Legal Aspect of Business

UNIT I
DEFINE THE TERM LAW.

The term law in a broader sense may be defined as the rules of conduct recognized and enforced by
the state to maintain peace and order in the society. Following are some of the important definitions of the
term law:
Law is the body principles recognized habit and thought of mankind which has gained distinct and
formal recognition in the shape of uniform rules backed by the authority and power of the government.
!oodrow !ilson.
Law is the body of principles recognized and applied by the state in the administration of "ustice.
#almond.
Law is a rule of civil conduct$ prescribed by the supreme power of state$ commanding what is right
and prohibiting what is wrong.
%lack #tone.
STATE THE OBJECTS OF LAW?
The ob"ectives of business law are as follows:
&n the earlier times$ the main concern of the government was to maintain law and order in the
country. 'nd the ob"ect of law was limited to this aspect only. %ut with the development of the society$ the
law has to play a special role in achieving various socioeconomic goals and establishing a welfare state.
(ow a days$ the main ob"ect of law is considered to be )to establish socioeconomic "ustice and
remove the e*isting imbalance in the socioeconomic structure+. Thus$ the function of law is to preserve$
guide and advance the social values of the society with a view to sustain liberty$ achieve "ustice and advance
the good of the society. Therefore$ the main ob"ect of law is to bring about all around welfare and
improvement of the society.
WHAT ARE THE MAIN SOURCES OF BUSINESS LAW OR MERCANTILE LAW?
&t is that branch of law which governs and regulates the trade and commerce. This deals with the
rights and obligations arising out of mercantile transactions ,i.e. business transactions- between the
mercantile persons. ' mercantile person is one who enters into business transactions and may be an
individual$ an association of persons such as partnerships$ or a company. The mercantile law is also called as
business law or commercial law.
The important sources of mercantile law in &ndia may be discussed under the following heads:
ENGLISH MERCANTILE LAW:
The .nglish /ercantile law is the most important source of the &ndian /ercantile Law. 's a matter
of fact$ the &ndian /ercantile Law is largely based on .nglish /ercantile Law.
PRECEDENTS (PAST JUDICIAL DECISIONS OF COURTS):
The past "udicial decisions of courts are the important source of law. They are generally followed by
the courts in deciding similar cases before them. &n &ndia$ the #upreme 0ourt is the high court$ and its
decisions have binding force on all the courts subordinate to it$ i.e. on the 1igh 0ourts$ 2istrict 0ourts and
other subordinate courts.
LOCAL CUSTOMS AND USAGES:
The customs and usages of particular trade are important sources of &ndian /ercantile Law. They
play an important role in regulating the business dealings between the merchants of that trade.
INDIAN STATUE LAW (ACTS OF INDIAN LEGISLATURE):
The acts passed by the &ndian Legislature are the main source of &ndian mercantile Law. &t may be
noted that these acts are mainly based on the .nglish /ercantile Law. The important 'cts passed by the
&ndian Legislature are the &ndian 0ontract 'ct 3456$ the (egotiable &nstruments 'ct 3443$ the #ale of 7oods
'ct 3896$ the 0ompanies 'ct 38:;. &t will be interesting to know that bulk of the &ndian /ercantile Law is
the #tatute Law. !here there are no specific provisions on any particular point$ the 0ommon law of .ngland
is applied by the &ndian courts.
INDIAN CONTARCT ACT, 1872
D!"#"$"%#:
' contract may be defined as an agreement between two or more persons which can be enforced in a
court of law. #ome of the eminent "urists have defined the contract as under:
.very agreement and promise enforceable at law is a contract
<allock.
' contract is an agreement between two or more persons which is intended to be enforceable at law
and is constituted by the acceptance by one party of an offer made to him by the other party to do or abstain
from doing some act
1alsbury.
' contract is an agreement creating and defining obligations between the parties
#almond.
T& $'( )%#$'*)$ "+ ,!"#, "# +)$"%# 2(&) %! $& I#,"*# C%#$*)$ A)$, -&")& '*,+ *+ .#,':
'n agreement enforceable by law is a contract.
The analysis of this definition shows that a contract must have the following two elements:
3. 'n agreement and 6. The agreement must be enforceable by law.
Contract = An agreement + Enforceability.
The term agreement is defined in section 6 ,e- of the &ndian contract act$ which read as under$
.very promise and every set of promises forming the consideration for each other$ is an agreement
T& $'( /'%("+ "+ ,!"#, "# +)$"%# 2(0) %! $& I#,"*# )%#$'*)$ *)$, -&")& '*,+ *+ .#,',
' proposal when accepted$ becomes a promise.
Agreement = Offer + Acceptance.
'll agreements are contracts if they are made by the free consent of parties competent to contract$
for a lawful consideration and with a lawful ob"ect and are not hereby e*pressly declared to be void.
The analysis of this definition shows that an agreement becomes a contract only if the following conditions
are satisfied:
3. The agreement must be made by the free consent of the parties.
6. The agreement must be made by the parties who are competent to contract.
9. The agreement must be made for lawful consideration and with lawful ob"ect.
=. The agreement must not be e*pressly declared to be void.
HOW WOULD 1OU CLASSIF1 THE CONTRACTS? OR DESCRIBE ELABORATEL1 THE
2ARIOUS 3INDS OF CONTRACTS?
C4*++"!")*$"%# %! )%#$'*)$+:
'll the contracts may broadly classified into the following three categories.
C CLASSIFICATION LASSIFICATION OF OF CONTRACTS CONTRACTS
According to enforceability According to enforceability According to formation According to formation According to performance According to performance

>alid >oid >oidable .*press &mplied ?uasi @nilateral %ilateral .*ecuted .*ecutory
@nenforceable
1. C4*++"!")*$"%# %! )%#$'*)$+ *))%',"#5 $% $&"' #!%')*0"4"$6 %' 45*4 7*4","$6:
The contracts may be classified into the following types according to their enforceability.
*) 2*4", C%#$'*)$+:
!e know that a contract is an agreement which is enforceable by law. The conditions of
enforceability are laid down in section 3A of the &ndian 0ontract 'ct. 'nd a valid contract is that which
satisfies all the conditions of enforceability.
0) 2%", C%#$'*)$+:
' void contract is that which is not enforceable by law. 's a matter of fact$ a void contract is not at
all a contract$ as it is without any legal effect.
Example: On the Nov, A agreed to sell his car to B for Rs. 50,000. It as agreed that the car as to !e
delivered on "5
th
Nov after ma#ing f$ll pa%ment. B$t on "0
th
Nov, the car as destro%ed in an accidental fire.
In this case, the contract !eteen A and B !ecomes void on the destr$ction of car.
)) 2%",*04 C%#$'*)$+:
!e know that free consent is an essential element of a valid contract. &f the consent of a party is
not free then such party$ may avoid the contract. #uch contract is voidable at the option of the party whose
consent is not free.
.*ample: ' agreed to sell his dog to % for Bs.3A$ AAA. The consent of ' was obtained by use of force. The
contract is voidable at the option of '. 'nd ' may put an end to his contract if he so decides.
,) U##!%')*04 C%#$'*)$+:
The unenforceable contracts are those which cannot be enforced in a court of law because of some
technical defects. &n certain cases$ there are special provisions of law which reCuire some formalities to be
fulfilled$ e.g. there are special provisions which provide that a contract must be in writing$ or it must be
registered$ or it must be properly stamped or it must be attested$ etc. if such formalities are not properly
observed$ the contract cannot be enforced in a court of law.
2. C4*++"!")*$"%# %! )%#$'*)$+ *))%',"#5 $% $&"' !%'(*$"%# %' (%, %! )'*$"%#:
The contracts may be classified into the following types according to their formation:
*) E8/'++ C%#$'*)$+:
'n e*press contract is that which is made in writing or by the words of mouth.
Example: A rote a letter to B, I am prepared to sell m% car for Rs.50000. B also accepted the offer !% a
letter. &his is an express contract.
0) I(/4", C%#$'*)$+:
'n implied contract is that which is not made in words. #uch contracts come into e*istence an
account of act or conduct of the parties.
Example: A ent to a resta$rant, and too# a c$p of tea. In this case, there is an implied contract that he ill
pa% for the c$p of tea.
)) 9.*+" C%#$'*)$+:
's a matter of fact$ Cuasicontracts are not ,supply of goods at Cuoted prices- contracts as there is no
intention of the parties to enter into a contract. &n fact$ it is an obligation which the law creates in the
absence of any agreement. ' Cuasicontract is based upon the eCuitable principle that a person shall not be
allowed to enrich himself at the e*pense of another.
Example: A, a tradesmen, left certain goods at B's ho$se !% mista#e. B treated the goods as his on. In this
case, B, is !o$nd to pa% for the goods.
:. C4*++"!")*$"%# %! )%#$'*)$+ *))%',"#5 $% $&"' /'!%'(*#):
The contracts may be classified into the following types according to their performance:
*) U#"4*$'*4 C%#$'*)$+:
' unilateral contract is a one sided contract in which only one party has to perform his obligation. &n
such contracts$ promise on one side is e*changed for an act on the other side. &t may be noted that after the
formation of a unilateral contract$ only one party remains liable to perform his obligation because the other
party has already performed his obligation by doing some act.
Example: A promised to pa% Rs."000 to an%one ho finds his lost dog. B fo$nd the dog and ret$rned it to A.
it is a $nilateral contract hich comes into existence hen the dog is fo$nd. No, onl% A has to perform his
o!ligation !% pa%ing Rs."000 to B, !eca$se B had alread% performed his part of o!ligation !% finding the
dog.
0) B"4*$'*4 C%#$'*)$+:
' bilateral contract is a two sided contract in which both the parties have to perform their respective
obligations$ i.e. at the time of formation of a contract the obligations of both the parties are outstanding. &n
such contracts$ promise on one side is e*changed for a promise on the other. The bilateral contracts are also
known as contracts with e*ecutory contracts.
Example: A promised to paint a pict$re for B, and B promised to pa% Rs."50 to A. it is a !ilateral contract
as there is exchange of promises, and o!ligations of !oth the parties are o$tstanding at the time of formation
of the contract.
)) E8).$, C%#$'*)$+:
!hen a contract has been completely performed$ it is termed as e*ecuted contract$ i.e. it is a contract
where$ under the terms of a contract$ nothing remains to be done by either party. ' contract may be e*ecuted
once i.e. at the time when it is made.
Example: A agreed to sell his horse to B for Rs."000 B paid the price and A delivered the horse. It is an
exec$ted contract as !oth the parties have performed their respective o!ligations.
,) E8).$%'6 C%#$'*)$+:
.*ecutory contract is that where under the terms of a contract something remains to be done by the
parties. &n other words$ where one or both the parties to the contract have still to perform their obligations in
future$ the contract is termed as e*ecutory contract.
Example: A agreed to sell his car to B for Rs.(0000. car as to !e delivered !% A on "5
th
of next month, and
the price as to !e paid !% B on )5
th
of that month. It is an exec$tor% contract.
WHAT ARE THE ESSENTIALS OF A 2ALID CONTRACT? OR WHAT ARE LEGAL RULES FOR
A 2ALID CONTRACT?
!e know that a contract is an agreement which is enforceable by law. &t is enforceable only when all
the conditions of enforceability are fulfilled. Following are the general conditions of enforceability and legal
rules for a valid contract. &n order to become a contract an agreement must have the following essential
elements:
1. 1. O OFFER FFER AND AND ACCEPTANCE ACCEPTANCE: :
&n an agreement there must be at least two parties one of them making the offer and the other
accepting it. &n other words$ there must be an offer by one party and its acceptance by the other. The offer
when accepted becomes agreement.
2. 2. M MUTUAL UTUAL CONSENT CONSENT OF OF THE THE PARTIES PARTIES: :
The parties to an agreement must have the mutual consent i.e. they must agree upon the same thing
and in the same sense. This means that there must be consensus ad idem ,i.e. meeting of minds-.
Example: A oned to horses, one !lac# and the other hite. *e offered to sell one horse to B. hile
ma#ing the offer, A had the !lac# horse in mind. B$t B accepted the offer, thin#ing that it as made for hite
horse. In this case, there is no consens$s ad idem, as the parties did not agree $pon the same thing in the
same sense. &h$s, no agreement came into existence.

Mutual
consen
t
Free
consen
t
Ofer and
acceptanc
e
Legal
obligations
Compete
nt to
contract
Lawful
object
:. :. L LEGAL EGAL OBLIGATIONS OBLIGATIONS: :
'n agreement must create legal obligations ,i.e. an obligation which is enforceable by law-. 'n
obligation is the legal duty to do or abstain from doing a definite act or acts. /oreover$ the parties must have
the intention to create legal obligations.
Example: A invited B to a dinner. B accepted the invitation. It is a social agreement. If A fails to serve dinner
to B, he cannot go to co$rts of la for enforcing the agreement.
;. ;. F FREE REE CONSENT CONSENT OF OF THE THE PARTIES PARTIES: :
The contract must have been made with free consent of the parties. &t may be noted that the consent
is not free$ when it is obtained by undue influence$ fraud$ misrepresentation of facts$ etc. if the consent of the
parties is not free$ then no valid contract comes into e*istence.
<. <. C COMPETENT OMPETENT TO TO CONTRACT CONTRACT: :
The parties to an agreement must be competent to contract. &n other words$ they must be capable of
entering into a contract. &t may be noted that minors or persons of unsound mind are not competent to
contract. &f the parties are not competent to contract then no valid contract comes into e*istence.
Example: A, a minor, !orroed Rs.5000 from B and agreed to repa% it ithin to months. &his is not a
valid contract as A is not competent to contract.
=.L =.LAWFUL AWFUL CONSIDERATION CONSIDERATION: :
The agreement must be support by a lawful consideration. The lawful consideration is that which is
not fraudulent$ forbidden by law$ immoral or opposed to public policy etc. if the consideration is not lawful$
then no valid contract comes into e*istence.
Example: A promised to o!tain an emplo%ment for B in a government department, and B promised to pa%
Rs."0000 to A. in this case, the agreement is not valid as the consideration for it is $nlaf$l.
7.L 7.LAWFUL AWFUL OBJECT OBJECT: :
The ob"ect of the agreement must be lawful. &t may be noted that a lawful ob"ect is that which is
neither fraudulent$ forbidden by law$ immoral nor opposed to any public policy etc. if the ob"ect is not
lawful$ then no valid contract comes into e*istence.
