENTS TO INCLUDE DEPARTMENTS, UNDERTAKINGS, AND BRANCHES (Sec. 3) ¾
General rule For the purpose of computation of bonus, an establishment shall
include department, undertakings, and branches. ¾ Exception A branch, department or
undertaking shall not be treated as part of an establishment if the following 2
conditions are satisfied. (a) A separate B/S and P & L A/c has been prepared for
such branch, department or undertaking. (b) Such branch, department or undertaking
has never been treated as part of the establishment for the purpose of computation
of bonus. 6. EMPLOYEE [Sec .2(13)]
¾ Meaning of employee • any person employed (other than an apprentice) • on a

salary or wage not exceeding Rs.10,000 per month • in any industry • to do any work
(i.e. skilled, unskilled, manual, supervisory, managerial, administrative,
technical or clerical) • for hire or reward • Whether the terms of employment are
express or implied. ¾ Illustrative list of employees entitled to bonus •
Probationer • Dismissed employee (provided Sec.9 is not attracted) or suspended
employee. • Retrenched employee • Temporary employee • Part time employee •
Employee of a seasonal factory – proportional Bonus according to number of days
work. • Piece rated employee SUJEET JHA 158 9213188188
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7.
“EMPLOYER”
[(Sec. 2(14)]
¾ If establishment is a factory (a) Owner (b) Occupier (Occupier means the person
who has ultimate control over the affairs of the establishment) (c) Agent of owner
or occupier (d) Legal representative of deceased owner or occupier (e) The person
named as a manager of the factory under the Factories Act. ¾ If it is any other
establishment (a) The person having ultimate control over the affairs of the
establishment (b) The manager or the managing director to whom the affairs of the
establishment are entrusted. 8. ‘SALARY OR WAGE’ [(Sec. 2(21)]
¾ ‘Salary or wage’ means - remuneration in respect of work done - which would

become payable to an employee - if the terms of employment (whether expressed or
implied) were fulfilled. ¾ ‘Salary or wage’ includes (a) Dearness allowance (i.e.
all cash payments by whatever name called, paid to an employee on account of a rise
in the cost of living) (b) Food allowance or the value of free food given by the
employer in lieu of salary) ¾ ‘Salary or wage’ does not include (a) Allowances (b)
Commission (c) Bonus (including incentive, production and attendance Bonus) (d)
Traveling concession (e) Ex-grata payment (f) Retrenchment compensation, gratuity
or other retirement benefits (g) Any amenity, service, or concessional supply of
food grains or other articles (h) Employer’s contribution to PF or pension fund (i)
Remuneration in respect of overtime work. 9. ELIGIBILITY FOR BONUS (Sec. 8)
Every employee is eligible for bonus if he has worked in the establishment ≥ 30

working days in a AY.
10. DISQUALIFICATION FOR BONUS (Sec. 9)
¾ Conditions for applicability of Sec.9 An employee is disqualified for bonus (and

is therefore not eligible to receive bonus) if – - he has been dismissed from
service; and - the reason for his dismissal was – SUJEET JHA 159 9213188188
LAW& AUDIT
(a) fraud; or (b) riotous or violent behavior while on the premises of the
establishment; or (c) theft, misappropriation or sabotage of any property of the
establishment.
¾ Effects of Sec.9 An employee who becomes disqualified u/s 9 shall not be eligible
to receive any bonus (whether for current AY or for any previous AY) under the Act.
11. PAYMENT OF MINIMUM BONUS (Sec.10, 11, 12, 13 and 14)
¾ Computation of Allocable surplus (Sec.11) Amount set on/set off u/s 15 shall be
taken into account while computing the allocable surplus for any AY. ¾ Amount of
minimum bonus (Sec. 10) Whether or not the employer has allocable surplus in an AY,
every employer is bound to pay to every employee (eligible as per Sec. 8) in
respect of every AY, minimum bonus, as follows. Employee aged ≥ 15 years Higher of
- 8.33% of salary or wage or Rs.100 Employee aged < 15 years Higher of - 8.33% of
salary or wage or Rs.60 ¾ Proportionate reduction in minimum bonus (Sec. 13) The
minimum bonus of Rs.100/60 shall be proportionately reduced if the employee has not
worked on all the working days in the AY. - computation of number of working days
(Sec. 14) It shall be deemed that the employee had worked on the days on which the
employee was – (a) laid off; (b) on leave with salary or wages; (c) on maternity
leave with salary or wages; (d) Absent due to temporary disablement caused arising
out of and in the course of his employment. ¾ Ceiling on salary or wage (Sec.12) If
the salary or wage of an employee exceeds Rs.3,500 per month, the salary or wage
for the purpose of computation of bonus shall be taken as Rs.3,500 per month. 12.
PAYMENT OF MAXIMUM BONUS (Sec.11 and 12)
¾ Computation of Allocable surplus (Sec.11) Amount set on/set off u/s 15 shall be
taken into account while computing the allocable surplus for any AY. ¾ Amount of
maximum bonus (Sec.11) If, in an AY, allocable surplus exceeds the amount of
minimum bonus, the employer shall pay to every employee, in lieu of minimum bonus,
which shall be an amount in proportion to the salary or wage earned by the employee
during the AY subject to a maximum of 20% of such salary or wage (Sec.11).
Following conclusions may be drawn; • Sec, 11 applies if, in an AY, allocable
surplus exceeds the amount of minimum bonus; SUJEET JHA 160 9213188188
LAW& AUDIT
If Sec, 11 applies, the whole of the allocable surplus shall be divided (i.e.
payment shall be made in the form of bonus) amongst the employees in proportion of
their salary or wage. However, if division of whole of the allocable surplus
amongst the employees in proportion of their salary or wage exceeds 20% of salary
or wage of the employees, then – (a) Such excess shall be carried forward for being
set on in the 4 succeeding AY(s); (b) Every employee shall be paid bonus equal to
20% of his salary or wage (this payment of maximum of 20% is termed as ‘maximum
bonus’).
¾ Ceiling on salary or wage (Sec. 12) If the salary or wage of an employee exceeds
Rs.3,500 per month, the salary or wage for the purpose of computation of bonus
shall be taken as Rs.3,500 per month. 13. SET ON AND SET OFF OF ALLOCABLE SURPLUS
(Sec.15)
¾ Allocable surplus > maximum bonus If, in any AY, allocable surplus (after taking
into account the amount set on / set off u/s 15) exceeds maximum bonus, such
exceeds (subject to a limit of 20% of salary or wage of the employees) shall be – •
Carried forward • For being set on in the 4 succeeding AY(s) in the manner
illustrated in Fourth Schedule. ¾ Allocable surplus < minimum bonus If, in any AY,
allocable surplus (after taking into account the amount set on/set off u/s 15) is
less than the minimum bonus, such deficiency shall be – • Carried forward • For
being set off in the 4 succeeding AY(s) in the manner illustrated in Fourth
Schedule. ¾ Utilization of amount carried forward - While calculating bonus for any
succeeding AY. - The amount of set off carried forward from the earliest AY. -
Shall first be taken into account. 14. DEDUCTIONS FROM BONUS (Sec. 17 and 18)
¾ Adjustment of bonus (Sec.17) The employer is entitled to deduct from bonus

payable to an employee – (a) the amount paid as customary bonus (e.g. puja bonus);
(b) the amount paid as interim bonus (i.e. bonus paid before it became payable) ¾
Deductions from bonus (Sec.18) Conditions (a) An employee is found guilty of
misconduct (b) Financial loss is actually caused to the employer. Effects • The
loss caused to the employer may be recovered from the bonus payable to the
employee. SUJEET JHA 161 9213188188
LAW& AUDIT
Such deduction can be made only from the amount of bonus payable in respect of same
AY in which the employee has caused financial loss to the employer.
15.
TIME LIMIT FOR PAYMENT OF BONUS
(Sec. 19)
¾ If there is a dispute regarding payment of bonus The bonus shall be paid within 1
month of- award becoming enforceable ;or - settlement coming into operation ¾ In
any other case Time limit – the bonus shall be paid within 8 months from the end of
AY. Extension of period. • AG may extent the time limit for payment of bonus. •
Conditions for extension of time are as follows: (a) An application shall be made
by the employer to AG. (b) AG must be satisfied that there are sufficient reasons
to grant extension of time for payment of bonus. (c) Total period including the
period of extension shall not exceed 2 years. 16. PAYMENT OF BONUS LINKED WITH
PRODUCTION OR PRODUCTIVITY (Sec.31A) ¾ Applicability of Sec.31A • Sec. 31A applies
only if there is an agreement or settlement between the employer and employers to
pay annual bonus linked with production or productivity. • Sec. 31A overrides the
entire Act. ¾ Terms of the agreement The agreement or settlement may provide that –
- the bonus shall be paid annually to employees; - such bonus shall be linked
production or productivity;. - Such bonus shall be paid in lieu of bonus based on
profits. ¾ Agreement to be void The agreement or settlement shall be null and void
in so far as it purports to deprive an employee of his right to minimum bonus. In
other words, every employee shall have a right to receive the minimum bonus even
though bonus calculated as per the provision of the agreement or settlement is less
than the amount of minimum bonus. ¾ Ceiling on bonus The bonus linked with
production or productivity calculated as per the agreement or settlement shall not
exceed 20% of salary or wages earned in the relevant AY. 17. RECOVERY OF BONUS DUE
FROM AN EMPLOYER ¾ Application by whom? (a) Employee (including an employee who is
no longer in employment) (b) Any person authorized by the employee in writing (c)
Legal heirs of the employee. ¾ Time limit SUJEET JHA 162 9213188188 (Sec. 21)
LAW& AUDIT
Application shall be made within 1 year of bonus becoming due for payment Time
limit for making application may be extended by AG it sufficient cause is shown.
¾ Application to whom? The application shall be made to AG. ¾ Issue of recovery

certificate If AG is satisfied that bonus is due. It shall issue a recovery
certificate. ¾ Recovery by collector The bonus shall be recovered by the collector
in the same manner as if it were arrears of land revenue. ¾ Delegation of powers
The powers u/s 21 may be delegated by AG to such authority as may be specified by
AG. 18. SPECIAL PROVISIONS APPLICABLE TO NEW ESTABILISHMENTS (Sec. 16) ¾ First 5
years (a) Bonus is payable only in respect of an AY in which the employer derives
profit. (b) Bonus shall be calculated in accordance with the provision of the Act.
(c) The Provisions of Sec. 15 (Set on/set off of allocable surplus) shall not
apply. ¾ 6th year Set on / set off shall be made Taking into account the
excess/deficiency of the allocable surplus In respect of 5th and 6th AY. ¾ 7th year
Set on/set off shall be made Taking into account the excess / deficiency of the
allocable surplus In respect of 5th, 6th, and 7th AY. ¾ 8th year onwards Sec. 15
(set on or set off) shall apply as it applies to any other establishment ¾ Meaning
of newly set up establishment An establishment shall not be deemed to be newly set
up merely by reason of a change in its location, management, name or ownership ¾
Meaning of employer deriving profit An employer shall not be deemed to have derived
profit in any AY, unless – (a) depreciation for such AY has been provided; and (b)
the arrears of depreciation and losses incurred during earlier AY(s) have been
fully set off against the profits. ¾ Manner of reckoning first five, 6th, 7th and
8th AY. First AY means the AY following the AY in which the employer sells the
goods manufactured by him or renders services, as the case may be, from such
establishment. Similarly, other AY(s) shall be construed. SUJEET JHA 163 9213188188
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¾ Meaning of ‘sale of goods’ Sale of goods manufactured during the trial running of
any factory or of the prospecting stage of any mine or an oil field shall not be
taken into consideration. 19. PRESUMPTION ABOUT ACCURACY OF B/S AND P&L A/C OF
CORPORATIONS AND COMPANIES (Sec.23) ¾ Applicability of Sec. 23 – Conditions (a)
There is dispute relating to – - payment of bonus; or - Applicability of Payment of
Bonus Act, 1965. (b) The dispute is filled with any Court, Tribunal or Arbitrator
(hereinafter referred to as the ‘said authority’). (c) The employer is a
corporation or a company. (d) During the course of proceedings, the B/S and P & L
A/c of such corporation or company are produced before the said authority. (e) The
B/S and P&L A/c have been audited – • In case of a company by an auditor qualified
u/s 226. • In case of a corporation by CAG. ¾ Presumptions about (a) The said
authority may presume that the particulars contained in such B/S and P & L A/c are
accurate. (b) It shall not be necessary for the corporation or company to – • Prove
the accuracy of such B/S and P & L A/c; or • Produce any affidavit for establishing
such accuracy. 20. AUDITED ACCOUNTS OF BANKING COMPANIES NOT TO BE QUESTIONED (Sec.
24)
¾ Applicability of Sec.24 – Conditions (a) There is a dispute relating to • Payment

of bonus; or • Applicability of Payment of Bonus Act. 1965 (c) The dispute is
filled with any Court, Tribunal or Arbitrator (hereinafter referred to as the ‘said
authority’). (d) The employer is a banking company. (e) During the course of
proceedings, the accounts of banking company are produced before the said
authority. (f) The accounts have been duly audited. ¾ Presumptions about the
accounts (a) The said authority may presume that the accounts are accurate. (b) No
trade union or employee shall be allowed to question the correctness of such
accounts. 21. AUDIT OF ACCOUNTS OF EMPLOYERS, NOT BEING CORPORATIONS OR COMPANIES
(Sec. 25) ¾ Applicability of Sec. 25 – Conditions SUJEET JHA 164 9213188188
LAW& AUDIT
(a) There is a dispute relating to - payment of bonus; or - applicability of

payment of Bonus Act, 1965 (b) The dispute is filled with any court. Tribunal or
Arbitrator (hereinafter referred to as the ‘said authority’). (c) The employer is
any person other than a corporation or a company. (d) During the course of
proceedings, the accounts of such employer are produced before the said authority.
(e) The accounts of the employer have been duly auditor who is duly qualified to
act as an auditor of a company (u/s 226 of the companies Act, 1965).
¾ Presumptions about the accounts (a) The said authority may presume that the
accounts are accurate. (b) It shall not be necessary for the employer to – - prove
the accuracy of such accounts; or - Produce any affidavit for establishing such
accuracy. ¾ Order for audit of accounts Nature of order The said authority may
order the employer to get his accounts audited – - within such time as may be
specified in the order; and - by such auditor as may be specified in the order.
Conditions for making order The said authority may make such an order, if – - the
accounts of the employer are not audited by an auditor qualified u/s 226;and - it
is of the opinion that audit of accounts is necessary for deciding the dispute.
Consequences of default by employer If the employer fails to get his accounts
audited – - the said authority may get the accounts audited by such auditor as it
thinks fit; - the remuneration paid to the auditor and other incident expenses
shall be paid by the employer. Presumption of accuracy The accounts so audited
shall be presumed to be accurate. 22. Provisions As To Maintenance Of Records And
Registers [Sec.26]
1. 2. 3. 4. 5.
Maintenance of Registers, Records etc. [Sec.26]: Every Employer shall prepare and
maintain such registers, records and other documents in such from and in such
manner as may be prescribed. Duty of Employers: Maintenance of records and
registers is an obligation, and a duty imposed on the Employers for due discharge
of their duties regarding payment of Bonus. Production of Records: The Employer is
legally bound to produce the registers and accounts when called upon by an
Inspector. Offence: Non – maintenance and non – production of records and registers
is an offences. Registers to be maintained : Rule 4 of Payment of Bonus Rules, 1965
prescribes the following registers to be maintained by the Employers, viz. –
Register in Register to contain – Form A Computation of Allocate Surplus referred
to in Sec.2(4) Form B Set – on and Set – off of Allocable Surplus u/s 15. Form C ¾
Details of amount of Bonus due to each of the 165 9213188188
SUJEET JHA
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Employees, ¾ Deductions under Sec.17 and 18, and ¾ Amount Actually disbursed to the
Employees.
23. INSPECTORS (Sec. 27)
¾ Manner of appointment The inspectors shall be appointed by AG by Notification in

the Official Gazette. ¾ Numbers and jurisdiction • Such number of inspectors may be
appointed as AG may deem fit. • AG may define the limits within which the
inspectors shall exercise jurisdiction. ¾ Powers of inspector (a) To call such
information from the employer as he considers necessary (b) To enter into any
establishment and require production of any books, registers and documents. (c) To
examine the employer, his agent or servants. (d) To make copies and take extracts
of any book, register or other document (e) To exercise such other powers as may be
prescribed. ¾ Purpose of appointment To ascertain whether or not the provisions of
the Act have been complied with by an employer. ¾ Duties of owners etc. Any person
required to produce any accounts, books, register or other documents or to give
information by an Inspector shall be legally bound to – (a) Produce accounts,
books, register or other documents required by the Inspector. (b) Give information
required by the Inspector. 24. EXEMPTION FROM PROVISIONS OF THE ACT (Sec. 36)
¾ Grounds for exemption Before granting exemption, AG shall consider financial

position and other relevant circumstances. ¾ Opinion of AG The exemption shall be
given only if AG is satisfied that it is not in public interest to apply all or any
of the provisions of this Act to an establishment or class of establishments. ¾
Publication of order The order of exemption shall be published by way of a
notification in the Official Gazette. ¾ Contents of order of exemption The order of
exemption shall specify – - conditions, subject to which exemption is given, and -
period of exemption 25. ESTABLISHMENT IN PUBLIC SECTOR 166 (Sec. 2(16) and (20)]
9213188188
SUJEET JHA
LAW& AUDIT
¾ Meaning [Sec,. 2(16)] Establishment in public sector means an establishment

owned, controlled or managed by – (a) a Government company; or as defined u/s 617
of the companies Act, 1965. (b) a corporation in which 40% or more capital is held
by – - CG, SG, RBI or a corporation owned by CG, SG, or RBI. ¾ Applicability of Act
(Sec. 20) General rule The Act does not apply to an establishment in public sector.
Exception The Act shall apply if the following 2conditions are satisfied; (a) In an
AY, it sells any goods or renders any services, in competition with an
establishment in private sector. (b) The income from such or services or bo is 20%
or more of its gross total income of the establishment in public sectors for that
accounting year. 26. Procedure for Settlement of Disputes [Sec.22] 1. Area of
dispute: Disputes may arise between the employer and employee with respect to – (a)
Bonus payable under this Act, or (b) Applicability of the provisions of this Act to
establishment in Public Section 2. Settlement: Any such dispute shall be deemed to
be an Industrial Dispute within the meaning of – (a) the industrial Dispute Act, or
(b) Any corresponding law relating to investigation & Settlement of industrial
dispute in force in the State. Hence, the provisions of the Industrial Disputes Act
or of such law in force shall apply to the settlement of disputes, unless otherwise
expressly provided. Some Other Definitions Appropriate Government [Sec.2(5)
Appropriate Government Central Government
27 1.
Situation An establishment in respect of which the Appropriate Government under the

Industrial Disputes Act, 1947 is the Central Government. Any other Establishment 2.
Government of the State in which the Establishment is situated.
3.
Award [Sec.2(7)]: Award means: (a) An interim or a final determination, (b) of any
industrial dispute or of any question relation thereto, (c) By – (i) any labour
court, Industrial Tribunal or National Tribunal constituted under the Industrial
Dispute Act, 1947 or (ii) any other authority constituted under any corresponding
law relation to investigation and settlement of industrial dispute in force in the
State, and includes an Arbitration Award made u/s 10 A of that Act. Co- Operative
Society [Sec.2(10)]: A Society registered or deemed to be registered under the Co –
Operative Society Act, 1912, or under any other law for the time being in force in
any State relating to Co – operative Societies. 167 9213188188
SUJEET JHA
LAW& AUDIT
4.
5. 6.
Corporation [Sec.2(11)]: Corporation means any Body Corporate established by or

under any Central, Provincial or State Act, Corporation does not include a Company
or a Co – Operative Society. Company [Sec.2(9)]: Company means as defined u/s 3 of
the Companies Act, 1956, and includes a Foreign Company within the meaning of Sec.
591 of that Act. Allocable Surplus [Sec.2(4)]: Most Imp. Allocable surplus 67% of
the Available surplus in an Accounting Year.
In relation to An Employer being a company other than a banking company which has
not made the arrangements prescribed under the Income Tax Act, for the declaration
and payment within India, of dividends payable out of its profits in accordance
with Sec.194 of the said Act In any other case 7. 8.
60% of the Available surplus in an Accounting Year.
Available Surplus [Sec.2(6)]: RTP, N 83, N 02 Available surplus means the Available
Surplus as computed u/s 5. Establishment in Private Sector [Sec.2(15)]: It means
any Establishment other than an establishment in Public Sector
Offences by Companies [Sec.29]

1. Definitions : For the purpose of this Section (a) “Company” means any Body
Corporate and includes a Firm or other – Association of Individual, and (b)
“Director”, in relation to a Firm, means a Partner in the Firm. Liability of
Company and Person In charge: Where an offence has been committed by a company,
every person who, at any time when the offence was committed, was in charge of and
was responsible to, the Company for the conduct of the business of the Company as
well as the Company, shall be deemed to be guilty of the offence, and shall be
liable to be proceeded against and punishable accordingly. Due Diligence: it the
person who is liable to any punishment under this Act proves that the offence was
committed without his knowledge or that he exercised all due diligence to prevent
the commission of such offence, then such person is not liable. Liability of
officers/ Directors etc: Where an offence has been committed by a Company and it is
proved that the offence has been committed with the consent or connivance of, or is
attributable to any gross negligence on the part of any Director, Manager,
Secretary or other of the Company, such Director, Manager, Secretary or other
officer of the company shall also be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished accordingly.
2.
3. 4.
SUMMARISED PROCEDURE FOR COMPUTATION OF BONUS

Step 1. Computer gross profit Step 2. Deduct prior charges from gross profits Step
3. Compute available surplus Step 4. Compute allocable surplus Step 5. Compute
bonus Step 1. Computation of gross profit Net profit as shown in P & L Account
after making usual and necessary provision Add: SUJEET JHA 168 9213188188
LAW& AUDIT
1. 2. 3.
4. 5. 6. 7. Less: 1. Capital receipts and capital profits. 2. Profits of any

business situated outside India. 3. Refund of any excess direct tax paid for
previous AY. 4. Cash subsidy received from the Government Gross profit Step 2.
Deduct prior charges from gross profit Gross profit Less: 1. Development Rebate 2.
Development Allowance 3. Investment Allowance 4. Depreciation admissible under
Income Tax Act. 5. Direct tax which the employer is liable to pay for the AY. 6.
Sums referred to in the Third Schedule, viz – (a) 8.5% of equity share capital (at
the beginning of the AY) (b) 6% of Reserve (at the beginning of the AY) (c)
Dividend paid on preference shares at actual rate. Gross profit after charges
Provision for bonus, depreciation and reserves. Bonus paid to employees in respect
of previous accounting years. Gratuity paid or payable to employees in excess of
the aggregate of – (a) the provision made for approved gratuity fund; and (b) the
amount actually paid to employees on their retirement or on termination of their
employment. Donations in excess of the amount admissible for income tax. Capital
expenditure Losses and expenditure of any business situated outside India. Income
directly credited to reserves
Step 3. Computation of available surplus [Sec. 2(6) real with Sec. 5] Gross profits
after prior charges Add: Tax saved in respect of bonus paid during the preceding AY
[Tax on Gross Profit less Tax on (Gross Profits Bonus paid) Available surplus Step
4. Computation of allocable surplus [Sec.2(4)] (a) If an employer is a company,
which has not made prescribed arrangements for declaration and payment of dividend
as per Sec.194 of Income Tax Act 1961, then the allocable surplus shall be 67% of
the available surplus. (b) In any other case, the allocable surplus shall be 60% of
available surplus. Step 5. Compute bonus Bonus shall be calculated as per the
provisions contained in Sec.10, 11, 12, 15 and other applicable provision of the
Act.
SUJEET JHA
169
9213188188
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3.8 THE PAYMENT OF GRATUITY ACT, 1972

1. APPLICABILITY OF THE ACT Initial Applicability (Sec.1(3) The Act applies to –
(a) Every Factory, Mine, Oilfield, Plantation, Port and Railway Company, (b) Every
Shop or Establishment within the meaning of any law for the time being in relation
to shops and establishments in a State, in which 10 or more persons are employed,
or were employed, on any day of the preceding 12 months, (c) Such other
establishments or class of establishments, in which 10 or more employee are
employed, or were employed, on any day of the preceding 12 months, as specified by
Central Government Notification. Continued Applicability [Sec.1(3A) A shop or
Establishment to which this Act has become applicable shall continue, to be
governed by this Act notwithstanding that the number of persons employed therein at
any time after it has become so applicable falls below 10.
¾ Right to receive gratuity An employee is eligible to receive gratuity under the

Act, if • He is employed in an establishment to which the Act applies (Sec.1) • He
is an employee as per Sec.2(e). • He has been in continuous service of 5 years –
subject to some exceptions. 2. DEFINITIONS (Sec.2)
¾ Appropriate Government [Sec. 2(a)] • In relation to any of the following

establishment, AG means CG: (i) An establishment belonging to, or under the control
of, CG. (ii) An establishment, being a factory, belonging to, or under the control
of, CG. (iii) An establishment connected with a railway company, a major port, a
mine or an oil field. (iv) An establishment having branches in more than one state.
• In relation to any other establishment, AG means SG. ¾ Family [Sec.2(h)] In the
case of a male employee, family means• The employee himself • Wife of employee •
Children of employee (whether married or unmarried) • Dependent parents of employee
SUJEET JHA 170 In the case of a female employee, family means – • The employee
herself • Husband of employee • Children of employee (whether married or unmarried)
• Dependent parents of employee 9213188188
LAW& AUDIT
Dependent parents of wife of • employee Widow and children of predeceased • son of

employee
Dependent parents of husband of employee Widow and children of predeceased son of

employee.
If – the personal law of an employee permits adoption by him/her of a child; and -

the employee lawfully adopts a child Then – the adopted child shall be deemed to be
included in his/her family. If – any child of the employee is adopted by another
person; and - the personal law of the person making such adoption permits such
adoption Then – such child shall be deemed to be excluded from his/her family. ¾
Factory [Sec.2(g)] ‘Factory’ means Any premises including the precincts (adjoining
area) thereof – (i) wherein 10 or more workers are working or were working on any
day of the preceding 12 months, and in any part of which a manufacturing process is
being carried on with the aid of power, or is ordinarily so carried on; or (ii)
wherein 20 more workers are working or were working on any day of the preceding 12
months, and in any part of which a manufacturing process is being carried on
without the aid of power, or is ordinarily so carried on. ‘Factory’ does not
include (i) a mine covered under the Mines Act, 1952; (ii) mobile unit belonging to
the armed forces of the Union; (iii) a railway running shed; (iv) a hotel,
restaurant or eating place.
¾ Employee [Sec. 2(e)] Employee means – • Any person (other than an apprentice) •
Employed on wages • In any establishment, factory, mine, oilfield, plantation, port
or railway company or shop • To do any work (i.e. skilled, unskilled, manual,
supervisory, technical or clerical) • Whether the terms of employment are express
or implied • Whether or not he is employed in a managerial or administrative
capacity. Employee does not include – • A person who holds a post under CG or SG •
If he is governed by any other Act or by any Rules proving for payment of gratuity:
¾ Employer [Sec.2(f)] • In relation to any establishment, factory, mine, oilfield,
plantation, port or railway company or shop belonging to or under the control of
the CG or SG, employer means – SUJEET JHA 171 9213188188
LAW& AUDIT
(a) the person or authority appointed by AG for the supervision and control of
employers; (b) head of the Ministry or the Department concerned, in case no person
or authority is appointed by AG for the supervision and control of employees.
• In relation to any establishment, factory, mine, oilfield, plantation, port or
railway company or shop belonging to or under the control of a local authority,
employer means – (a) the person or authority appointed by the local authority for
the supervision and control of employees. (b) The Chief Executive Officer of the
local authority, in case no person or authority is appointed by the local authority
for the supervision and control of employees. In any other case, employers means –
(a) the person or the authority having the ultimate control over the affairs of the
establishment; (b) the manager or the managing director (or any other person by
whatever name called) to whom the affairs of the establishment are entrusted.
¾ Wages [Sec.2(s)] • Wages means - all emoluments which are earned by an employee -
while on duty or on leave - in accordance with the terms and conditions of his
employment - Which are paid or payable to him in cash. • • Wages includes Dearness
allowance. Wages does not include – Any bonus, commission, house rent allowance,
overtime wages and other allowances.
¾ Superannuation [Sec.2(r)] Superannuation means - The attainment by the employee

of such age. - as is fixed in the contract or conditions of service - As the age on
attainment of which the employee shall vacate the employment. ¾ Retirement
[Sec.2(q)] Retirement means termination of service of an employee other than on
superannuation. ¾ Controlling authority [Sec.2(2) and 3] • Controlling authority
means an authority appointed by AG u/s 3 [Sec.2(d)] • As per Sec.3, AG may, by
notification in the official Gazette, appoint any officer to be a controlling
authority, who shall be responsible for the administration of this Act. AG may
appoint different controlling authorities for different areas. ¾ Completed year of
service [Sec. 2(b)] Completed year of service means continuous service for one
year. ¾ Meaning of Continuous Service [Sec. 2A(1): SUJEET JHA 172 9213188188
MS EDUCONZ PVT. LTD. Meaning An employee shall be said to be in continuous service
for a period if he has, for that period, been in uninterrupted service, or service
with permissible interruptions, whether such uninterrupted or interrupted service
was rendered before or after the commencement of this Act.
LAW& AUDIT
(a) (b) (c) (d)
(e) (f)
Permissible interruptions Sickness, Accident, Leave, Absence from duty without

leave (not being absence in respect of which an order treating the absence as break
in service has been passed in accordance with, standing orders, rules or
regulations governing the employees of the establishment), Lay – off, Strike or
Lock – out or cessation of work not due to any fault of the employee.
¾ Deemed Continuous Service: Where an employee is not in continuous service as

defined above, he shall be deemed to be in continuous service under the employer,
if the following minimum working days conditions are satisfied – Seasonal Other
than Seasonal Establishments [Sec.2A(2)] Establishments [Sec.2A(3)] For 1 year
period For 6 months period Not less than 75% of the number of days on which the
establishment was in operation during such period. •
190 days, in the case of any • employee employed below, the ground in mine or in an
establishment which works for less than 6 days in a week, and 240 days, in any
other case, • out of 12 calendar months preceding the date of calculation.
95 days, in the case of any employee employed below, the ground in mine or in an
establishment which work for less than 6 days in a week, and 120 days, in any other
case, out of 6 calendar months preceding the date of calculation.
¾ Inclusion of certain days: For the purposes of Sec.2A(2), the number of days on
which an employee has actually worked under an employer shall include the days on
which – (a) he has been laid –off under an agreement or as permitted by standing
order made under the Industrial Employment (Standing Orders) Act, 1946, or under
the Industrial Disputes Act, 1947, or under any other law applicable to the
establishment, (b) he has been on leave with full wages, earned in the previous
year, (c) he has been absent due to temporary disablement caused by accident
arising out of and in the course of his employment, and (d) in the case of a
female, she has been on maternity leave, however, the total period of such
maternity leave does not exceed 12 weeks. ¾ Notification [Sec.2(k)] • Notification
means a Notification published in the Official Gazette. • The Appropriate
Government may by Notification, make Rules for the purpose of carrying the
provisions of the Act. [Sec.15] SUJEET JHA 173 9213188188
MS EDUCONZ PVT. LTD. ¾ Prescribed [Sec.2(o)] Prescribed means prescribed by Rules
made under this Act.
LAW& AUDIT
Note: (a) An employee who is re – employed without any break in service, (b) a
retrenched employee, and (c) an employee resigning from service, will be eligible
for Gratuity. 3. DETERMINATION AND PAYMENT OF GRATUITY (Sec.7)
¾ Application for payment of gratuity Application by whom? • An employee who is

eligible for payment of gratuity • Any person authorised in writing by such
employee • Nominee of the employee (if the deceased employee had made a nomination)
• Legal heir of the employee (if the deceased employee had not made nomination)1
years Application to whom? • Application shall be made to the employee.
any
Manner of making application • The application shall be made in writing •

Ordinarily, the application shall be made within 30 days from the date gratuity
becomes payable. • If the date of superannuation or retirement of the employee is
known in advance, the employee may apply to the employer before 30 days of date of
superannuation or retirement. • The application shall require the employer to pay
the gratuity to the employee. ¾ Determination of amount of gratuity Determination
by employer • As soon as the gratuity becomes payable, the employer shall determine
the amount of gratuity. • The employer shall give notice to the person to whom
gratuity is payable as well as the controlling authority. The notice shall specify
the amount of gratuity determined by the employer. • The employer has to determine
the gratuity, and give notice to the person to whom gratuity is payable and
controlling authority irrespective of the fact whether an application for payment
of gratuity has been made or not. ¾ Payment of gratuity Time limit Within 30 days
of gratuity becoming payable, the employer shall pay the gratuity to the person to
whom it is payable. Consequences of default by employer • If the employer fails to
pay the gratuity within 30 days of gratuity becoming payable, he shall be liable to
pay simple interest at such rate as may be notified by CG from time to time. SUJEET
JHA 174 9213188188
LAW& AUDIT
The interest shall be paid for the period starting with the due date of payment of
gratuity and ending with the actual date of payment of gratuity.
Consequences of default by employee The employer shall not be liable to pay any
interest, if – • The delay in payment of gratuity is due to the fault of the
employee; and • The employer has obtained permission in writing from the
controlling authority for delayed payment on such ground. ¾ Dispute as to gratuity
Nature of disputes Dispute may arise as to – • The amount of gratuity payable, or •
The admissibility of any claim of an employee for payment of gratuity: or • The
person entitled to receive the gratuity. Duty of employer in case of dispute In
case of dispute, the employer shall deposit – - with the controlling authority -
such amount as he admits to be payable by him. Inquiry by controlling authority •
The controlling authority shall hold an inquiry. The proceedings before the
controlling authority shall be deemed to be judicial proceedings. • The controlling
authority shall give a reasonable opportunity of being heard to the parties
concerned. • Thereafter, the controlling authority determines the gratuity payable.
If amount determined by the controlling authority is more than the amount deposited
by the employer, the controlling authority shall direct the employer to pay the
balance amount. Powers of controlling authority For the purpose of concluding an
inquiry, the controlling authority shall have the following powers vested in a
civil court: (a) Summoning and enforcing the attendance of any person and examining
him on oath. (b) Requiring the discovery and production of documents. (c) Receiving
evidence on affidavits. (d) Issuing commission for the examination of witnesses or
documents. Appeal against the order of controlling authority • Any person aggrieved
by an order of the controlling authority may prefer an appeal with AG or such other
authority as AG may specify in this behalf (hereinafter called as appellate
authority). • The appeal may be filed within 60 days of receipt of order of the
controlling authority. However, if the appellate authority is satisfied that the
applicant was prevented by sufficient cause from filling the appeal within the
specified period of 60 days, if may admit the appeal within a further period of 60
days. • Appeal by employer shall not be admitted unless at the time of preferring
the appeal, the employer has deposited with the appellate authority a sum equal to
the amount of gratuity determined by the controlling authority. SUJEET JHA 175
9213188188
LAW& AUDIT
The appellate authority shall give a reasonable opportunity of being beard to the
parties concerned. Thereafter, the appellate authority may confirm, modify or
reverse the decision of the controlling authority.
4.
ELIGIBILITY FOR, AND AMOUNT OF GRATUITY
(Sec.4)
¾ Eligibility Gratuity shall be payable to an employee on the termination of his

employment after he has rendered continuous service for not less than 5 years – (a)
On his superannuation, or (b) On his retirement or resignation, or (c) On his death
or disablement due to accident or disease. [Here, the condition as to 5 years of
continuous service is not applicable] Note: Disablement means such disablement as
incapacitates an employee for the work which he was capable of performing service
is not applicable] ¾ Payee Generally, Gratuity is payable to the employee himself,
However, Gratuity is payable to the following persons in the situations given below
– Situation Gratuity Payable to Death of employee, and nomination has Nominee(s).
been made. Death of employee, and no nomination Heir(s) has been made. Where
Nominee(s) or Heir(s) is a Minor Deposited with controlling Authority, who shall
invest the same for the benefit of such Minor in term deposit with SBI or its
Subsidiaries or any Nationalized Bank, till such Minor attains majority. 5.
REDUCTION AND FORFEITURE OF GRATUITY [Sec.4(6)]
¾ Computation [Sec.4(2)]: Establishment Computation of Gratuity Amount