8.A 8.AGREEMENT GREEMENT NOT NOT DECLARED DECLARED 2OID 2OID: :
The agreement must not have been e*pressly declared to be void by any law in force in the country.
&f certain agreements are e*pressly declared to be void by the law of the country$ then such agreements if
entered into$ shall not be enforceable by courts of law.
Essentials
elements
of valid
contract
Agreement
not declared
void
Lawful
consideratio
n
Agreement
must be
certain
Performan
ce must be
impossible
Example: A agreed to pa% Rs.500 to !e if he does not marr% thro$gho$t his life B promised not to marr% at
all. In this case the agreement is not valid !eca$se agreements in restraint of marriage are expressl%
declared to !e void +i.e. not enforcea!l% !% la,.
>.A >.AGREEMENT GREEMENT MUST MUST BE BE CERTAIN CERTAIN: :
The meaning of the agreement must be certain. &n other words$ an agreement whose meaning is not
certain$ is not valid.
Example: A agreed to sell his hite horse for Rs.)500 +or, Rs.(000 to B. there is nothing to sho hich of
the to prices as to !e given. In this case the agreement is not valid as it is $ncertain.
1?.P 1?.PERFORMANCE ERFORMANCE MUST MUST NOT NOT BE BE IMPOSSIBLE IMPOSSIBLE: :
The performance of an agreement must be possible. 'n agreement to do an impossible act is not
valid.
Example: A agreed ith B to discover treas$re !% magic. In consideration, B agreed to pa% Rs.5000 to A. in
this case, the performance of the agreement is impossi!le, therefore it is not a valid agreement.
OFFER AND ACCEPTANCE
D!"# $& $'( %!!'.
The term )offer+ or )proposal+ is defined in section 6,a- of the &ndian 0ontract 'ct$ when one person
signifies to another his willingness to do or 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.
Example: A ith a vie to o!tain the assent of B, sa%s to him, -ill %o$ p$rchase m% motor c%cle for
Rs."0,000.. In this case, A is ma#ing an offer to B as he signifies to B his illingness to sell his motorc%cle
to him for Rs."0,000. And A is doing so ith a vie to o!tain B's assent to p$rchase the motorc%cle.
E8/4*"# $& ++#$"*4+ *#, 45*4 '.4+ !%' * 7*4", %!!'?
T& %!!' (.+$ 0 )%((.#")*$, $% $& %$&' /*'$6:
'n offer must be communicated to the person to whom it is made. 0ommunication of offer is
important to conclude an agreement because acceptance can be given only after one knows about the offer.
&f the offeree accepts the offer by acting according to the terms of the offer without knowing its contents is
not a valid acceptance and would not result in a valid contract.
T& %!!' (.+$ &*7 "$+ $'(+ ,!"#"$ *#, )4*':
The terms of an offer must be definite$ clear and certain. &f the terms of the offer are vague and
uncertain$ no contract will come into e*istence.
Example: A offered to sell to B, -a h$ndred tonnes of oil.. &he offer is $ncertain as there is nothing to sho
hat #ind of oil is intended to sold.
O!!' (.+$ 0 )*/*04 %! )'*$"#5 45*4 '4*$"%#+&"/:
'n offer must be such that when accepted it will result in a valid contract. ' social invitation cannot
be regarded as an offer$ because if such an invitation is accepted it will not give rise to any legal relationship.
Example: A invited B to a dinner and B accepted the invitation. It is a mere social invitation. And A ill not
!e lia!le if he fails to provide dinner to B.
O!!' (.+$ 0 ,"+$"#5."+&, !'%( *# *#+-' $% * @.+$"%#:
The terms of an offer should be clear so that there is no confusion whether it is a valid offer or an
answer to a Cuestion. 'n answer to a Cuestion cannot be taken as an offer.
T& %!!' (*6 0 (*, $% $& -%'4, *$ 4*'5:
&t means that it is not necessary that an offer should be made to a specific person.
'n offer may be specific as well as general one.
' specific offer is one which is made to an ascertained person.
'nd a general offer is one which is not made to a specific person$ but to the public at large.
&t may be noted that in case of general offer$ the contract is not made with the entire world.
%ut it is made only with the person$ who having the knowledge of the offer$ comes forward and acts
according to the conditions of the offer.
W&*$ *' $& ,"!!'#$ $6/+ %! %!!'?
T6/+ %! O!!':
Dffer may be of the following types:
.*press offer
&mplied offer
#pecific offer
7eneral offer
E8/'++ O!!':
'n offer made by e*press words$ spoken or written is known as e*press offer.
.*ample: < tells ? will you buy my cycle for Bs.5AAE
B writes to # & want to sell my car for Bs.6lakhs.
I(/4", O!!':
'n offer that is to informed or understood from the conduct of the parties or the circumstances of
each particular case is known as implied offer.
.*ample: The offer by a cinema theatre to screen films is always an implied offer.
S/)"!") O!!':
'n offer made to a specific person or group is known as a specific offer.
.*ample: ' school of management offers a cash prize of Bs.3AAA to its 36
th
std students who secure cent
present in any sub"ect in the board e*ams.
G#'*4 O!!':
!hen an offer is made to the world at large$ it is known as a general offer. 'ny member of public
who is aware of such an offer may accept it.
.*ample: F offers a reward of Bs.:A$AAA to anyone who traces out his missing son. G who is aware of the
offer$ finds the boy. 1e can claim the reward.
ACCEPTANCE
D!"# $& $'( AA))/$*#)B.
The term acceptance is defined in section 6,b- of the &ndian 0ontract 'ct$ which reads as under.
!hen the person to whom the proposal is made signifies his assent thereto$ the proposal is said to
be accepted. ' proposal when accepted becomes a promise.
.*ample: ' offers to sell his car to % for Bs.8AAAA. % accepts this and agrees to buy '+s car for Bs.8AAAA.
E8/4*"# $& 45*4 '.4+ '5*',"#5 * 7*4", *))/$*#)?
E ESSENTIALS SSENTIALS AND AND LEGAL LEGAL RULES RULES FOR FOR A A 2ALID 2ALID ACCEPTANCE ACCEPTANCE: :
The acceptance of an offer to be legally must satisfy the following conditions:
A))/$*#) (.+$ 0 A0+%4.$ *#, U#@.*4"!", (+).7 (1)):
&n order to be legally effective it must be an absolute and unCualified acceptance of all the terms of
the offer. .ven the slightest deviation from the terms of the offer makes the acceptance invalid. ' Cualified
or a conditional acceptance is no acceptance at all. &n fact$ it is only counter offer. ' counter offer puts an
end to the original offer and it cannot be revived by subseCuent acceptance.
A))/$*#) (.+$ 0 C%((.#")*$, $% %!!'%':
The acceptance is completed only when it has been communicated to the offeror. @ntil the
acceptance is communicated it does not create any legal relations. ' mere mental acceptance is no
acceptance.
A))/$*#) (.+$ 0 "# $& /'+)'"0, (*##':
!here the offeror prescribed a particular mode of acceptance then the acceptor should follow that
mode in the prescribed mode$ the proposer may$
A))/$*#) (.+$ 0 "# '+/%#+ $% %!!':
There can be no acceptance without offer. 'cceptance cannot precede offer. For e*ample: no
allotment of shares n a company can be made unless the allottee has applied for them beforehand. 's such$
acceptance should follow the offer and no precede it.
T& *))/$*#) (.+$ 0 06 $& %!!':
'n offer can be accepted only by the persons to whom it &s made. ' valid contract arises only if
acceptance is communicated by a person who has the authority to accept. &f it is communicated by any
unauthorized person$ it will not create any legal relationship.
T& *))/$*#) (.+$ 0 5"7# 0!%' $& %!!' 4*/++ %' "+ '7%C,:
'cceptance must be given within the specified time limit$ if any. 'nd no time is stipulated$
acceptance must be given within a reasonable time. The term reasonable time depends upon the facts and
circumstances of each case.
A))/$*#) (*6 0 "(/4", %' 8/'++:
'n acceptance$ which is e*pressed by words$ written or spoken$ is called e*press acceptance. The
acceptance$ which is e*pressed by conduct$ is called an implied acceptance.
C%((.#")*$"%# %! O!!' *#, A))/$*#)
C%((.#")*$"%# %! O!!':
'n offer can be communicated by any act or omission of the offeror by which he intends to
communicate it ,sec.9-. The offer can be communicated in any way which has the effects of laying before
willingness to do or abstain from doing something.
The communication of an offer is complete when it comes to the knowledge of the person to whom it
is made ,sec.=-. !hen an offer is made by post$ its communication will be complete when the letter
containing the offer reaches the offeree.
Example: /r. A offers !% a letter to sell his ho$se to B at a certain price. &he comm$nication of the offer is
complete hen B receives the letter.
C%((.#")*$"%# %! A))/$*#):
The acceptance can be communicated by any act or omission of the acceptor by which he intends to
communicate it or by any act or omission which has the effect of commanding it ,sec.9-.
The communication of an acceptance is complete as against the proposer when it is put in a course of
transmission to him so as to be out of power of the acceptor. 's against the acceptor the communication of
an acceptance is complete when it comes to the knowledge of the proposer.
The completion of communication of acceptance has two aspects viz.$
's against the proposer$ and
's against the acceptor.
The communication of acceptance is complete:
's against the proposer$ when it is put into a course of transmission to him$ when it is put into a
course of transmission to him$ so as to be out of the power of the person who makes itH
's against the acceptor$ when it comes to the knowledge of the proposer.
Example: A proposes !% a letter to sell his ho$se to B at a certain price. B accepts A's proposal !% a letter
sent !% post. &he comm$nication of acceptance is complete.
W&*$ ,% 6%. (*# 06 '7%)*$"%# %! %!!' *#, *))/$*#)?
R7%)*$"%# %! O!!':
#ection ; has described the modes in which an offer lapses. 'n offer comes to an end$ and is no
longer open to acceptance under the following circumstances:
B6 N%$"):
'n offer may be revoked any time before acceptance but not afterwards. 'n offer lapses when a
notice of revocation has been given any time before its acceptance is complete as against the offeror.
B6 L*/+ %! T"(:
!hen the proposer prescribes a time within which the proposal must be accepted$ the proposal lapses
as soon as the time e*pires.
A!$' E8/"'6 %! '*+%#*04 $"(:
&f not time has been prescribed$ the proposal lapses after the e*piry of a reasonable time.
R7%)*$"%# %! A))/$*#):
'n acceptance may be revoked at any time before the communication of the acceptance is complete
as against the acceptor but not afterwards ,sec.:-. &n fact$ revocation of acceptance amounts to withdrawal
of the acceptance to a proposal by the offeree himself.
Example: A proposes, !% letter sent !% post, to sell his ho$se to B. B accepts the proposal !% a letter sent !%
post. B ma% revo#e his acceptance an% time !efore the letter comm$nicating it reaches A !$t not afterards.
W&# ,%+ *# %!!' 4*/+?
'n offer may come to an end in any of the following ways stated in section ; of the &ndian 0ontract
'ct.
%y communication of notice of revocation
%y lapse of time
%y failure to accept condition precedent
%y the death or insanity of the offeror
%y counter offer by the offeree
%y not accepting the offer$ according to the prescribed or usual mode
%y re"ection of offer by the offeree
%y change in law
CONSIDERATION
D!"# )%#+",'*$"%#.
The term consideration has been defined in many ways we shall now see some important definition
to understand the term in a better way.
'ccording to pallock$ consideration is the price for which the promise of other is bought$ and the
promise of other is bought$ and the promise thus given for value is enforceable.
&n simple words$ the consideration is the price of the promise. The term is used in the sense of Cuid
proCuo i.e. something in return. This something may be some benefit$ right$ interest or profit it may also be
some determinant$ loss or responsibility upon the other party.
Example: A agrees to sell a ho$se to B for Rs."00000. for A's promise, the consideration is Rs."00000. for
B's promise, the consideration is the ho$se.
W&*$ *' $& ++#$"*4+ %! * 7*4", )%#+",'*$"%#?
E++#$"*4 *#, 45*4 '.4+ !%' * 7*4", )%#+",'*$"%#:
.ssentials of consideration or the legal rules in respect of consideration to an agreement are as under:
C%#+",'*$"%# (.+$ (%7 *$ $& ,+"' %! $& /'%("+%':
&ndian 0ontract 'ct says that an act$ which forms consideration for the promise$ must be done or
promised to be done according to the desire of the promisor.
Example: /r A sees B's ho$se on fire and helps in exting$ishing it. B did not as# for his help. &h$s, A
cannot demand pa%ment for his services.
T& )%#+",'*$"%# (*6 0 /*+$, /'+#$ %' !.$.':
' past consideration is something wholly done$ before the making of the agreement. This is$ present
promise is based on the consideration already taken place.
Example: A fo$nd B's p$rse and gave it to him. B promised to give Rs."00 as a reard. *ere for B's
promise, the act of A in finding B's p$rse is the past consideration.
0onsideration which moves simultaneously with the promise is called present consideration. 0ash
sales provide an e*cellent e*ample of the present consideration.
!hen the consideration from one party to the other is to pass subseCuently to the making of the
contract$ it will be future consideration.
Example: A agreed to sell his car after to ee#s at an agreed price. B agreed to pa% the price on deliver%.
*ere, as the amo$nt and the car are to !e transferred in f$t$re, therefore, the consideration is f$t$re for !oth
the parties.
T& )%#+",'*$"%# (.+$ 0 '*4 #%$ "44.+%'6:
'lthough considerations need not be adeCuate to the promise$ it should be competent$ real and
valuable in the eyes of the law. &t should not be unreal or illusory. !here consideration is physically
impossible$ illegal or illusory$ it is not real and$ therefore$ shall not be a valid consideration.
Example: if A promises to p$t life in the dead !od% of B0s son for Rs.50000, the agreement is void !eca$se of
the ph%sical impossi!ilit% of the performance.
T& )%#+",'*$"%# (.+$ 0 4*-!.4:
The consideration to a promise must be lawful. The consideration to an agreement is unlawful if:
&t is forbidden by law: or
&t s of such a nature that$ if permitted$ it would defeat the provisions of any lawH or
&t is fraudulentH or
&t implies in"ury to a person or property of anotherH or
The court regards it as immoral or opposed to public policy. .very agreement of which the
consideration is unlawful is void.
C%#+",'*$"%# (*6 0 "$&' /%+"$"7 %' #5*$"7:
The consideration may be a promise to do something or abstain from doing something. That is$
consideration may be an act to do or not to do something positive or negative.
Example: A re1$ested B to sell certain goods on credit. B agreed to do so provided 2 ill give g$arantee for
the pa%ment of price of goods s$pplied to A !% B. 2 g$aranteed the pa%ment !% B to A is the consideration
for 2's promise to g$arantee the pa%ment. &his is a positive consideration.
DS$'*#5' $% * )%#+",'*$"%# )*##%$ +.E. A' $&' *#6 8)/$"%#+ $% $&"+ '.4?
&f consideration is furnished not by the promisee but by a third person$ the promisee becomes a
stranger to consideration. #imilarly a person$ who is not a party to a contract$ cannot claim rights$ even
though the contract is for his benefit. 'nd such a person is known as stranger to contract.
E8)/$"%#+ $% $& '.4 %! )%#$'*)$:
The rule )' stranger to a contract cannot sue$ is sub"ect to the following e*ceptions:
B#!")"*'"+ "# $& )*+ %! $'.+$:
'n agreement to create a trust can be enforced by the beneficiary. @nder such a contract$ a benefit is
given to a person who is not a party to the contract. 1owever$ stranger must be clearly designated as a
beneficiary and the trust or charge in his favour must also be of some specific property.
M*''"*5 +$$4(#$, /*'$"$"%# *#, %$&' !*("46 *5'(#$:
!here a provision is made in a position or family arrangement for maintenance or marriage e*penses
of female members$ such members$ though not parties to the agreement$ can sue on the contract.
A)C#%-4,5(#$ %! 4"*0"4"$6:
#ometimes one of the parties to contract acknowledges the payment to a third party or otherwise
constitutes himself as an agent of the third party. 'nd that party acknowledges the payment to the third
person or constitutes himself as an agent of that third person$ then the third person can recover the amount
from such party.
C%#$'*)$+ $&'%.5& *5#$:
!here a contract is entered into by an agent$ the principal can sue on it.
A++"5# %! * )%#$'*)$:
@nder certain circumstances a party to a contract can transfer his rights under the contract to third
party. ' holder in due course of a negotiable instrument is a holder who has obtained the negotiable
instruments in good faith and for valuable consideration. 1e may sue the prior parties to the negotiable
instrument.
N% )%#+",'*$"%# N% )%#$'*)$. E8*("# )'"$")*446.
DN% )%#+",'*$"%# N% )%#$'*)$E. E8)/$"%#+ $% $& '.4.
7eneral rule of law is that an agreement without consideration is void. #ec.6: deals with e*ceptions
to this rule where a contract$ even though without consideration$ is enforceable. They are as follows:
N*$.'*4 4%7 *#, *!!)$"%#:
#ec.6:,3- of the &ndian 0ontract 'ct$ which reads as under: 'n agreement without consideration is
void$ unless it is e*pressed in writing and registered under the law for the time being in force for the
registration of documents and is made on account of natural love and affection between parties standing in
near relation to each other.
The following conditions must be satisfied for the application of this e*ceptionH
The agreement is made by a written document.
The document is registered according to the law relating to registration in force the time.
The agreement is made on account of natural love and affection.
The parties to the agreement stand in a near relation to each other.
2%4.#$*'6 )%(/#+*$"%#:
' promise made without any consideration is valid if$ )it is a promise to compensation wholly or in
part$ a person who has already voluntarily done something for the promisor$ or something which the
promisor was legally compellable to de.
The following conditions must be satisfied for the application of this e*ception:
a- The services should have been rendered voluntarily.
b- The services should have been done for the promisor.
Example: A fo$nd B's p$rse and gave it to him. B promised to give Rs."000 as reard. &his is a valid
contract.
T"( 0*'', ,0$:
#ec.6:,9-$ a promise by a debtor to pay a timeboard debt is enforceable that it is made in writing
and is signed by the debtor or his agent generally or specifically authorized in that behalf. The promise may
be to pay whole or part of the debt. 1ere it may be mentioned that a debt becomes timebarred if it not
claimed for a period of three years from the date it becomes due.
Example: 3 oes 2 Rs."000 !$t the de!t is !arred !% the limitation act. 3 signs a ritten promise to pa% 2
Rs.500 on acco$nt of the de!t. &his is a valid contract.
A5#)6:
(o consideration is reCuired between the principal and agent to create an agency.
C%(/4$, 5"!$:
#ec.6:$ states that nothing in this section shall affect the validity as between the door and the done$
of any gift actually made.

CONTRACTUAL CAPACIT1
D!"# $& $'( A)*/*)"$6 $% )%#$'*)$B.
#ec.3A states$ 'll agreements are contracts$ if they are made by the free consent of the parties
competent to contract. The )capacity to contract+ means the competence i.e. capability of the parties to enter
into a valid contract.
The term )capacity to contract+ is defined in sec.33 of the &ndian 0ontract 'ct$ every person is
competent to contract who is of the age of the ma"ority according to the law to which he is sub"ect$ and who
is of sound mind$ and is not disCualified from contracting by any law to which he is sub"ect.
'll persons are competent to make contracts e*cept the following:
/inors
<ersons of unsound mind
<ersons disCualified by any law to which they are sub"ect
W&% "+ ("#%'? E8/4*"# $& /%+"$"%# %! * ("#%' -"$& '5*', $% $& )%#$'*)$+ #$', "#$% 06 &"(?
' minor is a person who has not attained the age of ma"ority. For the purposes of entering into
contract$ the age of ma"ority is eighteen years. The term minor is e*plained in section.9 of the &ndian
0ontact 'ct.345:$ a minor is a person who has not completed eighteen years of age.
M"#%'+ A5'(#$:
The law regarding minor+s agreements may be summed up as under:
A# *5'(#$ -"$& * ("#%' "+ 7%", *0F"#"$"%:
Law acts as the guardian of minors and protect their rights because they don+t possess the capacity to
"udge what is good and what is bad for them. Thus$ agreement with a minor is void abinitio. 'n agreement
with a minor does not create any legal rights and obligations between the concerned parties.
N% +/)"!") /'!%'(*#):
#ince an agreement by a minor is absolutely void$ the court will never direct specific performance
of such an agreement by him. %ut a contract entered into$ on behalf of a minor by his guardian or by the
manager of his estate$ is binding on the minor and can be specifically enforced by or against the minor
provided: a- the contract is within the authority of the guardian or managed$ and b- it is for the benefit of the
minor.
A ("#%' )*# 0 *# *5#$:
'n agent is merely a connecting link between his principal and third person. Therefore$ a minor can
be appointed as an agent. %ut he will not be personally liable for any of his acts. #ec.34= of the &ndian
0ontract 'ct$ as between the principal and third persons any person may become an agent$ but no person
who is not of the age of ma"ority and of sound mind can became an agent so as to be responsible to his
principal.
T& '.4 %! +$%//4 ,%+ #%$ *//46 $% * ("#%':
The rule of estoppel does not apply to a minor i.e. minor is not estopped from pleading is infancy in
order to avoid a contract$ even if he has entered into an agreement by falsely representing that he was a full
age. &n other words$ where an infant represents fraudulently on otherwise that he is of age and thereby
induces another to enter into a contract with him$ then in an action found on the contract$ the infant is not
estopped from setting up infancy.
N% '*$"!")*$"%# 8)/$ "# )'$*"# )*++:
' minor cannot be ordered to make compensation for a benefit obtained under a void agreement$
because section ;= and ;: of the contract act$ which deal with restitution$ apply only to contracts between
competent parties and are not applicable to a case where there is not and could not have been any contract at
all.
Thus$ when the minor receives the benefits of money$ he may be compelled to restore the same. This
is based on the principle that he$ who seeks eCuity$ must do eCuity.
M"#%'B+ 4"*0"4"$6 !%' #)++*'"+:
/inor is liable for )necessaries+ supplied or )necessary services+ rendered to him or his minor
dependents. &n other words$ if a person supplies necessaries to a person who is incapable of entering into a
contract or to anyone whom such incapable person is legally bound to support$ then he can claim re
imbursement from the property of such incapable person. For such contracts he cannot be held liable
personally. 1is property or estate alone will be liable.
N% '*$"!")*$"%#:
The term )ratification+ may be defined as the act of approving or confirming. The doctrine of )no
ratification+ implies that an agreement made by a minor ,during the period of minority- cannot be confirmed
by him on attaining ma"ority. This is so because minor+s agreement is void abinitio and$ therefore$ cannot be
made valid by ratification.
P*'$#'+&"/ 06 ("#%':
The partnership of partners results from their agreement. ' minor$ being incompetent enter into a
contract$ cannot be a partner in the firm. 1owever$ he may be admitted only to the benefits of the firm.
M"#%'+ )*##%$ 0 ,)4*', "#+%47#$:
' minor cannot be ad"udicated an insolvent$ for$ he is incapable of contracting debts. .ven for
necessaries supplied to him$ he is not personally liable$ only his property is liable.
M"#%' )*##%$ 0 * +.'$6:
' minor cannot be surety as he is not liable to pay or compensate anything under a contract.
WHO ARE TREATED AS PERSONS OF UNSOUND MIND AND THE LEGAL POSITION OF
CONTRACTS WITH SUCH PERSONS?
'ccording to sec.36 of the &ndian 0ontract 'ct$ a person is said to be of unsound mind for the
purpose of making a contract$ if at the time when he makes it$ he is capable of understanding it and of
forming a rational "udgment as to its effect upon his interests.
Example: idiots, l$natics and dr$n#en persons.
L5*4 /%+"$"%#+ %! .#+%.#, ("#, /'+%#+:
I,"%$+:
'n idiot is a person who has completely lost his mental faculties of thinking. &diocy is a congenital
defect caused by lack of development of the brain. 1e is incapable of entering into a contract with an idiot is
void.
L.#*$")+:
' lunatic is a person who is mentally deranged due to some mental strain or other personal
e*perience but who has some lucid intervals of sound mind.
!hile he is of unsound mind he cannot enter into any contract. 'ny agreement entered into by him during
this period is altogether void and he cannot be held liable thereon.
!hile he is of unsound mind he can enter into a valid contract and he is liable for such contracts.
D'.#C#:
2runkard is a person who is under the influence of drinks or drugs or who is so drunk that he cannot
understand the terms of a contract or form a rational "udgment as to its effect on his interest. 1e cannot enter
into valid contracts while such drunkenness lasts.
The persons disCualified by to enter into a valid contract are as follows:
A4"# E#("+:
'll persons other than &ndian 0itizens are aliens. 'n alien is a person who is a foreigner to the land.
1e may be either an )alien friend+ or an )alien enemy+. 'n alien living in india can enter into contracts with
citizens of &ndia during peace time only$ and that too sub"ect to any restrictions imposed by the government
in that respect. Dn the declaration of a war between his country and &ndia$ he becomes an alien enemy and
cannot enter into contracts.
'lien friend can contract but an alien enemy cant contract
F%'"5# S%7'"5#+ *#, A(0*++*,%'+:
They can enter into contracts and enforce those contracts in our courts but they cannot be sued in our
courts without the sanction of the 0entral government unless they choose to submit themselves to the
"urisdictions of our courts.
C%#7")$+:
' convict is a person who is sentenced by a competent court to the death sentence or imprisonment.
' convict cannot enter into a valid contract which undergoing sentence$ nor can sue. 1is incompetent is
over$ when the period of his sentence is over or he is pardoned.
FREE CONSENT
W&*$ "+ (*#$ 06 A!' )%#+#$B? O' 8/4*"# $& /'%7"+"%#+ '4*$"#5 $% !' )%#+#$?
The term )consent+ is defined in +).1: of the &ndian 0ontract 'ct$ two or more persons are said to
consent when they agree upon the same thing in the same sense.
Example: A had to cars, one is of green colo$r and the other is hite. A offered to sell his green car to B
for Rs.50000. B accepted the offer !elieving it to !e for the hite one. In this case, no contract arises
!eteen A and B as there is no real consent of the parties.
'ccording to sec.3= consent is said to be free when it is not caused by:
0oercion ,sec.3:-
@ndue &nfluence ,sec.3;-
Fraud ,sec.35-
/isrepresentation ,sec.34-
/istake ,sec.6A$ 63 and 66-

COERCION
W&*$ "+ (*#$ 06 )%')"%#?
0oercion means forcibly compelling a person to enter into a contract. 0oercion is threat or force used
by one party against the other for making him to enter into an agreement. 'ccording to +).1< of the &ndian
0ontract 'ct$ coercion is the committing or threatening to commit$ any act forbidden by the &ndian penal
code$ or threatening to detain$ any property of any person with the intention of causing any person to enter
into an agreement.
E!!)$ %! C%')"%#:
The effect of coercion is that is makes the contract voidable at the option of the party whose consent
is obtained by coercion$ that is$ such party can put an end to the contract if he so chooses. The effect of
coercion is emphasized in sec.38 and 56 of the &ndian 0ontract 'ct.
#ection 38 states !hen consent to an agreement is caused by coercion$ the agreement is a contract
voidable at the option of the party whose consent was so caused.
#ection 56 states ' person to whom money has been paid or anything delivered under coercion$
must repay or retain it
DURESS
&n the .nglish Law$ the near eCuivalent of the term )coercion+ is )duress+. The term coercion in &ndia
covers much wider field than duress in .ngland. 2uress has been defined as causing$ or threatening to cause$
bodily violence$ or imprisonment$ with a view to obtain the consent of the other party to the contract. &n
short$ for duress the act or threat must be aimed at the life or liberty of the party to the contract or the
members of his family. ' threat destroy or detain property will not amount to )duress+.
ifference bet!een Coercion and "re##
S.NO COERCION DURESS
1. 0oercion can be employed by any
person.
2uress can be employed only against the other
party to the contract or the members of his
family.
2. 0oercion may be employed by any
person$ not necessarily by the promise.
2uress can be employed only by the party to
the contract or his agent.
:. 0oercion is wider in its scope and
includes unlawful detention of goods
also.
2uress on the other hand$ does not include
unlawful detention of goods.
$erformance of Contract
W&*$ "+ (*#$ 06 /'!%'(*#) %! )%#$'*)$?
<erformance of contract means fulfillment of legal obligations created by the contract. That is$
performance of contract means fulfilling of their respective legal obligations created under the contract by
both the promisor and the promise.
'ccording to sce.95 of the &ndian 0ontract 'ct$ provides for two modes for performance
'ctual performance:
!hen a party has done$ what he had undertaken to do and nothing is left the promise is said to be
performed his obligation to the contract called actual performance.