Establishment other 15/26 × Last Drawn Salary × No. of completed years of service
than seasonal or part thereof in excess of 6 months. Establishment i.e. In case of
Piece Rate Employee, Daily Wages shall be computed on the average of the total
wages of the 3 months preceding the General Rule termination of employment (Wages
for Overtime work shall not be included) Seasonal • Those who work throughout the
year: 15/26 rule as above. Establishment • Those who work only during the season: 7
days gratuity for each season. ¾ Maximum [Sec.4(3)]: The amount of gratuity Payable
to an employee shall not exceed Rs.1000000. SUJEET JHA 176 9213188188
LAW& AUDIT
¾ Disabled Employee [Sec.4(4)]: When an employee becomes disabled due to any

accident or disease and is not in a position to do the same work and re-employed on
reduced wages on some other job, the gratuity will be calculated in 2 parts – (a)
For the period preceding the disablement: on the basis of wages last drawn by the
employee at the time of his disablement. (b) For the period subsequent to the
disablement; on the basis of the reduced wages as drawn by him at the time of the
termination of services. ¾ Better Terms [Sec.4(5)]: Sec.4 shall not affect the
right of an employee to receive better gratuity under any award or agreement or
contract with the employer. However, the maximum statutory limit u/s 4(3) cannot be
reduced by mutual settlement or agreement.[Bharat Commerce and Industries vs Ram
Prasad] 6. NOMINATION (Sec.6)
In case of termination of service due to death of employee, the gratuity should be

paid to his Successors/Heirs. To avoid complications and controversies in such
payment, the employee shall make a nomination. The provisions relating to
nomination are –
¾ Nomination [Sec.6(1)] Each employee, who has completed 1 year of service, shall
make a nomination for the purpose of the sec.4(1) Second Proviso. Nomination shall
be made in From F, in duplicate within 30 days of completion of 1 year of service.
If the from is filed after the specified period, but with reasonable grounds of
delay, it shall be valid and accepted by the employer. ¾ Multiple Nominees
[Sec.6(2)]: An employee may, in his nomination, distribute the amount of gratuity
payable to him under this Act, amongst more than one nominee. ¾ Family [Sec.6(3)]:
If an employee has a family at the time of making a nomination, the nomination
shall be made in favour of member(s) of his family. Any nomination made by such
employee in favour of a person who is not a member of his family, shall be void.
[Sec Note below for “Family”] ¾ Acquiring a Family [Sec.6(4)]: If at the time of
making a nomination, the Employee has no family, the nomination may be made in
favour of any person(s), but if the employee subsequently acquires a family, such
nomination shall forthwith become invalid and the employee shall make a fresh
nomination in favour of member(s) of his family. This fresh nomination should be
made in From G, in duplicate, within 90 days of acquiring a family. ¾ Modification
[Sec.6(5)]: A nomination may, subject to Sec.6(3) and 6(4), be modified by an
employee at any time, after giving to his employer a written notice of his
intention to do so. This modification should be made in From H and be in duplicate.
¾ Death of Nominee [Sec.6(6)]: SUJEET JHA 177 9213188188
LAW& AUDIT
If a nominee pre-deceases the employee, the interest of the nominee shall revert
back to the employee, who shall file a fresh nomination, in respect of such
interest. This modification should be made in From H and be in duplicate.
¾ Custody [Sec.6(7)]: Every nomination, fresh nomination or alteration of
nomination, as the case may be shall be sent by the employee to his employer, who
shall keep the same in his safe custody. The Employer shall verify the service
particulars of the employee as given in the Nomination Form, and return one copy of
the Form to the employee, as acknowledgement. 7. PROTECTION OF GRATUITY (Sec.13)
¾ Nature of protection • Gratuity payable to an employee shall not be liable to

attachment in execution of any decree or order of the Civil or Revenue or Criminal
Court. • It is immaterial as to whether the gratuity is payable to the employee –
(a) Under the Act: or (b) In an establishment exempted u/s 5. 8. RECOVERY OF
GRATUITY (Sec.8)
¾ Recovery certificate • If the employer fails to pay the gratuity within the
prescribed time (i.e. within 30 days of termination of employment), the controlling
authority is empowered to issue a certificate to the collector to recover the
amount of gratuity. • Before issue to such certificate, the controlling authority
shall give the employer a reasonable opportunity of being heard. ¾ Payment of
interest • The employer shall also be liable to pay compound interest at such rate
as may be notified by CG from time to time. • The interest shall be paid starting
from the date of expiry of prescribed period for payment of gratuity and ending
with the actual date of payment of gratuity. • However, the interest payable shall
not exceed the amount of gratuity payable. ¾ Recovery by collector The gratuity
shall be recovered by the collector in the same manner as if it were arrears of
land revenue. The gratuity so recovered shall be paid to the person entitled to
payment of gratuity. 9. COMPULSORY INSURANCE (Sec. 4A)
¾ Compulsory Insurance [Sec.4A(1)]: Every employer shall obtain insurance for his
liability for payment of Gratuity under the Act, from – (a) the LIC, or (b) any
other prescribed Insurer. However, the following categories of employers need not
obtain such insurance cover – (a) Employer of an establishment belonging to or
under the control of Central / State Government. (b) Any other Employer, who has
established an Approved Gratuity Fund u/s 4A(2). ¾ Approved Gratuity Fund
[Sec.4A(2)]: SUJEET JHA 178 9213188188
LAW& AUDIT
The Appropriate Government may exempt(a) Employers who have already established an
Approved Gratuity Fund in respect of his employees and who desires to continue with
such arrangement, and (b) Employers having 500 or more persons, and who establishes
and Approved Gratuity Fund in the prescribed manner.
¾ Registration [Sec.4A(3)]: Every employers shall get his establishment registered
with the Controlling Authority. One those employers who have taken an insurance
u/s4A(1) or have established an Approved Gratuity Fund u/s 4A(2), shall be
registered. ¾ Rules [Sec.4A(4)]: To give effect to Sec.4A, the Appropriate
Government may make Rules including matters such as – (a) composition of Board of
Trustees of the Approved Gratuity Fund, and (b) recovery by the Controlling
Authority of the amount of gratuity payable to employee, from LIC or any other
Insurer with whom an insurance has been taken, or as the case may be, the Board of
Trustees of the Approved Gratuity Fund. ¾ Default [Sec.4A(5) & (6)]: If the
employer fails to pay the premium to the Insurer or to contribute to a Gratuity
Fund, he shall be liable to pay the amount of gratuity including interest, if any,
on delayed payments, to the Controlling Authority, Contravention thereof is
punishable with fine upto Rs.10,000 and in case of continuing offence with a
further fine of upto Rs.100 per day of default. 10. EXEMPTION FROM PROVISIONS OF
THE ACT ¾ Exemption by whom? The exemption may be given by AG. ¾ Manner of giving
exemption The exemption can be given only by way of a notification in the Official
Gazette. ¾ Terms of exemption • The exemption shall be subject to such conditions
as may be specified in the notification. • The exemption may be given prospectively
or retrospectively. • The exemption may be given from the operation of all or any
of the provisions of any Scheme. ¾ Conditions for giving exemption The exemption
may be given if AG is of the opinion that the employees are in receipt of gratuity
not less favourable than the benefits provided under this Act. 11. INSPECTORS
(Sec.7A and 7B) (Sec.5)
¾ Manner of appointment • The inspectors shall be appointed by AG by Notification

in the Official Gazette. • Every inspector shall be deemed to be a ‘public servant’
within the meaning of Sec.21 of IPC. ¾ Number and jurisdiction SUJEET JHA 179
9213188188
LAW& AUDIT
Such number of inspectors may be appointed as AG may deem fit. AG may define the
area to which the authority of an inspector shall extend. Where two or more
inspectors are appointed for the same area, AG may distribute or allocate work to
be performed by them (i.e. AG may define the limits within which the inspectors
shall exercise jurisdiction).
¾ Power of inspector (a) To call such information from the employer as he considers
necessary. (b) To enter into and inspect, at all reasonable times, any premises of
any establishment, factory, mine, oilfield, plantation, port or railway company or
shop to which this Act applies, any books, registers, records, notices and other
documents. (c) To examine the employer and his servants. (d) To make copies and
take extracts of any books, registers, records, notices and other documents. (e) To
exercise such other powers as may be prescribed. ¾ Purpose of appointment To
ascertain whether or not the provisions of the Act have been complied with by an
employer. ¾ Duties of owners etc. Any person required to produce any accounts,
books, register or other documents or to give information by an Inspector shall be
legally bound to(a) produce accounts, books, register or other documents required
by the Inspector; (b) give information required by the Inspector.
SUJEET JHA
180
9213188188
LAW& AUDIT
3.9 CONSUMER PROTECTION ACT, 1986

OBJECT OF THE ACT According to the preamble, the Act is to provide for better
protection of the interests of consumers and for that purpose to make provision to
make provision for the establishment of consumer councils and other authorities for
the settlement of consumer’s disputes and for connected therewith.
It may be noted that Consumer Protection Act (COPRA) is in addition to and not in
derogation of any other law. [Section 3]
BASIC RIGHTS OF CONSUMERS [SECTION 6] The basic rights of consumers that are sought
to be promoted and protected are; a) The right to be protected against marketing of
goods and services which are hazardous to life and property: b) The right to be
informed about the quality, quantity, purity, standard and price of goods, or
services so as to protect the consumer against unfair trade practices; c) The right
to be assured, wherever possible, access to variety of goods and services at
competitive prices; d) The right to be heard and to be assured that consumers’
interest will receive due consideration at appropriate forums; e) The right to seek
redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers; and f) The right to consumer education.
CONSUMER PROTECTION COUNCILS Introduction
The interest of consumers are sought to promoted and protected under the act inter
– alia by establishment of Consumer Protection Councils at the Central, State and
District levels.
Central Consumer Protection Council
Section 4 provides that the Central Government shall, by notification, establish a

Council to be known as Central Consumer Protection Council, which shall consist of
the following members: (i) The Minister – in – charge of Consumer affairs in the
Central Government, who shall be its Chairman; and (ii) Such number of other
official or non – official members representing such interest as may be prescribed.
The Central Council shall consist of 150 members and the term of the Council shall
be 3 years. The Central council shall meet as and when necessary, but atleast one
meeting shall be held every year.
State Consumer Protection Council
Section 7 provides that the State Government shall, by notification establish a

Council to be known as Consumer Protection council for (name of the state), which
shall consist of the following members: (i) The Minister – in – Charge of consumer
affairs in the state government, who shall be its chairmans;
SUJEET JHA 181 9213188188
LAW& AUDIT
(ii) (iii)
Such number of other or non – official members representing such interest as may be
prescribed by the State Government; and Such number of other official or non –
official members, not exceeding ten, as may be nominated by the Central Government.
The State Council shall meet as and when necessary but not less than two meetings
shall be held every year. The procedure to be observed in regard to the transaction
of its business at such meeting shall be prescribed by the State Government.
District Consumer Protection Council
Section 8A provides that the State Govt. shall establish for every district, by
notification, a council to be known as the District Consumer Protection council,
which shall consist of the following members; (i) The Collector of the district (by
whatever name called), who shall be its Chairman; and (ii) Such number of other
official and non –official members representing such interests as may be prescribed
by the State Govt. The District Council shall meet as and when necessary but not
less than two meetings shall be held every year.
REDRESSAL MACHINERY UNDER THE ACT Introduction The Consumer Protection Act, 1986
provides for a three – tier quasi – judicial redressal machinery at the District,
State and National levels for redressal of consumer disputes and grievances. They
are known as Consumer disputes Redressal Agencies. District Consumer Disputes
Redressal Forum The Act provides for the establishment of a District Forum by the
State Government in each district of the State by notification. The State
Government may establish more than one District Forum in a District if it thinks
for to do so. Section 10 provides that each District Forum shall consist of : (i) a
person who is, or who has been, or is qualified to be, a District Judge, who shall
be its President; and (ii) two other members, one of whom shall be a woman.
The members of District Forum should be persons of ability, integrity and standing
and should have experience relating to economics, law, commerce, accountancy,
industry, public affairs or administration. They must be graduates and over 35
years of age. Every member of the District Forum shall hold office for a term of 5
years or up to the age of 65 years, whichever is earlier, and shall be eligible for
re – appointment.
Jurisdiction [Sec. 11]: Section 11 provides for the jurisdiction of the District
Forum under the following two criteria: 1. Pecuniary limits: The District Forum can
entertain complaints where the value of goods or services and the compensation, if
any, claimed is up to Rs.20 lakhs. 2. Territorial limits: The District Forum can
entertain complaints if any of the opposite party ordinary resides or carries on
business or personally works for gain or has a branch office; or the cause of
action arises within the local limits of its jurisdiction. SUJEET JHA 182
9213188188
MS EDUCONZ PVT. LTD. State Consumer Disputes Redressal Commission
LAW& AUDIT
The Act provides for the establishment of the State Consumer Disputes Redressal
Commission by the State Government in the State by notification.
Section 16 provides that each State Commission shall consist of : (i) a person who
is, or has been a judge of a High Court appointed by the State Government (in
consultation with the Chief Justice of the High Court), who shall be its President;
and (ii) not less than two, and not more than such number of members, as may be
prescribed, and one of whom shall be a woman.
The members of State Commission should be persons of ability, integrity and

standing; and should have experience relating to economics, law, commerce,
accountancy, industry, public affairs or administration. They must be graduates and
over 35 years of age. Every member of the State Commission shall hold office for a
term of 5 years or up to the age of 67 years, whichever is earlier, and shall be
eligible for re – appointment.
Jurisdiction [Sec. 17]: The jurisdiction of the State Commission is as follows: 1.
Original Jurisdiction : The State Commission can entertain complains where the
value of the goods or services and the compensation, if any, claimed exceeds Rs.20
lakks but does not exceed Rs.1 crore. [Pecuniary Limits] The State commission can
entertain complaints if any of the opposite party ordinarily resides or carries on
business or personally works for gain or has a branch office; or the cause of
action arises within the local limits of its jurisdiction. [Territorial Limits] 2.
Appellate Jurisdiction: The State Commission also has the jurisdiction to entertain
appeals against the orders of any District Forum within the State. 3. Reversionary
Jurisdiction : The State commission also has the power to call for the records and
pass appropriate orders in any consumer dispute which is pending before or has been
decided by any District Forum of the same state. National Consumer Disputes
Redressal Commission
The Act provides for the establishment of the National Consumer Dispute Redressal
Commission by the Central Government by notification in the Official Gazette.
Section 20 provides that the National Commission shall consist of : (i) a person
who is or has been a judge of the Supreme Court, to be appointed by the Central
Govt. (in consultation with the Chief Justice of India), who shall be its
President; and (ii) not less than four, and not more than such number of members,
as may be prescribed, and one of whom shall be a woman. The members of National
Commission should be persons of ability, intergrity and standing; and should have
experience relating to economics, law, commerce, accountancy, industry, public
affairs or administration. They must be graduates and over 35 years of age. Every
member of the National Commission shall hold office for a term of 5 years or up to
the age of 70 years whichever is earlier and shall be eligible for re-appointment.
Jurisdiction [Sec. 21]: The jurisdiction of the National Commission is as follows:
SUJEET JHA 183 9213188188
MS EDUCONZ PVT. LTD. 1. 2. 3.
LAW& AUDIT
Original Jurisdiction : The National Commission can entertain complaints where the
value of the goods or service and the compensation, if any, claimed exceed Rs.1
crore. Appellate Jurisdiction :The National Commission also has the Jurisdiction to
entertain appeals against the original orders of any State Commission. Reversionary
Jurisdiction: The National Commission also has the power to call for the records
and pass appropriate orders in any consumer dispute which is pending before or has
been decided by any State Commission.
Time limit for filing the Complaint
A complaint must be filed within two years from the date on which the cause of
action arose. However, the District Forum, State Commission or National Commission
may entertain complaint even after the expiry of two years, if it is satisfied that
there was sufficient cause for not filing the complaint within prescribed period of
two years.
Time limit for filing the Appeal An appeal to the: (i) State Commission against the
orders of District Forum: (ii) National Commission against the original orders of
State Commission. (iii) Supreme Court against the original orders of National
Commission.
Must be filed within 30 days from the date of receiving the order or District Forum
/ State Commission / National Commission. However the State Commission, National
Commission Supreme Court may entertain an appeal even after the expiry of said 30
days, if it is satisfied that there was sufficient cause of not filing the appeal
within the prescribed period of 30 days. Further, appellant shall also be required
to deposit 50% of the amount required to be paid as per the order of the District
Forum/State Commission /National commission or Rs.25,000/35,000/50,000,
respectively, whichever is less. It may be noted that appeals are allowed only
against the original orders passed by the concerned Redressal Agency. Thus,
appellate orders passed by the State Commission or National Commission cannot be
further appealed against. Similarly, the revisional orders passed by the State
Commission or National Commission are also not appealable. However, only the
National Commission has the power to review any order made by it when there is an
error apparent on the face of the record.
NATURE AND SCOPE OF REMEDIES UNDER THE ACT [SECTION 14]
Where the goods complained against suffer from any of the defects specified in the
complaint or any of the allegations contained in the complaint about the services
are proved, the District Forum/State Commission / National Commission may pass one
or more of the following orders: a) To remove the defects pointed out by the
appropriate laboratory from the goods in question. b) To replace the goods with new
goods of similar description which shall be free from any defect? c) To return the
prices or the charges, as the case may be, to the complainant. d) To pay the amount
of compensation to the consumer for any loss or injury suffered and in addition,
punitive damages can be granted: e) To remove the defects in goods or deficiencies
in the services in question. f) To discontinue the unfair trade practice or the
restrictive trade practice.
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g) h) i) j) k) l)
No to offer the hazardous goods for sale; To withdraw the hazardous goods from
being offered for sale. To cease manufacture of hazardous goods; To pay such sum as
may be determined by it; To issue corrective advertisement; and To provide for
adequate costs to parties.
IMPORTANT DEFINITIONSW [SECTION 2] Complainant [Sec. 2(1) (b)] Complainant means –

(a) a consumer (b) any voluntary consumer association registered under any law; (c)
the Central or any State Government (d) one or more consumers, where there are
numerous consumers having the same interest; or (e) in case of death of a consumer,
his legal heir or representative, Who or which makes a complaint.
An association of persons to have locus standi as consumer, it is necessary that

all the individuals forming the association must be the consumer having purchased
the same goods or hired the same services from the party. In case the affected
consumer is unable to file the complaint due to ignorance, illiteracy or poverty,
any recognized consumer association may file the complaint as per the above clause
(b). Thus, rule of ‘privity of contract’ or ‘locus standi’ , which permits only the
aggrieved party to take action, has very rightly been set aside in the spirit of
public interest.
Complaint [Sec.2(1)(c)]
Complaint means any allegation in writing made by a complaint that – (i) an unfair
trade practice or a restrictive trade practice has been adopted by any trader; (ii)
the goods bought by him or agreed to be bought by him be suffer from one more
defects; (iii) the services hired or availed of or agreed to be hired or availed of
by him suffer from deficiency in any respect; (iv) the trader has charged a price
in excess of the price; (a) fixed under any law; (b) displayed on the goods or any
package containing such goods; (c) displayed on the price list exhibited by him; or
(d) agreed between the parties. (v) goods which will be hazardous to life and
property when used are being offered for sale to the public; (vi) services which
will be hazardous to life and safety of the public when used, are being offered by
the service provider. With a view to obtain any relief provided by law under this
Act.
Consumer [Sec. 2(1) (d)]
Consumer means – (i) In respect of goods, any person who purchases goods for a
consideration but does not include a person who has purchased goods for re – sale
or commercial purpose. Such consideration may be paid or promised or partly paid
and partly promised or under the system of deferred payments.
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(ii) (iii)
(iv) (v)
Any person who is using the goods, with the permission of the buyer of such goods
as specified in clause (i). In respect of service, any person who hires or avails
service for a consideration but does not include a person who has availed service
for commercial purpose. Such consideration may be paid or promised or partly paid
and partly promised or under the system of deferred payment. Any person who is
beneficiary under the services with the permission of the hirer of such services as
specified in clause (iii); A person who purchases goods or avails services
exclusively for the purpose of earnings his livelihood by means of self employment.
Commercial Purpose: A person who has purchased goods for “commercial purpose” shall
not be deemed to be a consumer. A purchase of goods could be said to be for a
“commercial purpose” only if two conditions are satisfied, namely : (i) the goods
must have been purchased for being used in some profit – making activity on a large
scale; and (ii) there should be close and direct nexus between the purchase of
goods and the profit – making activity.
Thus, a person who buys goods for re – sale or commercial purposes or avails
services for commercial purposes is specifically excluded from the definition of
‘consumer’. For example, a person buying one truck or tempo or sewing machine or
one computer for the purpose of earning his livelihood by self – employment will be
eligible to qualify as consumer. However, if a person buys two typewrites, out of
which one is used by a person employed by him, he will not be eligible to file a
complaint as a consumer because a person buying goods for re – sale or commercial
purpose is not a consumer. For instance, a lawyer purchased a computer and a
printer for his office. The printer started giving trouble form the day one. The
lawyer lodges a complaint under the Consumer Protection Act. In this case, the
printer has not been purchased by the advocate for any commercial purpose treated
as consumer and will succeed in his complaint. [Sanjay Krishana Kant v. M/s Grooy
Communication & Others]
Who is a Consumer : Following are some of the important decided cases in this
regard:
1. 2. 3. 4. 5.
Railway passengers traveling on payment of fare is consumer. [GM, South Eastern

Railways v. Anand Prasad Sinha] Beneficiary of bank guarantee is a consumer. [Union
Bank v. Seppo Rally] Parents who bring the child to hospital and the child both are
consumers. [Spring Meadows Hospital v. Harjot Ahluwalia] Allottees of house by
Housing Board are consumers [UP Avas Gram Vikas Parishad v. Garima Shukla] A person
obtaining water from a government agency and paying water bills for the water
supplied is a consumer. However, only if the water tax is levied, the person
availing services will not be a consumer. [Nagrik Parishad v. Garhwal Jal Sansthan]
The widow of a deceased policy holder is a consumer, as the term ‘consumer’
includes any beneficiary of service other than the person who hires the services
for consideration. [A Narsamma v. LIC of India]
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Who is not a Consumer: following are some of the important decided cases in this
regard.
1.
A charitable trust is not a consumer if it has purchased machinery for its

diagnostic centre, when only 10% patients are provided free services and charges
are levied on remaining patients Charitable Trust v. Toshniwal Brothers] Person
buying goods for manufacture of another product is not consumer as the goods were
intender for commercial purpose. [Rajeev Metal Works’ v. MMTC] A tenant is not
consumer when landlord has not agreed to render any service to tenant in lease
agreement. [Laxmiben Laxmichand Shah v. Sakerben Kanji] A hospital will not be
liable, if the hospital happens to be a government hospital where no fee is charged
for consultation and treatment, but only a token registration fee is charged.
[Indian Medical Assoc. v. V.P. Shanta & others]
2. 3. 4.
Goods [Sec. 2(1) (i)]
Goods means goods as defined in the sale of goods Act, 1930. As per Sale of Goods
Act, goods means every kind of moveable property other than actionable claims and
money; and includes stock and shares, growing crops, grass or things attached to or
forming part of the land which are agreed to be severed before sale or under the
contract of sale. Therefore, most common products would come within the purview of
this definition. Shares have been specifically included in ‘goods’. However, shares
before allotment are not goods, as they do not exist before the allotment is made.
To constitute a consumer, there must be transaction of goods. Hence, a prospective
investor cannot be regarded as a consumer within the meaning of this Act, [Morgan
Stanley Mutual Fund v. Kartik Das]
Services [Sec. 2(1) (o)]
Service means services of any description which is made available to potential

users and includes, but not limited to the provision of facilities in connection
with banking financing, insurance, transport, processing supply of electrical or
other energy, board or lodging or both, housing construction entertainment
amusement or the purveying of news of other information, but does not include the
rendering of any service free of charge or under a contract of personal services.
“Potential Users’ mean those who are capable of using the service. [Lucknow
Development Authority v. M.K. Gupta] Contract of Personal Service and Contract for
Personal Service: In contract of personal service, the master can order or require
what is to be done and how it is to be done. This is out of the purview of COPRA as
the master can always dispense with the service of the servant and hence no
occasion would arise for him to complain about service of the servant. However, in
contract
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for personal services, the person cannot order what is to be done and how it is to
be done. Services rendered in professional category could be treated as contract
for personal service and hence covered under COPRA. Consumer Forum cannot decide
disputes arising out of contract of appointment of personal service For instance,
Civil Servants and Professors in Universities are appointed under contract of
personal service and hence are not covered under COPRA. [Centre for Research &
Industrial Development v. Madam Lal Sahni]
What is Service: Following are some of the important decided cases in this regard:
1.
Passengers traveling by trains on payment of the stipulated fare charged for the
ticket are consumer’ and the facility of transportation by rail provided by the
railway administration is a ‘service’ rendered for consideration as defined in the
Act. [GM, South Eastern Railways v. Anand Prasad Sinha] Similarly telephone
services availed for consideration is a service. [District Manager, Telephones
Patna v. Lalit Kr. Baijla] Service rendered to a patient by a medical practitioner
(except where the doctor renders service free of charge to every patient) by way of
consultation, diagnosis and treatment, both medical and surgical, would fall within
the ambit of ‘service’. [Indian Medical Association v.V.P. Shanta & Others]
Accepting deposits from public agreeing to pay interest is service. If interest and
principal is not paid on due dates, it is deficiency of service and consumer forums
can issue orders for payment of outstanding dues. [Kalawati v. United Vaish]
Education is an activity which comes within the ambit of ‘service’ because
‘service’ means service of any description which is made available to potential
users under this Act. [The CBSE v. Consumer Disputes Redressal Forum]
2. 3.
4.
5.
What is not service: following are some of the important decided cases in this
regard:
1)
Conducting examination is not service as a candidate appearing for examination

could not be regarded as a person who has hired or availed the services of the
University or Board for consideration. Thus, the University or Board in conducting
examination is not performed any service. [Chairman, Board of Examination v.
Mohideen Abdul Kader] Registration of documents by government is not a service. A
person presenting a document for registration is not a consumer. There is no
commercialization involved. Officers who are doing the work of registration are
doing the statutory duty. [S.P. v. collector of Stamps] Payment of taxes is not
hiring of services. No complaint can be lodged against Municipal Corporation for
failure to carry out its statutory duty of proper maintenance of drains, as payment
of taxes is not hiring of services. [Signet corporation v. Commissioner, MCD, New
Delhi] Promotional activities of state and its agencies are not services and
complainants are not consumers, as facilities are provided by State and its
agencies without any specific
188 9213188188
2.
3.
4.
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consideration. [T.N. Sethuraman v. Goa, Daman and Diu Industrial Development

corporation] 5. Even if a litigant pays court fees, he is not hiring services of
Court. The Court is exercising sovereign function of dispensation of justice. Thus,
complaint against Court for delay in judgment is not maintainable under Consumer
Forums. Free Services are not covered under COPRA. The employer (Govt. in this
case) deducted insurance premium from salary of employee, but failed to make
payment to LIC. When the employee died LIC refused to pay as premium was not paid.
It was held that the employer was giving free service and hence he is not liable.
[State of Orissa v. LIC] However, if the employer is agent of LIC for the purpose
of colleting premium, then general principle of agency as contained in Contract Act
shall apply. Employee has no responsibility to intimate LIC about non – remittance
of the premium. Hence, LIC has to make payment of compensation if employer has
deducted premium from salary of employee. [Delhi Electric Supply v. Basanti Devi]
6.
7.
Consumer Dispute [Sec. 2(1) (e)]
Consumer dispute means dispute where the person against whom a complaint has been
made, denies in goods or against any deficiency in services or against charging an
exorbitant price.
Defect [Sec. 2(1) (f)]
Defect means any fault, imperfection or shortcoming in the quality, quantity,

potency, purity or standard of any goods which is required to be maintained by or
under any law for the time being in force or under any contact, express or implied,
or as is claimed by the trader in any manner whatsoever in relation to any goods.
In the case of Abhaya Kumar Panda v. Bajaj Auto Ltd. where the motor vehicle sold
to the petitioner was found to have major manufacturing defects which could not be
removed despite several repairs, it was held to be ‘defective’and the vehicle was
ordered to be replaced.
Deficiency [sec. 2(1) (g)]
Deficiency means any fault, imperfection, shortcoming or inadequacy in the quality

nature and manner of performance of any service which is required to be maintained
by or under any law for the time being in force or has been undertaken to be
performed by a person in pursuance of a contract or otherwise in relation to any
service. In order to get any loss compensated for deficiency in service, mere loss
or injury is not enough. Loss or injury must be coupled with negligence. The term
‘negligence’ means absence of reasonable care which a prudent person is expected to
observe in a given set of circumstances. Thus, no compensation can be claimed even
in case of loss or damage. If it was not caused due to negligence of the person.
[Consumer Unity and Trust Society v. Bank of Boroda] For instance, the driver of a
bus suddenly, applied the brake to avoid a collision with bullock cart and with
result the bus met with an accident resulting in the death of a passenger. The
legal heirs of the deceased lodged a complaint with Consumer Forum for compensation
on the ground of ‘deficiency in service.’ In the present case, the accident that
occurred had nothing to do with provided to the deceased because the injury
sustained has nothing to do with the service
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provided but due to the direct result of the accident, Further, there was no
element of negligence on the part of driver, as he had applied the brakes to avoid
a collision. Hence, the heirs of the deceased will not succeed in their complaint
against the transport company. [Chairman, Thiruvallavar Transport Corporation v.
Consumer Protection Council] It may be noted that COPRA does not have any
jurisdiction in respect of any matter, if there is some special law dealing with
that matter.
What is Deficiency in Service: Following are some of the important decided cases in
this regard:
1. 2.
Negligence in settlement of Insurance claim, [Div. Manager, LIC of India v.

Bhavanam Srinivas Reddy] Ornaments kept in the banks’ locker were found lost though
the certificate recorded by the custodian of the bank stated all lockers operated
during the day had beenm checked and found properly locked. [Punjab National Bank
v. K. B. Shetty] Issuing drafts on foreign banks where the bank had no account
causing inconvenience to the customer. [Tarun Kumar Kaniyalal Soni v. Punjab
National Bank] Honouring forged cheques [Corporation bank v. Filmalaya (P) Ltd.]
Debiting cheques to wrong accounts [Corporation Bank v. Filmalaya (P) Ltd.] Failure
to give possession of the house after receiving the price and registering the flat
in favour of the allottee. [Lucknow development Authority v. Roop Kishore Tandon]
Non delivery of letter by a courier company. [Skypack Couries Pvt. Ltd. v. Anupama
Bagla] Theft of car from parking of an hotel constitution the deficiency in
service. [Atul Virmani. V. Asian Hotels Limited] Delay in issue of units by UTI of
about 18 months is deficiency in service. In this case, 15% interest was awared as
compensation. [UTI. v. Smt. Bandana Roy] To run a boat club without having
necessary equipment and personal trained for meeting an emergency constitutes gross
negligence and serious deficiency in service. [Sandhu v. Union of India] Parking
vehicle in parking lot on payment of parking charges is bailment. Persons
responsible for management of parking area is liable to make good the loss due to
theft. [Mahesh Enterprises v. Arun Kumar Gumber] In the case of goods carrier
services, the liability of a carrier to whom the goods are entrusted for carriage
is that of an insurer and is absolute in terms. So long as the goods are in the
custody of the carrier, it is the duty of carrier to take due care as he would have
taken of his own goods and he would be liable if any loss or damage was caused to
the goods on account of his negligence3 or criminal act or that of his agent and
servants. This would be so even if goods are carried ‘AT OWNER’s RISK ----------‘.
Owners’ risk is understood in the sense that the carrier would not be liable for
damage or loss to the
190 9213188188
3. 4. 6. 7. 8. 9. 10. 11.
12.
13.
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LAW& AUDIT
goods if it was not caused on account of carrier’s own negligence or the negligence
of his servants and agents. [Nath Brothers v. Best Roadways Ltd.] 14. The
transportation of goods through carriers cannot be considered as for commercial
purposes and the transporter is liable for any deficiency in service. [Express
Goods Service v. Standard Textile Mills] Selling an item at double the price
printed on the wrapper is an Unfair Trade Practice. [Kapil Mitra v. Priya Village
Roadshow, New Delhi]
15.
What is not Deficiency in Service : Following are some of the important decided
cases in this regard:
1.
Refusal to give credit to customers on grounds that the unit belonged to a sick
Industry or was not economically viable on any other grounds would not fall under
deficiency of service as a bank is the sole judge of the credit worthiness of any
party. [Asha Sharma v. Union of India] Failure to deliver goods carried by the
railways is not covered clause ‘deficiency in service rendered’ of Consumer
Protection Act, But it is covered under Railway claims tribunal Act. 1987 and thus
required to be compensated in that Act. [Union of India v. M. Adaikalan] The
National Commission held that where the bank has not been accommodating the
complainant sufficiency in the matter of grant of adequate mursing facility for
small scale industry which consequently became sick, the proper forum to agitable
the said grievance is civil court and not a consumer redressal forum. It further
held that the banks have to exercise their discretion and act in accordance with
their best judgment after taking into account various relevant factors and hence
mere failure to provide financial facility cannot be said to constitute deficiency
in service. [Special Machines v. Punjab National Bank] A person or organization
engaged in the business of courier services for carriage of mail or parcels falls
within the purview of the COPRA, 1986 and delay in delivery of articles or non –
delivery will constitute deficiency in service. However the National Commission
held that the complainant ought to have insured the documents if they were of great
value and as per IATA Regulations, the consignee is bound to declare the nature of
the contents and hence did not grant any relief to the complainant. [Air Pack
couriers (India) Pvt. Ltd. v. S. Suresh] If the staff gives some information (or
leaflet containing some information) which is against the provisions of Statute,
the Authority is not liable for deficiency in service. In this case, the postal
staff gave incorrect information about rate of interest and maturity period of
National Saving Certificate. The Supreme Court held that since the terms are
specified by notification of Govt. of India, any information contrary to the
notification is not binding on Govt. of India. [Post Master v. Ms. Raja
Premeelamma] Disconnection of electric supply for non – payment of charges by
consumer is not deficiency in service. Electricity Board has power to discontinue
supply. It was also held that electricity board can make supplementary bill for
escaped bill. [Swanstic Industries. v. Maharashtra State Electricity Board]
191 9213188188
2.
3.
4.
5.
6.
SUJEET JHA
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7. 8.
Disconnecting power supply for tampering with electric meter is not deficiency in
service.[CESC Limited v. Sumitra Pal] In Airline services, delay due to bad weather
and poor visibility are unforeseen circumstances and hence there is no deficiency
in service. Compensation can be awarded only if there is negligence and loss is
suffered by complainant on account of negligence. [Indian Airlines Limited v. Dr.
V. J. Philip]
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STUDY NOTE – 4 OTHER LAWS 4.1 LAW RELATING TO RIGHT TO INFORMATION