'ttempted performance:
'ttempted performance otherwise known as tender or offer of performance. The party bound to
perform a promise under a contract is ready and willing to perform it at the proper time and place. This
willingness of the party is known as attempted performance or offer to perform.
W&*$ *' $& ++#$"*4 '@."+"$+ %! * 7*4", $#,' %! /'!%'(*#)?
' tender$ to be legally valid$ must fulfill the following conditions ,sec.94-:
I$ (.+$ 0 .#)%#,"$"%#*4:
o ' tender coupled with a condition is no tender. >alid tender of performance must be an
unconditional one.
I$ (.+$ 0 (*, *$ * /'%/' $"( *#, /4*):
' tender before or after the due date or at a place other than agreed upon is not a valid tender. &f the
place is not mentioned$ the rule is that the debtor must find the creditorH where no time is fi*ed then it is
valid to make the tender within reasonable time.
Example: A oes B Rs.500 pa%a!le on "
st
Octo!er ith interest. B offers to pa% the principal amo$nt ith
interest $p to 4eptem!er "
st
. It is not a valid tender as it not made at the agreed time.
I$ +&%.4, 0 "# '+/)$ %! $& -&%4 %04"5*$"%#:
'n offer to perform a promise in part is not valid tender. The tender must be whole and not of the
part. &f a debtor offers to pay only the principal amount and not to pay only the principal amount and not the
interest$ the tender is not valid. <art payment or part delivery of the goods contracted for$ is not a valid
tender.
I$ (.+$ /'%7", '*+%#*04 %//%'$.#"$6:
&f the tender relates to delivery of goods$ it must give reasonable opportunity to the promise for
inspection of goods so that he may be sure that the goods tendered are of agreed description. ' tender of
goods$ when the other party cannot inspect the goods$ is not a valid tender.
I$ (.+$ 0 "# $& /'%/' !%'(:
' tender of money must be in the legal tender money and not in any foreign currency. ' person is not
bound to accept a cheCue. %ut a payment by a cheCue is valid tender if the person to whom it is made is
ready and willing to accept it.
I$ (.+$ 0 (*, $% * /'%/' /'+%#:
' valid tender must be made to a proper person$ i.e. the promisee or his authorized agent. ' tender of
performance made to a stranger or a third party is not a valid tender.
Example: A agreed to s$ppl% certain goods to B on "
st
5$ne, On the partic$lar da%, A s$pplied the goods to
2, a friend of B. It is not a valid tender.
T& /'+%# (*C"#5 * $#,' (.+$ 0 *04 *#, -"44"#5 $% /'!%'( &"+ %04"5*$"%#:
&t must be made by a person who is in a position and is willing to perform the promise. ' tender by a
minor or idiot is not valid tender. &f the tender is of cash payment$ actual cash must be available for ready
payment. ' party cannot be said to be able and willing if he has neither possession nor control over the gods$
he had promised to supply.
S$*$ $& /'+%#+ 06 -&%( $& )%#$'*)$ +&%.4, 0 /'!%'(,?
T& /'%("+%' &"(+4!:
<romise must be performed by the promisor alone. &t means that the promises depending upon the
personal skill or diligence or upon personal consideration between the parties$ must be performed by the
promisor himself.
Example: A promises to paint a pict$re for B. A m$st perform this promise personall%.
T& *5#$:
&n other cases$ the promisor or his representatives may employ a competent person to perform it. The
contracts which do not involve any personal skill or consideration$ can also be performed by an agent
appointed by the promisor.
Example: A promises to pa% B a s$m of mone%. A ma% perform this promise, either !% personall% pa%ing the
mone% to B or !% ca$sing it to !e paid to B !% another, and , if A dies !efore the time appointed for pa%ment,
his representatives m$st perform the promise or emplo% some proper person to do so.
T& 45*4 '/'+#$*$"7:
&t need not reCuire personal skill. &n this case the legal representatives of a deceased promisor are
bound to perform contract.
Example: A promises to deliver goods to B on a partic$lar da% on pa%ment of Rs."000. A dies !efore that
da%. A's representatives are !o$nd to deliver the goods to B and B is !o$nd to pa% Rs."000 to A's
representatives.
T& $&"', /'+%#:
!hen a promisee accepts performance of the promise from the third person he cannot afterwards
enforce it against the promisor.
T& G%"#$ /'%("+%'+:
&n case of "oint promisors$ a promisee may compel one or more of the "oint promisors in the absence
of a contract to the contrary.
B'"!46 8/4*"# $& $"( *#, /4*) %! /'!%'(*#) %! * )%#$'*)$?
The time and place of performance of a contract is concerned$ it must be agreed upon by the parties
to the contract themselves. #ection =; to :A lay down rules in this regard.
P'!%'(*#) -"$&"# * '*+%#*04 $"( (+).;=):
#ection =; states that$ where by the contract$ a promisor is to perform his promise without
application by the promisee$ and no time for performance is specified$ the engagement must be performed
within a reasonable time.
P'!%'(*#) %! $& /'%("+ -&' $& $"( +/)"!", (+).;7):
!hen a promise is to be performed without application by the promisee$ and not undertaken to
perform it without application by the promisee$ the promisor may perform it at any time during the usual
hours of business on the such day and at the place at which the promise ought to be performed.
Example: A promises to deliver goods at B's areho$se on the "
st
5an$ar%. On that da% A !rings the goods
to B's areho$se, !$t after the $s$al ho$rs for closing and the% are not received. A has not performed his
promise.
A//4")*$"%# !%' /'!%'(*#) $% 0 *$ /'%/' $"( *#, /4*) (+).;8):
!hen a promise is to be performed on a certain day$ and promisor has not undertaken to perform it
without application by the promisee$ it is the duty of the promisee to apply for performance at a proper place
and within usual hours of business.
T% *//%"#$ * '*+%#*04 /4*) !%' /'!%'(*#) (+).;>):
!hen a promise is to be performed without application on a certain day$ and promisor has not
undertaken to perform it without application by the promisee$ it is the duty of the promisee to apply for
performance at a proper place and within usual hours of business.
P'!%'(*#) *+ /'+)'"0, 06 $& /'%("+ (+).<?):
The performance of any promise may be made in any manner$ or at any time which the promisee
prescribes or sanctions.
Example: A oes B Rs.)000. B accepts A's c%cle val$ing Rs.500 in red$ction of the de!ts. &he deliver% of
c%cle ill amo$nt to a part pa%ment of the de!t.
E8/4*"# $& +$*$(#$ DT"( *+ $& ++#) %! $& C%#$'*)$E?
The time as the essence of the contract means that the time is an essential element$ and the
concerned parties must perform their promise within specified time. The &ndian 0ontract 'ct lays down the
following promises in the regard.
W&# $"( "+ $& ++#) %! $& )%#$'*)$:
!hen a party to a contract promises to do a certain thing at or before a specified time or certain thing
at or before specified times$ and fails to do any such thing at or before the specified time$ or contract$ or so
much of it as has not been performed$ becomes voidable at the option of the promisee$ if the intention of
parties was that time should be of the essence of the contract.
Example: A promised to deliver goods to B on "
st
5an$ar%. B$t he failed to deliver the goods !% that time.
&he contract as voida!le at the option of B.
W&# $"( "+ #%$ $& ++#) %! $& )%#$'*)$:
&f it was not the intention of the parties that time should be of the essence of the contract$ the contract
does not become voidable by the failure to do such thing at or before the specified timeH but the promisee is
entitled to compensation from the promisor for any loss occasioned to him by such failure.
S$*$ *#, ,"+).++ $& )"').(+$*#)+ .#,' -&")& )%#$'*)$+ #, #%$ 0 /'!%'(,?
". &f the parties to a contract agree to substitute a new contract for it$ or to rescind or alter it$ the
original contract need not be performed ,sec.;6-
Example: A oes mone% to B $nder a contract. It is agreed !eteen A, B and 2 that B shall
thenceforth accept 2 as his de!tor instead of A. the old de!t of A to B is at an end, a ne de!t from 2
to B has !een contracted.'
). .very promisee may dispense with or remit$ wholly or in part$ the performance of the promise made
to him$ or may e*tend the time for such performance$ or may accept instead of it any satisfaction
which he thinks fit ,sec.;9-.
Example: A promises to paint a pict$re for B. B afterards for!ids him to do so. A is no longer
!o$nd to perform the promise.
(. 'ccording to sec.;=$ when a voidable contract is rescinded$ the other party need not perform his
promise.
6. &f any promisee neglects or refuse to afford the promisor reasonable facilities for the performance of
his promise$ the promisor is e*cused by such neglect or refusal as to any nonperformance caused
thereby ,sec.;5-.
W&*$ "+ (*#$ 06 *++"5#(#$ %! )%#$'*)$+ *#, -&*$ *' $& -*6+ %! *++"5#"#5 * )%#$'*)$?
Transfer of liabilities and rights under a contract to a third party$ is known as assignment of contract.
The assignment of contract may be by:
A++"5#(#$ 06 $& *)$ %! /*'$"+:
*) A++"5#(#$ %! )%#$'*)$.*4 4"*0"4"$"+:
i- @nder #ection =A$ contracts involving personal ability of skill or any other personal Cualification
cannot be assigned$ for e*ample$ painting of a picture by a painter$ acting in a film by the actor
engaged. Thus$ it is the state where one party cannot delegate the act of performance to another.
ii- ' promisor cannot assign his liabilities under a contract. &n other words$ a promisee cannot be
compelled the promise.
Example: A oes Rs."000 to B and B oes the same amo$nt to 2. B cannot as# 2 to record from A
$nless there is another contract !eteen A and 2 for the p$rpose.
0) A++"5#(#$ %! )%#$'*)$.*4 '"5&$+:
The rights and benefits under a contract cannot be assigned$ if they are of personal nature.
Example: A oes Rs."00. the creditor can transfer the right of recover% to 2 from A. it ill !e a valid
assignment m$st !e given to the de!tor.
O/'*$"%# %! L*-:
'ssignment by operation of law takes place in case of death or insolvency of a party to the contract.
DISCHARGE OF CONTRACT
W&*$ ,% 6%. (*# 06 ,"+)&*'5 %! )%#$'*)$? D"+).++ $& 7*'"%.+ (%,+ 06 -&")& * )%#$'*)$ (*6 0
,"+)&*'5,?
The discharge of contract means that the parties are no more liable under the contract. &n other
words$ when the rights and obligations created by the contract come to an end$ the contract is said to be
discharged. The discharge of contract may$ therefore$ be defined as the termination of contractual
relationship between the parties.
M MODES ODES OF OF DISCHARGE DISCHARGE OF OF CONTRACT CONTRACT

B6 /'!%'(*#) B6 (.$.*4 B6 I(/%++"0"4"$6 B6 B'*)& %! B6 O/'*$"%# B6 L*/+ %!
T"( A5'(#$ C%#$'*)$ %! L*-

'ctual performance
Dffer to performance (ovation 't the time /aterial alteration 'nticipatory breach of contract
'lteration of agreement /erger 'ctual breach of contract
Bemission @nknown to &nsolvency
Bescission both parties 2eath
!aiver Inown to both
the parties
D DISCHARGE ISCHARGE B1 B1 P PERFORMANCE ERFORMANCE: :
!hen the parties to a contract perform their respective promises$ the contract is said to have been
performed. This is the normal and natural mode of discharging of a contract.
A)$.*4 /'!%'(*#):
The contract is said to have been performed$ if both the parties to the contract have performed their
respective promises performance should be complete and precise. &t should be according to the terms of the
agreement. /ostly contracts are discharged in this mode only.
O!!' $% /'!%'( %' $#,':
Tender is an offer to perform the obligation under the contract. !hen one party offers to perform its
part of the promise and the other party refuses to accept the performance$ the first party is discharged from
its obligations provided the offer or tender to perform the contract as valid.
D DISCHARGE ISCHARGE B1 B1 A AGREEMENT GREEMENT: :
' contract may be discharged by mutual agreement of the concerned parties. The parties may enter
into a fresh agreement$ which provides for the e*tinguishments of their rights and obligations created by the
original contract.
N%7*$"%#:
The term )novation+ may be defined as the substitution of e*isting contract for a new contract. &n
other words$ when the parties to a contract agree to substitute the e*isting contract by a new contract$ it is
known as novation. &t may be noted that the novation must be with the mutual consent of all the parties.
R+)"++"%#:
The term )rescission+ may be defined as the cancellation of the contract. ' contract may be rescinded
by agreement between the parties at any time before it is discharged by performance or in some other way.
Example: A promised to deliver certain goods to B on a certain date. Before the d$e date of performance, A
and B m$t$all% agreed that the contract o$ld not !e performed. In this case, the parties have rescinded the
contract. And th$s, the contract is discharged.
A4$'*$"%#:
The term )alteration+ may be defined as change in one or more terms of the contract. The alteration is
valid when it is made with the contract of all the parties. 'nd the valid alteration discharges the original
contract$ and the parties become bound by the new contract ,i.e. contract with altered terms-.
Example: A agreed to s$ppl% to B 50 !ags of rice at the rate of Rs."00 per !ag. &he deliver% as to !e made
in five e1$al instalments the first s$ppl% as to commence from "
st
/a%. 4$!se1$entl%, A and B entered into
an agreement that the deliver% o$ld !e made in to e1$al instalments and the price o$ld !e Rs."05 per
!ag. In this case, the old contract is discharged and the parties !ecome !o$nd !% the contract ith changed
terms.
R("++"%#:
The term )remission+ may be defined as the acceptance of lesser fulfillment of the terms of the
promise$ e.g. acceptance of a less sum of money where more is due. &n other words$ the remission is the
lesser fulfillment of the promise made.
Example: A oed Rs.5000 to B, A paid Rs.)000 to B, and B accepted it in f$ll satisfaction. In this case, A is
discharged from his lia!ilit% of Rs.5000.
W*"7'+:
The term )waiver+ may be defined as the abandonment ,i.e. giving up- of the rights by the party who
is entitled to claim performance of the contract. Dn the waiver$ the other party to the contract is discharged
from the performance of his liabilities under the contract.
Example: A promised to paint a pict$re for B. afterards B for!ade him to do so. In this case, B has aived
his right to claim the performance. And th$s, A is no longer lia!le to perform the promise.
D DISCHARGE ISCHARGE B1 B1 IMPOSSIBILIT1 IMPOSSIBILIT1: :
#ometimes$ the performance of a contract is impossible. &n such cases$ the contract is discharged
because the parties cannot perform their respective obligations. The impossibility of performance may be of
the two types$ namely 3. &nitial impossibility$ and 6. #ubseCuent impossibility.