INTRODUCTIONS
Throughout the world, the right to information is seen by many as the Key to
strengthening participatory democracy and ensuring more people centered
development. In India also, the Government enacted Right to information (RTI) Act
in 2005 allowing transparency and autonomy, and access to accountability in public
authorities. In R.P. Limited Indian Express Newspaper, the Supreme Court read into
Article 21 the right to know. The Supreme Court held that right to know is a
necessary ingredient of participatory democracy. Article 21 confers on all persons
a right to know which include a right to receive information. It may be pointed out
that the right to impart and receiving information is a species of the right to
freedom of speech and expression. Article 19(1) (a) of our Constitution guarantees
to all citizens freedom of speech and expression. Right to freedom of speech and
expression in Art. 19 (1) (a) carries with it the right to propagate and circulate
one’s views and opinions subject to reasonable restrictions as mentioned under
Article 19(2). The prerequisite for enjoying this right is knowledge and
information. The Right to Information Act, 2005 provides an effective an effective
framework the right to information recognized under Article 19 of the Constitution.
DEFINITIONS Public Authority [Sec. 2(h)]
“Public authority” means any authority or body or institution of self government

established or constituted ¾ By or under the Constitution. ¾ By any other law made
by Parliament., ¾ By and other law made by State Legislature. ¾ By notification
issued or order made by the appropriate Govt.
Record [Sec 2(1)]
“Record” includes. (a) any document, manuscript and file; (b) any microfilm,
microfiche and facsimile copy of a document. (c) any reproduction of image or
images embodied in such microfilm; and (d) any other material produced by a
computer or any other device.
Information [Sec 2(1)]
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“Information” means any material in any form including records, documents, memos,
e-mails, opinions, advices, press release, circulars, orders, logbooks, contracts,
reports, samples, models, data materials held in any electronic form. Right to
Information [Sec. 2(i)] “Right to information” means the right to information
accessible under this Act with is held by or under the control of any public
authority and includes the right to – (i) taking notes, extracts, or certified
copies of documents or records. (ii) Inspection of work, documents, records. (iii)
Taking certified samples of materials. (iv) Obtaining information in the form of
diskettes, floppies, tapes, video cassettes or in any other electronic mode or
through printouts where such information is stored in a computer or in any other
device.
OBLIGATIONS OF PUBLIC AUTHORITY
Every public authority under the Act has been entrusted with a duty to maintain
records and publish manuals, rules regulations, instructions, etc. in its
possession as prescribed under the Act. As per Sec.4, every public authority has to
publish within 120 days of the enactment of this Act:
¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾
The particulars of its organization functions and duties. The powers and duties of
its officers and employees; The procedure followed in its decision making process,
including channels of supervision and accountability. The norms set by it for the
discharge of its functions; The rules, regulations instruction, manuals and records
used by its employees for discharging its functions; A statement of the categories
of the documents held by it or under its control; The particulars of any
arrangement that exists for consultation with, or representation by the members of
the public in relation to the formulation of policy or implementation thereof; A
directory of its officers and employees; The monthly remuneration received by each
of its officers and employees, including the system of compensation as provided in
its regulations. The budget allocated to each of its agency, including the
particulars of all plans, proposed expenditures and reports on disbursements made;
The manner of execution of subsidy programmes, including the amounts allocated and
the details and beneficiaries of such programmes: Particulars of recipients of
concessions, permits or authorizations granted by it; Details of the information
available to, or held by it, reduced in an electronic form; The particulars of
facilities available to citizens for obtaining information, including the working
hours of a library or reading room, if maintained for public use; The names,
designations and other particulars of the public Information Officers, Such other
information as may be prescribed; and thereafter update the publications every
year.
DESIGNATION OF PUBLIC INFORMATION OFFICERS [PIO]
Every public authority has to do the following;

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Designate in all administrative units or officers Central or State Public

Information Officers to provide information to persons who have made a request for
the information; and Designate at each sub – divisional level or sub – district
level Central Assistant or State Assistant Public Information Officers to receive
the applications for information or appeals or forwarding the same to the Central
or State Public Information Officers.
PROCEDURE FOR OBTAINING INFORMATION
PIO shall deal with requests from persons seeking information. If the information
requested for is held by another public authority; the PIO shall transfer, within 5
days, the request to that other public authority and inform the applicant
immediately. PIO, on receipt of a request shall as expeditiously as possible and in
any case within 30 days of the receipt of the request, provide the information on
payment of such fee as may be prescribed. hours of the receipt of the request. If
the PIO fails to give decision on the request Where the information requested for
concerns the life or liberty of a person, the same shall be provided within forty
eight within the period specified, he shall be deemed to have refused the request.
Where a request has been rejected, the PIO shall communicate the following to the
requester: (i) the reasons for such rejection; (ii) the period within which an
appeal against such rejection may be preferred; and (iii) the particulars of the
Appellate Authority.
EXEMPTION FROM DISCLOSURE
Certain categories of information have been exempted from disclosure under the Act.
These are; ¾ Where disclosure prejudicially affects the sovereignty and integrity
of India; ¾ Information which has been expressly forbidden by any court or tribunal
or the disclosure of which may constitute contempt of court: ¾ Where disclosure
would cause a breach of privilege of parliament or the state legislature; ¾
Information including commercial confidence, trade secrets or intellectual
property. ¾ Information received in confidence from a foreign government; ¾
Information the disclosure of which endangers life or physical safety of any person
or identifies confident source of information or assistance; ¾ Information that
would impede the process of investigation or apprehension or prosecution of
offenders; ¾ Cabinet papers including records of deliberations of the Council of
Ministers, Secretaries and other officers before the decisions are taken.
Section 8 provides that personal information which would cause invasion of the
privacy unless larger public interest justifies it, shall not disclosed Section 9
empowers the Public Information Officer to reject a request for information where
an infringement of a copyright subsisting in a person would be involved.
It may be noted that as per Section 10 of the RTI Act, only that part of the
record, which does not contain any information which is exempt from disclosure and
which can reasonably be severed from any part that contains exempt information, may
be provided. This is known as partial disclosure.
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WHO IS EXCLUDED?
The Act excludes Central Intelligence and Security agencies specified in the Second
Schedule like IB, R & AW, Directorate of Revenue Intelligence, Central Economic
Intelligence Bureau, Directorate of Enforcement, Narcotics Control Bureaus,
Aviation Research Centre, Special Frontier Force, BSF, and Nicobar, the Crime
Branch – CID – CB; Dadra and Nagar Haveli and Special Branch, Lakshadweep Police,
Agencies specified by the State Governments through a Notification will also be
excluded. The exclusion, however, is not absolute and these organization have an
obligation to provide information pertaining to allegations of corruption and human
rights violations. Further, information relating to allegations of human rights
violation shall be given only with the approval of the Central Information
Commission within forty – five days from the date of the receipt of request.
[Section 24]
INFORMATION COMMISSIONS Central Information Commission (CIC)
The Central Information Commission is to be constituted by the Central Government

through a Gazette Notification. The Central Information Commission consists of the
Chief Central Information Commissioner and Central Information Commission not
exceeding 10. The Chief Information Commissioner and Information Commissioners
shall be persons of eminence in public life with wide knowledge and experience in
law, science technology, social service, management, journalism, mass media or
administration and governance. CIC/IC shall not be a Member of Parliament or Member
of the Legislature of any State or Union Territory. He shall not hold – any other
office of profit or connected with any political party or carrying on any business
or pursuing any prolession. CIC shall be appointed for a term of 5 years or till he
attains the age of 65 years, whichever is earlier. CIC is not eligible for
reappointment.
State Information Commission (SIC)
The State Information Commission will be constituted by the state Government

through a Gazette notification. The State Information Commission consists of one
State. Chief Information Commissioner (SCIC) and not more that 10 State Information
Commissioners (SIC). The qualification for appointment as SCIC/SIC shall be the
same as that for Central Commissioners.
Powers of Information Commission
The Central Information Commission Information Commission has a duty to receive

complaints from any person. ¾ Who has not been able to submit an information
request because a PIO has not been appointed; ¾ Who has been refused information
that was requested.
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Who has received no response to his / her information request within the specified
time limits; Who thinks the fees charged are unreasonable; Who thinks information
given is incomplete or false or misleading; and Any other matter relating to
obtaining information under this law.
If the Commission feels satisfied, an enquiry may be initiated and while initiating
an enquiry the Commission has same powers as vested in a Civil Court. The Central
Information Commission or the State Information Commission during the inquiry of
any complaint under this Act may examine any record which is under the control of
the public authority, and no such record may be withheld from it on any grounds.
APELLATE AUTHORITIES
Any person who does not receive a decision within the specified time or is
aggrieved by a decision of the PIO may file an appeal under the Act.
First Appeal First appeal shall be filed to the officer senior in rank to the PIO
in the concerned Public Authority within 30 days, from the expiry of the prescribed
time limit for providing the information or from the receipt of the decision.
However, the Appellate Authority may entertain the appeal even after the expiry of
the aforesaid 30 days, if it is satisfied that the Appellant has been prevented by
sufficient cause from filing the appeal within the prescribed period of 30 days.
First Appeal shall be disposed of within 30 days from the date of its receipt or
within such extended period not exceeding a total of forty – five days from the
date of filing thereof, for reasons to be recorded in writing.
Second Appeal Second appeal shall be filed to the Central Information Commission or
the State Information Commission, as the case may be, within 90 days of the date on
which the decision was given or should have been made by the First Appellate
Authority. However, the Appellate Authority may entertain the appeal even after the
expiry of the aforesaid 90 days, if it is satisfied that the Appellant has been
prevented by sufficient cause from filling the appeal within the prescribed period
of 90 days.
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4.2 COMPETITION ACT, 2002

INTRODUCTION / REASONS FOR REPEAL OF MRTP ACT, 1969
MRTP Act, 1969 has become obsolete in certain areas in the light to international
economic developments relating to competition laws. So the need was felt to shift
the focus from curbing monopolies to promoting competition. Hence, the Competition
Act, 2002 was enacted, which aims at doing away from the rigidly structured MRTP
Act, 1969. The Competition Act, 2002 is flexible, behavior oriented and also
explicitly indicates the parameters which shall be kept in view while deciding the
adverse effect on competition, abuse of dominance and prejudicial combinations. The
main purpose of the Act is to ensure free and fair competition in the market.
SALIENT/IMPORTANT REATURES OF THE ACT
1)
The Competition Act, 2002 has been enacted to prevent practices having an
appreciable adverse effect on competition, to promote and sustain competition in
the market and to protect the interest of consumers and to ensure freedom of trade.
With the enforcement of the Competition Act, 2002 the MRTP Act, 1969 shall stand
repeated and the MRTP Commission shall be dissolved. The Competition Act, 2002
seeks to achieve its objectives by prohibiting anti – competitive trade agreements,
preventing abuse of dominance, regulating combinations and formulating a policy on
competition, creating awareness by imparting training on competition issues. The
Competition Act, 2002 provides for the establishment of Competition Commission of
India and prescribes its duties, functions and powers.
2) 3)
4)
IMPORTANT DEFINITIONS [SECTION 2] Agreement
Agreement includes any arrangement or understanding or action in concert – a)

Whether or not, such agreement, understanding or action is formal or in writing or
b) Whether or not, such agreement, understanding or action is intended to be
enforceable by legal proceedings.
Cartel
Cartel includes an association of producers, sellers or distributors, traders or

service providers who, by agreement amongst themselves, limit, control, or attempt
to control the production, distribution, sale or price of goods or services or,
trade in goods provision of services. The Competition Act, 2002 prohibits formation
of certain cartels.
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Consumer
Consumer means any persons who – (i) Buys any goods for a consideration which has
been paid or promised or partly paid and partly promised, or under my system of
deferred payment and includes any person who uses those goods with the approval of
the person buying those goods, whether such purchase of goods is for resale or for
commercial purpose or for personal use: (ii) Hires or avails of any services for a
consideration which has been paid or promised or partly paid and partly promised,
or under any system of deferred payment and includes any person who is the
beneficiary of those services with the approval of hirer or avail or of those
services, whether such hiring or availing of services is for any commercial purpose
or for personal use.
It may be noted that under the competition Act, 2002 even if a person purchases
goods or avails of services for commercial purpose. he’ll be a consumer, whereas
for the purpose of consumer Protection Act, 1986 a person purchasing goods or
availing services for commercial purposes is not a consumer and cannot seek relief
under that Act.
Enterprise
Enterprise means a person or department of the Government, who or which is, or has
been engaged in any activity, relating to the production, storage , supply,
distribution, acquisition or control of articles or goods or the provision of
services of any kind.
Goods Goods means goods as defined in the Sale of Goods Act, 1930 and include the
following: (i) Products manufactured processed or mined: (ii) Debentures, shares
and stocks after allotment; (iii) In relation to ‘goods supplied’, goods imported
in India Services
Services means service of any description which is made available to potential

users and includes the provision of services in connection with business of any
industrial or commercial matters such as banking, communication, education,
financing, insurance, chit funds, real estate, transport storage material treatment
processing, supply of electrical or other energy, boarding, lodging, entertainment,
amusement, constructions, repair conveying of news or information and advertising.
It may be noted that under the Competition Act, 2002 the services of industrial or
commercial nature also fall within the scope of the Act, whereas under the Consumer
Protection Act, 1986 the services of commercial nature or for business or
industrial purposes are excluded for interpreting deficiency in the supply of any
service.
Relevant Market, Relevant Geographic Market, and Relevant Product Market
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The turns Relevant Market, Relevant Geographic Market, and Relevant Product Market
have relevance in determination of the agreements being anti – competitive within
the meaning, of Section 3 of the Competition Act, 2002. Relevant Market means the
market, which may be determined by the Competition Commission of India with
reference to both the markets [Section 2(1)]. Relevant Geographic Market means a
market comprising the area in which the conditions of competition for supply of
goods or provision of services or demand of goods or services are distinctly
homogeneous. Can be distinguished from conditions prevailing in neighboring areas
[Section 2(s)] Relevant Product Market means a market comprising of all those
products or services, which are regarded as interchangeable or substitutable by the
consumer, by reasons of characteristics of products or services, their prices and
intended use [Section 2(1)]
IMPORTANT PROVISIONS Anti – competitive Agreements
Section 3(1) of the Competition Act, 2002 provides that no enterprise or

association of persons shall enter into any agreement in respect of production,
supply, distribution, storage, acquisition or control of goods or provision of
services, which causes or is likely to cause an appreciable adverse effect on
competition. Section 3(2) further provides that any anti competitive agreement
within the meaning of section 3(1) shall be void.
Prohibition on Agreements having Appreciable Adverse Effect on Competition
The following agreements shall be deemed to be prohibited under section 3(1), if

such agreements cause or are likely to cause an appreciable adverse effect on
competition. a) Tie – in arrangement, i.e. an agreement requiring a purchaser of
goods, as a condition of such purchase, to purchase some other goods. b) Exclusive
supply agreement, i.e. an agreement restricting in any manner the purchaser in the
course of his trade from acquiring or otherwise dealing in any goods other than
those of the seller or any other person. c) Exclusive distribution agreement i.e.
an agreement to limit, restrict or withhold the output or supply of any goods or
allocate any area or market for the disposal or sale of the goods. d) Refusal to
deal i..e., an agreement which restricts, or is likely to restrict, by any method
the person or classes of persons to whom goods are sold or from whom goods are
bought. e) Resale price maintenance i.e., an agreement to sell goods on condition
that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than those
prices may be charged.
Important Factors while determining whether as agreement has an ‘appreciable
adverse effect’ on competition.
Section 19(3) of the competition Act, 2002 provides that while determining whether
as agreement has appreciable adverse effect on competition, the Commission shall
give due regard to all or any of the following factors, namely – a) Creation of
barriers to new entrants in the market; b) Driving existing competitors out of the
market;
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c) d) e) f)
Foreclosure of competition by hindering entry into the market; Accrual of benefit

to consumers; Improvements in production or distribution of goods or provision of
services; and Promotion of technical, scientific and economic development by means
of production or distribution of goods or provision of services. Regulation of
combination Regulation of Combination is one of the core provisions of the
Competition Act, 2002 Section 5 of the Competition Act, 2002 provides that
acquisition of one or more enterprise by one or more persons or merger or
amalgamation of enterprise shall be combination of such enterprises and persons or
enterprise which are above the certain prescribed size in terms of (a) assets or
(b) turnover as provide under section 5. Section 6 of the Competition Act, 2002
provides that any person or enterprise entering into a combination which causes or
is likely to cause an appreciable adverse effect on combination within the relevant
market in India and if such a combination is formed, it shall be void.
COMPETITION COMMISSION OF INDIA Establishment of CCI [Section 7]
Section 7 empowers the Central Government to establish a Commission to be known as

“Competition Commission of India.” The commission is a body corporate having
perpetual succession and common seal. The Competition Commission has its head
office at New Delhi (established w.e.f. 14.10.2003). In addition to this, the
Commission can establish its offices at other places in India.
Composition of CCI [Section 8]
The Commission shall consist of a Chairman and other members, which shall not be
less than 2 and more than 10. The Chairman and all the members shall be appointed
by the Central Government. Following are the qualification of Chairman and the
members: 1) He shall be a person of ability, integrity and standing; and 2) He has
been or is qualified to be Judge of a High Court or he has special knowledge and
professional experience of not less than 15 years in international trade,
economics, business, commerce, law finance, accountancy, management, etc.
Term of Office [Section 10]
The term of office of chairman shall be 5 years or up to the age of 67 years,

whichever is earlier and that of other members shall be 5 years or up to the age of
65 years, whichever is earlier. However, they shall be eligible for reappointment.
Removal of Chairperson and other Members [Section 11]
The Chairperson or a Member of CCI may be removed from the office by the Central
Government in the following cases: a) Where he is adjudged as an insolvent: b)
Where he has been engaged in any paid employment;
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c) d) e) f)
Where he has been convicted of an offence which involved moral turpitude; Where he
has acquired such financial or other interest as is likely to affect prejudicially
his functions; where he has abused his position and Where he has become physically
or mentally incapable.
Restriction on employment of Chairperson and other Members [Section 12]
As per section 12, the Chairperson and other Member shall not, for a period of two
years, accept and employment connected with the management of administration of any
enterprise which has been a party to any proceeding before the Commission under
this Act. However, the said restriction shall not apply where the Chairperson or
any Member is offered an employment in a corporation established by or under any
Central, State or Provincial Act.
Validity of Acts of Competition Commission of India [Section 15]
Act of Competition Commission of India cannot be challenged on the ground only of

any defect in the constitution of competition Commission of India or the existence
of any vacancy in the Competition Commission of India. However, acts of Competition
Commission of India can be questioned on other acts such as acting mala fide,
acting on the basis of untenable evidence, etc. It may be noted that when an act of
Competition Commission of India is called in question on such other grounds,
defects in the constitution or the existence of a vacancy in the Competition
Commission of India may also be urged as an additional ground.
Powers of CCI
Following are the important powers or CCI. 1) To inquire into anti – competitive
agreements and abuse of dominant position. 2) to determine whether an agreement has
an appreciable adverse effect on competition: 3) Enquire whether a combination has
cause or likely to cause an appreciable adverse effect on competition: 4) To issue
‘cease and desist’ orders; 5) To grant such interim relief as would be necessary in
a particular case; 6) to award compensation; 7) To order division of dominant
undertakings: 8) To order demerger: 9) To impose firms; 10) To order cost for
frivolous complaints.
Powers of CCI to regulate its own procedure [Section 36]
The CCI has been empowered to lay down its own procedure and regulation and shall
not be bound by the procedure laid down by the Code of Civil Procedure, 1908.
However, it shall observe the principle of natural justice and shall be subject to
the rules made by the Central Government for the procedure to be followed in
inquiries. The CCI shall have the same powers as are vested in the civil court
under the Code of Civil Procedure. 1908 while trying a suit, in respect of the
following matters, namely; i) Summoning and enforcing the attendance of any person
and examining them on oath; ii) Requiring the discovery and production of
documents;
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iii) iv) v) vi) vii)
Receiving the evidence on affidavits; Issuing the commission for the examination of
witnesses or documents; Requisitioning any public record/document from any office;
Dismissing an application in default or deciding it; Any other such matter as may
be prescribed
Section 36 of the Competition Act, 2002 empowers the Commission to call upon the
experts from the fields of economics, commerce, accountancy, international trade or
from any other discipline to assist the Commission in the conduct of any inquiry
before it.,
DIRECTOR GENERAL
Section 16 empowers the Central Government to appoint a Director General and such
number of additional, joint, deputy or assistant Director Generals or other
advisers, consultants, or officers. These person shall be appointed from amongst
the persons of integrity and outstanding ability and who have experience in
investigation and knowledge of accountancy, management, business, public
administration, international trade, economics, law etc. Director General is an
important functionary under the Competition Act, 2002. He assists the Commission by
furnishing Investigation Report in respect of such matters as are referred to him
by the CCI. He also assists the Commission in conducting proceedings of enquiries,
which are initiated by the CCI suo moto.
COMPETITION ADVOCACY
Section 49 of the Competition Act, 2002 provides that while formulating a policy on
competition including review of laws related to competition, the Central Government
may make a reference to the CCI for its opinion on the possible effects of such a
policy on competitions. The Commission shall, within 60 days of receipt of such a
reference, give its opinion on it to the Central Government. Thereafter the Central
Government may formulate such policy as it deems fit. It may be noted that the role
of the Commission is advisory and the opinion given by it shall not be binding on
the Central Government.
DIFFERENCE BETWEEN MRTP ACT AND COMPETITION ACT
Following are the important differences between the MRTP Act, 1969 and Competition
Act, 2002: 1) 2) 3. MRTP Act is based on the pre – liberazation scenario whereas
Competition Act is based on the post liberalization scenario. MRTP Act emphasizes
on curbing monopolies whereas Competition Act emphasizes on Promoting competition.
MRTP Act provides for compulsory registration of agreements relating to restrictive
trade practices whereas in Competition Act, there is no such requirement of
registration of agreements. Under Competition Act, dominance per se is not bad but
only the abuse of dominance is considered bad whereas under the MRTP Act, dominance
itself is bad.
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5) 6)
Combinations are not regulated by MRTP Act whereas they are regulated by
Competition Act. MRTP Act does not vest MRTP Commission power to inquire into
cartels of foreign origin in a direct manner whereas the Competition Act seeks to
regulate them.
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4.3 The Negotiable Instruments, Act, 1881

1. INTRODUCTION TO NEGOTIABLE INSTRUMENTS ¾ Definition of Negotiable instrument
(Sec.13) Negotiable instrument means - a promissory note; or - bill of exchange; or
- cheque Payable - either to order; or - to the bearer. ¾ Meaning of Negotiable
instrument - Negotiable instrument means an instrument - The property in which is
acquired by anyone who takes it – • Bonafide; and • For value - notwithstanding any
defect in the title of any prior party. - In other words negotiable instrument
means an instrument - Notwithstanding any defect in the title of any prior party.
2. • • • • 3. ESSENTIALS OR CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT (Sec.13)
Freely transferable from one person to another Transferable infinitum (i.e.
indefinitely). HDC gets a good title to negotiable instrument even though the title
of transferor is defective. A negotiable instrument may more than one payee jointly
or alternatively. PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS (Sec.118)
Unless the contrary is proved, the following presumptions shall be made – ¾ As to

consideration That every negotiable instrument was made or drawn for consideration
and that every such instrument when it has been accepted, endorsed or negotiated
has been for consideration.
¾ As to date That every negotiable instrument bearing a date was made or drawn on
such date. ¾ As to time of acceptance That every accepted bill of exchange was
accepted within a reasonable time after its date and before its maturity. ¾ As to
time of transfer That every transfer of a negotiable instrument was made before its
maturity. ¾ As to order of endorsements That the endorsements appearing upon a
negotiable instrument were made in the order in which they appear thereon. SUJEET
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¾ That holder is a holder; That the holder of a negotiable instrument is a holder

in due course. ¾ As to dishonour If a suit is filed upon an instrument which has
been dishonored, the court shall, on proof of the protest, presume the fact of
dishonour.
The above presumptions are rebuttable (debatable) by producing evidence to the

contrary. It is the responsibility of the person alleging the non existence of
presumptions to prove the same. The above presumptions are not applicable where an
instrument has been obtained by an offence, fraud or for unlawful consideration.
4. MEANING OF PROMISSORY NOTE (Sec.4)
A ‘Promissory note’ is an instrument in writing (not being a bank – note or a

currency – note) containing an unconditional undertaking Signed by the maker to pay
a certain sum of money only to – (a) a certain person; or (b) the order of a
certain person. Rs……………. Place………….. Date…………..
……..month/days after date. I promise to pay ……….or Bearer/Order the sum of

Rs………..for value received with interest @..............p.a. with ………..rests …………..
(Maker)
5.
ESSENTIALS CHARACTERISTICS OF A PROMISSORY NOTE ¾ In writing An oral promise to pay

is not sufficient Example A promises to pay Rs.1,000 to ‘B’, over telephone.
(Sec.4)
¾ Express promise to pay There must be express promise to pay. Mere acknowledgement
of indebtedness is not sufficient. • “I acknowledge myself to be indebted to B in
Rs.5,000, to be paid on demand, for value received”. The promise to pay is definite
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“Mr. B.I.O.U Rs.1,000.” There is no promise to pay and therefore this is not a
valid promissory note.
¾ Definite and unconditional promise If a promise to pay is dependent upon an event

which is certain to happen, although the time of its happening is uncertain, the
promise to pay is unconditional. • “I promise to pay B Rs.500 seven days after my
marriage with C.” The promise is conditional since the promise is dependent upon
marriage of the promisor with C, which may or not happen. • “I promise to pay B
Rs.500 on D’s death, provided D leaves me enough to pay that sum.” The promise is
conditional since the promise is dependent upon the estate inherited by the
promisor. • “I promise to pay B Rs.500 on D’s death.” The promise is not
conditional, but definite since death of D is certain. Therefore, the promissory
not is valid. ¾ Signed by maker A promissory note must be signed by the maker. The
signatures may be made on any part of the instrument. ¾ Promise to pay a certain
sum • “I promise to pay B Rs.500 and all other sums which shall be due to him.”
Since the amount payable is not certain, it is not a valid promissory note. • “I
promise to pay B Rs.500 first deducting there from any money which he owes me.”
Since the amount payable is not certain, it is not a valid promissory note. ¾
Promise to pay money only “I promise to pay B Rs.500 and to deliver to him my black
horse on 1st January next.” It is not a valid promissory note since the promisor is
required to deliver his black horse also, which is not ‘money’. ¾ Payee must be
certain The name of payee must be specified in the promissory note, otherwise it
will be invalid. ¾ Stamped A promissory note must be stamped. Parties to a
promissory note Maker : The person who makes the promissory note is called as
maker. His liability is primary and unconditional. Payee : The person to whom money
is to be paid is named in the promissory note. He is called as payee.
The words “ or to the bearer of the instrument” is inoperative in view of section

31 of the Reserve Bank of India Act, 1934, which provides that no person in India
other than Reserve Bank of India or Central Government can make or issue promissory
note payable to bearer of the instrument.
6. BILL OF EXCHANGE (Sec. 5)
A ‘bill of exchange’ is an instrument in writing Containing an unconditional order

Signed by the maker
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Directing a certain person To pay a certain sum of money only to – (a) a certain
person ; or (b) the order of a certain person; or (c) the bearer of the instrument.
Amount: Rs………… Place……………. Date……………..
…….month/days after date, pay to ……………or Bearer/Order the sum of Rupees…………only for
value received. …………. (Drawer) To …………. (Drawee)
¾ Essentials characteristics of a bill of exchange (a) It must be in writing (b) It

must contain an express order to pay (c) The order to pay must be definite and
unconditional (d) It must be signed by the drawer (e) The sum contained in the
order must be certain (f) The order must be to pay money only (g) Drawer, drawee
and payee must be certain (usually, same person is the drawer and payee) (h) It
must be stamped. ¾ Parties to a bill of exchange Drawer • The person who draws the
bill (i.e.the person who makes the bill) is called as drawer. • His liability is
secondary and conditional • His liability is primary and conditional until the bill
is accepted. Drawee • The person on whom the bill is drawn is called as drawee. •
On acceptance of the bill (a) he is called as acceptor; (b) he becomes liable for
the payment of the bill; (c) his liability is primary and unconditional. Payee. •
The person to whom money is to be paid is named in the bill. • He is called as
payee.
The words “or the bearer of the instrument” is inoperative is view of section 31 of
the Reserve Bank of India Act, 1934, which provides that no person in India other
than Reserve Bank of India or Central Government can make or issue promissory note
payable to bearer of the instrument. Difference between promissory note and bill of
exchange.
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7.
CHEQUE
(Sec.6)
A cheque is a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand (i.e. it is always payable on demand) and it
includes – - the electronic image of truncated cheque; and - a cheque in electronic
from.
¾ Essentials characteristics of a cheque (a) It must be in writing (b) It must
contain an express order to pay (c) The order to pay must be definite and
unconditional (d) It must be signed by the drawer (e) The sum contained in the
order must be certain (f) The order must be to pay money only (g) Drawer, drawee
and payee must be certain (h) It is always drawn upon a specified banker (i) It is
always payable on demand • A cheque must contain all the characteristics of a bill
of exchange • A cheque does not require (a) stamping ; or (b) acceptance. ¾ Parties
to a cheque Drawer • The person who draws the cheque, i.e., the person who makes
the cheque is called as drawer. • His liability is primary and conditional Drawee •
The bank on whom the cheque is drawn is called as drawee. • He makes the payment of
the cheque. Payee • The person to whom money is to be paid (i.e., the person in
whose favour cheque is issued) is named in the cheque. He is called as payee. • The
payee may be the drawer himself or a third party.
Meaning of electronic cheque and truncated cheque

¾ Meaning of truncated cheque - A truncated cheque means a cheque - Which is
truncated during the course of a clearing cycle - Either by the clearing house or
bank whether paying or receiving payment. - Immediately on generation of an
electronic image. - For transmission substituting the further physical movement of
cheque in writing ¾ Meaning of ‘a cheque in electronic form’ - A cheque in
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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 biometric signature) and asymmetric crypto
system.
¾ Duties of collecting banker The collecting banker shall verify with due diligence
and ordinary care – • The prima facie genuineness of the cheque to be truncated; •
As to whether any fraud, forgery or tampering is apparent on the face of the
instrument. ¾ Presentment of truncated cheque In case of any reasonable suspicion
about the genuineness of the electronic image of a truncated cheque (e.g. suspicion
as to fraud, forgery, tampering or destruction of the instrument), the paying
banker is entitled to – • Demand any further information regarding the truncated
cheque; • Demand the presentment of truncated cheque itself for verification.
Difference between electronic cheque and truncated cheque Electronic cheque
Truncated cheque Paper is not used at any stage in creation of an A truncated
cheque is nothing but a paper electronic cheque. cheque, which is truncated during
the clearing cycle. Digital signatures must be used to create an The paper cheque,
which is afterwards electronic image of cheque. Thus, an electronic truncated,
contains no digital signature. The signatures in ink appear on the truncated cheque
contains digital signature. cheque. The original writing of an electronic cheque is
The – original writing of a truncated cheque is in electronic form. on paper duly –
signed in ink. After the paper cheque is converted into electronic form, it is
truncated and thus, it becomes a truncated cheque. 8. CAPACITY OF A PERSON TO BE A
PARTY TO A NEGOTIABLE INSTRUMENT (Sec. 26) ¾ Person must be capable of contracting
A person shall be liable on a negotiable instrument (by reason of making, drawing,
accepting endorsing, delivering or negotiating a negotiable instrument) only if he
is capable of contracting according to the law to which he is subject. ¾ Liability
in case of a minor • A minor may draw, endorse, deliver and negotiate any
negotiable instrument. • All the parties shall be bound on such negotiable
instrument. • However, the minor shall not be bound on such negotiable instrument.
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9.
CLASSIFICATION OF NEGOTIABLE INSTRUMENT Classification of instruments
(Sec. 13, 19 and 21)
Based on Transfer Bearer Order Instrument Instrument Inland
Based on Location Demand Instrument Foreign
Based on payment Time Instrument Ambiguous Instrument
Others Inchoate Instrument
¾ Order Instrument : An instrument • Payable to a particular person or 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. ¾ Bearer
Instrument : An instrument is payable to bearer of – (a) it is expressed to be so
payable, or (b) on which the only or last endorsement is an endorsement in blank. •
Promissory note – can not be made payable to bearer • Bill of exchange can not be
made payable to bearer on demand ¾ Demand Instrument: An instrument which satisfies
the following conditions – (a) Time for payment is not specified. (b) Expressed to
be payable on demand. (c) Can be presented for payment at any time. Note: A P/N or
B/E, in which no time for payment is specified, and a cheque, are payable on
demand. [ Sec.19] ¾ Time Instrument : An instrument in which time for payments is
specified and may be payable – (a) After a specified period, or (b) On a specified
day, or (c) Certain period after, sight, or (d) On the happening of a certain
event. ¾ Inland Instrument [Sec.11]: A P/N, B/E or cheque is said to be an inland
instrument, if any one of the following conditions is satisfied – (a) Drawn or made
in India and made payable in India, or (b) Drawn or made in India and drawn upon a
person resident in India. Note: Even if an Inland Bill is endorsed to a foreign
country, it continues to be an Inland Instrument. ¾ Foreign Instrument [Sec.12]: An
instrument which is not an Inland Instrument, is deemed to be a Foreign Instrument.
SUJEET JHA 211 9213188188
LAW& AUDIT
¾ Ambiguous Instruments [Sec.17]: (a) Where an instrument may be constructed either

as a P/N or as a B/E, the holder may at his option treat it as either, and the
instrument shall henceforth be treated accordingly, e.g. a B/E drawn in favour of a
fictitious person. (b) An Ambiguous Instrument treated as a P/N or as a B/E cannot
be treated differently afterwards. ¾ Conditions for an inchoate instrument (a) A
person signs a negotiable instrument. (b) The negotiable instrument is stamped. (c)
The negotiable instrument is either wholly blank or is partially blank. (d) The
person signing such negotiable instrument delivers it to another person. ¾ Legal
effect The holder gets a prima facie authority to make or complete the negotiable
instrument. ¾ Liability on an inchoate instrument Rights of a person to whom an
inchoate instrument is delivered He can recover only such amount as he was
authorised to fill. Rights of HDC He can recover the whole amount stated in the
instrument, but not exceeding the amount covered by the stamps. 10. MATURITY OF A
NEGOTIABLE INSTRUMENT (Sec.22)
¾ Maturity of a negotiable instrument Days of grace - It means the date on which

the negotiable instrument falls due for payment. - A negotiable instrument which is
payable otherwise than on demand is entitled to 3 days of grace. 11. CALCULATION OF
DAYS OF MATURITY Case Negotiable instrument payable on a specified day Negotiable
instrument payable on a stated number of days after date Negotiable instrument
payable on stated number of days after sight Negotiable instrument payable on
stated number of days after happening of a certain event Negotiable instrument
payable on stated number of months after date Negotiable instrument payable on
stated number of months after sight Negotiable instrument payable on stated number
of months SUJEET JHA Date of maturity Specified day + 3rd day (Sec.23 to 25)
Date on which negotiable instrument is drawn + stated number of days + 3rd day Date
on which negotiable instrument is presented for4 sight + stated number of days +
3rd day Date on which such event happens + stated number of day + 3rd day
Corresponding day of the relevant month (i.e., date on which negotiable instrument
is drawn + stated number of months) + 3rd day Corresponding day of the relevant
month* (i.e., Date on which negotiable instrument is presented for sight + stated
number of months) + 3rd day Corresponding day of the relevant month* (i.e., Date on
which such event happens + stated number of
212 9213188188
LAW& AUDIT
after happening of a certain months)+ 3rd day event If the day of maturity of
Immediately preceding business day negotiable instrument is a public holiday If the
day of maturity of Immediately succeeding business day negotiable instrument is an
emergency or unforeseen public holiday
12. NEGOTIATION – MEANING AND METHODS (Sec.14)
¾ Meaning of negotiation Negotiation means transfer of a negotiable instrument to

any other person so an to constitute that person the holder of such negotiable
instrument. ¾ Methods of negotiation Negotiation by delivery • A bearer instrument
may be negotiated by delivery. • The delivery must be voluntary Negotiation by
endorsement and delivery An order instrument can be negotiated only by way of (i)
endorsement; and (ii) delivery. 13. MEANING OF ENDORSEMENT Endorsement means
Signing - on the face or back of negotiable instrument; or - on a slip of paper
annexed to the negotiable instrument By - the holder of negotiable instrument For
the purpose of - negotiating such negotiable instrument . Type of Endorsement (Sec.
15)
In Blank Sign only and name of endorses not written
In full Sign with endorsee’s name written
Restrictive Restrict rights Sans Recourse Sans Frais
Qualified
Facultative
Endorser excludes his own liability

SUJEET JHA 213
No expenses Certain to be incurred rights on endorser waived account

9213188188
LAW& AUDIT
ESSENTIAL REQUEREMENTS OF A VALID ENDORSEMENT (Sec.15 and 16) Writing The

endorsement must be in writing Signed The endorsement shall not be valid unless it
is signed. By holder The endorsement shall be valid only if the negotiable
instrument is signed by the holder.
15.
KINDS OF ENDORSEMENTS
(Sec.16, 50, 52, 56)
¾ General endorsement i.e. endorsement in blank Meaning - General endorsement

means, an endorsement made by the endorser without writing the name of the
endorsee. Effect - Order instrument is converted into bearer instrument. ¾ Special
endorsement i.e., endorsement in full Special endorsement means an endorsement made
by a holder by – (a) singing his name, and (b) adding a direction to pay the amount
to a specified person ¾ Restrictive endorsement An endorsement which restricts the
right of further negotiation is called as restrictive endorsement. ¾ Partial
endorsement An endorsement which purports to transfer only a part of the amount of
the instrument is called as partial endorsement. Partial endorsement is not valid
at law. ¾ Conditional endorsement (a) Sans Recourse – Endorser relieves himself
from the liability to all subsequent endorsees. (b) Facultative – Endorser waives
any of his rights. (c) Contingent - Endorser makes his liability dependent upon the
happening of an event.
16.
NEGOTIATION BACK
(Sec.90)
¾ Meaning If – - a negotiable instrument is negotiated by the holder, but - the

endorser again becomes the holder of such negotiable instrument Then – SUJEET JHA
214 9213188188
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- it is called as negotiation back. ¾ Effect • The holder cannot enforce payment

against an intermediate party to whom he was previously liable. • The holder can
enforce payment against all the parties to whom he was not previously liable. •
However, the holder can sue all the prior parties (including all intermediate
parties to whom he was previously liable), if he had made sans recourse
endorsement.
17.
DISTINCTION BETWEEN NEGOTIATION AND ASSIGNMENT Negotiation If a negotiable

instrument is transferred by way of negotiation, Negotiable Instrument Act, 1881,
applies. Negotiation means transfer of a negotiable instrument to any other person
so as to constitute that person the holder of such negotiable instrument.
Negotiation can be made for transferring negotiable instruments only. A bearer
instrument can be negotiated merely by delivery, and an order instrument can be
negotiated by endorsement and delivery. Notice of negotiation is not required to be
given to any party. It is presumed that every negotiable instrument was negotiated
for consideration. The other party has to prove that negotiation was without any
consideration. The transferee of a negotiable instrument acquires a title better
than that of the transfer, i.e., he becomes a holder in due course. Negotiation
does not require payment of stamp duty. Assignment Where any right is transferred
by way of assignment, the Transfer of Property Act applies.
Basis 1. Applicable Act
2. Meaning
Transfer of a right to receive the payment of a debt by one person (viz, assignor)
to another document is called as assignment. Assignment can be made of any right.
Assignment is valid only if it is made in writing and is signed by the assignor.
Notice of assignment must be given by the assignee to the debtor. There is no such
presumption in case of assignment. The assignee has to prove that there was some
consideration. The assignee does not acquire a title better than that of the
assignor. Assignment requires payment of stamp duty.
3. Scope 4. Method or manner
5. Notice 6. consideration 7. Burden of proof 8. Better title
9. Stamp duty
18. MEANING AND PURPOSE OF CROSSING SUJEET JHA 215
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¾ Meaning of crossing Crossing means a direction given by the drawer of the cheque
to the drawee bank, not to pay the cheque at the counter of the bank, but to pay it
to a person who presents it through a banker. ¾ Purpose of crossing Crossing makes
it possible to trace the person to whom the payment has been made. Thus, it makes
the cheque safe. 19. TYPES OF CROSSING (Sec. 123 to 131A)
¾ General Crossing ; Sec.123 Where a cheque bears across its face an addition of –
• The words ‘and company’ or any abbreviations thereof between two parallel
transverse lines, or • Two parallel transverse lines simply.
………………. Pay………………………………………………………………………….. ……………………………………………………………………………..or bearer

Rupees………………………………………………………………. ……………………………………………………………………… XYZ Bank XXXX XXXX
Either with or without the words ‘not negotiable’, the addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed generally. Where a cheque is
crossed generally, the banker on whom it is drawn shall not pay it otherwise than
to a banker.
¾ Special Crossing : Sec.124. 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.
………………. Pay………………………………………………………………………….. ……………………………………………………………………………..or bearer

Rupees……………………………………………………………………………… …………………………………………………………………………….. XYZ Bank XXXX
XXXX
Two parallel transverse lines are not a must. Where a cheque is crossed specially,
the banker on whom it is crossed shall not pay it, otherwise than to the banker to
whom it is crossed or his agent for collection.
SUJEET JHA 216 9213188188
LAW& AUDIT
Difference: In general crossing the Name of the Bank is not mentioned whereas in
special crossing the Name of the Bank is mentioned. ‘Not Negotiable’ Crossing :
Sec.130. The object of “Not negotiable” crossing is to protect the rights of holder
of a cheque. A person taking a cheque crossed generally or specially, bearing in
either cases the words ‘not negotiable’, shall not have, and shall not be capable
of giving a better title to the cheque other than that which the person from whom
he took it had. Ordinarily a person acquiring a cheque in good faith becomes its
holder in due course just as in the case of an open document. Such a cheque can be
negotiated further. However, where a cheque is crossed as ‘Not Negotiable’, either
generally or specially, the Holder in due course will not get a better title than
the person from whom the received. It maybe noted that though it is mentioned ‘Not
Negotiable’, the cheque can be transferred. The only restriction is with regard to
the title passed. In other words, the principle of nema dat 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, even though the cheque is in the hands of a
holder in due course.
¾ ‘Account Payee’ Crossing / Restrictive Crossing The purpose of this crossing
bearing the words “A/c Payee” is to obviate the risk of a wrong person obtaining
payment on a cheque.
It is a direction to banker to credit the proceeds only to the account of the

payee. The cheque remarks legally negotiable but “A/c payee” crossing hinders the
negotiability of the cheque in practice.
20. BOUNCING OR DISHONOUR OF CHEQUES (Sec.31 and 138)
¾ Liability of drawee on dishonour Conditions (Sec.31) If – - the drawer has

sufficient funds in the account; and - such funds are properly applicable to
payment of the cheque Then – - the drawee is duly required to pay the cheque. - In
case of default by drawee (i.e. Banker), the drawee shall compensate the drawer for
loss caused to him. ¾ Liability of drawer on dishonour (Sec.138) Nature of
liability • Imprisonment – 2 years (Maximum); or • Fine - 2 times the amount of
cheque (Maximum); or • Both Conditions - Cheque was issued to discharge a legally
enforceable debt. • Debt • Reason for dishonour – insufficiency of funds •
Presentment of cheque – within 6 months or validity period of the cheque SUJEET JHA
217 9213188188
MS EDUCONZ PVT. LTD. • • • 21.
LAW& AUDIT
Demand made from drawer – within 30 days of dishonour Default by drawer to pay -
within 15 days of demand made. Complaint by holder – within 1 month, with the
Court.
(Sec.8 and 9)
HOLDER
¾ Meaning of ‘holder’ (Sec.8) (a) He must be entitled to the possession of

negotiable instrument in his own name. (b) He must be entitled to receive or
recover the amount due on negotiable instrument from the parties liable on
negotiable instrument. ¾ Holder for value ‘Holder for value’ means, as regards all
parties prior to himself, holder of an instrument for which value has, at any time,
been given. ¾ Meaning of ‘holder in due course’ (Sec.9) (a) He must be a holder.
(b) He must have become the holder for consideration. (c) He must have obtained the
possession of negotiable instrument before maturity (d) He must have obtained the
negotiable instrument in good faith, i.e. without sufficient cause to believe that
any defect existed in the title of the person from whom he derived his title.
Example:Situation Holder Holder for Holder in due Value Course a. X steals a cheque
√ × × √ √ × b. X gets a cheque for consideration but after maturity √ √ √ c. X gets
a cheque for consideration before maturity. 22. PRIVILEGES OF A HOLDER IN DUE
COURSE (Sec.20, 36, 43, 46, 53 and 58)
Every prior party to a negotiable instrument is liable to a HDC (Sec.36) A

holder who derives title from HDC has the same rights as that of a HDC (Sec.53)
No prior party can set up a defense that the negotiable instrument was drawn, made
or endorsed by him without any consideration (Sec.43) No prior party can set up a
defence that the negotiable instrument was lost or was obtained from him by an
offence or fraud or for an unlawful consideration. Thus, HDC gets a valid title to
the negotiable instrument even though the title of the transferor was defective
(Sec.58) No Prior party can allege that negotiable instrument was delivered
conditionally or for a special purpose only (Sec.46). HDC can claim full amount
of the negotiable instrument (but not exceeding the amount covered by the stamp)
even though such amount is in excess of the amount authorised by the person
delivering an inchoate negotiable instrument (Sec.20). 23. DIFFERNCE BETWEEN HOLDER
AND HDC 218 9213188188
SUJEET JHA
MS EDUCONZ PVT. LTD. Basis 1. consideration Holder A person becomes a holder even
if he obtains the negotiable instrument without any consideration. A person becomes
a holder even is he obtains the negotiable instrument after the maturity of the
negotiable instrument. A person becomes a holder, even if he does not obtain the
negotiable instrument in good faith. A holder is not entitled to the privileges,
which are available for HDC.
LAW& AUDIT HDC A person becomes a HDC only if he obtains the negotiable instrument
for consideration. A person becomes a HDC only if he obtains the negotiable
instrument before its maturity.
2. Before Maturity
3. Good Faith, i.e., bonafide 4. Privileges
For being a HDC, a person must obtain the negotiable instrument in good faith.
5. Right to sue
24. 25.
A HDC is entitled to various privileges as specified under the Negotiable

Instruments Act, 1881. A holder cannot sue all the A HDC can sue all the prior
prior parties. parties.
(Sec.10)
PAYMENT IN DUE COURSE.
Payment is made as per apparent tenor. Payment is made in good faithPayment is made
without negligence Payment is made to holder of negotiable instrument Payment is
made in money only
PROTECTION TO PAYING BANKER (Sec.85)
¾ Cheque payable to order • Payment is made in due course. • The protection shall
be available notwithstanding that any endorsement subsequently turns out to be a
forgery. ¾ Cheque originally payable to bearer • Payment is made in due course •
Payment is made to the bearer of the cheque • The protection shall be available
notwithstanding that any endorsement appears on the cheque ¾ Cheques crossed
generally • Payment is made in due course. • Payment is made to any banker. ¾
Cheques crossed specially • Payment is made in due course • Payment is made to the
banker to whom the cheque is crossed.
SUJEET JHA
219
9213188188
MS EDUCONZ PVT. LTD. 26. LIABILITY OF THE PAYING BANKER
LAW& AUDIT (Sec.129)
The paying banker shall be liable to the owner of the cheque for any loss sustained
by him in the following 2 cases. (a) Where the paying banker pays a cheque crossed
generally otherwise than to a banker. (b) Where the paying banker pays a cheque
crossed specially otherwise than to the specified banker.
27. 28. BANKER MUST REFUSE TO HONOUR A
CUSTOMER’S CHEQUE
Stop payment Garnishee order Death of customer Insolvency of customer Insanity or

customer Assignment of funds by customer Defect in title of holder Loss of cheque
Materially altered cheque, mutilated cheque, cheque of doubtful validity,
incomplete cheque Different signatures Receipt of application for closure of
account Irregular endorsement Stale cheque, i.e., outdated cheque Post dated cheque
Undated cheque
BANKER MAY REFUSE TO HONOUR A CUSTOMER’S CHEQUE
Insufficient funds Funds not applicable Presentment at different branch Presentment

after banking hours
29. EFFECT OF NON – PRESENTMENT OF CHEQUE WITHIN REASONABLE TIME (Sec.84) ¾ No

liability of drawer if bank fails Conditions (a) The drawer has sufficient balance
when he issue the cheque, and when the cheque ought to be presented for payment.
(b) The holder fails to present the cheque within a reasonable time of issue of the
cheque. (c) Meanwhile (i.e. after issue of the cheque but before presentation of
the cheque by the holder) the bank fails, and consequently the drawer suffers
actual damages. 30. MATERIAL ALTERATION (Sec.20, 49, 87 and 125)
¾ Meaning An alteration is called as material alteration if it alters – • the

character or operation (i.e. the legal effect) of a negotiable instrument; or • the
rights and liabilities of any of the parties to a negotiable instrument. SUJEET JHA
220 9213188188
LAW& AUDIT
¾ Material alterations authorised by Act (a) Filling blanks of an inchoate

instrument (Sec.20) (b) Conversion of a blank endorsement into an endorsement in
full (Sec.49) (c) Crossing of cheques (Sec.125) (d) Conversion of general crossing
into special crossing or not negotiable crossing or A/c Payee Crossing (but not
vice – versa) (e) Conversion of a bearer instrument into an order instrument by
deleting the word ‘Bearer’. ¾ Effects of material alteration (87) All the parties
to negotiable not consenting to the material alteration are discharged. 31.
ACCEPTANCE ¾ Meaning of acceptance (Sec.7) (a) The drawee signs the bill; and (b)
The drawee delivers it to the holder of the bill; or ¾ Effect (Sec.7) The drawee
becomes the acceptor. ¾ Essentials of a valid acceptance (Sec.7) (a) Writing
(whether on the face or back of the bill) (b) Signed (Signature without the word
‘accepted’ is also valid) (c) Signing on the bill (d) Delivery or intimation to the
holder that the bill has been accepted. ¾ Types of acceptance (Sec.86) (a) General
– Acceptance of bill without any qualification. (b) Qualified – Acceptance of bill
subject to some qualification (e.g. accepting the bill subject to the condition
that the payment of bill shall be made only on happening of an event specified
therein). ¾ Effect of qualified acceptance (Sec. 86) (a) The holder may object to
the qualified acceptance. In such a case, it shall be treated that the bill is
dishonoured due to non – acceptance. (b) He may give his consent to the qualified
acceptance. In such a case, all the previous parties, not consenting to it, are
discharged. 32. DISHONOUR BY NON – ACCEPTANCE (Sec.91) (Sec.7 and 86)
¾ Meaning A bill is dishonoured by non – acceptance if it is duly presented for

acceptance, but the drawee refuses to accept the bill. ¾ Cases in which a bill is
dishonoured by non – acceptance (a) Where a bill is not accepted by the drawee
within 48 hours of presentment of bill. If the holder allows to the drawee more
than 48 hours for acceptance, all the prior parties not consenting to the same are
discharged from liability to such holder. (b) In case there are two or more drawees
who are not partners, if the bill is not accepted by all the drawees. (c) Where the
drawee is a fictitious person (d) When the drawee cannot be found even after a
reasonable search. SUJEET JHA 221 9213188188
LAW& AUDIT
(e) When the drawee is incompetent to contract. (f) Where the drawee gives a
conditional acceptance, and the holder does not give his consent to the conditional
acceptance.
¾ Effects • The holders gets an immediate right to sue all the prior parties. • He
need not wait till the maturity of the bill for it to be dishonoured on presentment
for payment. ¾ Non – applicability A promissory note or a cheque cannot be
dishonoured by non – acceptance since a promissory note or a cheque does not
require any acceptance. 33. ACCEPTANCE FOR HONOUR (Sec.108 to 112)
¾ Meaning The person who accepts the bill for the honour of any other person is
called as an acceptor for honour; ¾ Conditions for ‘acceptance for honour’ • The
bill must have been noted for non – acceptance • The acceptance is given – - for
the honour of any party already liable under the bill. - By any person who is
already not liable under the bill. - With the consent of the holder of the bill. •
The acceptance must be made in writing on the bill. ¾ Liability of acceptor for
honour • He is liable to pay the amount of the bill, if the drawee does not pay. •
He is liable only to the parties subsequent to the party for whose honour the bill
is accepted. ¾ Rights of acceptor for honour He is entitled to recover the amount
paid by him from the party for whose honour the bill was accepted, and from all the
parties prior to such party. 34. PAYMENT FOR HONOUR (Sec.113 and 114)
¾ Meaning of ‘payer for honour’ A person who pays a bill for honour of any other
person is called as ‘payer for honour’ ¾ Conditions for ‘payment for honour’ • The
bill must have been noted for non – payment. • Payment for honour is made – - for
the honour of any party already liable under the bill. - By any person (whether or
not he is already liable under the bill). - With the consent of the holder of the
public. • The payment must be recorded by Notary Public. ¾ Rights of payer for
honour • The payer for honour is entitled to all the rights of a holder. SUJEET JHA
222 9213188188
LAW& AUDIT
He can recover all the sums paid by him form – (a) the party for whose honour he
pays; and (b) all the parties prior to such party.
35.
DISHONOUR BY NON – PAYMENT (Sec.92) Kinds of negotiable A negotiable instrument

shall be dishonoured by non – payment instrument if default in payment is made by
the following parties Promissory note Maker Bill Acceptor (Drawee, in case the bill
does not require acceptance Cheque Drawee NOTICE OF DISHONOUR (Sec.93 to 98)
36.
¾ Notice by whom? Notice may be given by the holder or any party liable on the
negotiable instrument. ¾ Notice to whom? Notice must be given to all the parties to
whom the holder seeks to make liable ¾ Contents of notice Notice must disclose the
fact of dishonour of negotiable instrument ¾ Effects of default A party (other than
the party primarily liable on the negotiable instrument) to whom notice of
dishonour is not given is discharged from liability on the negotiable instrument. ¾
When notice of dishonour is unnecessary or excused (Sec.98) (a) When notice of
dishonour is dispensed with by a party. (b) Where the drawer of the cheque has
countermanded payment, notice to drawer is not required to be given. (c) When the
party entitled cannot be found even after due search. (d) Where the party bound to
give notice is unable to give notice without any fault of his own. 37. NOTING AND
PROTESTING (Sec.99 to 103)
¾ Meaning of noting Recording the fact of dishonour of a negotiable instrument on

the negotiable instrument. ¾ Procedure and contents of noting • The dishonoured
bill is handed over to a Notary Public. • Notary Public presents it again for
acceptance/payment. • If the drawee/acceptor refuses to accept or pay the bill, the
Notary Public records the fact of dishonour on the bill. ¾ Noting is optional It is
net mandatory to get the fact of dishonour noted. ¾ Meaning of protest A
certificate issued by Notary Public stating the fact of dishonour. 38. DRAWEE IN
CASE OF NEED 223 (Sec.7 and 115) 9213188188
SUJEET JHA
LAW& AUDIT
The name of any person may be given in a bill as ‘drawee in case of need’. His
liability arises on the bill only when the bill is not accepted by the drawee named
in the bill. The bill is not dishonoured until it has been dishonoured by drawee
in case of need. 39. DISCHARGE OF A NEGOTIABLE INSTRUMENT The Negotiable Instrument
is deemed to be discharged in the following cases – ¾ Payment [Sec.78]: • When the
party primarily liable on the instrument i.e. Maker of P/N, Acceptor of B/E or
Drawee Bank, makes the payment in due course to the Holder at or after maturity. •
Payment by a party who is secondarily liable does not discharge the instrument
because the payer holds it to enforce it against prior indorsers and the principle
Debtor. ¾ Cancellation of N/I [Sec.82]: When the holder cancels an instrument with
intention to release the party primarily liable thereon from liability, the
instrument is discharged and ceases to be negotiable. ¾ Express Waiver of Rights by
Holder: The N/I is discharged when the Holder, at or after its maturity absolucly
and unconditionally renounces in writing , his rights against all the parties to
the instrument. ¾ Lapse of time : An instrument becomes discharged by lapse of time
making the debt time barred under the limitation Act. ¾ Insolvency of party
primarily liable: When the party primarily liable becomes insolvent, the instrument
is discharged and the holder cannot make any other prior party liable thereon. ¾
Material Alteration to Instrument ; The instrument stands discharged when it is
rendered void by a material alteration to the Instrument. ¾ Negotiation to Acceptor
[Sec. 90]; When a B/E which has been negotiated is, at or after maturity, held by
the Acceptor in his own right, all rights of action thereon are extinguished, i.e.
the B/E is discharged. 40. DISCHARGE OF A PARTY Discharge by Cancellation Causal
Factor Holder deliberately cancels the name of Acceptor / Indorser (by striking off
the name) with an intent to discharge him from liability. (Sec.82 to 90) Discharge
of …….. Maker, Acceptor or Indorser of N/I is discharged from liability to such
Holder and to all parties claiming under such Holder.
Note: Cancellation done under a mistake or without authority of the Holder would be
inoperative and will and discharge any party. Release
SUJEET JHA
Holder
discharges
224
the Maker, Acceptor or Indorser

9213188188
LAW& AUDIT
Maker/Acceptor / Indorser by any method other than cancellation of names, e.g.

separate agreement of waiver, release, or remission etc. Payment Party primarily
liable on the N/I makes payment in due course to the Holder at or after maturity.
Allowing Drawee Holder of a B/E allows the more than 48 hours to Drawee more than
48 hours, exclusive of public holidays, accept to consider whether he will accept
the same . Cheque not duly Cheque is not presented for presented payment within a
reasonable time, and Drawer suffers actual damage as a result of the delay by the
bankers.
of N/I is discharged from liability to such Holder and to all parties claiming
under such Holder. All the parties to the instrument stand discharged, as the
instrument is also discharged by such payment. All previous parties not consenting
to such allowance are thereby discharged from liability to such holder. Drawer is
discharged as against the Holder to the extent of the actual damage suffered by
him.
Payment of Cheque payable to order Cheque originally expressed payable to Bearer

Payment of Drafts
Taking Qualified or Limited Acceptance
Material alteration Material alteration

SUJEET JHA
Note: Holder of the cheque as to which such Drawer is dischared shall be a

Creditors to the Banker to the extent of such damage and entitled to recover the
amount from him. Cheque payable to order The Drawee i.e. the Paying purpose to be
endorsed by or Banker is discharged from on behalf of the payee is paid liability.
in due course. Bank makes a payment in due The Drawee, i.e. the paying course to a
Bearer. Banker is discharged from liability notwithstanding any indorsement (full
or blank or restrictive) thereon. A Draft drawn by one Bank The Bank is discharged
from upon another office of the liability. same Bank for a sum of money payable to
order on demand is paid in due course. Holder of B/E agrees to All prior parties
whose consent is not obtained to such acceptance – an acceptance are discharged •
Which is qualified, or • Limited to part of money from liability to the Holder and
those claiming under such due, or • Which substitutes a Holder. different time or
place for payment or • Not signed by all Drawees who are not partners. Any material
alteration N/I is void as against anyone without the consent of any who is a party
at the time of making such alteration. party thereto. Any material alteration made
Indorser is discharged from all by the indorsee. liability to the Indorsee in 225
9213188188
LAW& AUDIT
respect of consideration thereof. Payment of altered Payment in due course is The

person or Banker making such payment in due course is instrument made in respect of
– • A P/N, B/E or cheque has discharged from all liability been materially altered
but thereon. does not appear to be so altered, and • A cheque presented for payment
which at the time of presentment does not appear to have an obliterated crossing
Non – presentment of Where B/E payable after a Drawer and all Indorsers who a bill
for acceptance certain period after sight, is were liable towards such a not
presented for acceptance Holder are discharged from by the Holder within a their
liability. reasonable time. No notice of When the Holder does not Any party to a
N/I (other than dishonour send any notice of dishonour. party primarily liable) to
whom notice of dishonour is not sent is discharged from liability as against the
holder.
Note : The parties to a N/I are also discharged by operation of law, in the
following cases • Upon Order of Insolvency Court, the Insolvent is discharged. •
When a judgment is obtained against the Acceptor, Maker or Indorser, debt under the
bill is merged into Judgment Debt. • By lapse of time, when the remedy becomes time
– barred. 41. MEANING OF HUNDI
A. TYPE OF HUNDIS ¾ Shah jog hundi • Three parties – Drawer, Drawee and financier
(Shah) • Payable to shah • Shah presents the hundi when it falls due for payment to
drawee on behalf of holder ¾ Jokhmi hundi • Documentary bill drawn by consignor on
consignee in respect of goods shipped by consignor. • Name of the vessel by which
goods are shipped is mentioned in the hundi. • Consignee is required to pay only on
goods reaching destination. ¾ Nam Jog Hundi • Hundi payable to party named or to
his order. • Party has right to endorse as in the case of Bill of Exchange. ¾
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Form – Ordinary letter advising parties that he may collect money from banker.
Remitter hands over hundi to banker Banker endorses hundi to a correspondent
residing in the town in which payee is resident Correspondent forwards hundi to
payee. Payee on presenting letter collects amount from correspondent.
¾ Dhani Jog Hundi • Hundi payable to owner, i.e., person who owns it ¾ Firman Hundi
• Hundi payable at sight ¾ Dharshani Hundi • Hundi payable at sight • Transferable
by endorsement • Similar to bill of exchange payable on demand. ¾ Maidi Hundi •
Known in Bengal as MUDDATI HUNDI • Hundi payment after a time • Usually, the
interest for the period upto the due date is deducted in advance. B. OTHER TERMS ¾
Zikri Chit • Issued by some party liable thereon to the holder of hundi • Letter of
protection addressed to a merchant in town where hundi is payable requesting
acceptance of the hundi in case of dishonour. • Intended to be used by holder if
hundi is dishonoured by non – acceptance. ¾ Peth • Duplicate copy of hundi issued
on loss of original hundi. • The holder at the time when bill is lost before it is
overdue may apply to the drawer to give him another bill of the same tenor
(Sec.45). The holder may give security, if required to indemnify him against all
persons in case the bill alleged to have been lost is found again. If the drawer
refuses to give a duplicate bill on request, he may be compelled to do so. ¾
Perpeth • Triplicate copy of hundi given on loss of duplicate hundi ¾ Khoka • A
hundi paid and cancelled.
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STUDY NOTE - 5
SECTION II AUDITING
The concept of audit is a very old Phenomenon. The word “audit” is taken from the
Latin word “Auditus”- act of hearing. An ancient time, the owners of the business
verify their accounts by expert accountants or book-keepers to detect errors and
frauds. Even the king and Amenders used to listen from the accountants regarding
receipts and payments of their kingdom. At the end of fifteenth century due to
renaissance in Italy there was a rapid growth in industry, trade and commerce. The
principle of doubled entry system was introduced by Luca Pacioli, a famous Italian
mathematician. Besides cash transaction accounting system also records credit
transactions and as a result complexity of accounts was increased. As a result of
industrial revolution in England in the 18th century there was a subs trial
increase in the volume of business. A rapid increase in commercial activity,
emergence of banking, insurance and joint stock companies, Separation of ownership
from management of the business, growing activities in the government sector led
the need for audit of accounts. A rapid change in socio-economic business
environment scenario, requirement of the globalization of business, complex
regarding true accounts, necessity of the government to get audited accounts for
different purposes have influenced auditing to be used a fact-finding tool have
caused a greater responsibility in the technique, scope, reporting standard,
professional, legal, moral and ethical responsibilities from the auditors.
AUDITING- DEFINITION, SCOPE AND FEATURE. Auditing” In modern concept, auditing is
the scientific and systematic examination of the books, accounts, vouchers and
other financial records that will help the auditor to give opinion regarding true
and fair view of the state of affairs of the business and to verify that profit and
loss account reflects a true and fair view of profit or loss for the financial
year. In the words of Spicer and Pegler, “Audit is such an examination of the
books, accounts and vouchers of a business, as will enable the auditor to satisfy
himself that the balance sheet is properly drawn up, so as to give a trued and fair
view of the state of affairs of the business, and whether the Profit and Loss
account gives a true and fair view of profit or loss for the for the financial
period, according to the best of his information and the explanations given to his
and as shown by the books; and if not, in what respect he is not satisfied.”
According to F.R.M. De Paula., “An audit denotes the examination of a Balance Sheet
and Profit and Loss Account prepared by others together with the books, accounts
and vouchers relating thereto in such a manner that the auditor may be able to
satisfy himself and honestly report that, in his opinion, such Balance Sheet is
properly drawn up so as to exhibit a true and correct view of the state of affairs
of the particular concern according to the information and explanations given to
him and as shown by books.” Prof. Montgomerty “Auditing is a systematic examination
of the books and records of business or other organization in order to ascertain or
verify and to report upon the facts regarding its financial operations and the
result thereof.
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M.L. Shandilya “Auditing may be defined as inspecting comparing, checking

reviewing, vouching ascertaining, scrutinizing, examining and verifying the books
of accounts of a business concern with a view to have a correct and true idea of
its financial state of affairs.
According to the Institute of Charted Accountants of India auditing is “a

systematic and independent (Financial and otherwise) of an enterprise for a stated
purpose. In any auditing situation the auditor perceives and recognizes the
propositions before him for examination, collects evidence, evaluates the same and
on this basis formulates his judgment which is communicated through his audit
report.”
The meaning of an Audit contains ¾ An intelligent and critical examination of the
books of accounts of business. ¾ It is done by an independent qualified person. ¾
It is done with the help of vouchers, documents, information and explanations
received from the clients. ¾ The auditor satisfied himself with the authenticity of
the financial accounts prepared for a particular period. ¾ The auditor reports that
• The balance Sheet exhibits a true and fair view of the state of affairs of the
concern. • The Profit and Loss account reveals the true and fair view of the profit
or loss for the financial period. • The accounts have been prepared in conformity
with the concerned law. • If he is not satisfied then reports in what respect he is
not satisfied. Benefits of Business: Business may get many advantages of conducting
audit by a qualified auditor. The advantages are discussed below: (a) True and Fair
view: With the help of audit of accounts, it is possible get a true and fair view
of the financial position of the business. (b) Detection of errors and frauds: If
books of accounts are audited, errors and frauds can be detected and necessary
action can be taken to prevent it. (c) Moral pressure on the employees: If audit is
conducted by the organization, employees should be cautions and there should be a
moral pressure on them. As a result, chances of errors and frauds will be
minimized. (d) Proper accounting control: A system of regular audit helps the
organization to maintain proper books of accounts regularly and books of accounts
are kept up to date. (e) Acceptable evidence: Audited accounts are very strong
financial document acceptable to many interested parties e.g. taking loan from
financial institution, determination of income tax, sales tax, amalgamation of
companies, determination of purchase consideration, admission, retirement, death of
a partner etc. (f) Helps to determine future policy: By comparing the audited
accounts with past year the trend of financial activities can be determined. On the
basis of this review, weaknesses are found out and future policy is determined. (g)
Valuable suggestions given by the auditor: If there is a system of continues audit
in the organization the auditor can give his valuable advice for the improvement of
the business. (h) Increase in goodwill: Audit of business on a regular basis
increases confidence to the interested parties and general public. As a result
goodwill of the business increases.
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(ii)
To the Owner: The owners of the business are also interested to know the financial
position of the business. There are discussed below: (a) Benefit to the sole
proprietor: In case of large business, the proprietor can get a true and fair view
of the accounts maintained by his employees and also able to know the state of
affairs and profit made by him. The proprietor is also benefited for getting loan
from financial institutions, to pay income tax etc. (b) Benefits to the partners:
Shareholders are the owners of a company. With the help of audited accounts help to
the partners to settle their unsettled disputed, for taking loan from financial
institutions, to get off the books of accounts maintained by the employees etc. (c)
Benefits to the shareholders: Shareholders are the owners of a company. With the
help of audited accounts they get a real picture of the financial position of The
company and they can assure that business is running efficiently. (d) Benefit to
the non-profit seeking organizations: There are different non-profit seeking
organizations e.g., charitable institution, club, religious institute, school,
college etc. This organization run with public money. Whether public money is
properly utilized or not can be revealed from the audited accounts.
(iii)
To the third parties: Besides business and the owners, there are different outside
interested parties who required audited accounts for different purposes: These are:
(a) Government may be interested to get the audited accounts to show the deficiency
of the business for giving grant and subsidy. (b) Financial institutions sections
loan to the organization on the basis of verification of financial soundness form
the audited accounts. (c) Tax authorities may depend on audited accounts for
determination of income tax, sales tax, excise duty etc. (d) Prospective buyers who
want to invest money in shares and debentures of a company may rely on audited
accounts. (e) Creditors who supply goods to the business may asses the solvency and
liquidity position of the business on the basis of audited accounts. (f) For
settlement of insurance claim, insurance companies can barely on audited accounts.
From the above discussion, it is clear that both accounting and auditing are not
contradictory but complementary to each other,
To achieve the primary objective, an auditor has to verify that: (i) All the
transactions are properly recorded in the books of accounts. (ii) All the
transactions are for the current financial year. (iii) To verify that all the
assets and liabilities are properly shown in the balance Sheet. (iv) All materials
facts have been considered while preparing financial statements. Objective Of audit
Primary Secondary
Reflects true and fair view of the books Accounts and certify it to the appointing
Authority
1. Detection of errors and frauds. 2. Prevention of errors and frauds. 3. Necessary

steps to rectify the above
(1.) Errors: Errors means careless representation of books of accounts or mistake

in the process of keeping accounting records by the employees’ who maintain the
books of accounts. There are different types of errors founds in the books of
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auditor. Errors may be of two type’s i.e., intentional errors and unintentional
errors. Intentional errors are conducted by the dishonest employees to falsify the
books of accounts for their personal interest. Unintentional errors are made due to
the be shown diagrammatically which are as follows: Error Clerical Errors Errors of
Omission Errors of Commission Errors of Principle Errors of Duplication
Compensating Errors
Frauds- Detection and Measures for Remedy Frauds are the international
misrepresentation of transactions in the books of accounts by the dishonest
employees to deceive another. Fraud may be of two types i.e. (a) Misappropriation
of cash and goods and (b) Falsification or manipulation of accounts. The different
type of frauds can be shown diagrammatically which are as follows: Frauds
Misappropriation Of cash and Goods
Falsification or manipulation of Accounts
DEFERENCE BETWEEN ERROR AND FRAUDS
Errors 1. Errors means careless representation of books of account or mistake in

the process of keeping accounting records by the employees’ who maintain the books
of accounts
1.
2. Errors may be international or unintentional 3. Generally employees of the

accounting department commit errors whether intentional or unintentional 4.
Unintentional errors are comparatively easier to detect. Intentional errors can
also be finding out by the auditor if proper attention is given.
2. 3. 4.
Frauds Frauds are the intentional misrepresentation of transactions in the books of

accounts by the dishonest employees to deceive another. Fraud may be of tow types
i.e., (i) Misappropriation of cash and goods and (ii) Falsification or manipulation
of accounts Fraud is always intentional and is committed to deceive the
organization. Generally frauds of cash and goods are done by the higher level of
management staff It is comparatively through to detect frauds because this is
always intentional.
DISTINCTION BETWEEN ACCOUNTANCY AND AUDITING Accountancy: Accountancy and auditing

is not a similar thing Accountancy is related with maintaining books of accounts
and to prepare financial statements. i.e., Profit and loss Account and Balance
Sheet in such a way that will reflect the financial position and supplies the
information relating to financial position to the interested parties. For this, it
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has to collect, classify summaries and present the financial date in such a manner
that is acceptable to the different users.
Audit: In modern concept, audit is the scientific and systematic examination of the
books, accounts vouchers and other financial records that will help the auditor to
give opinion and other financial regarding true and fair view of the state of
affairs of The business and to verify that profit and loss account reflects a true
and fair of profit or loss for the financial year.
Therefore, where the works of an accountants ends, the work of auditor starts. The
different between accountancy and auditing are given below: Accountancy Auditing 1.
Auditing is the scientific and 1. Accountancy is related with maintaining books of
accounts and to systematic examination of the books, prepare financial statements
i.e. profit accounts, vouchers and other financial and Loss account and Balances
Sheet records that will help the auditor to in such a way that will reflect the
given opinion regarding true and fair financial position and supplies the view of
he state of affairs of the information relating to financial business and to verify
that profit and position to the interested parties. loss account reflects a true
and fair view of profit or loss for the financial year. 2. The main objective of
audit of a 2. To reflect the financial position to the business at the end of the
financial year business is to show that the books of and its presentation to the
different accounts are prepared with recognized interested parties are the main
object of accounting principles and reflects the accountancy true and fair view of
the financial position of the organization and to give opinion regarding true and
fair view of the state of affairs of the business and to verify the at profit and
year. 3. Generally the audit works is done by 3. The accounting job is done by an a
accountant i.e. he may not be a an independent professionally qualified
professionally qualified person i.e. person i.e. a Charted Accountant. The Charted
Accountant. The accountant is auditor is not an employee of the a paid employee of
the organization. organization. He works on the basis of audit if required. 4. The
accounting work is done 4. Generally audit is conducted at the end throughout the
accounting year. of the financial year except in case of big organizations, there
may be continuous audit if required. 5. A social knowledge, skill and expertise 5.
An accountant does not require a special skill and expertise for doing are require
for doing auditing work. accounting work 6. An accountant may not have an idea 6.
The auditor must have a sound regarding audit knowledge in accountancy. Otherwise
auditing works is not possible 7. The work of accounting begins first 7. The work
of audit starts when the tasks with the past financial transactions of financial
accounts are completed. 8. There are some generally accepted 8. In India the work
of audit controlled by
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accounting principles followed by all the organizations while preparing books of

accounts. 9. If there is may errors and frauds the employees are accountable of the
management of the company. 10. After completion of accounting work the accountant
gives his report to the management of the company
the Company’s act, 1956 and the standard auditing practices (SAP) framed by the
Institutes of Character Accountant of India. 9. If there are any undisclosed errors
or frauds due to the negligence of the auditor, he will be liable as per civil,
criminal and professional misconduct of the country. 10. After completion of audit
work the auditor gives his audit report to the shareholders (in case of a company)
and in other cases to the appointing authority.
3.
• • • • • •
MAJOR INFLUENCES OF AUDITING Industrial Revolution Ownership Professional