I#"$"*4 I(/%++"0"4"$6:
&t is the impossibility$ which e*ists at the time of formation of a contract. &t makes the contract void
ab initio$ i.e.$ void from the very beginning. 'nd thus$ the contract does not create any rights and obligations
on the contracting parties. This provision is contained in sec.:; of the &ndian contract act$ which reads as an
agreement to do an act impossible in itself$ is void.
Example: A agreed ith B to discover a treas$re !% magic. And B agreed to pa% Rs.500 to A for this act.
&his agreement is void d$e to initial impossi!ilit%.
S.0+@.#$ %' +./'7#"#5 "(/%++"0"4"$6:
#ometimes the performance of a contract is Cuite possible when it is made. %ut subseCuently$ some
event happens which renders the performance impossible or unlawful. #uch impossibility is called the post
contractual impossibility.
Example: A and B contracted to marr% each other. Before the time fixed for the marriage, A !ecame mad. In
this case, the contract !ecomes void d$e to the s$!se1$ent impossi!ilit%, and th$s discharged.
D DISCHARGE ISCHARGE B1 B1 OPERATION OPERATION OF OF LAW LAW: :
&n certain cases$ the contract is discharged by the operation of law. i.e. the law regards the contracts
as discharged. Following are the circumstances under which the law regards the contract as discharges.
M*$'"*4 *4$'*$"%#:
#ometimes$ a contract is contained in a written document. 'nd one party alters it in material
particulars without the consent of the other party. &n such cases$ the effect of alteration would be the same as
that of cancellation of the document. Thus$ the material alteration discharges the parties from the
performance of their respective obligations under the contract.
Example: A contracted to sell his plot of 500 s1$are %ards to B for Rs."00000. the sale deed as exec$ted
hich as in possession of A. !efore the registration of the sale deed, A altered the deed and made it a deed
for the sale of (00 s1$are %ards plot for Rs."00000. in this case, the contract is discharged and B is not
!o$nd to p$rchase the plot.
I#+%47#)6:
#ometimes$ a person is declared insolvent by the court of law. &n such cases$ he is discharged from
all liabilities and debts incurred prior to the court orders.
D*$& %! /'%("+':
#ometimes$ the contract involves personal skills or Cualifications of the promisor himself. &n such
cases$ the contract is discharged on the death of the promisor.
Example: A, an expert, agreed ith B to translate some part of !oo# from 7rench to English. A died !efore
the translation or# started. In this case, the contract is of personal nat$re as it involves the personal
1$alification of the promisor +A,. And th$s, the contract is discharged on the death of A.
M'5' %! '"5&$+:
#ometimes$ the inferior rights and the superior rights coincide and meet in one and the same person.
&n such cases$ the inferior rights merge into the superior rights. Dn merger$ the inferior rights vanish and are
not reCuired to be enforced.
Example: A gave his land on lease to B. s$!se1$entl%0 B !o$ght the land, hich he as holding $nder the
lease. In this case, B !ecomes the oner of the propert% and his rights as a lessee merge into his rights as
the oner. And th$s, his rights as a lessee vanish, and are not to !e enforced.
D DISCHARGE ISCHARGE B1 B1 BREACH BREACH OF OF CONTRACT CONTRACT: :
The )breach of contract+ means the failure of a party to perform his obligations. 'nd a breach of
contract discharges the aggrieved party from performing his obligations. The breach of contract is of the
following two types:
A)$.*4 0'*)& %! )%#$'*)$:
&t occurs when on the due date of performance or during the performance$ a party fails to perform his
obligations. Thus$ the actual breach of contract may be discussed under the following two heads:
'ctual breach of contract on the due date of performance:
#ometimes$ on the due date of performance$ one party fails to perform his obligations. &n such cases$
the other party is discharged from the performance of his obligations$ and can hold the Cuality party liable
for the breach of contract.
Example: A agreed to sell his car to B on "
st
5$ne. A ref$sed to sell the car to B. on A's ref$sal to sell the car,
there occ$rred a !reach of the contract. A and B can hold A lia!le for the !reach of contract.
A)$.*4 0'*)& %! )%#$'*)$ ,.'"#5 "$+ /'!%'(*#):
#ometimes$ one party performs his obligations under the contract and the other party fails or refuses
to perform this obligations. &t is an actual breach of contract during its performance. 'nd sometimes$ one
party$ no doubt$ performs his obligations but not strictly according to the contract.
Example: A, a shoe man$fact$rer, contracted ith B, a dealer in shoes, to s$ppl% him 500 pairs of shoes at a
certain price. &he shoes ere to !e delivered in instalments. After the s$ppl% of )00 pairs of shoes, B told A
that no more shoes are re1$ired. In this case, the !reach of contract as committed d$ring the performance
of the contract.
A#$")"/*$%'6 0'*)& %! )%#$'*)$:
&t occurs when prior to the due date of performance$ the promisor absolutely refuses or disables
himself from the performance of his obligations. &n other words$ it is a declaration by one party of his
intention not to perform his obligations under the contract. Thus$ the anticipatory breach is the premature
destruction of the contract$ i.e. the repudiation of the contract before due date of performance.
Example: A contracted to s$ppl% to B "00 pieces of spar# pl$gs on "5
th
3ec. !$t !efore the d$e date of
performance, A informed to B that he is not going to s$ppl% the spar# pl$gs at all. On A's ref$sal to s$ppl%
the goods, the anticipator% !reach of the contract occ$rs. A and B ma% p$t an end to the contract.
D DISCHARGE ISCHARGE B1 B1 LAPSE LAPSE OF OF TIME TIME: :
's a matter of fact$ the contracts must be performed within the period of limitation i.e. the period
specified by the Limitation 'ct. The Limitation 'ct lays down the different limitation period for different
kinds of contracts. &f the contract is not performed and the aggrieved party does not enforce his rights within
the limitation period$ then he is debarred from enforcing from the contract. &n other words$ after the e*piry
of limitation period$ the courts will not enforce the contract.
'nd thus$ the contract is discharged$ as the parties cannot enforce their respective obligations
through the courts of law.
Example: A !orroed Rs.5000 from B, a mone%lender, and agreed to repa% the loan on ("
st
/arch "89(. On
("
st
/arch "89(, A failed to repa% the loan. B$t B did not ta#e an% legal action against A till ("at /arch. In
this case, B cannot recover the amo$nt of loan from A as the limitation period for the recover of loan is (
%ears from the date of defa$lt, hich has expired. And th$s, A is discharged from his lia!ilit% to pa% the loan.
REMEDIES FOR BREACH OF CONTRACT
W&*$ '(,"+ *' *7*"4*04 $% *# *55'"7, /*'$6 !%' $& 0'*)& %! * )%#$'*)$? O' ,"+).++ 0'"!46 $&
'(,"+ *44%-, 06 $& I#,"*# C%#$'*)$ *)$ $% $& *55'"7, /'+%# "# )*+ %! 0'*)& %! * )%#$'*)$.
T6/+ %! '(,"+ !%' 0'*)& %! )%#$'*)$:
Following types of remedies are available to the aggrieved party ,i.e. the party who is not at fault-.
#uit for recession
#uit for damages
#uit for Cuantum meruit
#uit for specific performance
#uit for in"unction
1. S."$ !%' R+)"++"%#:
The term )rescission+ may be defined as the cancellation of the contract. &n other words$ putting an
end to the contract. !here a party commits a breach ,i.e. refers to perform his obligations in the contract-$
the other party becomes entitled to put an end to the contract. 1e may bring an action for the rescission of
the contract.
Example: A agreed to sell his car to B for Rs.50000. and B agreed to pa% the price after the deliver% of the
car. 4$!se1$entl%, A ref$sed to deliver the car to B. in this case, B !ecomes entitled to cancel the contract.
And on the cancellation, he shall !e discharged from his o!ligations $nder the contract. And on the
cancellation, he shall !e discharged from his o!ligations $nder the contract, i.e. he cannot !e as#ed to
perform the contract and pa% the price.
2. S."$ !%' D*(*5+:
The term )damages+ may be defined as the monetary compensation payable by the defaulting party to
the aggrieved party for the loss suffered by him. The aggrieved party may$ therefore$ bring an action for
damages against the party who is guilty of the breach of the contract. 'nd the party$ guilty of breach$ is
liable to pay damages to the aggrieved party.
:. S."$ !%' 9.*#$.( M'."$:
Literally$ the e*pression )Cuantum meruit+ means )as much as earned+. &n legal sense$ it means the
)payment in proportion to the work done+. i.e. a person can recover compensation in proportion to the work
done by him. This doctrine is applied where there is no e*press promise to pay definite remuneration to a
person. 'nd the person claims reasonable remuneration for the services rendered by him.
;. S."$ !%' S/)"!") P'!%'(*#):
The term )specific performance+ may be defined as the actual carrying out the respective obligations
of both the parties. #ometimes$ the damages are not an adeCuate remedy for breach of the contract. &n such
cases$ the party aggrieved by the breach may bring an action for specific performance of the contract.
Example: A agreed to sell an old painting of /$ghal period to B for Rs.5000. !$t s$!se1$entl%, A ref$sed to
sell the painting. In this case, B ma% file a s$it against A for the specific performance of the contract. And
the co$rt ma% order A to sell the painting to B as agreed.
<. S."$ !%' I#G.#)$"%#:
The term )in"unction+ may be defined as an order of the courts warning a person from doing
something$ which he promised not to do. &n this case also the courts are at discretion to issue an in"unction
order. &t is$ usually$ issued in cases where the compensation in terms of money is not an adeCuate relief.

W&*$ ,% 6%. (*# 06 ,*(*5+ !%' 0'*)& %! )%#$'*)$? E8/4*"# $& 7*'"%.+ C"#,+ %! ,*(*5+
*-*',, %# $& 0'*)& %! )%#$'*)$?
The term )damages+ my be defined as the monetary compensation payable by the defaulting party to
the aggrieved party for the loss suffered by him. Dn the breach of contract$ the aggrieved party may file a
suit for damages against the party who is guilt of the breach of the contract. 'nd the guilty party is liable to
pay damages to the aggrieved party.
3 3INDS INDS OF OF DAMAGES DAMAGES: :
O',"#*'6 ,*(*5+:
Drdinary damages are those which naturally arose in the usual course of things from such breach.
2amages$ awarded to compensate the in"ured party for the actual amount of loss suffered by him conseCuent
upon the breach$ are known as general damages. 7eneral damages are usually assessed on the basis of actual
loss. The measure of ordinary damage is the difference between the contract price and market price at the
date of breach.
Example: A contracts to deliver "00 !ags of rice at Rs."000 a !ag on a f$t$re date. On the d$e date he
ref$ses to deliver. &he price on that da% is Rs.""00 per !ag. &he meas$re of damages is the difference
!eteen the mar#et price on the date of !reach and the contract price i.e. Rs. "0000.
S/)"*4 ,*(*5+:
#pecial damages are those resulting from a breach of contract under some special or unusual
circumstances. These damages constitute the indirect loss suffered by the in"ured party due to the breach of
contract. These are the damages which parties knew$ when they made the contract$ as likely to arise from the
breach of the contract.
Example: A !$ilder, contracts to erect and finish a ho$se !% first of 5an$ar%, in order that B ma% give
possession of it at that time to 2, to hom B has contracted to let it. A is informed of the contract !eteen B
and 2. A !$ilds the ho$se so !adl% that, !efore the first 5an$ar%, it falls don and has to !e re!$ilt !% B,
ho, in conse1$enc%, loses the rent hich he as to have received from 2 and is o!liged to ma#e
compensation to 2 and is o!liged to ma#e compensation to 2 for the !reach of his contract. A m$st ma#e
compensation to B for the cost of re!$ilding the ho$se, for the rent lost, and for the compensation made to
2.
E8(/4*'6 ,*(*5+:
These are damages which are awarded by way of compensation for the loss suffered and not by way
of punishment. .*emplary damages are granted for in"ured feeling$ sufferings etc. where courts take into
account the feelings of the aggrieved party$ e*emplary damages may be ordered. .*emplary damages have
no place in the law of contract and are not recoverable for a breach of contract.
N%("#*4 ,*(*5+:
These are the damages which are very small in amount. &n some cases there may be a breach of
contract but no material loss would have been caused thereby. Thus nominal damages are awarded only for
the name sake. (ominal damages are awarded simply to recognize the right of the party to claim damages of
the breach of the contract even though the party suffered no loss.
UNDUE INFLUENCE
W&*$ "+ .#,. "#!4.#)? W&*$ *' $& !!)$+ %! .#,. "#!4.#) %! $& )%#$'*)$?
The term )undue influence+ means the unfair use of one+s superior power in order to obtain the
consent of a person who is in a weaker position. 'ccording to sec.3; ,3- of the &ndian 0ontract 'ct '
contract is said to be induced by )undue influence+ where$
The relations subsisting between the parties are such that one of eth parties is in a position to
dominate the will of the other.
@se the position to obtain an unfair advantage over the other.
E!!)$+ %! U#,. I#!4.#):
The effect of undue influence is that it makes the contract voidable at the option of the party whose
consent is obtained by undue influence i.e. such party can put an end to the contract.
'ccording to sec. 38' when consent to an agreement is caused by undue influence$ the agreement is
a contract voidable at the option of the party whereas consent was so caused.
any such contract may be set aside either absolutely$ or$ if the party who was entitled to avoid it has
received any benefit there under$ upon such terms and conditions as the court may seem "ust.
FRAUD
D!"# $& $'( F'*.,.
'ccording to sec.35 of the &ndian 0ontract 'ct$ Fraud means and includes any of the following acts
committed by a party to a contract or with his convince$ or by his agent$ with intent to deceive another party
there to or his agent$ or to induce him to enter into the contract:
The suggestion as to a fact$ of that which is not true by one who does not believe it to be true.
' promise made without any intention of performing it.
'ny such act or omission as the law specially declares to be fraudulent.
W&*$ *' $& ++#$"*4 4(#$+ %! !'*.,?
M*C"#5 * !*4+ +.55+$"%# *+ $% * !*)$:
To constitute fraud there must be an ascertain of something false within the knowledge of the party
asserting it. That is$ to constitute fraud$ there must be a false representation or a statement by a party to a
contract who knows that the suggestion is false. There must be intention to deceive the other party or the
intention to induce him to enter a contract.
Example: &he prospect$s of a compan% did not refer to the existence of a doc$ment disclosing lia!ilities.