Management Statutory Provisions Case Laws Information Technology
6.
ROLE OF EVIDNCE IN AUDITING Meaning and Importance • Evaluation of the

proposition in terms of materiality or significance. • Collection of evidence
within given Limits of time and costs • Evaluation of evidence obtained as valid or
not valid. • Formation of judgment as to the propositions at issue. Types of
Audit Evidence ¾ Meaning Audit Evidence refers to any information obtained by the
auditor so that he can draw conclusions & express opinion on financial statements.
¾ Analytical evidence These evidences consist of journals, subsidiary books
allocation sheets reconciliation statements or any other records which supports the
data appearing in the books of accounts. ¾ Corroborative Evidence This evidence
consist of invoices, confirmations cancelled cheques or similar documents. •
Physical examination by the auditor of the thing represented in the accounts. •
Written of oral statement by independent third parties. • Authoritative documents
prepared inside or outside the enterprise. • Formal or informal statement by
officers and employees of the enterprise. • Calculations performed by the auditor.
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• Satisfactory internal control procedure. • Subsequent actions by the enterprise

and by others • Subsidiary or detailed records with no significant indications of
irregularities. • Interrelationship within the data examined. Obtaining Audit
Evidence • Inspection • Observation • Inquiry and Confirmation • Computation •
Analytical Review 7. AUDIT TECHNIQUES AND PRACTICES Audit Techniques: • Physical
Examination • Confirmation • Comparing Documents with The Records (Vouching) •
Computation • Re tracking Book – keeping • Scanning • Inquiry • Examining
Subsidiary Records • Co – relation With The Related Information • Observation of
Pertinent Activities. Professional Pronouncements Contained in your module as per
page B – 7, 8, 9. International Financial Reporting Standards (IFRS) The
international federation of accounts had issued following international financial
reporting standards. Actually these standards are pronounced by the International
Accounting Standard Board (IASB) constituted in place of old International
Accounting Standards Committee (IASC) in 2001, this pronunciation has amended
certain IAS by IFRS. These IFRS apply to the general purpose of financial
statements and other financial reporting by profit oriented entities. These IFRS
apply to individual company and consolidated financial statements. The ICA of India
has decided to fully converge with IFRS from the accounting period commencing on or
after 1st April 2011. IFRS 1 – First time adoption of International Financial
Reporting Standards. IFRS 2 – Share based payments IFRS 3 – Business combinations
IFRS 4 – Insurance contracts IFRS 5 – Noncurrent assets held for sale and
discontinued operations IFRS 6 – Exploration for and evaluation of mineral assets
IFRS 7 – Financial instruments disclosures IFRS 8 – Operating segments Guidance
Note The ICA of India issued a number of guidance notes on matters raised by its
members relating to auditing. These notes are recommendatory in nature, cost
accountant should ordinarily follow recommendations to an auditing matter but this
guidance notes will be superseded by the accounting standard coming in force (after
guidance note). The ICWA of India issued no. of guidance notes as for the benefit
of cost accounts, which includes. (i) Guidance note on valuation audit under
(centre excise law). (ii) Guidance on central excise – MODVAT audit (iii)
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guidelines on inventory valuation (v) total cost management in the manufacturing

process (vi) guidelines on transfer pricing (vii) guidelines on CENVAT audit under
central excise. (viii) Environmental audit. 8. GENERALLY ACCEPTED AUDITING
STANDARDS PRINCIPLES (GAAS/GAAP) ¾ General Standards – • Independence – The
auditor, in all matters relating to the assignments, should follow an independent
attitude. • Due Care – In exercising the work of audit, the auditor should exercise
due care. ¾ Field Work Standards – • Planning and Supervision – Before the
beginning of an audit, the audit work should be properly planned and the work
assigned to assistants be carefully supervised. • Internal Control – The internal
controls existing in the enterprise be studied and evaluated beforehand. •
Evidential Matter – While auditing, auditor should collect the evidential documents
to afford a reasonable basis for forming an opinion on the financial statements. ¾
Reporting Standards – • Financial Statements – Auditor should make a mention
whether the financial statements are prepared according to the Generally Accepted
Auditing Standards Principles or not• Consistency – He should make a mention
whether these Principles / Standards are consistently are taken as reasonably
adequate. • Obligation – Auditor should submit his report, when the work is
finished, stating clearly his opinion or if not possible make a mention there in
that “optioning cannot be expressed” and in such a case support it with reasons.
These formal standards / principles are framed in the context of statutory auditing
but the AICPA suggest that while following these GAAP/GAAS, due consideration be
given to materiality and “audit risk”. The International Federation of Accountants
had issued following nine broad GAAP i.e. Basic Principle governing an audit: •
Integrity, Objective and Independence • Confidentially • Skills and Competence •
Work Performed by Others • Documentation • Planning • Audit Evidence • Accounting
System and Internal Control • Audit Conclusions and Reporting US – GAAP The
features of US-GAAP and Indian Accounting Standards are clear from their
differences. They are as follows:India USA 1. Financial Statement 1. Financial
Statements Prepared in accordance with the Not required to be prepared under any
presentation requirements of Schedule specify format as long a they comply with VI
to the Companies. Act, 1956 the disclosure requirements of US (Schedule VI).
Accounting Standards. 2. Fixed Assets & Depreciation 2. Fixed Assets & Depreciation
Revaluation of assets permitted. Revaluation of assets not permitted except in
Depreciation is based (usually) on rates cases of quasi-re-organisations.
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set out in Schedule XIV to the Depreciation is over the useful economic Companies
Act, 1956. lives of assets. Depreciation and profit / loss on sale is based on
historic cost. 3. Investment in own shares 3. Investment in own shares Expressly
prohibited except in cases of Permitted, and is shown as a reductions form buy back
of own securities. shareholder’s equity 4. R & D 4. R & D Costs can be capitalized
subject to the Costs are expenses as incurred except for conditions of the criteria
of technical plant and depreciation if they have feasibility of the production
resource alternative future uses or expenses as availability and existence of
market, etc. incurred if they have no alternative future (AS – 8, Research &
Development, uses. issued by the Institute of Chartered Accountants of India) 5.
Goodwill 5. Goodwill Purchased goodwill is capitalized and Treated as any other
intangible asset, and is amortized over the expected period of capitalized and
amortized. The maximum benefit or charged against available carry forward and
period is 40 years. capital reserves. No, standard except for brief references is
AS – 10, Fixed Assets and AS – 14, Accounting for Amalgamations Goodwill arising
from amalgamations can be written off over 5 years. 6. Pre – operative Expenses 6.
Pre – operative Expenses All direct and indirect expenses incurred Concept does not
exist. They are expenses prior to commencement of business are unless they are
capital is nature. treated capitalized to the cost of fixed cost of assets. These
are also allowed to be deferred and written off over a period of 3 – 5 years or 10
years. 7. Assets and Liabilities 7. Assets and Liabilities No mandatory disclosure
of current and Mandatory disclosures about current and long term components. long
term components separately. Current component normally refers to one year of the
operation cycle. 8. Foreign Currency Transactions 8. Foreign Currency Transactions
Gains and losses resulting from the Exchange gain/loss is taken to the income
translation of financial statements into a statement. The concept of capitalization
of reporting currency should be recognized exchange fluctuations arising from
foreign as income or expenses for the period. currency liabilities incurred for
acquiring fixed assets does not exist. 9. Foreign Currency Transactions 9. Foreign
Currency Transaction Gains and losses resulting from the Gains and losses resulting
from the transaction of financial statements into a transaction of Financial
Statements into a reporting currency should be recognized reporting currency are
reported of a separate as income or expenses for the period. component of
shareholder’s equity in the balance sheet. 10. Related Party Transaction 10.
Related Party Transactions No specific disclosures required. Disclosures are
stringent and require Auditors have a duty to report certain descriptions of nature
of relations and transactions entered into by related control, transactions,
amounts involved, and
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parties as defined under the companies amounts due. Act, 1956: AS – 18 is issued
w.e.f. 01.04.2001
9. CONCEPT OF MATERIALITY IN AUDITING According to AAS 13, “information is material
if its misstatement (i.e. omission or erroneous statement) could influence the
economic decision of user taken on basic of the financial information. Materiality
depends on the size and nature of the item, judged in the particular circumstances
of its misstatement. The following are some of the specific requirements in the
form of Balance Sheet based materiality consideration implicit in the very process
of prescribing the format in Part I of schedule VI. • Loans from directors to be
shown separately. • Nature of interest if any of any director with the bankers or
other officers of the company at any time during the year should be disclosed by
way of a note. • The maximum due by directors or other officers of the company at
any time during the year should be disclosed by way of a note.
Further whenever there is any change in the basis of accounting the effect thereof
must be disclosed. AAS 13 on ‘ Audit Materiality’ requires that the auditor should
consider materiality and is relationship with audit risk when conducting an Audit.
Circumstance of Materiality According to the ICFAI the circumstance of
materiality are as under – • Mistake discovered like valuation of stock calculation
of depreciations calculation of interest estimation of liability etc. • Non –
disclosure of abnormal and unusual items or non recurring or expenditure etc. • Non
– disclosure of items violating the statutory provision. etc. Materiality and
Audit Risk Risk of Providing inappropriate opinion Inherent Risk (I.R) Risk that
Material Misstatement may occur Arises at level of management Auditor can only
assess this risk Risk of system of management This is generally high, However
certain factors may be present due to which it can be less than high. Control Risk
(CR) Detection Risk (D.R.) Risk that I.C. fail to Risk that auditor’s substantive
operate as desired. procedures will not detect a material Misstatement Arises at
level of Arises at auditor’s level. management Auditor can only assess Auditor can
frame this risk. this risk. Risk of I.C. system of Risk of substantive procedure
management adopted by auditor. This is evaluated in stages DR should be inversely
(See chart below) proportionate to combined assessment of I R & C R DR ∝ 1/(IR +
CR) If IR & CR are high, DR should be kept at low level.
• •
Internal Risk – Risk that material error will remain. Control Risk – Risk that
client’s internal control system cannot prevent or make up for such error. 237
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Detection Risk – Risk that material errors though they are there will not be
detected.
STUDY NOTE – 6 AUDIT MEMORANDUM- ITS CONTENTNS

Accounts of the Company LOCATION OF BOOKS OF ACCOUNT [Sec.209(1) and (2)] 1.
Registered office : All the books of account shall be kept at the registered
office. 2. Any other place Place in India All or any of the books may be kept at
any other place in India. Board resolution The Board must pass a resolution
according approval to keep the books at such other place. Requirements of Board
resolution The Board resolution must specify – (i) the nature of books of be kept
at such other place; and (ii) the full address of such other place. Notice of
registrar • The company shall give a notice to the registrar. • The notice shall be
given within 7 days of passing the Board resolution. 3. Branch office Nature of
books All the books of account in respect of branch office may be kept at such
branch office. Duties of the company (a) The branch office shall prepare up – to –
date summarized return. (b) The interval between preparation of any two summarized
returns shall not exceed 3 months. (c) The summarized returns shall be sent to be
company (at the registered office or at such other place where the books are kept)
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CONTENTS OF BOOKS OF ACCOUNT [Sec.209(1)] Nature of books to be kept Every company

shall keep books of account with respect to – (a) receipts and expenditures (b)
sale and purchase of goods. (c) Assets and liabilities. (d) Prescribed particulars
relating to cost incurred on materials, labour and other items if – (i) the company
is engaged in production or processing or manufacturing or mining, and (ii) an
order for maintenance of cost records in made by CG. PROPER BOOKS OF ACCOUNT
Conditions prescribed u/s 209(3) True and fair view • The books must not suppress
any transaction. • The books must not contain any fictitious transaction. [Sec.
209(3) and 541(2)
Accrual basis Cash basis and Hybrid system of maintenance of books is prohibited.
Double entry Single entry system of maintenance of books is prohibited. Conditions
prescribed u/s 541(2) Explain financial position The books must be such as fully
explain the financial position and transaction of the company. Disclosure relating
to goods The books must sufficiently disclose – (a) the details of annual stock
takings. (b) All purchase and sale of goods. (c) The particulars of buyers and
sellers, except where goods are sold by way of ordinary retail trade. PRESERVATION
OF BOOKS OF ACCOUNT [Sec. 209(4A)] Books of account for 8 years immediately
preceding the current year shall be preserved. • • The relevant vouchers shall also
be preserved. RESPONSIBILITY FOR MAINTENANCE OF BOOKS OF ACCOUNT [Sec.209(5) and
(6)] Persons responsible u/s 209(6) (a) MD or manager (b) Every director, if the
company has neither employed MD nor manager (c) All officers and employees of the
company. Charging a competent person with duty of maintenance of books [Sec.209(5)]
Duty charged to whom? Any competent and reliable person Duty charged by whom? By
the manager or MD or Board Effect – Defense for persons responsible u/s 209(6)
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The persons responsible u/s 209(6) may put a defense that the person charged with
the duty of maintenance of books of account was competent, reliable and was in a
position to discharge such duty.
ANNUAL ACCOUNTS – LEGAL REQUIREMENTS [Sec.210 and 211] Laying of annual accounts at
an AGM Duty of laying of annual accounts It is the duty of the Board of directors
to lay the annual accounts at every AGM. Meaning of annual accounts (i) B/S (ii)
P&L A/c
Requirements of B/S and P & L A/c B/S (i) The B/S shall be in the same form as set
out in Part I of Schedule VI. (ii) The B/S must comply with the “Notes” given at
the end of Part I of Schedule VI.
P&L A/c (i) No form has been prescribed for P & L A/c. (ii) P &L A/c must comply
with the requirements of Part II of Schedule VI. B/S and P&L A/c B/S and P&L A/c
must give a true and fair view. ‘Financial year’ Meaning of FY • The period for
which P&L A/c is prepared is called as FY. • It may be more or less than a calendar
year. Maximum period of FY • FY shall not exceed a period of 15 months. • But, it
may exceed upto 18 months with the special permission of registrar. Change of FY
from year to year The Board is empowered to decide the period covered in a FY. • •
The period covered in a FY may be different from the period covered in the
preceding FY(s). Responsibility Same persons are responsible for preparation of B/S
and P&L A/c as are responsible for maintenance of books of account. ACCOUNTING
STANDARDS (Sec.211. 217 and 227) Meaning of accounting standards • AS means the
standards of accounting recommended by ICAI, as may be prescribed by CG after
consultation with National Advisory Committee on Accounting Standards. • Until AS
are prescribed by CG, the standards of accounting specified by the ICAI shall be
AS. Duties of the company regarding AS (Sec. 211) Compliance with AS Every company
shall comply with AS. Disclosure in case of non – compliance SUJEET JHA 240
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Deviation from AS. Reasons for deviation Financial effect due to deviation.
Duties of the auditor regarding AS (Sec.227) The auditor shall state as to whether
the P&L A/c and B/S comply with AS. • • If the P&L A/c or B/S does not comply with
AS, the auditor shall qualify the audit report. Duties of the directors regarding
AS [Sec. 217(2AA)] (a) Director’s Responsibility Statement must be included in
Board’s report. (b) Following disclosures must be given in the Directors’
Responsibility Statement ; • Whether applicable AS have been followed • In case of
material departures, proper explanation therefore must be given. CONTENTS OF
BOARDS’ REPORT Contents specified u/s 217(1) (a) The state of the company’s affairs
(b) Profits proposed to be transferred to reserves. (c) Dividend recommended by the
Board (d) Material changes subsequent to close of FY. [Sec.217]
Disclosure relating to conservation of energy etc. Conservation of energy (a)

Energy conservation measures taken (b) Additional investment and proposals being
implemented for reduction of consumption of energy. (c) Impact of measures on
reduction of energy consumption and cost of production. (d) Total energy
consumption and energy consumption per unit of production.
Technology absorption Efforts made in technology absorption. Foreign exchange
earnings and outgo (a) Activities relating to exports (b) Initiatives taken to
increase the exports, development of new export markets and export plans. (c) Total
foreign exchange used and earned. Changes during the financial year Nature of
disclosure required. Change in – (a) nature of the company’s business. (b)
Company’s subsidiaries. (c) Nature of business carried on by subsidiaries of the
company (d) Generally, in the classes of business in which company has an interest.
When is disclosure required? • Disclosure is required if it would result in better
understanding of state of affairs of the company. • Disclosure is not required if
such disclosure will be harmful to the business of the company or its subsidiaries.
Disclosure of particulars of certain employees SUJEET JHA 241
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When is disclosure required? (a) An employee who received a remuneration of Rs.24

lakhs or more during the FY. (b) An employee who received a remuneration of Rs.2
lakhs per month or more for any part of FY. (c) An employee satisfying the
following 2 conditions. (i) He has received remuneration at a rate which, in the
aggregate, is in excess of remuneration drawn by MD or WTD or manager. (ii) He
holds 2% or more of the equity share capital. Nature of disclosure required
Designation, Remuneration, Nature of duties, Qualifications and experience, Age,
Last employment, Nature of employment, Other terms and conditions, Percentage of
equity shares held, Whether the employee is a relative of any director or manager.
Disclosures in Director’s Responsibility Statement [Sec.217(2AA)] Accounting
standards • The directors shall state as to whether they have complied with the AS.
• In case of material departures, the directors shall give proper explanation for
the same. Accounting policies The directors shall state as to whether the
accounting policies – • Have been consistently applied ; and • Used by them are
reasonable. Judgments and estimates The directors shall state as to whether the
judgments and estimators made by them are – • Reasonable and prudent; and • Give a
true and fair view; Proper and sufficient care The directors shall state as to
whether they has taken proper and sufficient care for – • The maintenance of
adequate accounting records in accordance with the provision of this Act; •
Safeguarding and assets of the company; and • Preventing and detecting fraud and
other irregularities. Going concern Assumption The directors shall state as to
whether they have adopted the assumptions of going concern while preparing annual
accounts. Reasons for non – completion of buyback Every buy – back should be
completed within 12 months from the date of passing the • resolution for buy – back
(whether SR or a resolution at a BM only). • If a buy – back could not be completed
within the specified period of 12 months, the Board shall disclose the reasons for
the same. Comments on auditors’ report The Board shall give fullest information and
explanation in respect of every reservation, qualification or averse remark
contained in the auditors’ report. SIGNING OF BOARD’S REPORT AND ANNUAL ACCOUNTS
Signing of Boards’ report (Sec.217) SUJEET JHA 242 (Sec.215 and 217) 9213188188
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Case (a) The chairman of the Board is authoridsed by the Board to sign the Board’s
report The Board’s report shall be signed y the chairman of the Board. Case (b) In
any other case • The Board’s report shall be signed by 2 directors (one of whom
shall be MD, if there is one). • The Boards’ report shall be signed by 1 director,
if only I director is for the time being in India. Signing of annual accounts
(Sec.215) Case (a) If only I director is for the time being the India The annual
accounts shall be signed y – (a) the manager or secretary; and (b) I director. Case
(b) Any other case The annual accounts shall be signed by – (a) the manager or
secretary; and (b) 2 directors (one of whom shall be MD, if there is one) Approval
of annual accounts B/S and P&L A/c shall be approved by the Board before – - they
are signed on behalf of the Board; and - they are submitted to the auditors for
their report thereon. CIRCULATION OF ANNUAL ACCOUNTS, ETC. [Sec.219] Nature of
documents requiring circulation (a) Balance sheet (b) Profit and loss account (c)
Auditors’ report (d) Every other document required to be annexed or attached to B/S
The above documents have been referred to as’ annual accounts etc.’ u/s 219 and
270. Persons entitled to receive annual accounts, etc. (a) Every member (b) Every
debenture trustee (c) All persons who are entitled to receive the notice of GM,
e.g. the auditors Supplying of annual accounts, etc. on demand Who can demand the
annual accounts, etc. (a) A member (b) A debenture holder (c) Any depositor. Duties
of the company The company shall supply the annual accounts, etc. - free of cost -
within 7 days of demand. Consequences of default SUJEET JHA 243 9213188188
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CLB may direct the company to furnish the annual accounts, etc. Time limit for
circulation of annual accounts, etc. General rule The annual accounts, etc. shall
be sent at least 21 days before the date of GM. Exception The annual accounts, etc.
may be sent less than 21 days before the date of GM, if so agreed by all the
members entitled to vote at the GM. Circulation of annual accounts, etc. in case of
a listed company Option 1 The company may send the annual accounts, etc. in full.
Option 2 The company shall comply with the following 2 conditions (a) The company
shall send the abridged version of the annual accounts etc. (b) The unabridged
version of the annual accounts etc. shall be made available for inspection at the
registered office during working hours for a period of 21 days before the date of
AGM.
FILING OF ANNUAL ACCOUNTS WITH THE REGISTRAR (Sec.220) Where thirty five days from
the date of presenting before annual general meeting three copies of the balance
sheet and the profit and loss account signed by the managing director, Manager or
secretary of the co. be filed with the Registrar. In case of default the company
and every officer by the company who is in default shall be liable to like
punishment as is provided by section 162 for a default in complying with the
provisions of section 159, 160 or 161. Teeming and Lading – A process of
Misappropriating Cash- Auditors Duty in this respect. Teeming and lading is a
process of misappropriating cash from an organization by the dishonest employees.
In this process, collection from credit customers are misappropriated and
collection from subsequent customers are recorded in the accounts of previous
customers and this process is goes on until the dishonest employees leave the
organization or absconded.
i. ii. iii. iv. v. vi.
Auditor’s Duty: This type of fraud is very hard to detect. The auditor should
carefully detect the following points. Internal check system: The auditor should
verify the internal check system and its effectiveness regarding cash received from
customers and the amount deposited into bank. Checking Debtors account: Verify all
the debtors account and the amount due from them with the statement sent by them
and also check how much delay is made by them, confirm the debtors balance if any.
Verify Bank Pass Book: Check the bank pass book to show that all receipts are
deposited in to bank and prepare bank reconciliation statement if required.
Checking of Receipt: The auditor should verify the counterfoils of receipts with
the cash book and confirm that all receipts are properly recorded in the cash book.
Confirmation from Debtors: If any suspicion arises during the course of audit
regarding collection from credit customers, the auditor may take help direct
confirmation with the debtors and may meet with them is situation arises.
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STUDY NOTE – 7
COMPANIES ACT PRVISIONS RELATING TO AUDITS
DISQUALIFICATIONS FROM APPOINTMENT AS AN AUDITOR [Sec.226 (3)] 1. A body corporate

2. An officer or employee of the company 3. A person who is a partner / employee of
either an officer / employee of the company. 4. A person who – a) Is Indebted to
the company for amount exceeding Rs.1000 b) Has given any guarantee / provided any
security in connection with any third person for an amount exceeding Rs.1,000.
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5. 6. 7.
A person holding any security (means an instrument carrying voting rights) of the
company. A person disqualified from acting as auditor of the company’s subsidiary
or holding company or of any other subsidiary of the same holding company.
[Sec.226(4)] A partnership firm, wherein any partner is disqualified because of any
of the aforesaid Provisions.
VACATION OF OFFICE [Sec.226 (5)] If after being appointed as an auditor, he

attracts any of the disqualifications in Sec.226 (3) or (4) above, he shall be
deemed to have vacated his office. APPOINTMENT OFAUDITOR 1. FIRST AUDITORS [Sec.224
(5)] (a) Appointed by - Board of Directors (b) Time limit of - Within 1 month of
date of appointment (c) Tenure of Office - Until conclusion of 1st AGM. (d) Failure
to appoint - Appointment by shareholders at General Meeting, by within 1 Month of
passing Ordinary resolution. registration. (e) First Auditor’s name - Articles to
be void. Only by procedure in Sec.224 (5) included in Articles above. (f) Notice
appointment - NOT required. Neither by company to 1st Auditor, Nor by the First
Auditor to the Registrar. 2. SUBSEQUENT AUDITORS A) Appointment at Nature of
meeting At every AGM, the auditor are appointed an AGM or reappointed by the
company Nature of regulation Ordinary resolution Nature of business Ordinary
business B) Tenure of office The auditors hold office from the conclusion of the
meeting in which they are appointed to the conclusion of the next AGM.
C) Notice appointment
of Notice by company
the
• •
Notice by auditor
• •
The company shall give notice of appointment reappointment to the auditor. Such
notice shall be given within 7 days of the appointment or reappointment The auditor
shall give notice to the register Such notice shall be given within 30 days of
receipt of notice of appointment or reappointment from the company. The notice
shall state to whether he has accepted or refused the appointment.
REAPPOINTMENT OF RETIRING AUDITOR SUJEET JHA 247 9213188188

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a) Reappointment of retiring - At an AGM, auditor - the retiring auditor, by

whatsoever authority appointed, - shall retire and he shall be reappointed. b)
Exception The retiring auditor shall not be reappointed in the following cases: (i)
Where he is not qualified or is disqualified for reappointment. (ii) Where he has
expressed his unwillingness in writing to be reappointment. (iii) Where a
resolution has been passed at the AGM appointing somebody instead of him or
providing expressly that he shall not be reappointed. (iv) Where notice has been
given of an indented resolution to appoint some person in the place of a retiring
auditor, and by reason of the death, incapacity or disqualification of the person,
the resolution cannot be proceeded with. c) AGM not held within time • The auditors
hold office from the conclusion of the meeting in whether auditor vacates his which
they are appointed to the conclusion of the next AGM. office? As such the
appointment of auditors is made in terms of this period and not for any FY. •
Therefore, an auditor shall continue in his office even if AGM is not held within
the time limits specified u/s 166 and 210. a) Notice to CG
APPOINTMENT OF AUDITORS BY CG. Notice by whom? The company shall give notice to CG.
When is notice required? If no auditors are appointed or reappointed at an AGM.
Time limit for giving The notice shall be given by the company notice within 7 days
of conclusion of AGM. b) Appointment by On receipt of notice from the company, CG
shall fill the vacancy. CG c) No auditor is (i) Where the appointment of a person
appointed as an auditor in an appointed examples auditor in an AGM is void ab
initio. (ii) where OR is passed, but the appointment of auditors requires SR. a)
Right to remuneration
REMUNERATION OF AUDITOR fix If appointment made by (i) The remuneration shall be
fixed member by the members is GM. (ii) Alternatively, the GM may determine the
manner in which the remuneration shall be fixed. If appointment is made The
remuneration shall be fixed by the by board Board. If appointment is made The
remuneration shall be fixed by CG. by CG If appointment is made (i) The
remuneration shall be fixed by CAG by the member in GM. (ii) Alternatively, the GM
may determine the manner in which the remuneration shall be fixed. of • Any sum
paid by the company in respect of the auditors, expenses 248 9213188188
b)
Meaning
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remuneration
shall be deemed to be included in the expression remuneration. • Out – of – pocket

– expenses of the auditors shall be included in the remuneration unless the
resolution fixing the remuneration specifically provides that such expenses shall
be paid separately. • Remuneration for other services is permissible without
sanction of shareholders. However, disclosure in P & L A/c is required.
REMOVAL OF AUDITORS (i) OR shall be passed at a GM. (ii) No special notice is
required for such removal. (iii) Procedure prescribed u/s 225(2) and (3) shall be
followed. (iv) Any other person may be appointment in his place.
a) Removal of first auditor before expire of his term (i.e. before the 1st term
AGM) (sec.224(5)] b) Removal of subsequent auditor before expire of his term (i.e.
before the AGM) [Sec.224(7)] c) Removal of auditor (whether first auditor
subsequent auditor) at an AGM (sec.225)
(i) Previous approval of GC is required, (ii) OR shall be passed at a GM. (iii) No

special notice is required for such removal. (iv) Procedure prescribed u/s 225(2)
and (3) shall be followed. (i) Previous approval of CG is not required. (ii) OR
shall be passed at a GM. (iii) Special notice is required for such removal. (iv)
Procedure prescribed u/s 225(2) and (3) shall be followed. Special notice may
require that – (i) the retiring auditor shall not be reappointed; or (ii) some
person, other than retiring auditor, shall be appointed, as an auditor. When can CG
exercise Where appointment of nominee directors its power u/s 408? is made u/s 408
to end the oppression or mismanagement. Nature of power of CG • Amongst other
power, CG has power to give directions to the company u/s 408. • The directions may
include a direction to remove the existing auditor. • The directions given by CG
shall come into effect as if all the provision of the Act, in this behalf has been
compiled with. Effect of direction of CG a) The existing auditor shall vacate
office without requiring any action for his removal.
Procedure prescribed u/s 225 (2) and (3). The company shell sends the notice of
removal to the auditor. (i) Right to be heard orally at the meeting. (ii) Right to
make a representation in writing to the company. (iii) Right to get his
representation circulated amongst the member. (i) To send a copy of the
representation to every member of the company. 249 9213188188
d) Removal by CG
a) Notice to auditor b) Right of the auditor c) Duties of company

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d) Reading representation
(ii) To state the fact of the representation heaving been made in the notice given
to the member. of If a copy of not sent by the company to the member, the auditor
may require that the representation shall be read out at the meeting. Application
to whom? An application may be made to CLB/NCLT. Application whom? Satisfaction
CLB/NCLT by • The company, or • Any other aggrieved person. of The right to make a
representation is being abused by the auditor to secure needless publicity for
defamatory matter. CLB / (i) Copy of representation not be sent to the members.
(ii) The representation need not be read out at the meeting. (iii) Cost on such an
application shall be paid by the auditor.
e) Intervention CLB/CLT
by
Order by NCLT
AUDIT OF ACCOUNTS OF BRANCH OFFICE Meaning of branch (i) Any establishment

described as a branch by the company office (ii) Any establishment carrying on
either the same or substantially the same activity as that carried on by the head
office. (iii) Any establishment engaged in any production, processing or
manufacture [Sec.2(9)] b) Qualifications of (i) The company’s auditor as appointed
as an auditor u/s 224. branch auditor (ii) Any person qualified to be appointed as
an auditor u/s 226. (iii) Where the branch office is situated in a foreign country,
any person duly qualified to act as auditor in such foreign country may also be
appointed as an auditor. c) Appointments of (i) Appointment may be made by the
member in GM. branch auditor (ii) Alternatively, the shareholders may authorize the
Board to make the appointment of branch auditor in consultation with company’s
auditor. d) Power and duties of A branch auditor has the same powers and duties as
that of company’s branch auditor auditor. e) Right of company’s Where the accounts
of any branch office are audited by a person other auditor than the company’s
auditor, the company’s auditor has the following rights; (i) Right to visit the
branch office, if he deems it necessary to do so for the performance of his duties
and auditor. (ii) Right of access at all times to the books, accounts and vouchers
to the company maintained at the branch office. f) Remuneration of (i) The
remuneration shall be fixed by the members in GM. branch auditor (ii) Alternatively
the GM may authorize the Board to fix the remuneration. g) Report of branch ¾
Report shall be prepared in accordance with sec.227. auditor ¾ Report shall be
prepared in accordance with CARO. ¾ Report shall be forwarded to the company’s
auditor. ¾ The company’s auditor, while preparing his report, shall deal with the
report of the branch auditor in such manner as he deems fit. SUJEET JHA 250
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EXEMPTION FROM BRANCH AUDIT (i) Any manufacturing processing or treading activity
is carried on at the branch office. (ii) The exemption is available only if the
amount calculated in step 2 is not more then amount calculating in Step 3. Step 1.
Calculate ‘quantum of activity’. The quantum of activity means the highest of the
following: (i) a) Aggregate value of goods produced or manufactured or processed at
the branch office. (ii) Aggregate value of goods sold any services rendered by the
branch office. (iii) Aggregate value of expenditure, whether of revenue or capital
nature, incurred by the branch office. Step 2. Calculate average of ‘ quantum of
activity’ by taking average of the quantum of activity during 3 FYs immediately
preceding the relevant FY. Step 3. Calculate the higher of the following two
limits: (i) Rs.2 lakhs;or (ii) 2% of the average of the total turnover of the
company including all its branch offices, earnings from services rendered and
earnings from any other source. b) Exemption in other Conditions for claiming
exemption; cases Discretion of CG Exemption may be given for specified period and
subject to conditions. Withdrawal of CG may withdraw the exemption if the exemption
by CG term and conditions of exemption are not complied with. Submission of a copy
of A copy of exemption order shall be exemption order submitted to the company
auditor. Reading of exemption It shall be the duty of the auditor to read order the
exemption order at the GM. Ground for exemption Additional conditions for claiming
exemption (a) Company has made ¾ Company is not carrying on sufficient arrangements
manufacturing processing or for scrutiny and check trading activities; and of
account of branch ¾ Scrutiny and check shall be made office by a responsible
person. Such person is competent to scrutinize and check the accounts. (b) A branch
auditor is CG shall pay regard to the nature not likely to be quantum of activity
carried on at the available at a branch office. reasonable cost (c) Company has
made Audit shall be done by a person arrangements for the otherwise qualified for
appointment as a audit of accounts of branch auditor, except that he is an employee
of the company. branch office (d) For any other person CG is satisfied that
exemption should be granted. SUJEET JHA 251 9213188188
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SPECIAL AUDIT a) Circumstances in which CG is of an opinion that – (i) special