&his gave the impression that the compan% as prospero$s. If the existence of the doc$ment had !een
disclosed the impression o$ld have !een 1$ite different. *eld, non:disclos$re amo$nted to fra$d and
an%one ho p$rchased shares on the faith of this prospect$s co$ld avoid the contract.
A)$"7 C%#)*4(#$ %! * F*)$:
' person making a false statement is not guilty of fraud if he honestly believes in its truthfulness.
The fraudulent act must have been made with the knowledge of its falsity ,i.e. without belief in its truth-. &t
must be remembered that active concealment does not mean nondisclosure of material fact$ since the
e*planation to sec.35 clearly says that silence is not fraud e*cept under certain circumstances.
A /'%("+ (*, -"$&%.$ *#6 "#$#$"%# %! /'!%'("#5 "$:
&f a man while entering into a contract has no intention to perform his promise$ there is fraud on his
part. Example: p$rchase of goods itho$t an% intention of pa%ing for them.
A#6 +.)& *)$ %' %("++"%# *+ $& 4*- +/)"*446 ,)4*', $% 0 !'*.,.4#$:
S).17 (<) refers to the provisions in certain acts which make it obligatory to disclose relevant facts.
Thus$ under sec.:: of the Transfer of <roperty 'ct$ the seller of immovable property is bound to disclose to
the buyer all material facts. Failure to do so amounts to fraud.
T& /*'$6 +.0G)$, $% !'*., (.+$ &*7 +.!!', +%( 4%++:
&t is a common rule of law that there is no fraud without damages. 's such )fraud without damage+
does not give rise to an action of deceit.
MISREPRESENTATION
W&*$ ,% 6%. (*# 06 ("+'/'+#$*$"%#?
The term misrepresentation is defined by sec.34 of the &ndian 0ontract 'ct as
The positive ascertain$ in a manner not warranted by the information of the person making it$ of that which
is not true$ though he believes it to be trueH
'ny branch of duty which without an intent to deceive$ gains an advantage to the person
committing it$ or any one claiming under him$ by misleading another to his pre"udice or to the
pre"udice of anyone claiming under himH
0ausing$ however$ innocently a party to an agreement to make a mistake as to the substance of the
thing which is the sub"ect of the agreement.
E8/4*"# $& '@."'(#$+ %! ("+'/'+#$*$"%#?
' misrepresentation is relevant if it satisfies the following reCuirements.
&t must be a representation of a material fact. /ere e*pression of opinion does not amount to
misrepresentation even if it turns out to be wrong.
&t must be made before the conclusion of the contract with a view to inducing other party to
enter into the contract.
&t must be made with the intention that it should be acted upon by the person to whom it is
addressed.
&t must be actually have been acted upon and must have induced to contract.
&t must be wrong but the person who made it honestly believed it to be true.
&t need not be made directly the plaintiff ,petitioner-. ' wrong statement of facts made to
third person with the plaintiff also amounts to misrepresentation.
J
D"!!'#$"*$ 0$-# M"+'/'+#$*$"%# *#, F'*.,.
S.NO MISREPRESENTATION FRAUD
1. There is no intention to deceive the other
party to the contract.
There is intention to deceive.
2. &t is not an act punishable by the &ndian
<enal 0ode. &t is not an offence.
&t is a criminal act punishable under &ndian <enal
0ode.
:. &t is an innocent wrong. The person making
the false statement believes it to be true.
&t is intentional or willful wrong. The person
making the false statement does not believe it to be
true.
;. The aggrieved party cannot avoid the
contract.
The contract is voidable even though the aggrieved
party has the means of discounting the truth with
ordinary prudence.
C%#+@.#)+ %! M"+'/'+#$*$"%#:
&n the case misrepresentation by the other part$ the aggrieved party can
'void or rescind the contract ,or-
'ccept the contract but insist that he shall be placed in the position in which he would have been$ if
the position in which he would have been$ if the misrepresentation had been true.
SALE OF %OOS ACT& '()*
D!"# * A)%#$'*)$ %! +*4B.
'ccording to +)$"%# ;(1) of the #ale of 7oods 'ct$ 389A$ contract of sale of goods is a contract
whereby the seller transfers or agrees to transfers or agrees to transfer the property in goods to the buyer for
a price. )0ontract of sale+ is a generic term which includes both a sale as well as an agreement to sell.
Example: A sells his !i#e for Rs."0, 000 to B. It is a sale, as the onership of the !i#e has !een transferred
to B !% A for a price.
A agrees ith B to sell his !i#e after to months for Rs."0000. it is an agreement to sell as the !i#e is to !e
transferred on a f$t$re date.
E8/4*"# $& ++#$"*4+ %! * 7*4", )%#$'*)$ %! +*4?

S44' *#, B.6':
There must be a seller as well as a buyer. )%uyer+ means a person who buys or agrees to buy goods
H+)$"%# 2(1)I. )#eller+ means a person who agrees to sell goods H+)$"%# 2(1:)I. ' person cannot be a seller
as well as a buyer as a person cannot buy his own goods.
G%%,+:
There must be some goods. )7oods+ means every kind of movable property other than actionable
claims and money and includes stock and shares$ growing crops$ grass and things attached to or forming part
of the land which are agreed to be severed before sale or under the contract of sale H+)$"%# 2(7)I.
T'*#+!' %! P'%/'$6:
<roperty means the general property in goods$ and not merely a special property H+)$"%# 2(11)I.
7eneral property in goods means ownership of the goods. #pecial property in goods means possession of
goods. Thus$ there must be either a transfer of ownership of goods or an agreement to transfer the ownership
of goods.
P'"):
There must be a price. <rice here means the money consideration for a sale of goods H+)$"%# 2(1?)I.
!hen the consideration is only goods$ it amounts to a )barter+ and not sale. !hen there is no consideration$
it amounts to gift and not sale. 1owever$ the consideration may be pertly in money and partly in goods
because the law does not prohibit as such.
E++#$"*4+ E4(#$+ %! * 2*4", C%#$'*)$:
'll the essential elements of a valid contract as specified under S)$"%# 1? of &ndian 0ontract 'ct$
3456 must also be present since a contract of sale is a special type of a contract.
E8/4*"# $& !%'(*4"$"+ "#7%47, "# * )%#$'*)$ %! +*4?
F FORMALITIES ORMALITIES OF OF A A C CONTRACT ONTRACT OF OF S SALE ALE H HSEC SEC.<I: .<I:
O!!' *#, A))/$*#): ' contract of sale is made by an offer to buy or sell the goods for a price and
acceptance of such offer.
D4"7'6 *#, P*6(#$: The contract of sale may provide for any of the following combinations:
Essential Elements of a Contract
of Sale
Seller
and
u!er
"oods
#ransfer of
general
propert!
Price
Essential
elements of a
valid contract
eli+ery $ayment
&mmediate &mmediate
&mmediate %y installments
%y installments &mmediate
E8/'++ %' I(/4",:
.*press &n writing or by word of mouth
&mplied %ehaviour of the parties
D"+$"#5."+& 0$-# +*4 *#, *5'(#$ $% +44?
'n agreement to sell becomes a sale when the time elapses or the conditions are fulfilled sub"ect to
which the ownership in the goods$ is to be transferred.
4.NO BA4I4 O7
3I4&IN2&ION
4A;E A<REE/EN& &O 4E;;
1. T'*#+!' %!
%-#'+&"/
Transfer of ownership of goods
takes place immediately.
Transfer of ownership of goods is to take
place at a future time or sub"ect to
fulfillment of some condition.
2. E8).$, )%#$'*)$
%' 8).$%'6
)%#$'*)$
&t is an e*ecuted contract
because nothing remains to be
done.
&t is an e*ecutory contract because
something remains to be done.
:. C%#76*#) %!
/'%/'$6
%uyer gets a right to en"oy the
goods against the whole world
including seller.
%uyer does not get such right to en"oy the
goods.
;. T'*#+!' %! '"+C Transfer of risk of loss of
goods takes place immediately
because ownership is
transferred.
Transfer of ownership of loss of goods
does not take place because ownership is
not transferred.
<. R"5&$+ %! +44'
*5*"#+$ $& 0.6'
#eller can sue the buyer for the
price even though the goods
are in his possession.
#eller can sue the buyer for damages even
though the goods are in the possession of
the buyer.
=. R"5&$+ %! 0.6'
*5*"#+$ $& +44'
%uyer can sue the seller for
damages and can sue the third
party who bought those goods.
%uyer can sue the seller for damages only.
W&*$ ,% 6%. (*# 06 &"'F/.')&*+ *5'(#$?
1ire purchase agreement means an agreement under which goods are let on hire and under which the
hirer has an option to purchase them in accordance with the terms of the agreement and includes the
agreement under which:
<ossession of goods is delivered by the owner thereof to a person on condition that such person pays
the agreed amount in periodical installments.
The property in the goods is to pass to such a person on the payment of the last installment.
#uch a person has a right to terminate the agreement at any time before the property so passes.
D"+$"#5."+& 0$-# +*4 *#, &"'F /.')&*+?
S.NO ,ASIS OF
ISTINCTION
SALE -IRE.$/RC-ASE A%REE0ENT
1. R5.4*$"#5 4*- 'll contracts of sale are governed
by sale of goods act$ 389A.
The hire purchase agreement are
governed by hire purchase act$ 3856.
2. N*$.' %! )%#$'*)$ &t is a contract of sale. &t is an agreement of hiring and hence
an agreement to sell.
:. T'*#+!' %!
%-#'+&"/ %! 5%%,+
Dwnership of goods is transferred
immediately.
Dwnership of goods is transferred on
the payment of the last installment.
;. R"5&$ $% $'("#*$ The buyer has no right to repossess
the goods. 1e can sue for price.
The hire vendor has a right to
repossess the goods if the hire
defaults.
<. T'*#+!' %! 5%%,
$"$4 $% $&"', /*'$6
The buyer can transfer a good title
to third party because ownership of
goods has been transferred.
The hirer cannot transfer a good title
to third party because ownership of
goods has not been transferred.
=. T'*$(#$ %!
/*6(#$ (*, 06
"#+$*44(#$
The payment made by the buyer is
treated as payment towards the
price of goods.
The payment made by the hire
purchase is treated as hire charges for
the use of goods till the option to
purchase the goods is e*ercised.
D!"# $& $'( 5%%,+.
7oods mean every kind of movable property other than actionable claims and money$ and include
the following:
#tock and shares
7rowing crops$ grass and thing attached to or forming part of the land which are agreed to be served before
sale or under the contract of sale.
W&*$ *' $& $6/+ %! 5%%,+?
T T1PES 1PES OF OF GOODS GOODS:F :F
E8"+$"#5 5%%,+:
.*isting goods mean the goods which are either owned or possessed by the seller at the time of
contract of sale. The e*isting goods may be specific or ascertained as follows:
4pecific goods =sec.) +"6,>: These are the goods which are identified and agreed at the time when a contract
of sale is made.
Ascertained goods: 7oods are said to be ascertained when out of a mass of unascertained goods$ the Cuantity
e*tracted for is identified and set aside for a given contract. Thus$ when part of the goods lying in bulk are
identified and allocated for sale$ such goods are termed as ascertained goods.
?nascertained goods: These are the goods which are not identified and agreed upon at the time when a
contract of sale is made. ..g. goods in stock.
F.$.' 5%%,+ H+). 2(=)I:
Future goods mean goods to be manufactured or produced or acCuired by the seller after the making
of the contract of sale. There can be an agreement to sell only. There can be no sale in respect of future
goods because one cannot sell what he does not possess.
C%#$"#5#$ 5%%,+ H+). =(2)I:
These are the goods the acCuisition of which by the seller depends upon a contingency which may or
may not happen.

Goods
E$istin
g
"oods
Future
"oods
W&*$ "+ $& !!)$ %! ,+$'.)$"%# %! 5%%,+?
I# )*+ %! )%#$'*)$ %! +*4 H+)$"%# 7I:
The contract of sale is void if the following three conditions are satisfied:
There must be a contract of sale for specific goods.
The goods must have decomposed or become so damaged as no longer to answer to their description
in the contract$ before making of the contract.
The seller must not be aware about the destruction of goods.
The aforesaid provision is based on the principle of impossibility of performance of the contract.
I# )*+ %! *# AA5'(#$ $% S44B H+)$"%# 8I:
'n agreement to sell becomes void if the following four conditions are satisfied:
There must be an agreement to sell specific goods.
The goods must have decomposed or become so damaged as no longer to answer to their description
in the agreement.
There must not be any fault of seller or buyer.
The risk must not have passed to the buyer$ i.e. the goods must have perished before the agreement to
sell becomes sale.
D!"# A)%#,"$"%#B "# * )%#$'*)$ %! +*4 %! 5%%,+.
'ccording to sec.36 ,6- a condition is a stipulation which is essential to the main purpose of the
contract$ and the breach of which gives the aggrieved party a right to terminate the contract.
Example: @ as#ed a car dealer to s$ggest him a car s$ita!le for to$ring p$rposes. &he dealer s$ggested a
AB$ggati car'. Accordingl%, @ p$rchased it !$t fo$nd it $ns$ita!le for to$ring p$rpose. In this case,
s$ita!ilit% of car for to$ring p$rpose as a condition of contract. @ as, therefore entitled to reBect the car
and have ref$nd of the price paid.
W&*$ "+ * -*''*#$6 "# * )%#$'*)$ %! +*4?
'ccording to sec.36 ,9- a warranty is a stipulation which is collateral to the main the purpose of the
contract$ and the breach of which gives the aggrieved party a right to claim damages but not a right to re"ect
goods and to terminate the contract.
Example: @ as#ed a car dealer to s$ggest him a good car and hile s$ggesting the car, the dealer said that
it co$ld r$n for )0#m per litre of petrol. B$t the car co$ld r$n onl% "5#ms per litre of petrol. In this case, the
statement made !% the seller as a arrant%. @ as, therefore not entitled to reBect the car !$t he as
entitled to claim the damages.
D"+$"#5."+& 0$-# )%#,"$"%# *#, -*''*#$6.
S.N
O
,ASIS OF
ISTINCTION
CONITION 1ARRANT2
Continge
nt "oods
Speci%c Ascertained &nascertained
1. .ssential vs.
collateral
&t is stipulation which is essential to
the main purpose of the contract.
&t is stipulation which is only
collateral to the main purpose of the
contract.
2. Bight in case of
breach
The aggrieved party can terminate the
contract.
The aggrieved party can claim
damages but can not terminate
contract.
:. Treatment ' breach of condition can be treated
as a breach of warranty. For e*ample$
a buyer may like to retain the goods
and claim only for damages.
' breach of warranty cannot be
treated as a breach of condition.
E8/4*"# $& E8/'++ *#, I(/4", C%#,"$"%#+ *#, W*''*#$"+ "# )%#$'*)$ %! +*4 *+ /'%7",, "# $& S*4
%! G%%,+ A)$?
0onditions and !arranties may be either e*press or implied. !hen the conditions and warranties are
definitely written in the contract they are known as .*press 0onditions and !arranties. !hen the
0onditions and !arranties are not written in the contract but are attached to the contract by operation of law
or custom$ they are called &mplied 0onditions and !arranties.
E EJPRESS JPRESS CONDITIONS CONDITIONS: :
These are e*pressly provided in the contract. For e*ample$ a buyer desires to buy a #D(G T> /odel
(o.39=6. 1ere$ model no. is an e*press condition. &n an advertisement for Ihaitan fans$ guarantee for :
years is an e*press warranty.
I IMPLIED MPLIED CONDITIONS CONDITIONS: :
These are implied by law in every contract of sale of goods unless a contrary intention appears from
the terms of the contract.
The various implied conditions are given below:
C%#,"$"%# *+ $% T"$4 H+).1; (*)I:
&n every contract of sale of 7oods$ there is an implied condition that the seller has right to sell the
goods at the time the sale is affected. &n case of an agreement to sell$ the seller will have the right to sell the
goods at the time when the property is to pass from the seller to the buyer. This condition is called a
condition as to title.
The condition as to the seller+s title is very essential to protect the interest of the innocent buyers.
The whole ob"ect of the sale is to transfer the property from one person to another.
Example: A p$rchased a second hand car from B, a car dealer. After a fe months, the car as ta#en !% the
Colice !eca$se, it as a stolen one. A as forced to ret$rn the car to the tr$e oner. *eld, A co$ld recover
the f$ll price from B. *ere there as a !reach of condition as to title !eca$se B had no right to sell the car.
C%#,"$"%# *+ $% D+)'"/$"%# H+).1<I:
!here there is a contract of sale of goods by description$ there is an implied condition that the goods
shall correspond with description. The main idea is that the goods supplied must be same as were described
by the seller. #ale of goods by description includes many situations as under:
!here the buyer has never seen the goods and buys them only on the basis of description given by
the seller.
!here the buyer has seen the goods but he buys them only on the basis of description given by the
seller.
!here the method of packing has been described.
C%#,"$"%# *+ $% S*(/4 H+).17I:
&n case of a contract of sale by sample$ the implied conditions are:
The goods delivered shall correspond with the sample.
%uyer shall have a reasonable opportunity of comparing the goods with the sample.
7oods shall be free from apparent ,noticeable- defects.
C%#,"$"%# *+ $% S*(/4 *+ -44 *+ D+)'"/$"%# H+).1<I:
&n case of a contract of sale by sample and description$ the implied condition is that the goods shall
correspond with both$ the sample as well as description.
C%#,"$"%# *+ $% 9.*4"$6 H+).1= (1)I:
The general rule is caveat emptor$ i.e.$ let the buyer beware. #o$ the seller need not disclose the
faults in the goods he sells. The buyer must buy the goods after having satisfied himself about the Cuality
and fitness. 'ccording to sec.3; of the #ale of 7oods 'ct$ there shall be no implied condition as to ?uality
for particular purpose. %ut$ there is an implied condition as to ?uality only if the following reCuirements are
fulfilled.
The goods are reCuired by the buyer for a particular purpose.
The buyer should make known to the seller with regard to the particular purpose.
The buyer should rely on the skill or "udgement of the seller.
C%#,"$"%# *+ $% M')&*#$*0"4"$6 9.*4"$6 H+).1= (2)I:
!hen the goods are sold by description it is implied that the goods shall correspond with the
description and also that they shall be a /erchantable ?uality i.e. a Cuality that is ordinarily accepted in the
market. 7oods will be unmerchantable if they have defect which will make them unfit for ordinary use or
are such that a reasonable person knowing of their condition would not buy them.
C%#,"$"%# *+ $% W&%4+%(#++:
&n the case of eatables and provisions or foodstuffs$ there is an implied condition as to
wholesomeness. 0ondition as to wholesomeness means that the goods shall be fit for human consumption.
Example: @ !o$ght mil# from D's diar%. &he mil# contained t%phoid terms. @'s ife cons$med mil#, !ecame
infected and died. D as lia!le for damages !eca$se the mil# as not fit for h$man cons$mption.
E EJPRESS JPRESS W WARRANTIES ARRANTIES: :
&t is a warranty which has been e*pressly agreed upon both parties at the time of contract of sale. &t
may be noted that it is open to both the parties to include in their contract many number of e*press
warranties.
I IMPLIED MPLIED W WARRANTIES ARRANTIES: :
&t is the warranty that the law implies into the 0ontract of #ale. That is$ it is the stipulation which has
not been included in the contract of sale in e*press word. %ut the law presumes that the parties have
incorporated in into their contracts. Following are the implied warranties that are contained in the #ale of
7ood 'ct.
W*''*#$6 *+ $% 9."$ P%++++"%# H+).1; (0)I:
's per this warranty$ the buyer shall have and en"oy the ?uiet <ossession of the goods. &f buyer+s
right of possession and en"oyment is disturbed by anyone$ then the buyer can recover the damages from the
seller through the court of law.
W*''*#$6 *+ $% F' !'%( E#).(0'*#) H+).1; ())I:
There is an implied warranty that the goods are free from any charge or encumbrance in favour of
any third person if the buyer is not aware of such charge or encumbrance. The breach of this warranty gives
a right to claim damages from the seller.
Example:
W*''*#$"+ "(/4", 06 C.+$%(':
's the parties enter into an agreement sub"ect to the known customs or usage of trade$ implied
warranties may be attached to a contract of sale by custom or usage of trade.
W&*$ "+ $& ,%)$'"# %! AC*7*$ E(/$%'B? W&*$ *' $& 8)/$"%#+ $% $& '.4?
D DOCTRINE OCTRINE OF OF C CA2EAT A2EAT E EMPTOR MPTOR
The e*pression )0aveat .mptor+ means )let the buyer beware+. &n other word$ the buyer must take
care of his own interest while purchasing the goods. %uyer in a contract of sale of specific goods will
purchase them at his own risk with regard to the Cuality or fitness of the goods e*cept in case of fraud or
where a condition to that effect is laid down in the contract itself.
E EJCEPTIONS JCEPTIONS TO TO THE THE D DOCTRINE OCTRINE OF OF C CA2EAT A2EAT E EMPTOR MPTOR
1. I(/4", )%#,"$"%# '5*',"#5 @.*4"$6 %' !"$#++:
!here the buyer has made known to the seller the purpose for which he reCuires the goods and
depends on the skill and "udgement of the seller$ there is an implied condition that the goods will be fit for
the purpose for which the buyer reCuires them. This condition is not applicable in those cases where he
goods have been sold under a patent mark or trade name.
#ale of goods by description:
!here the goods are purchased from a seller by description$ who deals in such class of goods$ there
will be implied condition that the goods shall be merchantable Cuality.
2. U+*5 %! T'*,:
'n implied warranty or condition as to Cuality or fitness for a particular purpose may be anne*ed by
the custom or usage of trade.
:. M"+'/'+#$*$"%#:
!here the seller has made a false representation relating to the goods and the buyer has relied upon
it$ the doctrine will not apply. #uch a contract being voidable at the option of the innocent party the buyer
has a right to rescind the contract.
TRANSFER OF PROPERT1
W&*$ ,% 6%. (*# 06 $'*#+!' %! /'%/'$6? S$*$ $& +"5#"!")*#) %! $'*#+!' %! /'%/'$6 *#, $& 45*4
'.4+ '4*$"#5 $&'$%.
The )Transfer of property+ in goods means transfer of ownership of goods. The term )property+ in the
goods may be defined as the legal ownership of the goods. The term )property in the goods+ must be
distinguished from the term )possession of the goods+. The term )property in the goods+ means the
ownership of the goods$ whereas the term )possession of the goods+ simply mean the custody or physical
control over the goods. The e*pression )transfer of property+ means the transfer of ownership of the goods
from seller to the buyer so as to constitute the buyer the owner thereof.
I IMPORTANCE MPORTANCE OF OF T TRANSFER RANSFER OF OF P PROPERT1 ROPERT1
The right and liabilities of the parties are linked with the transfer of ownership. The following points
are significant for the transfer of ownership of the goods.
1. R"+C !%44%-+ %-#'+&"/:
Bisk passes to the buyer as property in the goods passes to him. The risk of destruction or loss of
goods sold falls on the buyer and not on the seller through the goods may still be in the possession of seller.
2. A)$"%# *5*"#+$ $&"', /*'$"+:
!hen there is danger to the goods being damaged by the action of third parties. &t is only the owner
who can take action. That is the right to proceed against a third party for destruction or damage to the goods
depends not on possession but on the transfer of property.
:. S."$ !%' /'"):
The seller can see for the price$ unless otherwise agreed$ only if the goods have become the property
of the buyer. That is$ the transfer of property confers upon the seller the right to see the buyer for the prices.
;. I#+%47#)6:
!hen the buyer or seller becomes insolvent$ the official assignee to determine the insolvent is the
owner of the goods at the time of his becoming insolvent. &f he finds that he is the owner of the goods he can
take over the goods otherwise he cannot take over it.
R RULES ULES REGARDING REGARDING T TRANSFER RANSFER OF OF P PROPERT1 ROPERT1
G%%,+ $% 0 A+)'$*"#,:
'ccording to sec.34$ where there is a contract for the sale of unascertained goods$ no property in the
goods is transferred to the buyer unless and until the goods are ascertained.
P*'$"+ I#$#$"%#:
'ccording to sec.38 ,3-$ where there is a contract for the sale of specific goods$ the property in them
is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
W&# #% "#$#$"%# "+ 8/'++,:
'ccording to sec.38 ,9-$ unless a different intention appears$ the rules contained in section 6A to 6=
of the #ale of 7oods 'ct are rules for ascertaining the intention of the parties as to the time at which the
property in the goods is to pass to the buyer.
D DOCUMENTS OCUMENTS OF OF TITLE TITLE TO TO G GOODS OODS
' document of title to goods is a proof of the ownership of the goods. &t authorizes its holder to
receive goods mentioned therein or to further transfer such right to another persons by proper endorsement
and delivery.
B"44 %! 4*,"#5:
' bill of lading is a receipt given by the ship owner acknowledging the receipt of goods for carriage.
D%)C W*''*#$:
' dock warrant is document which is issued by a dock owner. &t authorizes the person holding it to
receive the possession of the goods.
W*'&%.+ C/'B+ )'$"!")*$:
!arehouse keeper+s certificate is a document which issued by the warehouse keeper. &t is a certificate
by the warehouse keeper that the goods specified in the document are in the warehouse.
R*"4-*6 ')"/$:
' railway receipt is a document which issued by the railways as the acknowledgement of the receipt
of goods. &t provides that on surrender of the receipt at the destination of the goods by the consignee the
goods mentioned therein will be delivered to him.
D4"7'6 %',':
' delivery order is an order which as given by the owner of goods directing a person who holds the
goods on his behalf to deliver them to a persons named therein.
S*4 06 N%#FO-#'+
E#.('*$ $& )"').(+$*#)+ -&# * #%#F%-#' )*# $'*#+!' * 0$$' $"$4 $&*# -&*$ & &"(+4!
/%++++? W&*$ "+ (*#$ 06 A#*(% ,*$ @.%, #%# &*0$B?
S*4 06 #%#F%-#'+
The general rule is e*pressed by the Latin ma*im Namo dat 1$od non ha!et., which means that no
one can give what he does not himself possess. &f the seller+s title to the goods is defective$ the buyer+s title
will also be defective because the buyer acCuires his title to the goods from the seller. 1ence$ the seller
cannot give a better title to the buyer than he himself has.
Example: @ stole a &E and delivered it to D, an a$ctioneer. D sold the &E to F at a$ction. It as held that F
o!tained no title to the &E !eca$se @ had no title to it.
E8)/$"%#+ $% $& G#'*4 R.4
The circumstances under which a seller can give a better title than what he himself has have been
given below:

Exceptions to the General
Rule
! a
Mercantile
agent
! one
of t'e
(oint
owners
! a
person in
Possessio
n under
voidable
contract
! seller
in
Possessio
n after
sale
! bu!er
in
possessio
n before
transfer of
owners'ip
! an
unpaid
seller
! a
%nder
of
goods
! a
Pawne
e or
pledge
1. S*4 06 * (')*#$"4 A5#$:
'ccording to section 65$ the agent must be in possession of goods or a document title to the goods
with the consent of the owner. The agent must have sold the goods in the ordinary course of business as a
mercantile agent.
Example: C, the oner of the car instr$cted an agent A to sell his car at not less than Rs.50, 000. B$t A sold
the car for Rs.60000 and misappropriated the mone%. B acted in good faith and itho$t notice of the a!ove
instr$ction to agent. *ere, B got a good title to the car and the real oner C cannot recover the car from B.
2. S*4 06 %# %! $& G%"#$ %-#'+:
'ccording to section 64$ the "oint owner must be in the sole possession of goods with the consent of
the other coowners. The buyer must have bought the goods in good faith. The buyer must have no
knowledge that the seller had no authority to sell.
Ex: @, D and F ere the co:oners of some goods. @ as in the possession of those goods ith the consent
of D and F. @ sold those goods to !e B ho !o$ght them in good faith and itho$t notice that @ had no
a$thorit% to sell. In this case, B got a good title to the goods and D and F cannot recover the goods from B.
:. S*4 06 * /'+%# "# /%++++"%# .#,' 7%",*04 )%#$'*)$:
The seller must be in possession of goods under a contract voidable 38 of &ndian 0ontract 'ct$ 3456
on ground of coercion$ undue influence$ misrepresentation or fraud.
Example: @, !% fra$d o!tained the possession of a diamond ring from D. @ sold the ring to B !efore D
rescinded the contract. B !o$ght the ring in good faith and itho$t notice of @'s defective title. B got a good
title and D cannot recover the ring from B.
;. S*4 06 +44' "# /%++++"%# *!$' +*4:
'ccording to section 9A,3-$ the seller must be in possession of goods or a document of title to the
goods$ in the capacity of a seller and not in any other capacity such as bailee. The buyer must have bought
the goods in good faith.