audit may be The affairs of the company are not being managed in ordered accordance
with sound business principles or prudent commercial practices; or (ii) The company
is being managed in a manner likely to cause serious injury or damage to the
interests of the trade, industry or business to which it pertains; or (iii) The
financial position of the company is such as to endanger its solvency. b) Period of
special audit Special audit shall be conducted for such period as may be specified
in the order of CG. c) Appointment of special ¾ Special auditor shall be appointed
by CG. auditor ¾ The person appointed to conduct the special audit shall be – (i)
Company’s auditors; or (ii) Any other CA (whether or not he is in practice.)
d) Powers and duties
Special auditor shall have same powers and duties as that of a company’s auditor.
e) Directions by CG. CG may direct any person to furnish to the special auditor
such information as may be required by him. f) Report of special auditor Submission
of report The special auditor shall submit his report to CG Action by CG On receipt
of report, CG may take such action, as it deems fit. g) Remuneration special ¾
Remuneration shall be determined by CG. auditor ¾ Such determination shall be
final.
COST AUDIT
a) Cost audit – when (i) The company is compulsorily required to maintain cost
records required? as per Sec.209 (1) (d); and (ii) CG has issued a direction to the
company to conduct a cost audit. b) Qualifications of cost (i) Cost accountant; or
auditor (ii) CA, possessing the prescribed qualifications, if CG is of the opinion
that – sufficient number of cost accountants are not available for conducting the
cost audit; and a notification is issued to this effect. c) Disqualification of a
(i) A person disqualified to act as a statutory auditor u/s 226. cost auditor (ii)
The statutory auditor of the company . d) Vacation of office The cost auditor shall
vacate his office if after appointment; any of the disqualifications are attracted
to him. e) Appointment of cost The cost auditor shall be appointed by the Board.
auditor The appointment of cost auditor requires previous of CG. f) Ceiling on
number of Timing of giving The auditor shall, before appointment, give audits
certificate a certificate of his eligibility to appointed as cost auditor.
Requirement of The certificate shall state that the certificate appointment, if
made, will be within the SUJEET JHA 252 9213188188
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ceiling on number of audits as specified u/s 224(1B). g) Powers And Duties of The
cost auditor shall have same power and duties as that of a cost auditor company’s
auditor (given u/s227). Submission of report The cost auditor shall submit a report
to CG and the company. The report shall be submitted within 180 days of close FY.
h) Cost Audit Report Reply by the ¾ The company shall furnish to CG company full
information and explanations on every reservation or qualification contained in
cost audit report. ¾ The reply shall be submitted within 30 days from the date of
receipt of cost audit report. Calling of further CG may call further information
from the information company. The company shall furnish the information required by
CG within the time specified by CG. Action by CG CG may take such action as it
deems fit. i) Duties of the company (i) Give all facilities and assistance to the
cost auditor. (ii) Submit cost records to the cost auditor within 30 days of the
close of FY.
Types of audit report Standard unqualified report It is issued when the following
conditions are met: (a) all financial statements give a true and fair view in
accordance with the financial reporting framework used for the preparation and
presentation of the financial statements. (b) the financial statements have been
prepared in accordance with the generally accepted accounting principle. (c) the
financial statements comply with relevant statutory requirements and regulations;
and (d) disclosure are adequate and statutory requirements with regard to them have
been adhered to; In case of a limited company, thus if the auditor makes various
statutory affirmations contained in section 227 without any reservation, he is said
to have issued an unqualified audit report or clean report. Modified reports SA
700, The Auditor’ Report on Financial Statements, states. An auditors’ report is
considered to be modified when it includes. (a) Matters that do not affect the
auditor’s opinion • Emphasis of matter (b) Matters that do affect the auditors’
opinion • Qualified opinion • Disclaimer of opinion • Adverse opinion 253
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(i) Unqualified report with an ‘emphasis of matter’ paragraph (a) Auditor may
attach paragraph to an unqualified opinion to put emphasis on a matter regarding
financial statements due to its importance. (b) Such a matter is, generally,
included in a note to the financial statements which discusses it in greater
details. (c) ‘Emphasis of matter’ paragraph does not change the nature of the audit
report as it relates to a matter that does not affect the auditor’s opinion. (d)
Examples of situation in which an auditor’s introduces ‘emphasis of matter’
paragraph are given below; • Going concern doubt • Significant uncertainty (ii)
Qualified audit report (a) Qualified audit report is a report wherein the auditor
has expressed a qualified opinion, that is to say, an opinion subject to certain
reservations. (b) Important aspects in relation to qualification in an audit report
are mentioned below • The auditor shall give a qualified opinion when the subject
matter of qualification is not highly material and pervasive and he believes that
he overall financial statements give a true and fair view. • A qualification should
be preceded by the words ‘subject to’ or ‘except that’ to make it clear that the
matter is of exceptional nature. • The audit report should quantity the effect of
individual qualifications also the total effect of all qualification on the
financial statements. • The auditor shall the reasons for his qualification. • In
case of a limited company, if any of the statutory affirmations in section 227(2)
and section 227(3) are answered in negative or with qualification by the auditor,
the audit report would be termed as a ‘qualified audit report’. • Qualification
which deal with matters, which have an adverse effect on the functioning of the
company should be thick type o in italics. (c) A qualified report can result from:
• Scope limitation • Disagreement with management with regard to departure from
generally accepted accounting principles or adequacy of disclosure. (iii)
Disclaimer of opinion (a) The auditor issues a declaimer of opinion if the subject
matter involved is material pervasive and he I unable to obtain sufficient
appropriate evidence to express an opinion on it. (b) A disclaimer an result
because material and pervasive uncertainties could not be resolved, there is going
concern doubt or there is a material limitation on the scope of the audit. (iv)
Adverse report (a) When the auditor is of the opinion that the effect of
disagreement with the management is material and pervasive to the financial
statement, he gives an adverse report. (b) The auditor must, categorically state
that the financial statements do not give a true and fair view.
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AUDIT REPORTS UNDER COMPANIES ACT, 1956. Report on specific enquiries Section
227(IA) Section 227(IA) requires the auditor to make specific enquiries during the
conduct of his audit. He is however, not required to report on these matters unless
he has any special comments to make. It should be understood that the auditor
should only enquire on the specific matters and is not to investigate into them. It
requires reporting on following. (i) Whether loans and advances made by the company
on the basis of security have been property secured and whether the terms on which
they have been made are not prejudicial to the interests of the company or its
members. (ii) Whether book entries are prejudicial to the interests of the company.
(iii) Whether the sale price of the shares, debentures and other securities held by
the company is less than their purchase price. (iv) Whether loans and advances made
by the company have been shown as deposits. (v) Whether personal expenses have been
charged to revenue account. (vi) 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 accounts books and the balance
sheet is correct, regular and not misleading. Report on true and fair view Section
227(2) The auditor shall state whether, in his opinion and to the best of his
information and according to the explanations given to him, the Balance sheet and
Profit & loss account give – (i) the information required by the Act, and (ii) a
true and fair view of state of affairs of the company. Report on principal
assertions Section 227(3) 1. Whether he has obtained all the information and
explanations; 2. Whether in his opinion, proper books of account have been kept. 3.
Whether the report of branch auditor has been forwarded to him and how he has dealt
with the same in preparing his audit report. 4. Whether the B/S and P& L account
are in agreement with the books of account and returns ; 5. Whether AS have been
complied with: 6. The observations or comments of the auditors which have any
adverse effect on the functioning of the company in thick type or in italics; 7.
Whether any director is disqualified from being appointed as a director u/s 274(1)
(g). 8. Whether cess payable by the company has been so paid. (NOTE: The companies
(Second Amendment) Act, 2002 provides for section 441A which states as follows: • A
cess on companies will be levied for purpose of rehabilitation or revival of sick
industrial Co. • These provisions are made in sections 441 A to 441 F. • The amount
to be collected must be in a range of 0.005% to 0.1% on value of annual
turnover/annual gross receipts (whichever is more) as the Central Government may
notify from time to time is official gazette. • The company shall pay the amount to
Central Government within 3 months from close of every financial year). SUJEET JHA
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Report on CARO Section 227 (4A)The auditor has to report on all the matters
specified in CARO.
STUDY NOTE – 8 REVIEW AND AUDIT OF INTERNAL CONTROL SYSTEM

Brief description of different types of the following (i) Statutory audit:
Statutory audit is a compulsory audit for the companies conducted by the qualified
independent auditor as per company’s act, 1956. (ii) Non-statutory audit: The audit
which is not compulsory under the statute and depends on need of the organization
is known as non-statutory audit: E.G. audit of soleproprietorship and partnership
firm. (iii) Government audit: When audit of government departments are made by the
employees of the government department under the supervision of Comptrollers and
Auditor General of India is known as government audit. (iv) Complete Audit: When
audit start after completing books of accounts and after the close of the financial
year is known as complete audit. (v) Partial audit: When audit is conducted for
some particular work out of various matters is known as partial audit e.g.
Verification of assets. (vi) Balance sheet Audit: A balance Sheet audit is an audit
relating to verification of assets and liabilities appearing in the balance sheet.
In this audit the auditor starts audit work from the balance sheet and proceeds
backwards. (vii) Continuous audit: Continuous audit is a system of audit where the
auditor and his staff examines all the transactions and books of accounts in
details continuously throughout the year at regular intervals i.e., weekly or
fortnightly or monthly etc. (viii) Periodical audit: Periodical audit is an audit
which is conducted at the end middle of the year to pay interim dividend or to get
half yearly financial statements for different purposes of the management. (ix)
Interim audit: Interim audit is an audit, which is generally conducted at the
middle of the year to pay interim dividend or the get half yearly financial
statements for different purposes of the management. SUJEET JHA 256 9213188188
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Cost Audit: Cost audit means examining by the company and to verify the audit of
costing records maintained by the company and to verify each element of cost to
give a true and fair view of cost of production so that cost efficiency can be
achieved. (xi) Management audit: Management audit is a method of independent and
systematic evaluation of the management activities at all levels of management to
ascertain the functions, efficiency and achievement of the management (i.e.
policies) as compared to standards set by the company. (xii) Social Audit: Business
is a part of society, so it has some social obligation towards the society, Social
audit is a process of audit of organizations of a country to evaluate the benefit
the entity has received from the country and its contribution to the welfare of the
society. (xiii) System audit: A system audit is a technique of certification of
effectiveness of system of accounting internal control and internal check instead
of checking all transactions in detail. This audit is applicable in large
organization where there are numerous transactions. (xiv) Property audit: Property
audit is a method of audit which verifies the reasonableness of expenditure
incurred by an organization and is not detrimental to public interest. This audit
is generally applicable to the government organizations. (xv) Performance audit:
Performance audit is a special type of audit which determines the overall
performance of the organization and efficiency and economy of utilizing resources
as compared to predetermined standards. It seeks to identify possibilities for
economy, efficiency and effectiveness. (xvi) Tax audit: Tax audit is a special type
of audit directed by the tax department in case of needs and complexities of the
business e.g. tax audit is compulsory in case of solepartnership and partnership
firm if turnover exceed Rs. 40,00000. (xvii) Special Audit: When audit is done by
the special auditors as per section 223A of the company’s act, by order of the
central government regarding the affairs, management and financial position of the
company is known as special audit. (xviii) Human resource audit: When the audit is
conducted to evaluate and review of the performance and contribution of the
organization’s employees towards the overall achievement of the entity’s goal is
known as human resource audit. (xix) Financial audit: Financial audit is the
scientific and systematic examination of the books, accounts, vouchers and other
financial records that will help the auditor to give opinion regarding true and
fair view of the state of affairs of the business and to verify that profit and
year. CONTINUOUS AUDIT
Continuous audit: Continuous audit is a system of audit where the auditor and his
staff Examines all the transactions and books of accounts in details continuously
throughout the year at regular intervals i.e. weekly or fortnightly or monthly etc.
According to Spicer and Pegler, “a continuous audit is one where the auditor’s
staff is occupied continuously on the accounts the whole year round, or where the
auditor attends at intervals, fixed or otherwise, during the currency of the
financial year and performs an interim audit; such audits are adopted where the
work involved is considerable and have many points in their favour although they
are subject to certain disadvantages.”
Where this audit is applicable: In the following cases continuous audit is
applicable. (i) Where there are enormous transactions in a big organizations and
continuous monitoring of accounts are required. SUJEET JHA 257 9213188188
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(ii) (iii) (iv) (v)
If there is no internal check system in the organization or the system is not very
much effective. When the company wants to declare interim dividend and for this
purpose interim accounts are to be prepared. In case of financial institutional and
insurance companies, where it is necessary to get the final accounts just after the
end of the financial year. If the management of the company are to get statement of
accounts at a regular intervals.
Advantages of continuous audit: Following are the advantage of continuous audit in

an organization. These are discussed below. (i) Extensive checking: As the auditor
regularly visits the client’s office, he should get time for extensive checking of
small transactions and the audit work can ne smoothly conducted. (ii) Early
detection of errors and frauds: As continuous audit is conducted throughout the
whole year, errors and frauds can be quickly detected. The accounting staff should
not get sufficient time to manipulate accounts. (iii) Early Preparation of Final
accounts: AS this audit is conducted throughout the whole year, it is possible to
prepare final accounts i.e. Profit and Loss account and Balance Sheet just at the
end of the financial year. The management and the owners can know the financial
results without delay. (iv) Deceleration of interim dividend: Those companies who
want to declare interim dividend at the middle of the year is to prepare interim
accounts. Continuous audit helps to get interim account in time. (v) More
reliability on audited accounts: If continuous audit is done throughout the year,
all the interested parties can rely much on the audited accounts. (vi) Moral check:
As a result of continuous audit employees should feel a moral pressure and the
chances of errors and frauds are minimized. (vii) Early declaration of dividend:
With the help of continuous audit final accounts are prepared just at the end of
the financial year and the shareholder get dividend without delay. (viii) Early
submission of report: As continuous audit is conducted throughout the year the
auditor can complete final accounts audited just at the end of the financial year
and can submit his audit report to the shareholders as early as possible. (ix)
Increase in efficiency: As audit is conducted on continuous basis, all the
transactions are correctly recorded in the books of accounts and overall efficiency
in according work can be made.
Disadvantage of continuous audit: The following are the disadvantages of continuous
audit: (i) High Cost: As continuous audit is conducted throughout the year the
organization has to give huge remuneration to the auditor. Therefore, a small
concern cannot afford the high cost of conducting such audit. (ii) Difficulties in
accounting work. As a result of frequent visits of the auditor often it is seen
that the books of accounts are checked by the audit staff and for this audit work
is hampered. (iii) Change of figures: It may so happen that the portion of accounts
which have already examined by the auditor may alter the figures by the dishonest
employees to achieve some personal interest. (iv) Loss of continuity of work: As
continuous audit is conducted at regular intervals, the auditor may left unchecked
same audit work which was pending during his last audit work. (v) Adverse effect on
employees morale: (vi) monotony in Work SUJEET JHA 258 9213188188
LAW& AUDIT
(vii)
Chances of collusion between organization’s staff and auditor’s staff
How disadvantage many overcome: (i) No work unfelt: (ii) Prepare fixed audit
programme (iii) Rotation of Work (iv) Frequent visit: (v) Use of special mark: (vi)
Use of ink for writing of castings (vii) Keep important notes: (viii) Preparation
of effective audit programme (ix) Pending of checking impersonal and general
ledger: (x) A revise of the past work DISTINCTION BETWEEN STATUTORY AUDIT AND
INTERNAL AUDIT Statutory Audit Internal Audit 1. Internal audit being a part of
internal 1. Statutory audit is a compulsory audit for the companies conducted by
the control system is a detailed review of qualified independent auditor as per the
books of accounts throughout the company’s Act, 1956. The primary accounting year
by a specialist group duty of a Statutory auditor is to give of employed auditors
independently opinion in his report that profit and within an organization to
assure loss account and balance sheet of the management that proper accounts has
company have been drawn up as per been maintained, adequate safeguards law and
whether the accounts shows a to maintain revenue and protect true and fair view of
the state of misappropriation of assets and affairs of the company of not.
evaluated the effectiveness of policies given by the management. 2. Internal audit
is not compulsory for i.e. 2. Statutory audit is compulsory for every company as
per company Act, it is optional i.e. non-stationary and is 1956. conducted in case
of necessity. 3. Statutory audit is conducted by 3. Internal audit is an audit
conducted by independent external auditor the employees of the company. 4. Internal
audit is an audit conducted by 4. Statutory auditors are generally appointed by the
shareholders in the the employees of the company. annual general meeting of the
company. 5. No statutory qualifications are 5. A Statutory auditor must have
prescribed qualifications under section prescribed in the company’s act for 226 of
the company’s Act, 1956. Internal auditor. 6. Internal audit is done on a
continuous 6. Generally statutory audit is done after the preparation of final
accounts and basis and for the whole year. at the end of the financial year. 7. The
scope nature, rights and duties of 7. The scope, nature, rights and duties of
Statutory auditors are determined by work is determined by the the company’s Act,
1956. management. 8. Statutory auditor has to give his report 8. Internal auditor
has to submit his report to the shareholders to the management. 9. Internal auditor
can be removed by the 9. Only shareholders of the Company can remove the statutory
auditor in the management. annual general meeting. 10. Remuneration of statutory
audit is 10. Remuneration of internal auditor is SUJEET JHA 259 9213188188
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fixed by the shareholders in the annual general meeting 11. Statutory auditor is
not an advisor except specifically requested. 12. Statutory auditor while auditing
may take help of test checking 13. Statutory auditors has a right to attend Annual
general meeting of the company 14. Statutory audit is compulsory for the companies.
Hence, internal audit is optional and conducted according to the needs of the
company. 15. In statutory audit, right, duties, nature and scope of an auditor is
determined by the companies Act, 1956.
fixed by the management. 11. Internal auditor gives suggestion to the management
regarding efficiency of business and how to prevent errors and frauds. 12. Each and
every transaction is checked by internal auditor. 13. Internal auditor has no right
to attend in the annual general meeting of the company. 14. Internal audit is not a
substitute\e of statutory audit. In additional to internal audit statutory audit is
required. 15. The option and suggestion given by an internal auditor is highly
includes by the top management i.e., freedom of work of the internal auditor is
restricted.
CARO, 2003
i) Fixed Assets: a) Whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assets; b)
Whether these fixed assets have been physically verified by the management at
reasonable intervals; whether any material discrepancies were noticed on such
verification and if so, whether the same have been properly dealt with in the books
of account; c) If a substantial part of fixed assets have been disposed off during
the year, whether it has affected the going concern. Inventory: a) Whether physical
verification of inventory has been conducted at reasonable intervals by the
management; b) Are the procedures of the physical verification of inventory
followed by the management reasonable and adequate in relation to the size of the
company and the nature of its business? If not, the inadequacies in such procedures
should be reported. c) Whether the company is maintaining proper records of
inventory and whether any material discrepancies were noticed on physical
verification and if so, whether the same have been properly dealt with in the books
of account. Loan Given or Taken: a) Has the company granted any loans, secured or
unsecured to companies, firms or other parties covered in the register maintained
under Section 301 of the Act. If so, give the number of parties and amount involved
in the transactions: b) Whether the rate of interest and other terms & conditions
of loans given by the company, secured or unsecured, are prima – facie prejudicial
to the interest of the company; c) Whether the receipts of the principal amount and
interest are also regular; 260 9213188188
(ii)
iii)
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d)
If overdue amount is more than one lakh, whether reasonable steps have been taken
by the company for recover of the principal and interest.
iv)
Internal Control: Is there an adequate internal control system commensurate with

the size of the company and the nature of its business, for the purchase of
inventory and fixed assets and for the sale of goods and services? Whether there is
a continuing failure to correct major weaknesses in internal control system.
Section 301: a) Whether the particulars or arrangements referred to in Section 301
of the Act have been entered in the register required to be maintained under the
section: b) Whether transactions made in pursuance of such contracts or
arrangements have been made at prices which are reasonable having regard to the
prevailing market prices at the relevant time.
v)
[This information is required only in case of transaction exceeding the value of

five lakh rupees in respect of any party and in any one financial year]
vi) Deposits from the public; In case the company has accepted deposits from the
public, whether the directives issued by the Reserves Bank of India (RBI) and the
provisions of Section 58 A and 58AA or any other relevant provision of the Act and
the rules framed there under, whether applicable, have been complied with. If not
the nature of contraventions should be stated ; if an order has been passed by
Company Law Board (CLB) or National Company Law Tribunal (NCLT) or Reserve Bank of
India (RBI) or any court or any other Tribunal whether the same has been complied
with or not? Internal Audit System: In the case of listed companies and / or other
companies having a paid – up capital and reserves exceeding Rs. 50 lakhs as at the
commencement of the financial year concerned, or having an average annual turnover
exceeding five crores rupees for a period of three consecutive financial years
immediately preceding the financial year concerned, whether the company has an
internal audit system commensurate with its size and nature of its business. Cost
Records: Where maintenance of cost records have been prescribed by the Central
Government under section 209 of the Act, whether such accounts and records have
been made and maintained. Statutory Dues: a) Is the company regular in depositing
undisputed statutory dues including Provident fund, Investor, Education and
Protection Fund, Employee’s State Insurance, Income Tax, Sales – Tax, VAT, Service
Tax, Wealth Tax, Custom Duty, Excise Duty, Cess & any other statutory dues with the
appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as at the last day of financial year concerned for a period of more
than six months from the date they become payable, shall be indicated by the
auditor: b) In case dues of Income Tax/ Sales Tax/ Wealth Tax Service Tax/ Custom
Tax / Excise Duty / Cess have not been deposited on account of any dispute, the
amounts involved and the forum where dispute is pending shall be mentioned. 261
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viii)
vii)
ix)
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x)
Company Registered for more than 5 years; Whether in case of a company which has
been registered for a period not less than five years, its accumulated losses at
the end of the financial year are not less than fifty percent of its net worth and
whether is has incurred cash losses in such financial year and in the immediately
preceding financial year. Default in payment of dues of Financial Institutions or
Debenture holders; Whether the company has defaulted in repayment of dues to a
financial institution or bank or debenture holders? If yes, the period of amount of
default to be reported. Loan / Advance Secured: Whether adequate documents &
records are maintained in cases where the company has granted loans and advances on
the basis of security by way of pledge of shares, debentures and others
securities ; if not, the deficiencies of be pointed out. Special Statutes to Chit
Fund: Whether the provisions of any special statute applicable to chit fund have
been duly complied with? a) Whether the net owned fund to deposit liability ratio
is more than 1:20 as on the date of balance sheet; b) Whether the company has
complied with the prudential norms on income recognition and provisioning against
substandard / doubtful / loss assets; c) Whether the company has adequate
procedures for appraisal of credit. Proposals/ request , assessment of credit needs
and repayment capacity of the borrowers; d) Whether the repayment schedule of
various loans granted by the Nidhi is based on the repayment capacity of the
borrower. Company Trading or Dealing in Shares / Securities, etc; If the company is
dealing or trading in shares, securities, debentures and other investments, whether
proper records have been maintained of the transaction and contracts and whether
timely entries have been made therein; also whether the shares, securities,
debentures and other investments have been held by the company, in its own name
except to the extent of the exemption, if any granted under Section 49 of the Act.
Guarantee to Bank / Financial Institution; Whether the company has given any
guarantee for loans taken by others, from bank or financial institutions, the terms
and conditions whereof are prejudicial to the interest of the company. Term Loans;
Whether the term loans were applied for the purpose for which the loans were
obtained. Short Term Funds; Whether the funds raised on short term basis have been
used for long term investment. If yes, the nature and amount is to be indicated.
xi)
xii)
xiii)
xiv)
xv)
xvi)
xvii)
xviii) Preferential allotment to parties covered under registered maintained under

Section 301: Whether the company has made any Preferential allotment of shares to
parties and companies covered in the Registered maintained under Section 301 of the
Act, and if so SUJEET JHA 262 9213188188
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whether the price at which shares have been issued is prejudicial to the interest
of the company.
xix) Security/ Charge created for debentures issued: Whether securities or change
has been created in respect of debentures issued? End Use; Whether the management
has disclosed the end use of money raised by public issues and the same has been
verified. Fraud on / by company reported: Whether any fraud on or by the company
has been noticed or reported during the year, if yes, the nature and the amount
involved is to be indicated.
xx)
xxi)
Summary of CARO, 2003 . Non – applicability to: (a) Banking Companies (b) Insurance
Companies (c) Companies registered under Sec. 25 of Companies Act. (d) Pvt. Ltd.
Company at all times during the year whose – (i) Paid up capital + Reserves ≤ 50
lakhs; and (ii) Loans outstanding ≤ 25 lakhs; and (iii) Turnover ≤ 5 crores
‘Turnover’ ¾ Includes both sale of goods & rendering of services. ¾ Commission to
3rd parties should not be deducted. ¾ Following shall be deducted; 9 Trade
discounts 9 Sales Tax/ Excise duty, if credited separately to such A/cs 9 Sales
Returns (even if relating to prior years) ‘Reserves’ [(Capital Reserve +
Revaluation Reserve) + (Revenue Reserve – Debit Bal. of P & L A/cs) (Upto the
extent of revenue reserve only) ‘ Loan outstanding’ ¾ Both long term & short term
shall be taken. ¾ Aggregate of loans from both banks & financial institutions shall
be taken. ¾ Loan taken from a company shall not be considered. 1. Fixed Assets •
Proper records (situation wise and quantity wise) • Physical verification and
discrepancies • If disposed off → whether affecting going concern 2. Inventories •
Physical verification SUJEET JHA 263 9213188188
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Procedure reasonable (inadequacy to be pointed out) Proper records and discrepancy.
3.
Loan to parties covered under register u/s.301
Given
Taken
1. If yes, number of parties and amount 1. If yes, number of parties and amount 2.
Interest, term & conditions prejudicial 2. Interest, term & conditions prejudicial
3. Receipt regular 3. Payment regular 4. Interest Control 4. If overdue amount > of
1 lakh, reasonable steps. • Purchase inventory and Fixed assets • Sale of goods and
services • Is failure to correct weaknesses? • 5. Transaction with parties covered
under register u/s. 301 • Particulars of contract / arrangements entered in
register • Transaction at reasonable prices (for transaction > 5 lakh for each
party for each F.Y.) 6. Companies accepting public deposit • RBI/Companies Act/any
other act complied. • Order by CLB / RBI/ NCLT complied. 7. Internal Audit
Listed Company or Other Company Paid up capital + reserves > 50 lakh at starting of
year or Average annual turnover > 5 crore Rs. For F.Y. immediately preceding this
year. Cost Record: Whether maintained, if prescribed. Statutory Dues Regular in
depositing undisputed statutory dues. If not, extent of arrears as at • balance
date exceeding 6 months to be reported. • If dispute, amount and forum. Company
registered ≥ 5 years • Accumulated losses at end ≥ 50% of net worth, and • Cash
loss in this / immediately preceding F.Y. Defaulted: Default in payment of dues of
Financial Institutions or Debenture holders – Yes, then amount. Loan / Advance
(secured): Proper records/Documents (deficiency) Special Statutes to Chit Fund: •
Net owned fund/deposit liability > 1/20 as at Balance sheet. • Companies complied
with prudential norms. • Adequate procedure for credit appraisal. • Repayment
schedule based on repayment capacity. Company trading / dealing in Share /
securities, etc. • Proper records of transfer and contracts • Timely entries
(i) (ii)
8. 9.
10. 11. 12. 13.
14.
SUJEET JHA
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• Investment in own name (except u/s 49) Guarantee to Bank / Financial Institution:
Terms and conditions prejudicial Term Loans: Applied for purpose for which
obtained. Short term funds – Used for long term (amount and nature); Preferential
allotment to parties covered under register maintained u/s. 301 • Whether made. •
Price (whether prejudicial) Security / charge – created for debenture issued. End
use: Whether management disclosed end use of money raised by public issue and same
verified. Fraud: on / by company reported. If yes, then, nature and amount.
AUDIT PROGRAMME- ITS FEATURES AND OBJECTIVES Audit programme: Audit programme means
a written plan made by the auditor before doing actual audit work. It is a detailed
plan and procedure to be followed for audit work.
In the opinion of professor W.B. Meigs, “An audit programme is a detailed plan of
auditing work to be performed, specifying the procedures to be followed in
verification of each item in the financial statements and giving the estimated time
required.”
Features or principles of Audit Programme: Every audit programme has some common
features. These are discussed below: (i) Cover all aspect of audit: Audit programme
cover all areas of auditor work so that no matters left unchecked. (ii) Techniques
and procedures: All important techniques and procedures of audit works are to be
given in details so that audit programme can be constructive. (iii) Time bound: Any
audit programme should consider the time (iv) Logical: The techniques and
procedures to be followed by the audit staff should be based on logic and not
haphazard. (v) Flexibility: Audit programme should not be rigid rather it will be
flexible enough and may be changed according to the need or situation. (vi) Covers
only important matters: Planning of audit programme should be such that only
important matter which requires examination is to be considered OBJECTIVE OF AUDIT
PROGRAMME: An audit programme has a great importance to an auditor. Audit programme
is guideline or roadmap through which an auditor conducts audit works in a smooth
way. The objectives for which an audit programme is prepared are discussed below:
(i) Proper distribution of work: (ii) No work unleft: (iii) Finished within
scheduled time (iv) Evidence for future reference (v) Systematic procedure can be
maintained: Steps for preparing Audit programme and its Contents: Before preparing
audit programme an auditor has to consider the following steps: (i) Purpose and
scope of audit: (ii) Nature of the organization (iii) Effectiveness of internal
control and internal check system: (iv) Procedure of accounting (v) Books of
accounts SUJEET JHA 265 9213188188
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(vi) (vii)
Important documents Verification of last year audited accounts
Contents of generally audit programme: The matters which are generally included in
an audit programme are given below: (i) Name and address of the organization. (ii)
The objects and the nature of the business (iii) Time scheduled for completing
audit work. (iv) Date of commencement of audit work. (v) Details of audit work to
be done as per importance and sequence e.g. examination of cash and bank account,
checking of purchase and sales day book, verification if different transaction,
valuation of assets and liabilities etc. (vi) Opinion given by the previous auditor
in his report. (vii) Procedures and methods of accounting followed by the
organization (viii) List of importance documents etc. Advantages of a fixed audit
programme: An audit programme has many advantages which are discussed below: (i)
Proper distribution of work (ii) Help to know the portion of work completed: (iii)
Responsibility and accountability: (iv) No pending of work (v) No loss of time (vi)
Continuity of work (vii) Evidence for future disputes (viii) Monitoring and
controlling of work (ix) Increase in performance of the audit staff (x) Helps to
prepare futures audit programme Disadvantage of a fixed audit programme Though
audit programme has many advantages still it is not free from limitations. The
limitations are: (i) Lack of flexibility: (ii) Monotony in work (iii) Not suitable
for small organizations (iv) Difficulties for inefficient staff (v) Problems to
cover all items:
Steps to be taken to remove the drawbacks of fixed audit programme:
The problems or difficulties arise for preparing fixed audit programme can be
removed in the following way: (i) Flexible audit programme (ii) Modification of
programme (iii) Encourage to the audit assistances (iv) Effectiveness of internal
control system (v) Participation of the audit staff (vi) Checking without notice
(vii) Change of audit programme after some years
SUJEET JHA 266 9213188188
MS EDUCONZ PVT. LTD. Audit Note Book and Its Contents:
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Audit note book: During the course of audit work the auditor and his staff may have
to face different queries and problems relating to various matters. These queries
and matters which require explanations and solutions are noted in a bound book is
known as audit note book.
Contents of audit note book: The audit note book records the following general
points. (i) Objectives and nature of the business, organization structure relating
to administration and accounts. (ii) The manes of the management staff and their
functions, power and responsibilities. (iii) Important points of Memorandum of
association, Articles of Association, minutes in case of companies, and partnership
deed in case of partnership business which may be required in future. (iv)
important contracts made by the client with the third parties. (v) List of missing
vouchers and duplicate found if any. (vi) List of all important documents. (vii)
Suggestions given by the audit staff. (viii) Methods of according and efficiency of
internal control system. (ix) List of queries for which further explanations are
required. (x) List of all important correspondence. (xi) Date’s and information for
future reference. (xii) Submission and balances of important ledger accounts.
(xiii) List of matters for which detailed investigation is required. (ix) Matters
of opinion which is to be given in the audit report. (x) Portion of audit work
already completed. (xi) A list of errors and frauds detected in the books of
accounts while conducting audit work. Advantages of Audit Note Book:
Audit note book is a very important document to an auditor, by maintaining audit

note book and auditor gets many advantages. These are discussed below: (i) A
storehouse of important information: The auditor and his staff keep important
information in the audit note book which will be required for audit work. For any
future reference these information helps the auditor. (ii) Minimization of errors
and frauds: As all the important information is recorded in the audit note book
chances of errors and frauds are minimized. (iii) Effectiveness of work: With the
help of audit note book the auditor can evaluate the progress of work done by the
audit staff and can also judge their knowledge and efficiency. (iv) Continuity of
work: If all the important matters are accurately recorded in the audit note book,
there is no chance of dislocation of work if any new staff joined for audit work or
if any existing audit staff transferred for other work. (v) Evidence for future
reference: Audit note book is a very important document to the auditor. He can
defend himself against the charges made by the company or by the third parties for
negligence and misfeasance if audit note book is properly maintained by him. (vi)
Helps for future audit programme: On the basis of important information and records
in the audit note book future audit programme is prepared.
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Routine checking: Routine checking is a checking of books of original entry and

ledgers as a matter of routine work to determine the arithmetical accuracy and to
detect errors and frauds and ensures the reliability of final accounts.
Objective of routine checking: The objectives of routine checking are discussed
below: (i) Checking of primary books (ii) Examining arithmetical accuracy (iii)
Examination of pointing (iv) Helps to detect errors and frauds (v) Prevent to alter
errors and frauds (vi) Accuracy of Trail Balance (vii) Reliability of Final
Accounts Advantage or importance of Routine Checking: There are many advantages of
routine checking. These are discusses below: (i) Examination of arithmetical
accuracy (ii) Through checking of books of accounts (iii) Detection and prevention
of frauds (iv) Reliability of final accounts (v) Prevent to alter figures (vi) Easy
examination Disadvantages or Limitations of Routines Checking. The following are
the limitations of routine checking. (i) All errors can not be detected (ii) All
frauds can not be detected (iii) Highly mechanical Audit Working Paper and its
Objectives Audit working papers: Audit working papers are the permanent financial
evidences obtained during the course of audit and is required to give audit
conclusions and for future references.
According to Mautz, “Audit work papers are the specific device used to accumulate
the evidence needed by an auditor to support his opinion.”
Examples of audit working papers: The following are the examples of audit working
papers generally kept for future reference: (i) Documents regarding audit programme
and audit note book. (ii) Statement of reconciliation between cash book and bank
pass book. (iii) Copy of correspondence between the auditors and debtors creditors,
bank, income tax authority and with the other third parties. (iv) Important points
of minutes of board meetings and shareholder’s meetings. (v) Copy of previous audit
report. (vi) List of all fixed assets, debtors, creditors, investment etc. (vii)
Copies of certificates received from the management regarding valuation of closing
stock, outstanding expenses, accrued income etc. Objective or purposes or
importance of preserving audit working papers:
Audit working papers have a great importance to the auditor. This is an documents
of audit work already made because all important documents are kept as working
papers during the audit period.
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Evidence of work performed: Audit working papers acts as written documents of audit
work already made because all importance documents are kept as working papers
during the audit period. (ii) Documentary evidence for future reference: if any
charges are made against the auditor for negligence and misfeasance of work, he can
defend himself with the help of working papers. (iii) Measurement of efficiency: On
the basis of preparation of working papers, the auditor can evaluate the
efficiencies of audit staff. (iv) Report can be made within short time: If the
working papers prepared by the audit staff are available within the time schedule,
the auditor can prepare his audit report within a short time. (v) Continuity of
work: If all the working papers are readily available there will be no dislocation
of work, if any new staff joined for audit work or if any existing audit staff
transferred for other work. (vi) Helps for preparing futures working papers:
Present working papers acts as a guide to the auditor for preparing future working
papers. If there are nay weaknesses in the present working papers the auditor can
rectify it at the time of preparing future working papers. (vii) Giving advice to
the management: If there is weakness in the system of internal control and internal
check and in the system of maintaining accounts, the auditor cab give valuable
advice to the top management on the basis of his working papers. (viii) Acts as a
good control system: With the help of audit working papers, the auditor can monitor
and control the total work distributed among the audit staff. As a result
cooperation between the employees increases. Features/Principles/ characteristics/
essentials/ scope of maintaining goods working papers:
(i)
Successful audit work depends on maintaining and preserving of good working papers.
For this purpose, some common principles are to be followed. These are discussed
below: (i) Relevance: Only working papers which are materials for the purpose of
audit are to be preserved. Irrelevant working papers should not be kept. (ii)
Completer information: The working papers prepared by the audit staff should be
complete and accurate in all respect so that necessary information can be obtained
when the situation demands. The data’s and figures should be arithmetically
correct. (iii) Arrangement of working papers: Working papers should be arranged
according to the need and priority of audit work. Besides that audit staff should
mention the date on which it was prepared. He should also sign on the face of the
working paper. (iv) Changeability: Working papers should not be rigid. This should
be prepared according to the need of the audit work and changes are to be made if
required. (v) Safe custody: Working papers should be kept secret and protected in
such a way that no one can access these without authorization. (vi) Correctness in
presentation: The working papers should contain such information’s which is correct
and not misleading. Goods presentation of information should not create any
problems at the time of using of working papers.
OWNERSHIP OF WORKING PAPER: There is great controversy regarding the perspective or
ownership of working papers i.e. who is the owner of the working papers. Both the
auditor and his client demand these working papers to be kept with them. The logic
of the owner is that the auditor has prepared audit working papers on behalf of the
company in the capacity of agent. Moreover, the auditor contracted with the third
parties of the company has collected information which has been recorded in the
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working papers. For these, audit working papers are the assets of the company and
they can retain it. On the other hand, the logic behind the preservation of working
papers by the auditor is that he is doing audit work on behalf of the Company but
he prepares working papers for his benefits of work. Besides these, he should keep
these working papers for any charges made against him by the company for negligence
of duty or for misfeasance. Therefore, he is the real owner of the audit working
papers.
Case Laws: (i) Stockkinsky vs. Bright Grahm & Company (1938): In this case it was
held that working papers are the property of the auditor even after the payment of
his audit fees. The judgment of the court was in favour of the auditors on the
ground that during the performance of his duties, he acts as an independent
contractor and not as an agent of his client. (ii) Chantry Martion & Company vs.
Martin: In this case, it was held that working papers for the purpose of producing
Balance Sheet are the property of the auditor and the correspondence made between
the auditor and the income tax department relating to tax liability of the client
is the property of client. Therefore, it can be concluded that the auditor is the
owner of the working papers prepared by him so far as it relates to the examination
of books of accounts. Auditing In Depth- Its Scope And Objective
Auditing in depth: Auditing in depth is a technique of detailed examination of some

selected transactions of each class to assure the accuracy of financial data’s.
According to Taylor and Perry, “IT (Auditing in depth) implies the examination of
the system applied within a business entailing the tracing of certain transactions
from the origin to their conclusion investigating at each stage the record created
and their appropriate authorization.”
Scope or applicability of auditing in depth: Generally auditing in depth is applied
in the organization which is large enough and there are huge transactions. If there
is no internal control system in the organization or the system is inefficient,
this technique is not applicable. In large organizations, if there is an efficient
internal control system, the auditor can take help of auditing in depth because
detailed examinations of all transactions and records are not possible. In this
case, the auditor should determine the transactions on selective basis and should
apply audit in depth from the beginning to the conclusion of some selected
transactions of each class to assure the accuracy of financial data’s.
Objective of auditing in depth: Auditing in depth has a great importance to the

auditor for examination of books of accounts from the beginning to the conclusion
of some selected transactions of each class to assure the accuracy of financial
data’s Routine checking is a checking of books of books of original entry and
ledgers as a matter of routine work to determine the of final accounts. On the
other hand, test checking is a technique the arithmetical accuracy and to detect
errors and frauds and ensures the reliability of final accounts. On the other hand,
test checking is a technique of intensive checking of some selected transactions on
random basis out of huge transactions to avoid waste of time, Labour, inaccuracy
and costs. To remove the demerits of both routine checking and test checking
auditing in depth is applied. Auditing in depth is the detailed examination of some
selected transactions of each class from the beginning to the conclusion to assure
the accuracy of financial data’s.
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The following are the objective of auditing in depth: (i) Detailed checking of
selective transactions (ii) Help for test checking (iii) Useful for verification
(iv) Easy detection of frauds (v) Verify accuracy
Advantage of Auditing in Depth: The following are the advantage of auditing in
depth: (i) Detailed examinations of accounts on selective basis (ii) Saving in
time, labour and costs (iii) Manipulation of accounts can be checked (iv)
Shareholders interest protected (v) Moral pressure on client’s staff (vi) No
monotony in work Disadvantage of Auditing in Depth: There are limitations of
auditing in depth. These are discussed below: (i) Not applicable in all cases: (ii)
Chances of risks (iii) Not suitable for unskilled audit staff AUDIT FILE AND ITS
CONTENTS: Audit file: The file which is used for preserving necessary papers and
information obtained during the course of audit is known as audit file.
Classification of audit File: Audit file may be of two types: (a) Permanent audit
file and (ii) current file. Permanent Audit File: The document collected during the
course of audit and are kept permanently in the audit and which is required in the
future years is known as permanent audit file. The contents of permanent audit
files are: (i) Statement showing nature and objectives of the business, name of the
management people and their functions, organization structure, nature of activities
i.e. manufacturing or service, important contracts with the third parties etc. (ii)
The primary documents relating to organization i.e. Memorandum of Association,
Articles, of Association in the case of company and partnership deed in the case of
partnership firm. (iii) List of books accounts maintained by the entry. (iv) Check
list of internal control system. (v) Copy of correspondence between the auditors
and debtors, creditors, bank, income tax, authority and with the other third
parties. (vi) Important points of minutes of board meetings and shareholders
meetings. (vii) Copy of previous audit report. (viii) List of all fixed assets,
debtors, creditors, investments etc. (ix) Procedure and methods of accounting
maintained by the organization etc. Current Audit File: This file prepared for the
current year under audit and according to the needs of the auditor. Generally this
file is not required in the succeeding years. The contents of current audit file
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(i) (ii) (iii) (iv) (v) (vi) (vii)
A statement of changes made in the organization during the year on the basis of
internal control system A statement of evaluation of internal control and internal
check system. Some important decisions taken by the auditor during the current
year. A statement of discussion with the management. A reconciliation statement of
bank and petty cash account. Relevant documents and explanatory statements during
the audit period. Copies of letter made between the organization and the third
parties.
Advantage or Importance of maintaining Audit File:
Maintaining audit file gives different advantages to the auditor. These are
discussed below: (i) Help to prepare subsequent audit file (ii) Assist to help for
comparison (iii) Gives quick and ready information (iv) increase in efficiency (v)
Saving in time, Labour and Costs (vi) Continuity of work
TEST CHECKING
If the organization is large enough and there are huge transactions, it is very
much impracticable and hard job for the auditor to examine and verify each
transaction one by one. Detailed checking of transactions required time, effort and
money. To overcome this situation, the technique of test checking is applied. Test
checking is a technique of intensive checking of some selected transactions on
random basis out of huge transactions to avoid waste of time, Labour inaccuracy and
costs. According to professor Meigs, “Testing and test checking means to select and
examine a representative sample from a large number of similar items.” In the
opinion of L.R,. Dicksee,, “the theoretical responsibility of the auditor extends
ultimately to every entry in the books of accounts, but it does not follow that it
is likely necessary possible to examine every entry in details.” In case of large
organizations, if there is a sound system of internal control system, the auditor
can take help of test checking.
INTERNAL CONTROL INTERNAL CHECK AND INTERNAL AUDIT
Due to increase in size and nature of activities today’s business worlds is most
competitive. In this competitive business more and more control is required or
smooth running of business.
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Internal control is the total control of an organization financial and other wise
to safeguard business assets, prevention and detection of errors and frauds,
increase the efficiency of the management and good system of according records and
includes internal check and internal audit.
According to Spicer and Pegler, “Internal Control is best regarded as the whole
system of controls financial and otherwise, established by the management in the
conduct of a business including internal check, internal audit and other forms of
control. ” Features of Internal Control System: A big organization having a sound
internal control system has the following characteristics: (i) Total System of
control (ii) Fixes authority and responsibility (iii) Integrate other subsystem
(iv) Control also non-financial activities (v) Effectiveness depends on employees
(vi) Minimizations of errors and frauds
Objective of Internal Control in relation to an according system
As per auditing Accounting Standard (AAS)-6 of the Institute of Chartered

Accountants of India, the following are the objectives of Internal Control System
in relation to an accounting system: (i) Authorization (ii) Accountability (iii)
Safeguarding of assets (iv) Comparison
Advantage of Internal Control System: Being a total control system, internal
control has many advantages. These are: (i) Entire system of control (ii) Use
different tools for control (iii) Early detection of Errors and frauds (iv) A
Reliable System to the External Auditor (v) True and Fair View of Accounting (vi)
To review the effectiveness of internal check and internal audit system (vii)
Brings overall Efficiency (viii) Increase Overall Efficiency and Profitability
Disadvantages or Limitations of Internal Control System:
In spite of many advantages, internal control system Is not free form limitations.
These are: (i) High cost (ii) Not Flexible (iii) Chances of Errors and Frauds (iv)
A Routine matter
INTERNAL CHECK Internal check system is a part of Internal Control System. To
execute internal control system check is implemented. Internal Check system is such
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the employees where work of one employee is automatically checked by others i.e. no
one is allowed to do the total work of a transaction. According to F.R.M de Paula
“Internal Check means practically a continuous internal audit carried on by the
staff itself, by means of which the work of each individual is independently
checked by other members of the staff.” Internal check has been defined by the
Institute of Chartered Accountant of England and Wales as “checks on day to day
transactions which operate continuously as part of the routine system whereby the
work of one person is proved independently or is complimentary to the work of
another, the object the prevention of early detection of errors and fraud.”
Principles or Features of Internal Check System The following are the main
principles of good system of internal check: (i) Allocation of Duties: Under this
system, duties are allocated in such a way that no one person can be allowed to
access all the transactions of a financial matter. (ii) Checking of transactions:
The system are introduced in such a way that day to day transactions are checked
and chances of errors and frauds are minimized. (iii) Continuous service: This is a
continuous built in device and a part of routine system i.e. the system is
repetitive. (iv) Complementary: Work is complementary i.e. the total job is
allocated in such a way among the employees that the work of each person is checked
by other. (v) Encourage to take leave: To detect frauds every employees of the
organization should be encouraged to go on leave at least once in a year. (vi)
Separation of duties: Those who are in charge of assets should not be permitted to
deal books of accounts. AS a result chances of manipulation of accounts can be
minimized. (vii) Use of mechanical devices: Some mechanical devices e.g. Automatic
Cash Register, Cheque Signing Machine etc may be employed to prevent
misappropriation of cash. (viii) Sound accounting control: A sound system of
accounting control should be implemented for each important class of assets. (ix)
Sound budgetary control: A sound budgetary control system should be implemented for
each important class of assets. (x) Rotation of jobs: Transfer of employees from
one job to another is to be made for detection of errors and frauds. (xi) Perpetual
inventory system: A good perpetual inventory system with accountability should be
implemented. (xii) Deposit of cash: Receipts of cash should be immediately
deposited in the bank. (xiii) Effective control: Effective control should be
implemented over all purchases, sales, receipts and issue of goods. (xiv) Periodic
verification: There should be a system of periodical verification and testing go
some accounting records. (xv) Periodical review: Periodic review of accounting
procedure is a part of internal check system. (xvi) Others: (a) Storekeeper giving
charge of store should not be allowed to keep accounts relating to purchase. (b) A
good internal check system should be implemented regarding payment of wages (c)
Accounting of credit sales and credit purchase should be strictly dealt with.
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Following are the objective and advantages of internal check system. (i) Division
of Work (ii) Responsibility (iii) Early detection of errors and frauds (iv) Proper
books of accounts. (v) Timely preparation of Final Accounts (vi) Dependence of
Auditor (vii) Exercising moral pressure (vii) Increase Overall Efficiency (viii)
Overall Economy
DISADVANTAGE OR LIMITATIONS OF INTERNAL CHECK SYSTEM:
Though internal check system has numerous advantages still this is not free from
limitations. These are (i) Costly system (ii) Not Applicable for small organization
(iii) Chances of collusion. (iv) Monotonous for the workers (v) Disorder in work
DISTINCTION BETWEEN INTERNAL CONTROL AND INTERNAL CHECK SYSTEM Internal Control
Internal Check 1. Internal Check is a part of internal 1. Internal Control is a
total control i.e. financial and otherwise to safeguard control system and is a set
of rules that assets of the business. are the part of accounting system. 2. The
main purpose is to maintain 2. The object of internal control is not only to detect
errors and frauds but also accounts in such a way that errors and to formulate
management policies with frauds can easily be detected and efficiency. prevented.
3. As internal control covers total control 3. As internal check covers accounting
of the organization its scope is wider aspect and detection of frauds and errors,
its scope is narrower. 4. Generally, rules framed out for 4. AS internal control is
a total system of control its principles are flexible and implementing internal
check is not may change according to the need of changed for a time period. the
organization. 5. As work is allocated among the 5. As internal control is a total
control i.e. financial and otherwise, the total employees in such a way the work of
responsibility is of the directors. one person is automatically checked by others.
So each employee performs his own work and the directions do not interfere on the
job. INTERNAL CHECK IN RESPECT OF PAYMENT OF WAGES EMPLOYING A LARGE NUMBER OF
WORKERS
Internal check system is part of Internal Control System. To execute internal

control system internal check is implemented. Internal check system is such an
arrangement of allocating checked by others i.e. no one is allowed to do the total
work of a transaction.
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Internal check regarding payment of wages: A sound of internal check regarding

payment of wages may avoid errors and frauds which may be revealed from time and
piece wages records. The following steps may be followed. (i) There should be a
separate Time and Pay Roll department. (ii) A record card for each employee should
be maintained where date of apportionment, terms of employment, rate of wages,
should be written. (iii) A good time keeping system should be introduced so that
time of entering and leaving of each employee is recorded. (iv) Actual time spent
by each worker on the jobs should be properly recorded in the job card and signed
by the departmental manager. (v) In case of piece rated workers details by the
departmental manager. (vi) Those persons who prepares wages sheet does not have
access with the preparation of attendance sheet. (vii) There should be proper
authority for grant of overtime work. (viii) The person who is in charge for
payment of wages should not have connection with the preparation of wages sheet.
(ix) While preparing wages sheet, number of workers shown in the wages sheet should
be matched with the records of the personnel department, so that chance of
inclusion of dummy workers can be detected. (x) Incentives and production bonus
given to the workers must be based on time saved or getting more output in standard
time and the bases of calculating time saved should be checked. (xi) Wages should
be paid in the presence of a responsible person who can intently the employee.
(xii) Unclaimed wages should be deposited immediately into the bank.
INTERNAL CHECK WITH REGARD TO CREDIT PURCHASE OF A BIG BUSINESS ORGANIZATION
The following are the guidelines of a sound system of internal check with regard to
credit Purchase of a big business organization. (i) Separate department for
purchase: In case of large organization there are huge transaction regarding
purchase of different goods. For this purpose, a separate department for purchase
should be established under an authorized person. (ii) Receiving purchase
requisition: Each departmental manager should prepare purchase requisition duly
authorized and signed mentioning the quantity and quality of goods required and
send it to the storekeeper or direct to the purchase department. After receiving
purchase requisition the purchase manger should like initiative for purchase of
goods. (iii) Verify the quantity of stock: After receiving purchase requisitions
the purchase department should verify the stock in hand of different goods and
determine the quantity to be purchased. (iv) Inquiry for purchase: After
determining quantity t of goods to be purchased, the purchase manager gives tender
for purchase or make inquiry from different supplier regarding price, quality,
quantity, mode of transport, payment terms, facility of discount, time required, to
supply etc. (v) Selection of supplier: After considering all the factors mentioned
above, the purchase department select the supplier who will supply goods at least
cost with required quality. (vi) Giving purchase order: After selecting supplier
the purchase manager should place purchase order to the supplier. Generally five
copies of purchase order are prepared and distributed as: (a) one copy sent to the
selected supplier (b) one copy is retained by the
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purchase department (c) one copy is sent to the stores department (d) one copy is
sent to the accounts department and (e) the last copy is sent to the department who
gives purchase requisition. (vii) Receiving and inspecting goods: When the supplier
supplies goods that should be inspected at the factory gate by the responsible
official and tested if regards quality and if satisfied then passes it for
receiving the goods. (viii) Preparing goods received note: After receiving
inspection reports, the receiving department should records the details of goods
received in a form known as “Goods Received Note”. One copy of goods received note
is to be sent to the storekeeper, one copy to the accounts department and the last
copy to the purchase department. (ix) Return of goods purchased: If goods received
is not as per quantity ordered and of required quality or goods send by the
supplier is defective then it is to be returned to the supplier along with a debit
note. (x) Checking and passing of bill for payment: After receiving goods the
purchase manger will take initiative to make voucher for payment. The invoice must
be serially numbered and entered in the Inward Invoice Register. A final voucher is
prepared on the basis of invoice and other documents and payment is to be made as
per terms of contract. (xi) Maintaining proper records: All importance documents
should be properly maintained i.e. purchase order, goods received note, inspection
report, debit/credit note, challens, voucher etc.
INTERNAL CHECK WITH REGARD TO CASH DEPARTMENT OF A LARGE DEPARTMENT STORE
A large departmental store generally has many departments with respect of various
goods and services. There should be a separate cash department for receiving and
handling of cash and cheques. A good system of internal check regarding cash
department must have the following gaudiness: (i) All incoming mails should be
opened in presence of a responsible officer not connected with persons like cashier
and administration department. (ii) Receipts of all cheques and cash are to be
immediately recorded in cash abstract. (iii) All cash and cheque received should be
immediately deposited into bank. (iv) bank paying in slips should be prepared by
person other than cashier. (v) Printed receipt book with serial number to be used
and all receipts must be issued to the depositors signed by the appropriate
authority. (vi) Any defective slip should be identified and market it as cancelled
with proper initials. (vii) There should be a regular check of counterfoils of the
paying-in slips with the cash book recording the receipts of cash and cheque.
(viii) To get the better result of internal check system use of automatic cash
register is preferred. (ix) Unused cheques and receipt book should be kept in safe
custody under a responsible person. (x) Periodical bank reconciliation statement
should be prepared to know the actual cash balance.
INTERNAL AUDIT A big organization has to maintain enormous books of accounts.
Internal audit being a part of internal control system is a detailed review of the
books of accounts throughout the accounting year by a specialist group of employed
auditors independently within an organization to assure management that proper
accounts has been maintained, and the system gives adequate safeguard to maintain
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assets and evaluated the effectiveness of other controls and confirms that the
polices given by the management are being properly executed. The institute of
Charted Accountant of England and Wales defines internal audit as “as review of
operations and records, sometimes continuous undertaking within a business by a
special staff.” Features of Internal Audit: Internal audit has some fundamental
features. These are discuses below: (i) Separate identify: A separate department
must have to be established for conducting internal audit continuously monitors the
accounting work throughout the accounting year. (ii) A sub-system of internal
control: Being a part of internal control system internal audit continuously
monitors the accounting work throughout the accounting year. (iii) Independent
appraisal: Internal audit department with the help of its specialized group of
auditors group of auditors protect misappropriation of assets and evaluated the
effectiveness of other controls and confirms that the policies given by the
management are being properly executed. (iv) Advisory function: By caucusing the
weak points in the accounting system, the internal auditor gives valuable
suggestion to the top management for taking appropriate measures to rectify it. (v)
Judge the effectiveness of internal check system: The efficiency and effectiveness
of internal check system can be verified by the internal auditor and he can inform
to the appropriate authority if there is any drawback in the system. (vi) Review of
accounting system: Continuous review and monitoring of accounting system is the
most important task of the internal audit department. For this purpose, internal
auditor applies different analytical procedure. Objective and Advantage or
Importance of Internal Audit: The following the objectives and importance of
internal audit system: (i) Accuracy in financial accounts (ii) Maintaining standard
accounting policies (iii) Evaluation of internal check system (iv) Judges overall
financial efficiency (v) Detect inefficiency in production (vi) Examines proper
authority (v) Early detection of errors and frauds (vi) Ensure proper safeguard of
frauds: (vii) Verifies different assets (viii) Verify efficiency of fanatical
system (ix) Constructive suggestion. Disadvantage or Limitations of Internal Audit:
In spite of many advantages the internal audit suffers from certain limitations.
These are (i) Expensive (ii) Expertise needed: (iii) Lack of impartial opinion
Distinction between Internal Audit and Statutory Audit Internal Audit: Internal
audit being a part of internal control system is a detailed review of the books of
accounts throughout the accounting year by a specialist group of employed auditor
independently within an o0rganization to assure management that proper accounts has
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maintained, and the system gives adequate safeguard to maintain revenue and protect
misappropriation of assets and evaluated the effectiveness of other controls and
confirms the policies given by the management are being properly executed.
Statutory Audit: Statutory audit is compulsory audit for the companies conducted by
the qualified independent auditor as per company’s act 1956. The primary duty of a
Statutory auditor is to give onion in his report that profit and loss account and
balance sheet of the company have been drawn up as per law and whether the accounts
shows a true and fair view of he state of affairs of the company or not. Following
are the difference between Internal Audit and Statutory
Internal Audit 1. Internal audit is n audit conducted by the employees of the
company Statutory Audit 1. Statutory audit is a compulsory audit for the companies
conducted by the qualified independent auditor as per company’s Act, 1956. 2.
Statutory auditor is generally appointed by the shareholders in the annual general
meeting of the company. 3. A Statutory auditor must have prescribed qualifications
under Section 226 of the company’s Act, 1956. 4. Generally statutory audit is done
after the preparation of final accounts and at the end of the financial year. 5.
The scope, nature, rights and duties of statutory auditor are determined by the
company’s Act, 1956. 6. The Primary duty of a Statutory auditor is to give opinion
in his report that profit and loss account and balance sheet of the company have
been drawn up as per law and whether the accounts shows a true and fair view of the
state of affairs of the company or not. 7. Statutory auditor has to give his report
to the shareholders. 8. Statutory auditor has to give his report to the
shareholders. 9. Remuneration of statutory auditor is fixed by the shareholders in
the annual general meeting. 10. Statutory auditor is not an advisor except
specifically requested.
2. Internal auditors are appointed by the management of the organization. 3. No

Statutory qualifications are prescribed in the company’s act for internal auditor.
4. Generally internal audit is done continuously for the whole year, 5. The scope,
nature, rights and duties of work is determined by the management. 6. The Primary
duty of Internal auditor is to find out the accuracy of the account and to detect
any errors and frauds which have been committed.
7. Internal auditor has to submit his report to the management, 8. Internal auditor
can be removed by the management. 9. Remuneration of internal auditor is fixed by
the management. 10. Internal auditor gibes suggestion tot eh management regarding
efficiency of business and how to prevent and frauds 11. Each and every transaction
is checked by internal auditor 12. Internal auditors have no right to attend
general meeting.
11. Statutory auditor while auditing can take help of test checking. 12. Statutory
auditors have a right to attend annual general meeting.
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DISTINCTION BETWEEN INTERNAL AUDIT AND INTERNAL CHECK Internal Audit Internal Check
1. Internal Check system is such an 1. Internal audit being a part of internal
control system is a detailed review of arrangement of allocating tasks among the
books of accounts throughout the the employees where work of one accounting year by
a specialist group of employee where work of one employee employed auditors
independently us automatically checked by others i.e. within an organization to
assure no one is allowed to do the total work management that proper accounts has
of a transaction. been maintained and the system gibes adequate safeguards to
maintain revenue and protect misappropriation of assets and evaluated the
effectiveness of to other controls and confirms that the policies given by the
management are being properly executed. 2. In case of internal check, work is so 2.
Internal audit is an audit conducted by a separate department and by the
distributed that job done by one professionally qualified employees. employee is
automatically checked by others. 3. Internal check is such an efficient tool 3. The
primary duty of internal auditor is to find out the accuracy of the accounts which
protects the organization for and to detect any errors and frauds being committing
errors and frauds. which have been committed. 4. Internal check is being used as an
4. Internal auditor gives suggestion to the management regarding efficiency of
efficient system prevails in the business and how to prevent errors and
organization and almost every frauds. employee is covered under this system. Hence
this is not an advisory system. 5. Internal auditor had to submit his report 5.
Under the system of internal check, day to the management. to-day transactions are
being reported to the head of the department. RELIANCE OF STATUTORY AUDITOR OR
INTERNAL AUDIT SYSTEM External Audit: Statutory audit is compulsory audit for the
companies conducted by the qualified independent auditor as per company’s act,
1956. The primary duty of a Statutory auditor is to give opinion in his report that
profit and loss account and balance sheet of the company have been drawn up as per
law and whether the accounts shows a true and fair view of the state of affairs of
the company or not. Internal Auditt: Internal audit being a part of internal
control system is a detailed review of the books of accounts throughout the
accounting year by a specialist group of employed auditors independently within an
organization to assure management that proper accounts has been maintained, and the
system gives adequate safeguards to maintain review and protect misappropriation of
assets and evaluated the effectiveness of the other controls and confirms that the
policies given by the management are being properly executed. SUJEET JHA 280
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1. Routine checking is a process of verification 1. Vouching is the verification of

accounting of arithmetical accuracy of transaction entries recorded in the books of
accounts with documentary evidences such as vouchers, recorded in the books of
accounts. invoices, confirmation etc and to check the genuineness, relevance,
validity, authenticity of the transactions through the help of inspection,
observation, inquiries, confirmation etc. 2. The scope of routine checking is very
2. Vouching includes routine checking i.e. the limited i.e. checking of
arithmetical accuracy, scope is very large. casting posting, totaling, carry,
forward etc. 3. Routing checking includes casting, totaling 3. Vouching includes
verification of and balancing of books of prime entry, accounting entries with the
vouchers, invoices, checking of ledger balance, arithmetical of confirmation
genuineness of the transactions with the help of inspection, observation, Trial
balance etc. enquiries etc. 4. Only some minor errors can be detected. 4. Through
the process of vouching major errors and frauds can be detected. 5. No expertise is
required for conducting 5. Expertise is required for the job of routine checking.
vouching.
CONTINGENT LIABILITY AND AUDITOR’S DUTY: Contingent Liability: Contingent liability

is not an actual liability at the end of the present year but may become liability
in the future on the happenings on certain unpredictable contingencies. Examples
are; (i) Liability for bill discounted with the bank yet to be matured. (ii)
Liability for pending case before the court. (iii) Guarntee given on behalf of
others (iv) Liability regarding party paid up shares (v) Arrear on Cumulative
Preference Shares. How it is shown in Balance Sheet? According to company’s act
1956, contingent liability should be shown as a foot note in the Balance Sheet and
state that (i) Claims against the company not acknowledged as debts. (ii) Uncalled
liability on shares partly paid (iii) Arrears on fixed cumulative dividend. (iv)
Estimated amount of contracts remaining to be executed on capital account and not
provided for. (v) Other money for which the company is contingently liable.
Auditors Duty: The following points should be considered for verification of
contingent liability: (i) Examine the minute book to ascertain the probable future
contingent liability. (ii) Examine, whether sufficient provision has been made for
uncertain contingent liability. (iii) Examine the Bill book and confirm the amount
of bills discounted before the date of maturity; (iv) Check the provision which has
made for arrear cumulative preference dividend. (v) Verify that all contingent
liability should have correctly shown in the balance sheet as a foot note. SUJEET
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(vi)
Disclosure about contingent liability is to be given in the financial statement as

required by accounting standard (AS) 29.
Contingent Assets 1. Contingent assets are those assets the claim for which may
depend on performance and activities of future period. Examples are (i) Uncalled
share capital of a company (ii) a legal action taken by the company against another
company for use of its patent.
Contingent Liability 1. Contingent liability is not an actual liability at the end

of the present year but may become liability in the future on the happenings on
certain unpredictable contingencies. Example are; (i) liability for bill discounted
with the bank yet to be matured. (ii) Liability for pending case before the court.
2. Indian Company’s Act does not prescribe 2. Contingent Liabilities are shown as
foot any procedure to show contingent assets in the note in the balance sheet.
balance sheet. THE DEFFERENCE BETWEEN DEPRECIAIOTN AND OBSOLESCENCE ARE GIVEN
BELOWS: Depreciation 1. Depreciation may be defined as 1. gradual and permanent
decline in the value of fixed assets as a result of wear and tear, obsolesce,
efflux ion of time, market changes or for any other reasons. Obsolescence When a
new technology or technical know-how captures the market and on account of that,
existing assets losses its value is known as obsolescence. l i k Provision for
obsolesce can not be estimate Accurately obsolescence is a Type of loss which may
occur within a Short time. In case of obsolescence, a fixed amount not be
determined accurately.
2. Provision for depreciation can be 2. estimated beforehand So that there is Lower

risk for replacement of assets. 3. Generally depreciation on fixed assets 3. is
made in a uniform percentage over the years.
~
Provision or Specific Reserve General Reserve 1. A general reserve is a reserve

which is 1. Provision is a specific reserve made out for the purpose of some
uncertain created out of normal profit of the liabilities or for a known loss
expected business for the purpose of meeting at a future date. unknown future
losses or for strengthening the financial position of the business. 2. Provision is
created for meeting 2. Reserve is created for providing further uncertain
liabilities. working capital and for strengthening the financial position of the
business. 3. Provision is a charge against profit 3. Reserve is an appropriation of
profit. 4. Provision is to be made to meet some 4. General reserve is created for
meeting known expenditure or loss e.g. any purpose. provision for depreciation.
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5. The amount of provision to be created does not depend on profit. 6. Provision

may be shown in the liability side of the balances sheet or can be deducted from
the respective assets on the asset side. 7. The amount of provision which is
created for meeting any particular liability cannot be used for distribution of
dividend. 8. Some provisions made for specific purposes are a tax deductible item
for the purpose of income tax e.g. provision for depreciation as per income tax
act. 9. If provision is not made for known losses or for future uncertain
contingencies the auditor should clearly mentioned it in his audit report.
5. The amount of reserve to be created depends upon the availability of profits. 6.

Reserve is shown in the liability side of the balance sheet under the head Reserve
& Surplus. 7. Dividend can be distributed out of free reserve as reserve is made
out of distributable profit. 8. Amount transferred to general reserve out of
distributable profit not admissible expenses as per income tax act. 9. A certain
percentage of profit is to be transferred to reserve account before declaring
dividend. Except that an auditor has nothing to do if a company does create reserve
out of distributable profit. 10. Reserve is made out of distributable profit. So,
reserve has no direct role for measurement of income.
10. Income can not be accurately measured without making provision.
THE DIFFERENCE BETWEEN RESERVE AND RESERVE FUND ARE DISCUSSED BELOW: Reserve
Reserve Fund 1. Reserve fund is a part of profit created 1. A general reserve is a
reserve which is created out of normal profit of the out of normal business
activities for the business for the purpose of meeting purpose of investing the
amount in unknown future losses or for outside securities and to earn profit.
strengthening the financial position of the business 2. The purpose of creating
reserve fund is 2. Reserve is created for providing further working capital and for
strengthening to invest the amount outside the the financial position of the
business. business in profitable securities and to earn profit i.e. non – trading
income. 3. Reserve is shown in the liability side of 3. Reserve fund is shown in
the liability the balance sheet under the head side of the balance sheet under the
head ‘Reserve & Surplus.’ ‘Reserve & Surplus’ and reserve fund investment is shown
in the assets side of the balance sheet under the head ‘Investment’. 4. Dividend
can be distributed out of free 4. Reserve fund cannot be utilized for SUJEET JHA
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reserve as reserve is made out of distributable profit. 5. A company must have to

transfer a certain percentage of profit to general reserve before declaring
dividend. 6. Reserve is the base for providing additional working capital or for
strengthens financial position of the business
payment of dividend except from ‘Dividend Equalization Fund’. 5. No amount of

profit should be transferred to the reserve fund before declaring dividend. 6.
Reserve fund is not a source of additional working capital of the business rather
it is a source of non trading income.
DISTINCTION BETWEEN CAPITAL RESERVE AND REVENUE RESERVE Capital Reserve Revenue
Reserve 1. A revenue reserve is a reserve which is 1. The reserve which arises out
of capital profit is known as capital reserve e.g. created out of normal profit of
the (i) Profit on revaluation of assets. (ii) business for the purpose of meeting
Profit on revaluation of assets. (iii) unknown future losses or for Profit on re –
issue of forfeited shares strengthening the financial position of (iv) Shares or
debentures are issued at a the business. premium. (v) Profit prior to incorporation
of a company (vi) Purchase of own debenture by redeeming at a discount in the open
market etc. 2. Capital reserve is utilized for written 2. Revenue reserve is used
for written of off capital losses. revenue losses and also for writing of capital
losses. 3. Dividend can be declared out of this 3. Dividend can be distributed out
of free profit subject to some conditions. reserve as reserve is made out of
distributable profit. 4. Business assets increase out of capital 4. Revenue reserve
is created for reserve. providing as reserve is made capital and for strengthening
the financial position of the business. 5. Capital reserve can arises any time 5.
Revenue reserve is created out revenue during the continuity of the business profit
at the end of financial year.
Capital expenditure Revenue expenditure 1. Revenue expenditure is those which are

1. Capital expenditure are those which are made for the purchase or acquisition of
incurred for day to day operating assets for earning revenue and the activities of
the business and whose benefit is obtained for a number of benefits are exhausted
within the years. Purchase of land and building, current accounting year. Expenses
on plant and machinery, patent, furniture material, labour and overheads etc are
etc are the examples of capital the examples of revenue expenditure. expenditure.
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2. The benefit from capital expenditure is not exhausted within the current
accounting year but also extended for some future years. Capital expenditure is
unexpired cost. 3. A large sum of money is to be paid for capital expenditure. 4.
Depreciation on capital expenditure is charged against revenue and is treated as
expenses. 5. Fixed assets made out of capital expenditure can be sold out or
transferred. 6. Through capital expenditure inflow of assets arises.
2. The benefits from revenue expenditure are exhausted within the current
accounting year. Revenue expenditure is expired costs. 3. Amount of revenue
expenditure is comparatively lower than capital expenditure. 4. Revenue expenses
are fully charged against revenue as expired costs. 5. Here, goods or services made
from revenue expenditure can be sold not. 6. Through revenue expenditure income
generated.
SECRET RESERVE: Secret Reserve: A Secret Reserve is a reserve, the existence of

which is not disclosed on the face of the balance sheet. Secret reserve indicates+
concealment of profit either by means of understatement of assets or overstating
its liabilities. When a company makes secret reserve, it indicates that the actual
financial position is better than what it has been shown in the books of accounts.
According to Spicer and Pegler, "Secret reserve is a reserve, the existence and /
or amount of which is not disclosed on the face of the Balance Sheet". Methods of
creating Secret Reserve: Secret reserve may be created in the following ways: . (i)
By showing capital expenditure as revenue. (ii) By showing fewer amounts on fixed
assets. (iii) By showing undervaluation of stock. (iv) By recording fictitious
expenditure in the books of accounts (v) By making more provision for bad debt and
for outstanding liabilities. (vi) By showing the liabilities of the business at
more amounts. (vii) By showing more amount of purchase and fewer amounts of sales
in the books of accounts. (viii) By showing excess depreciation on fixed assets.
(ix) By not considering the increase in the value of assets. (x) By recording
contingent liability as real liability. Merits or Advantages or Benefits of
creating Secret Reserve: There are some benefits or advantages of creating secret
reserve for the business because it strengths the financial position of the company
and this reserve can be utilized when situation and needs demands. The benefits of
creating secret reserve are discussed below. (i) Sound financial structure: To
protect unexpected future losses: (ii) (iii) Not to disclose actual financial
position to the competitors: (iv) To give lower dividend SUJEET JHA 285 9213188188
MS EDUCONZ PVT. LTD. (v) Maintaining stable rate of dividend
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Auditor’s duties regarding Secret Reserve:

Secret reserve is legally prohibited as per companies act except certain companies
who may create secret reserve i.e. banking, investment, insurance and electricity
companies. The duties of an auditor regarding secret reserve are given below: (i)
The auditor should carefully examine the books of accounts and verify the assets
and liabilities to find out the existence and the amount of secret reserve if any.
(ii) The auditor should enquire the Articles of Association and find that whether
any clause has been given for creation of secret reserve. (iii) The auditor should
verify the purposes for which secret reserve has been utilized and give his opinion
regarding this in the audit report. (iv) If excess provision has been made for bad
and doubtful debt in the books of accounts that should be clearly mentioned by him
in his audit report. (v) He should examine whether proper valuation of assets and
liabilities have been made. . (vi) He should confirm that secret reserve created is
not used by the managerial personnel for their personal purposes.
CAPITAL RESERVE AND RESERVE CAPITAL: DISTINCTION
The difference between capital reserve and reserve capital are given below: Capital
reserve Reserve capital
l. The reserve which arises out of capital profit is known as capital reserve. e.g.
(i) Profit on revaluation of assets. (ii) Profit on sale of assets (iii) Profit on
re-issue of forfeited shares (iv) Shares or debentures are issued at a premium.(v)
Profit prior to incorporation of a company.(vi) Purchase of own debenture by
redeeming at a discount in the open market etc. l. This is a part of authorized
capital which is not called except in case of liquidation of company is known as
reserve capital.
2. Capital reserve is utilized for Written off capital / 3. Capital reserve is

treated as internal liability and is shown in the Balance Sheet under the head
'Reserve and Surplus.'
2. Reserve capital cannot be utilized for any purposes except in cases of winding
up of a company. 3. Capital reserve is not treated as liability and is not shown in
the Balance Sheet.
4. This reserve is created out of capital profit .

5. Dividend can be declared out of this profit subject to some Conditions. 6.
Business assets increase 'out of SUJEET JHA
4. This reserve is created out of

authorized capital. 5. There is no relation between reserve Capital and dividend. 6
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7. Capital reserve can arises any time during the continuity of the
business.
7 In case of winding up of a company reserve capital is required.
London Oil Storage Company Ltd. vs. Seear Hasluck and Company (1904): In this case
the auditor was negligent to verify the existence of cash in hand. The auditor was
liable for branch of duty for not taking proper steps to verify the existence of
assets shown in the balance sheet. Arthur E. Green & company vs. The Central
Advance And Discount Corporation Ltd. (1920): In this case the auditor was guilty
for negligence for not considering huge amount of bad debt which remains unpaid for
a long time and the company was not made sufficient provision for bad debt. As a
result, profit was inflated and dividend was paid on the basis of this profit.
Irish Woolen Company vs. Tyson and Others (1900): In this case, the auditor was
liable for damages of the company by reason of falsification and manipulation of
accounts which might have been discovered if he exercise reasonable care and skill
during the course of his audit. Therefore, it can be concluded that an auditor must
verify the truth regarding financial transaction and assets and liabilities which
are shown in the balance sheet. He must exercise reasonable care and skill to
disclose the falsification of accounts. The Kingston Cotton Mill Company Ltd.
(1896). Justice Lindsay told it is no part of the auditor’s duty to take stock. No
one contends that it is. He must rely on other people for details of the stock- in
– trade in hand, if there are no suspicious circumstances. Westminister Road
Construction and Engineering Company Ltd. (1932) In this case, it was held that an
auditor must take the fullest use of all materials available to him and although he
is neither a stock taker and nor a valuer of work – in – progress. He will be
guilty of misfeasance if he fails to take notice of all available evidence from
which it could be reasonable concluded that the work – in – progress was
overvalued. Le Lievere and Dennes vs. Gould (1893): In this case it was held that
as there is no contractual relationship between the auditor and the third party,
the auditor is not liable. Distinction between Audit and Investigation:
Investigation of accounts: Investigation of the accounts of business means special
examination of the books of accounts and records for some special purpose e.g.
checking of books of accounts of an existing business intended to purchase by a
person or a company may conduct investigation of audited accounts of their
business:
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STUDY NOTES 9
EDP AUDIT OR AUDITING FOR COMPUTERIZED ACCOUNTING: ITs FEATURES AND ADVANTAGES: EDP
audit or auditing for computerized accounting: EDP audit. is a process of
collection where evidences are collected and evaluated to assure that the system
properly safeguards assets, maintains data integrity, reliability and efficiency of
the information system, uses resources of the organization in an efficient manner
and gives a sound reporting structure. Features/Principles/objectives/advantages
benefits of EDP audit: The following are the advantages or principles of EDP audit:
(i) EDP audit evaluates that proper and sufficient data control, data integrating
and efficiency of the information system. . (ii) It properly safeguards the assets
and uses and also includes hardware, software, system documentation, data files
etc. (iii) This system of audit ensures the utilization of resources in an
efficient manner and within the minimum costs. (iv) Under this audit, proper
administration and procedural controls are created and implemented. (v) It ,ensures
that data processing of different application system are accurate. (vi) It ensures
that there is a proper system of reporting structure. (vii) Under this system of
audit, rules, regulations and statutory laws are maintained and ensure compliance
of statutory rules. (viii) It reviews the system of scope of the organization data
processing method and the system efficiency and effectiveness and also asses the
fulfillment of need of the users. (ix) By maintaining managerial control over the
data processing system, it reduces the chances of errors and frauds. (x) Through
the help of EDP audit, areas· can be detected where more work is to be performed.
Security programme and overall control for the risk associated with the information
system can be found out. LIMITATIONS OF EDP OR COMPUTERIZED ACCOUNTING: Though EDP
audit has many advantages to the auditor, it is not free of limitations. The
difficulties which arise during EDP audit are discussed below: (i) Problems to get
supporting vouchers: In case of manual auditing system every transaction has a
supporting voucher and with proper authorization. But in case of computerized
accounting many transactions are directly put in to the computer without the record
of authorization e.g. purchase invoice, sales invoice, discount allowed etc. This
creates a problem to. the auditor regarding authenticity of transactions because of
non-existence of input documents. Output reports may not give supporting details
e.g. printed reports which may contain only transactions details and total. (ii)
Easy way to fraud and manipulation of data: Accounting through computer system may
give chances of huge fraud and manipulation of data's in different ways. If there
is easy access and lack of security, frauds may leads to loss of substantial SUJEET
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(iv)
(v)
amount. Deficiency of visible audit trail: In conventional accounting there is a

system of in depth checking and verification of transactions from the beginning to
the end through a series of process and it is possible to get necessary documents
and supporting vouchers. But in a computerized accounting system, there is' no
series of process followed for recording of transactions as input. Therefore, there
is a lack of audit trail and as a result there is a huge chance of manipulation.
Problem of codification: In conventional accounting system transactions are
classified according to the different accounting heads. But in computerized
accounting different codes are used for the transactions which creates problem for
the auditor except expertise in this field. Effect of computer virus: This is a
serious problem for computerized accounting. This is a preplanned programme applied
to destroy the area of different accounting data, for the purpose of the employee's
personal gain. The auditor has to be very cautious regarding computer virus while
auditing through computer.
MAJOR AREAS ON INTERNAL CONTROL SYSTEM IN AN EDP ENVIRONMENT: The main objective of
EDP audit is to proper data control, data integrity, system efficiency and
safeguarding of assets. But the objective of EDP audit would fail to get result if
there is not a sound internal control system in the organization. The major areas
of internal control system are discussed below: A big organization having a sound
internal control system covers the following major areas: (i) Total system of
control: Internal control system is a whole system of control financial and
otherwise. (ii) Integrate other subsystem: To execute the proper functioning of
internal control, internal check and internal audit are implemented. (iii) Control
all aspects: Internal control system is such a control which exercises control over
assets, . liabilities, revenue and expenses. (iv) Control also non-financial
activities: Internal control exercises not only internal check and internal audit
but also perform non-financial activities for smooth running of business. COMPUTER
INFORMATION SYSTEM AND INTERNAL CONTROL: Internal control is the total control of
an organization financial and otherwise to safeguard business assets, prevention
and detection of errors and frauds, increase the efficiency of the management and
good system of accounting records and includes internal check and internal audit."
Some of the important internal control system for computer information system is:
(i) Creation of Password: There should be a system of password for authentication
of the person for processing the task. In other words, data fed into the system and
processing done by the computer is authorized. (ii) Process of Edit Test: Financial
Control and Edit Control test help in accurate data entry and the accurate
processing of computer information system. (iii) File Libraries: This is a system
which can be used as an internal control technique to protect the computer
information system from destruction anti corruption. SUJEET JHA 289 9213188188
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(vii)
Audit Trails: This system helps to preserve all those records within the system
from which financial statement can be obtained. Batch Cancellation Stamp: This
control helps repetition of processing of data and only one time processing is
required. General Control: This control helps to implement overall control on all
the activities of computer information system. The sub-system of this control is
(a) Organization Control (b) System and Documentation control (c) Hardware Control
(d) Procedural Control etc. Application Control: In addition to general control,
control of application of the computer information system is also important. The
subsystem of this control is (a) Input Control (b) Output Control and (c)
Processing control. SYSTEM OF
CHARACTERISTICS OF AN EFFECTIVE COMPUTER AUDIT PROGRAMME The characteristics of

compute~ audit programme are:
The system must be simple enough for being use so that it can remember countless
details normally required in writing or changing computer programme. (ii) The
system of computer audit programme would be such so that it is easily
understandable to all. (iii) It has the capacity for being used with different
configuration of computers. (iv) The staff should be sufficiently trained and the
package must-have adequate support at the time of installation. There should be
enough flexibility for future revision of. the programme. (v) The package must have
statistical sampling capability. (vi) The programme should frame in such a way so
that it can process different types of applications. . (vii) The system should be
such that it can be easily executed by all users and can be compared with the
existing system. (viii) The program must have function of report writing and is
capable to prepare multiple reports in a single program run and also can generate
output report format which is flexible as per requirement. Steps for Auditing of
Computerized Accounting: The following steps should require before audit of
computerized accounting: (i) .
(i)
(ii)
Examine the fundamental features of computerized accounting. This includes: (a)

System and methods of keeping accounting (b) Management information system (c)
Documentation of input (d) Procedure and system of control (e) Methods of
segmentation of duties. Evaluate the system of documentation. This includes: (a)
Contents of data (b) Internal control system (c) Coding procedure (d) Formats of
input (e) System flow chart (f) Documentation of new system software (g) Access to
system documentation. 290 9213188188
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MS EDUCONZ PVT. LTD. (iii)
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Control over inputs. This includes: (a) Authorization of transactions (b) Is there
any missing transactions or transactions are changed or duplicated. (c) Rejection
of incorrect transactions. (iv) Designing of test procedure. This consists of: (a)
Choice of testing technique (b) Processing of testing operations. (v) Audit tools
through computer. This includes: (a) Construction of general audit programme (b)
Test dect (c) Recovery procedure of data and computer programme. (vi) Preparing
audit programme. (vii) Compliance audit procedure (viii) Review of output (ix)
Timely submission of report to the management. DISTINCTION BETWEEN FINANCIAL AUDIT
AND COST AUDIT Financial Audit Cost Audit 1. Financial audit is the audit of 1.
Cost audit is the audit of cost accounting financial accounts of an records of an
organization to reflect true cost of a organization, at the end of the product or
service and pricing. financial year to reflect true and fair view of accounts. 2.
Financial audit is compulsory 2. Cost audit is not compulsory except in certain'
for every company as per cases i.e. companies' carrying. on business of company's
manufacturing or mining and where the Central act, 1956. government has directed to
maintain cost accounts in certain industries under Section 209(d) and compulsory
cost audit under Section 233B. 3. The purpose of financial audit 3. The objects of
cost audit are to examine the cost are to find out whether accounting records,
verify it and to give report financial accounts are regarding efficiency or
inefficiency in cost of properly maintained and production and detailed analysis of
cost data's. whether reflects true and fair view of the state of affairs of the
company.
4. In this audit all types of 4. In case of cost audit, only expenses related to
are costs i.e. material, labour, overheads, and stores are thoroughly checked. 5.
Financial audit is primarily 5. Cost audit is primarily conducted to protect the
conducted to protect the interest of the management, customers, interest of the
shareholders. government and of the society. 6. The first auditor of a company 6.
Cost auditors are always appointed by the board is appointed by the board of of
directors with the previous approval of the directors and subsequent Central
government. auditors are appointed by' the shareholders in the annual SUJEET JHA
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financial transactions examined.

MS EDUCONZ PVT. LTD. general meeting except in certain cases. The financial auditor
has to 7. verify the value of stock and ensure that it has been correctly valued
and shown in the balance sheet and can A financial auditor does not 8. check the
cost records in detail where manipulation can be made. Audited financial accounts
are 9. required to give return of income to The Financier auditor gives his 10.
opinion regarding true and fair view of accounts and do act as an advisor. II. At
the end of audit work the financial auditor sends his audit report to the
management of the company.
LAW& AUDIT
7.
In addition to valuation of stock a cost auditor has to determine the quantity of

stock and has to see it is excessive or inadequate. A cost auditor examines the
cost records in detail to find the errors and also to find manipulations in the
cost accounts. Audited cost audit is not generally acceptable to the income tax
department. The cost auditor gives his opinion regarding true position of cost
accounting records and also gives advice regarding increase in efficiency and
profit in the At the end of cost audit the cost auditor sends his audit report to
the company as well as to the Company Law Board.
8.
9.
10.
11.
SUJEET JHA
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MANAGEMENT AUDIT - ITs SCOPE AND OBJECTIYES Management Audit: Management audit is a
method of independent and systematic evaluation of the management activities at
.all levels of management to ascertain the functions, efficiency and achievement
of' the management (i.e. policies) as compared to standards set by the company.
According to L. R. Howard, "Management audit is an investigation of business from
the highest level downward in order to ascertain whether sound management prevails
throughout, thus facilitating the most effective relationship with outside world
and smooth running of internal organization." As per Taylor and Perry; "Management
auditing is a method to evaluate the efficiency of management at all levels
throughout the organization, or more specifically, it comprises the investigation
of a business by an independent body from the highest executive level downwards, in
order to ascertain whether sound management prevails through and to report as to
its efficiency or otherwise with recommendations to ensure its effectiveness where
such is not the case." Scope of management audit: The scope of management audit is
much wider than financial audit because management audit evaluates not only
financial audit but also other aspects of the business. It is the method of
evaluating the total efficiency of the management from the top level to the lowest
level. Therefore, the main scope of management audit is:
(i)
(ii) (iii) (iv) (v)
Evaluate the efficiency of the management: Management· audit evaluates and appraise
the efficiency of the management at all levels. Implementation of principles and
policies of the management: Management audit review whether principles and policies
formulated by the management have been successfully implemented or not. Find
variances: It detects the variances in efficiency with the standards set by the
management. . Analyze the reasons for variances: Management audit analyze the
reasons for inefficiencies of the management for not fulfilling the targets.
Recommend suggestions for improvement: It gives suggestions for improvement in the
areas e.g. production, sales, purchase, finance, human resources, administration
etc.
Objectives of management audit: Management audit is the total audit of the

management i.e. reviews how the policies of the management have been implemented
and its efficiency to execute the policy. Therefore, the scope is much greater than
financial audit, as it examines the all aspects of the management. Management audit
has some objectives. These are discussed below: (i) Verifying the efficiency:
Management audit aims at to asses the efficiency at all levels of management and
implementation of policies. Gives suggestion for increase in efficiency: Management
audit highlights the 293 9213188188
(ii)
SUJEET JHA
LAW& AUDIT
(iii) (iv) (v)
(vi)
inefficiencies in different areas of management and gives his valuable suggestions

and means to improve the efficiencies. Asses the effectiveness of Planning and
policies: Management audit examine and evaluates the plans and policies and judge
whether planning and policies are properly implemented. Helps to increase
profitability: Management audit helps the management to increase profitability by
giving remedies to maximize the organization's resources in an efficient way. Helps
to co-ordinate activities: Management audit detects the interrelationship among the
activities, evaluates the authority and responsibility and gives valuable
suggestions for improvement of co- ordination among the activities and the
employees. . Gives valuable advice: By scanning the management efficiency and
detecting the weak spots of different levels of management, the management auditor
gives valuable advice to the top management regarding different policies and future
course of action FINANCIAL AUDIT AND
DISTINCTION BETWEEN MANAGEMENT AUDIT
Financial Audit: Financial audit is the systematic examination of the books of

accounts to give opinion regarding true and fair view of the financial position.
Management audit is the evaluation of the efficiency of the management at all
levels' i.e. financial and otherwise. Therefore, management audit is a total audit
of the business and financial audit is a part of it. Management audit: Management
audit is a method of independent and systematic evaluation of the management
activities at all levels of management to ascertain the functions, efficiency and
achievement of the management (i.e. policies) as compared to standards set by the
company. The difference between financial audit and management audit are discussed
below. Financial Audit Management Audit 1. Financial audit is the scientific and 1.
Management audit is a method of systematic examination of the books, independent
and systematic evaluation of the accounts, vouchers and other financial management
activities at all levels of records that will help the auditor to management to
ascertain the functions, give opinion regarding true and fair efficiency . and
achievement of the view of the state of affairs of the management (i.e. policies)
as compared to business and to verify that profit and standards set by the company.
year. 2. The scope of financial audit is given 2. The scope of management audit is
to asses in the company's act, 1956. This audit the efficiency of the employees at
all levers of is only relating to financial management which is related to
production, transactions, so its scope is limited. marketing, finance, human
resources, sales etc, so its scope is larger than financial audit. 3. The person
who conducts financial 3. The person who . conducts management audit audit must
have professional should have a strong background in different l qualification,
knowledge, skill, ability subjects and expertise in different fields in and
expertise in the field of financial addition to financial matters. SUJEET JHA 294
9213188188
MS EDUCONZ PVT. LTD. accounting except in some cases where he may not be a
Chartered Accountant. 4. Financial' audit generally starts after the close of the
financial year and after' making all accounts ready. 5. Financial audit is the
historical examination of books of accounts of an organization by an auditor to
assure that the books of accounts reflects a true and fair view of state of affairs
and profit and loss for the vear. 6. Financial auditor gives opinion regarding true
and fair view of the financial position of the organization. 7. The task of
financial auditor ends when he gives his report and gives his opinion on it.
LAW& AUDIT
4. Management audit may be conducted at any time depends on the needs and
circumstances. 5. Review and appraisal of implementation of policies and assessment
of overall efficiency is the main task of the management auditor.
8. Financial audit is compulsory in case of companies as per Companies act,

9. Financial audit report is to be given to the members of the company.
6. Management auditor makes assessment of the overall efficiency at all levels of

management and gives suggestions for 7. When the financial audit ends, management
audit starts and ends when they give a report and makes outcome of assessment and
gives suggestions for 8. Management audit is not compulsory as per companies act,
1956. This depends on the needs of the Company. 0> • 9. Management audit report is
to be given to the appointing authority.
ADVANTAGES OR IMPORTANCE OF MANAGEM'ENT AUDIT: There are several advantages of

conducting management audit of an organization. When an organization grows in its
volume and activities, there is a need for management audit for evaluating
efficiency and effectiveness of the management at all levels of the organization.
The advantages and importance of management audit are discussed below: (i)
Evaluates efficiency of the management: Management audit is a method of independent
and 'systematic evaluation of the management activities at all levels of management
to ascertain the functions, efficiency and achievement of the management (i.e.
policies) as compared to standards set by the company. (ii) Scrutiny of the plans,
policies and procedure: Management audit helps to determine how the management has
implemented their plans, policies and procedure to reach the organizations goal.
(iii) Helps for correction of plans, policies and procedure: Through management
audit, it is possible to change or revise the plans, policies and procedure as per
needs of the company. (iv) Aids for decision making: Management audit asses the
ability of the managers to take important decisions and helps them to rectify the
defects. (v) Helps to get loan: Financial institutions who gives huge loan to the
organizations are interested to know the efficiency of the management and the
profitability. Management audit certainly gives a guide to them. (vi) Helps to get
subsidy: Before granting subsidy by the government, to any entity they are
interested to know the efficiency and functioning of the management. Management
audit helps in this matter. (vii) Helps to increase profitability: Management audit
helps the management to SUJEET JHA 295 9213188188
LAW& AUDIT
increase profitability by giving remedies to maximize the organization's resources

in an efficient way. (viii) Gives valuable advice: By scanning the management
efficiency and detecting the weak spots of different levels of management, the
management auditor gives valuable advice to the top management regarding different
policies and future course of action. Limitation or disadvantages of Management
Audit: Though management audit has a high value for the organization to evaluate
overall efficiency of the management, still there are some limitations of this
audit. These are discussed below: (i) Reluctant to accept: The management people
are not very interested to conduct such audit because of their weaknesses and
inefficiency which may be revealed. (ii) High costs: Conducting management audit of
a company is a costly matter. Therefore, except large organizations small
businesses can-not afford the cost of doing management audit. (iii) Unavailability
of experienced auditor: Management audit is a complex task because of its nature
and large scope. The person who conducts such audit must have professional
qualifications, expertise, skill, ability, and other qualities. But there are scare
human resources in this field. (iv) Not a regular audit: As management audit is
conducted according to needs and circumstances of the management and is not a
regular audit, the benefit of this audit can be achieved for short period.
PROPRIETY AUDIT .... ITs SCOPE AND OBJECTIVES Propriety audit: Propriety audit is a
method of audit which verifies the reasonableness of expenditure incurred by an
organization and is not detrimental to public interest. This audit is generally
applicable to the government organizations. According to E. L. Kohler, " Propriety
means that which meets the test of public interest, commonly accepted customs and
standards of conduct. Propriety audit is an audit in which various actions and
decisions are examined to find out whether they agree in public interest and
whether they meet the standards of conduct." Scope and objectives: Propriety audit
not only determines the accuracy of books of accounts but also justify the
expenditure in term of propriety and reasonableness. Therefore, this audit tests
the public interest and evaluates its financial propriety in relation to standards
or commonly accepted customs. Propriety audit is generally applicable to the
government organizations as it involves a huge public money. So, public
accountability is the main criteria of propriety audit. It evaluates the efficiency
and prudence of government department and its propriety in relation to public
money. The scope and objectives are: (i) Confirm collection of revenue: Propriety
audit helps to assess whether revenue are properly collected and recorded in the
books of accounts. (ii) Helps to detect fraud and misrepresentation: This audit
helps to judge whether there is any fraud and misrepresentation of funds. (iii)
Wastage of funds: With the help of propriety audit wastage of public funds can be
determined and also its utilization can be verified. (iv) Verify justification of
expenditure: Verify Justification of expenditure in relation to generally accepted
standards and customs. (v) Not detrimental: It verifies that the contracts made by
the organization with the third parties are not detrimental to the public interest.
SUJEET JHA 296 9213188188
MS EDUCONZ PVT. LTD. (vi) (vii)
LAW& AUDIT
Finds misuse of power: Whether there is any misuse of power at the top level of
management regarding appropriation of funds. Evaluates internal control system:
This audit evaluates whether internal control system is effective and well
performing.
ADVANTAGES OF PROPRIETY AUDIT There are many advantages of conducting propriety

audit. These are discussed below: (i) Review of plans, policies and procedure:
Propriety audit helps to determine how the management has implemented their plans,
policies and procedure regarding utilization of funds. (ii) Scanning of activities
of the directors: Propriety audit helps to measure the efficiency of the directors
regarding justification and propriety of expenditure made by them. (iii) Evaluates
internal control system: This audit evaluates whether internal control system is
effective and "Yell performing. If there is any weaknesses in the system that may
be located and remedial measures can be taken. “AN AUDITOR IS A WATCH DOG BUT NOT A
BLOOD HOUND". The remark was made by Justice Lopes in a famous case law, The
Kingston Cotton Mill Company Ltd (1896). The contents of the case are given below.
Facts of the case: Stock was overvalued for several years fraudulently '0 inflate
profit and dividend was paid out of that profit which results in erosion of
capital. The auditor took the value of stock certified by the manager and the value
was agreed by the auditor without applying reasonable care and skill and entered in
the balance sheet with a note "as per manager's certificate." Judgment: In this
case Justice Lopes observed, "It is the duty of an auditor to bring to bear on the
work he has to perform that skill, care and caution which a reasonably competent,
careful and cautious auditor would use. What is reasonable skill, care and caution
must depend on the particular circumstances of each case. An auditor is not bound
to be a detective, or, as was said, to approach his work with suspicion or with a
foregone conclusion that there is something wrong. He is a watch-dog but not a
bloodhound. He is justified in believing tried servants of the company in whom
confidence is placed by the company. He is entitled to assume that they are honest,
and to rely upon their representations, provided he takes reasonable care. If there
is anything calculated to excite suspicion he should prove it to the bottom, but in
the absence of anything of that kind, he is only bound to be reasonably cautious
and careful.
SUJEET JHA
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Q. What is Pre and Post audit? Ans. Pre-Audit: Before payments are made by the
business entities, proper verification should be made. This is known as pre-audit.
For example, payments made for salaries, medical bills, conveyance expenses etc. In
this case payment should be made after proper scrutiny of the expenses by the
employees of the organization. Post-Audit: The payments which are incurred within a
very short period and it is not possible to scrutiny of the payments by the
employees of the organization e.g. festival bonus is to be paid by a large
organization to their employees within a day, then payment is made immediately.
After making payment, verification can be made. This is known as post-audit. Q.
Give two point of difference between continuous audit and periodical audit. Ans.
Continuous Audit Periodical Audit 1. In this audit detailed 1. This audit starts
after completing books examination of books of accounts of a accounts and after the
close of the are continuously made throughout financial year. the whole year. 2.
More expensive and applicable 2. Less expensive and applicable for all for large
organization. organization. Q. What is audit risk? Ans. Audit risk is the risk of
giving inappropriate opinion on financial information given by the auditor in his
audit report. Therefore, before giving opinion regarding any matters the auditor
should consider risk at each level of activity. Q. What are collateral vouchers? .
Ans. A voucher which is produced instead of original voucher is called collateral
voucher. Q. Ans. What is cut-off procedure? Cut-off procedure is a process of
examination of transactions of a particular period and that would be separate from
those in the forthcoming period. In other words, Cut-off procedure means separation
of transactions of on period from other period.
Q. State the sources of payment of dividend in case of a company limited by shares.

Ans. As per Section 205 of the company's Act, 1956, the sources of payment of
dividend are: (i) Out of current years distributable profit (ii) Undistributed
profit of the past years (ii) Moneys provided by the Central or State Government
under guarantee Q. What do you mean by Audit Trail? Ans. Audit trail refers to a
system of designing of an information system in a manner that the previous data and
information may be find out at any stage to verify the SUJEET JHA 298 9213188188
LAW& AUDIT
source, correctness, authenticity, flow and destination including the stages of

security procedures for establishment of integrity of data and information. Q. What
is Fictitious Assets? Ans. Fictitious assets are those assets which has no real
physical existence i.e. assets having any realized value but whose benefit may be
extended for some years. E.g. preliminary expense, profit and loss (Dr.), discount
on issue of shares etc. Q. Why Auditing is called a dynamic Social Science? Ans.
Like a social science audit has also some social objectives and social
responsibilities toward the business and to the society. With the passage of time
complexities and volume of business has increased substantially and increased. As a
result there is a major change in its scope and responsibility Audited accounts
protect the interest of the business owners, employees, customers, creditors,
financial institutions, Debenture holders, Preference shareholder, Tax department,
government and the others. For this auditing is called a dynamic social science. Q.
Can dividend be paid out of pre – incorporation profit? Ans. Legally, a company has
no existence before incorporation. So the profit earned at that time is not a legal
profit. Therefore, a company can not declare dividend out of profit made prior to
incorporation. Q. Give the meaning of capital profit. Give examples. Ans. Profit
which should not arise normal business activities or day to day activity is known
as capital profit. In other words profit arises out of non – trading activity is
capital profit. Q. What is operational audit? Ans. Operational audit is the audit
of examination of all operations and activities of an organization. It evaluates
the efficiency of the departments which are in conformity with standards set by the
entity and also determine how much economy and efficiency has been achieved. Q.
What is inherent risk with reference to the relevant Auditing and Assurance
Standard? Ans. As per AAS 6 inherent risk is the susceptibility of an account
balance or class of transactions to misstatement that could be material either
individually or, when aggregated with misstatements in other balances or classes,
assuming there were no related internal controls. Q. Distinguish between Audit and
Investigation. (give two points). Ans. Audit Investigation 1. Audit is the
scientific and systematic 1. Investigation is a process through which examination
of the books, accounts, an investigator on behalf of his client vouchers and other
financial records that investigates different matters as per need of will help the
auditor to give opinion the client and gives report to him. regarding true and fair
view of the state of affairs of the business and to verify that profit and loss
account reflects a true and fair view of profit or loss for the financial year.
SUJEET JHA 299 9213188188
LAW& AUDIT
2. A person must be Charted Accountant 2. There is no prescribed qualification in

for conducting audit of a company. the company’s act for conducting investigation.
Q. What is Surprise Check? Ans. Some times the auditor makes a surprise check to
ascertain the effectiveness of Internal Control system and to examine whether
transactions are promptly recorded in the books of accounts. E.g. verification of
cash balance, stock etc. Q. Is there any distinction between Intangible assets and
Fictitious assets? Ans. Intangible Assets Fictitious Assets 1. Intangible assets
are those assets which 1. Fictitious assets are those assets which can not be
touched or seen but whose has no real physical existence i.e. assets existence can
be realized through some having any realized value but whose producing ability e.g.
Patent, Trade Mark, benefit may be extended for some years. and Goodwill etc. E.g.
preliminary expenses, profit and loss (Dr.) discount on issue of shares etc. 2.
These assets are generally shown in the 2. These assets are written off over the
Balance Sheet at cost price. years and unadjusted amount is shown in the assets
side of the Balance Sheet. Q. Distinguish between Net Profit and Divisible profit.
Ans. Net Profit Divisible Profit 1. The excess of current income over 1. The part
of profit which can be legally current expenditure is net profit. distributed as
dividend among the shareholders is known as divisible profit. 2. As per companies
act 1956, a company 2. The company is not bound to give the can not distribute its
whole net profit as whole net profit (after making depreciation dividend among the
shareholders without and amount set aside for reserve) if the providing
depreciation of the current years directors thinks it prudent to use profit for and
also the previous year or years and the development of the company. without setting
aside ascertain percentage of profit to the reserve Q. Give two advantages of
Statistical Sampling in Auditing. Ans. The advantages of statistical sampling are
(i) This method helps to estimate the minimum sample size considering the risk and
precision and (ii) It gives a good description of a large population of data than a
detailed examination of all the data. Q. Give two example of deferred revenue
expenditure. Ans. Examples are: (i) Preliminary expenses for formation of Company
(ii) Discount on issue of Debentures. Q. Distinguish between Depreciation and
Fluctuation in Value. Ans. Depreciation Fluctuation in Value 1. Depreciation may be
defined as gradual 1. Fluctuation is a temporary decrease and and permanent decline
in the value of fixed increase in the value of an asset due to rise assets as a
result of wear and tear, and fall in market price of an asset. SUJEET JHA 300
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LAW& AUDIT
obsolesce, efflux ion of time, market changes or for any other reasons. 2.
Provision for depreciation can be 2. No depreciation is provided for estimated
beforehand so that there is lower fluctuation of assets because earning risk for
replacement of assets. capacity or working life of assets does not affected due to
fluctuation in value of assets. 3. Generally, depreciation is made on fixed 3.
Fluctuation in value may be on fixed assets. assets or current assets. Q. Is
valuation included in verification? Ans. Verification means checking of physical
existence of assets and liabilities and confirmation and accuracy of actual
ownership and liabilities shown in the balance sheet. The scope of verifications
larger than valuation i.e. valuation is a part of verification. Therefore valuation
is included in verification. Q. What is meant by preliminary expenses? Ans. When a
company wants to form its business, some expenses are required for formation which
is called preliminary expenses e.g. expenses relating to Memorandum and Articles of
Association, Lawyers fees, expenses for preparing project report, prospectus etc.
Q. What is the meaning of window dressing? Ans. Window dressing is a process of
showing the state of affairs in a Balance Sheet in such a way that reflects a
better position than its actual position to fulfill some objectives. Q. Distinguish
between Interest and Dividend. Ans. Interest Dividend 1. Interest is paid on loan
capital such as 1. Dividend is calculated and paid on Debentures, loan from
financial institution subscribed share capital such as equity etc. share capital
and Preference share capital. 2. Interest is treated as expenses of the 2. Dividend
is treated as appropriation of company and charged to Profit and Loss profit and
charged to Profit and Loss account. Appropriation account. 3. Payment of interest
is a tax deductible 3. Payment of dividend is not a tax item. deductible item. 4.
Irrespective of profit or losses of the 4. If there is no profit the question of
entity interest has to be paid. payment of dividend does not arises subject to some
exception. Q. What is CRR? Ans. Capital Redemption Reserve is a reserve which is
created out of undistributed profit equal to the nominal vale of redemption of
Preference Share out of profit. Q. Give two example of asset, “Intangible but not
fictitious assets.” Ans. Patent, Goodwill. Q. What are wasting assets? Give
examples. Ans. Wasting assets are those assets which are continuously depleted and
losses its SUJEET JHA 301 9213188188
LAW& AUDIT
value at the end of a particular time period for earning revenue. Examples are Oil
Well, Quarry, Mines etc. Q. Preksha, a member of the ICAI, does not hold a
Certificate of practice. Is her appointment as an auditor valid? Ans. To be an
auditor a person must be chartered accountant of India within the meaning of the
chartered Accountants Act, 1949 and also a member of the institute holding a
certificate of practice. In the given case, Preksha does not have Certificate of
Practice. Hence she is not eligible to be appointed as an auditor of a company.
SUJEET JHA
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Law of Contract 1

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MS EDUCONZ PVT. LTD.

Indian Status Law

Customs and Usages

STUDY NOTE – 1 : INDIAN CONTRACT ACT, 1872

7. Contract 2(h) :- An agreement enforceable by Law is a contract. 8. Void

ESSENTIALS OF A VALID CONTRACT

Offer + acceptance = Promise + consideration = Agreement + enforceability By Law

Lawful consideration :- consideration must not be unlawful, immoral or opposed to

said to be free when it is not caused by coercion, undue influence, fraud,

3. Enforceability : 4. Interrelationship 5. Scope 6. Validity 7. Legal Obligation :

Types of contracts :(1) On the Basis of creation a. b. c. d. e. Express contract

Valid contract a. Executed contract Void contract b. Executed contract Voidable

Express contract :- A contract made by word spoken or written. According to sec 9

Valid contract:- An agreement which satisfies all the requirements prescribed by

Example: An agreement which is required to be stamped will be unenforceable if the

Unilateral contract:- A unilateral contract is a one sided contract in which only

Difference Between Void and Voidable Contract

Example Example Application filled in by a prospective Issue of prospectus by a

In case of acceptance by post Where the acceptance is given by post, the

Offer Acceptance • Communication of a • As against the offerer/ is proposal is

Idiot Drunken and Intoxicated Convict Corporation and Company Insolvent

1. Who is competent to make a contract:Section 11. Every person is competent to

Position of Agreements by Minor:1. Validity: - An agreement with a minor is void-

A person of unsound mind

LAW& AUDIT while such delirium drunkenness lasts. or

Drunken person An agreement made by intoxicated person is void.

Person Disqualified by law

Person Disqualified by Law

A transferred certain properties to B to be held by him in trust for the benefit of

Future or executory consideration:- A Promises to B to deliver him 100 bags of

Coercion [Section 15]

Essential elements of coercion

Effect of Threat to commit suicide:- Threat to commit suicide amounted to coercion

Undue influence [Section 16]

No. Presumption of Domination of will:¾ ¾ ¾ ¾ Landlord and Tenant Creditor and

Effect of undue Influence:-[Section 19A]

Rebutting presumption:¾ Dominant party – full disclosure ¾ Price was adequate ¾

Undue influence Vs Coercion

Ex.:- A sells by auction to B a horse which A knows to be unsound. B’ is A’s

Misrepresentation (section 18)

Exception :- Silence SUJEET JHA 30 9213188188

Ex. :- A woman, falsely misrepresenting herself to be wife of a well known Baron

(d) If it involves or Implies injury to a person or property of another. Ex. :-

If it is possible to severe them, whether the illegality be due to Statute or

In case of pre – existing civil liability, the dropping of criminal proceedings

Agreement opposed to public policy:Alternative promises: where in alternative

Champerty & Maintenance : (Refer Class Note)

Agreement in Restraint of marriage [26]

Agreement in Restrain of trade [27]

Exception to Sec. 27 (1) Sale of goodwill: - Seller of goodwill of a business may

Agreement in Restraint of legal proceedings [28]

Essential elements of wagering agreements

(3) (4) (5) (6)

Effects of wagering agreements:⇒ ⇒ ⇒ ⇒ Agreement is void. No suit can be filled for

Meaning One in another Reason Punishment Void – ab – initio SUJEET JHA

A valid – collateral – is not Illegal, collateral – illegal void 38 9213188188

Rules regarding contingent contract.

[Sec. 32] (1)

3. Nature of uncertain event 4. Void / valid.