<. S*4 06 * 0.6' "# /%++++"%# 0!%' $& $'*#+!' %! %-#'+&"/:
'ccording to section 9A,6-$ the buyer must be in possession of the goods or a document of title to the
goods$ with the consent of the original seller and must have bought or agreed to buy the goods. The new
buyer must have bought the goods in good faith.
=. S*4 06 *# .#/*", +44':
'ccording to section :=,9-$ an unpaid seller must have e*ercised his right of stoppage in transit.
7. S*4 06 * !"#,' %! 5%%,+:
The owner$ if found refuses to pay the lawful charges of finder$ if the goods are in danger of
perishing or of losing the greater part of its value or if the lawful charges of the finder in respect of the thing
found amounts to two third of its value.
8. S*4 06 * P*-# %' /4,5:
The pawnor or pledger must have made a default in the payment of the debt or the performance of
the promise at the stipulated time. The <awnee or pledge must have given a reasonable notice to the pawnor
or pledger.
P PERFORMANCE ERFORMANCE OF OF C CONTRACT ONTRACT
D!"# $& $'( ,4"7'6 %! 5%%,+.
'ccording to section 6,6-$ delivery means voluntary transfer of possession from one person to
another. 2elivery is a bilateral act. &t reCuires two parties to act. &f transfer of possession of goods is not
voluntary i.e. possession is obtained by theft etc.$ there is no delivery. The performance is mutual and is laid
down in section 93 of the 'ct states that$ it is the duty of the seller to deliver the goods and of the buyer to
accept and pay for them$ in accordance with the terms of the contract of sale.
T T1PES 1PES OF OF D DELI2ER1 ELI2ER1
The delivery of goods may be of the following three types:
A)$.*4 D4"7'6: 2elivery is said to be actual where the goods are physically handed over to the
buyer or his authorized agent.
Example: @ sells to D "oo !ags of heat l%ing in F's areho$se. @ orders F to deliver the heat to D. F
delivers to D. in this case there is an act$al deliver% of goods.
S6(0%4") D4"7'6: 2elivery is said to be symbolic where some symbol of the real possession or
control over the goods is handed over to buyer.
Example: @ sells to D "00 !ags of heat l%ing in F's areho$se and hands over the #e% of F's areho$se to
D. in this case, there is s%m!olic deliver% of goods.
C%#+$'.)$"7 D4"7'6: 2elivery is said to be constructive where a person who is possession of the
goods$ acknowledges to hold the goods on behalf of the buyer.
Example: @ sells to D "00 !ags of heat l%ing in F's areho$se. D orders F to deliver the heat to D, F
agrees to hold the "00 !ags of heat on !ehalf of D and ma#es the necessar% entr% in his !oo#s. In this case,
there is s%m!olic deliver% of goods.
R RULES ULES TO TO DELI2ER1 DELI2ER1 OF OF GOODS GOODS
P*6(#$ *#, D4"7'6 $% 0 C%#).''#$ H+)$"%# :2I: 2elivery of the goods and payment of the
price are concurrent conditions$ that is to say$ the seller must be ready and willing to give possession
of the goods to the buyer and the buyer must be ready and willing to pay the price.
M%, %! D4"7'6 H+)$"%# ::I: 2elivery must have the effect of putting the goods into the buyer+s
or his authorized agent+s possession.
E!!)$ %! P*'$ D4"7'6 H+)$"%# :;I: ' delivery of part of goods with an intention of giving the
delivery of the whole amounts to the delivery of the whole for the purpose of transfer of ownership
of goods$ 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.
B.6' $% A//46 !%' D4"7'6 H+)$"%# :<I: @nless otherwise agreed$ the seller of the goods is not
bound to deliver them until the buyer applies for delivery.
P4*) %! D4"7'6 H+)$"%# :=(1)I: &t should be specified in the contract. Further$ the goods must be
delivered at that place during hours on a working day.
T"( %! D4"7'6 H+)$"%# :=(2)I: !here under the contract of sale the seller is bound to send the
goods to the buyer$ but no time for sending them is fi*ed$ the seller is bound to send them within a
reasonable time.
E8/#++ %! D4"7'6 H+)$"%# :=(<)I: @nless otherwise agreed$ the e*penses of putting the goods
into a deliverable state shall be borne by the seller.
D4"7'6 %! W'%#5 9.*4"$6 H+)$"%# :7I: #ub"ect to any usage of trade$ special agreement or course
of dealing the parties$ the rules as to the delivery of wrong Cuantity are summarized as under:
The buyer may accept the goods so delivered or
The buyer may re"ect the goods or
The buyer may accept the goods so delivered or
The buyer may re"ect the whole or
The buyer may accept the goods which are in accordance with the contract and re"ect the rest.
D4"7'6 06 I#+$*44(#$+ H+)$"%# :8I: @nless otherwise agreed$ the buyer of goods is not bound to
accept delivery by installments.
W&*$ *' $& R"5&$+ *#, D.$"+ %! $& B.6' *#, S44'?
R RIGHTS IGHTS OF OF A A BU1ER BU1ER: :
R"5&$ $% &*7 D4"7'6 %! G%%,+ (+).:2):
The buyer has the right to take delivery of the goods on payment of price when delivery of goods and
payment of price are concurrent conditions in the contract of sale.
R"5&$ $% RG)$ $& G%%,+ (+).:7): The buyer is entitled to re"ect the goods in the following cases:
!here the seller delivers lesser Cuantity than that contracted forH
!here the seller delivers larger Cuantity than that contracted forH
!here the seller mi*es the contracted goods with goods of a different description.
R"5&$ #%$ $% A))/$ I#+$*44(#$+ (+).:8): #ub"ect to contract$ the buyer is under no obligation to
accept delivery of the goods by installments. 1e can re"ect contract in such circumstances.
R"5&$ $% E8*("# $& G%%,+ (+).;1): The buyer is not deemed to have accepted the goods unless
and until:
i. 1e has reasonable opportunity to e*amine the goodsH
ii. 1e is afforded a reasonable opportunity of e*amining the goods to see whether the
goods are in conformity with the contract.
R"5&$ #%$ $% '$.'# $& RG)$, G%%,+ (+).;:): #ub"ect to agreement$ the buyer is not liable to
return the goods re"ected by him rightfully. &t is sufficient if he intimates the seller that he refused to
accept the goods.
R"5&$ $% $& N%$") %! I#+.'*#) H+).:> (:)I: &t is the duty of the seller to give notice to the buyer
to enable him to insure the goods during the sea transit. &f he fails to do so$ the buyer is not liable for
destruction of goods in transit.
D DUTIES UTIES OF OF THE THE B BU1ER U1ER
The buyer$ in respect to the contract of sale$ has to perform the following duties:
D.$6 $% /*6 /'") *#, *))/$ $& 5%%,+ H+).:1I: &t is the duty of the buyer to take the delivery of
the goods and pay for them in accordance with the terms of the contract.
D.$6 $% *//46 !%' ,4"7'6 H+).:<I: The seller is not bound to deliver the goods to the buyer until
the buyer applies for delivery$ in the absence of any contract of the contrary.
D.$6 $% ,(*#, ,4"7'6 *$ * '*+%#*04 &%.' H+).:= (;)I: 's per sec. 9; ,=-$ demand or tender
of delivery may be treated as incompetent unless made at a reasonable hour.
D.$6 $% *))/$ "#+$*44(#$ ,4"7'6 *#, /*6 !%' "$ H+).:8 (2)I: !here there is a contract for the
sale of goods to be delivered by stated installments which are to be separately paid for$ it is the duty
of the buyer to accept the installment delivery and pay for it.
D.$6 $% $*C ,4"7'6 H+).;;I: &t is the duty of the buyer to take delivery of the goods within a
reasonable time after the tender of delivery. 1e becomes liable to the seller for any loss occasioned
by his neglect or refusal to take delivery.
D.$6 $% "#$"(*$ $& +44' -&# 'G)$ $& 5%%,+ H+).;:I: @nless otherwise agreed$ it is the duty
of the buyer to inform the seller in case he refuses to accept the goods.
R RIGHTS IGHTS OF OF SELLER SELLER
R"5&$ $% )4*"( )%(/#+*$"%# H+).;;I:
&t is the right of the seller to claim compensation for the loss occasioned by the buyer+s
neglect or refusal to take delivery and also reasonable charges for the care and custody of the goods.
R"5&$ $% +. !%' /'") H+).<< (1)I:
@nder a contract of sale the property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to the terms of the contract$ the seller
may sue him for the price of the goods.
R"5&$ $% +. !%' /'") *5*"#+$ )%#$'*)$ H+).<< (2)I:
@nder a contract of sale the price is payable on a certain day irrespective of delivery and the
buyer wrongfully neglects or refuses to pay such price$ the seller may sue him for the price although
the property in the goods has not passed and the goods have not been appropriated to the contract.
R"5&$ $% +. !%' ,*(*5+ H+).<=I:
!here the buyer wrongfully neglects or refuses to accept and pay for the goods$ the seller
may sue him for damages for nonacceptance.
R"5&$ $% $'*$ $& )%#$'*)$ *+ +.0+"+$"#5 H+).=?I: !here the buyer repudiates the contract before
the date of delivery of goods$ seller may either treat the contract as subsisting and wait till the date of
delivery$ or he may treat the contract as repudiated and sue for damages for the breach.
D DUTIES UTIES OF OF S SELLER ELLER
D.$6 $% ,4"7' $& 5%%,+ H+).:1I:
&t is the duty of the seller to deliver the buyer goods in accordance with the terms of the
contract.
D.$6 $% ,4"7' $& 5%%,+ *$ $& *5', /4*) H+).:= (1)I:
&t is the duty of the seller to send the goods to the buyer within the fi*ed time or within
reasonable time when no time for spending the goods is fi*ed.
D.$6 $% +#, $& 5%%,+ *$ '*+%#*04 &%.' H+).:= (;)I:
Tender of delivery may be treated as ineffectual unless made at a reasonable hour. !hat is
reasonable hour is a Cuestion of fact.
D.$6 $% 5"7 #%$") $% $& 0.6' H+).:> (:)I:
#ub"ect to the agreement$ it is the duty of the seller to give notice to the buyer to get the
goods insured while the goods are sent by a route involving sea transit. &f he fails to do so$ goods
shall be deemed to be seller+s risk during such sea transit.
W&*$ *' $& '"5&$+ %! *# .#/*", +44'?
R RIGHTS IGHTS OF OF AN AN U UNPAID NPAID S SELLER ELLER
The rights of an unpaid seller can broadly be classified under the following two categories:
&. Bights against the goods
&&. Bights against the buyer personally
I. I. R RIGHTS IGHTS AGAINST AGAINST THE THE GOODS GOODS
W&' $& /'%/'$6 "# $& 5%%,+ &*+ /*++, $% $& 0.6':
R"5&$ %! L"# H+).;= (1) (*) *#, ;7 $% ;>I:
The right of lien means the right to retain the possession of the goods until the full price received.
The unpaid seller of goods who is in possession of them is entitled to retain possession of them until
payment or tender of the price in the following cases.
!here the goods have been sold without any stipulation to creditH
!here the goods have been sold on credit$ but the term of credit has e*piredH and
!here the buyer becomes insolvent.
R"5&$ %! S$%//*5 %! G%%,+ "# T'*#+"$ H+).;= (1) (0) *#, <? $% <2I:
The right of stoppage in transit means the right of stopping the goods while they are in transit$ to
regain possession and to retain them till the full price is paid.
R"5&$ %! R+*4 H+).;= (1) ()) *#, <;I:
'n unpaid seller can resell the goods under the following three circumstances:
!here the goods are of a perishable nature.
!here the seller e*pressly reserves a right of resale if the buyer commits a default in making the payment.
II. II. R RIGHTS IGHTS AGAINST AGAINST THE THE BU1ER BU1ER PERSONALL1 PERSONALL1
#uit for price ,sec.::-
#uit for damages for non K acceptance ,sec.:;-
#uit for repudiation of the contract before due date ,sec.;A-
#uit for interest ,;3-
WHAT ARE THE REMEDIES FOR BREACH OF CONTRACT OF SALE?
R(,"+ !%' B'*)& %! C%#$'*)$ %! S*4:
The sale of 7oods act gives the following remedies to a seller and a buyer for breach of a contract of sale.
R(,"+ *7*"4*04 $% +44':
#uit for price ,sec.::-
#uit for damages for non K acceptance ,sec.:;-
#uit for repudiation of the contract before due date ,sec.;A-
#uit for interest ,;3-
R(,"+ *7*"4*04 $% 0.6':
#uit for damages for nondelivery of goods ,sec.:5-
#uit for damages for repudiation of the contract ,sce.;A-
#uit for specific performance ,sec.:4-
#uit for breach of warranty ,sec.:8-
#uit for interest ,sce.;3-
W&*$ "+ *# AA.)$"%# S*4B?
'uction sale means a public sale where intending buyer assemble at one place and offer the price at
which they are ready to buy the goods. The offer of the price is known as )bid+ and the person making the
bid is known as the )bidder+. The owner of the goods may himself sell them by auction or appoint a person
to sell the goods by auction on his behalf. The person so appointed is known as )auctioneer+.
R.4+ '5*',"#5 +*4 06 *.)$"%# H+).<;I
The various rules regarding sale by auction are given as follows:
' sale is complete when the auctioneer announces its completion by the fall of the customary
manner. Lsce.;= ,6-M
@ntil the announcement of completion of sale is made$ any bidder may withdraw his bid Lsec. ;=,6-M
' right to bid may be reserved e*pressly by or on behalf of the seller and$ where such right is
e*pressly so reserved$ the seller or anyone person on his behalf may bid at the auction Lsec ;=,9-M
' sale may be notified to be sub"ect to a reserve or upset price Lsection ;=,:-M. The term )reserve+ or
)upset+ price may be defined as the minimum price below which the auctioneer will not sell the
goods put up for auction sale.
&f a seller makes use of pretended bidding to raise the price$ the sale is voidable at the option of the
buyer Lsection ;=,;-M.
AGENC1
W&% )*# 0 *# A5#$?
#ection 34= lays down that Nas between the principal and third person any person may become an
agent$ but no person who is not of the age of ma"ority and of sound mind can become an agent so as to be
responsible to his principalN.
Thus$ a minor or a lunatic or a drunken person may be an agent. %ut if a person who is not competent
to contract is appointed as an agent$ the principal is liable to the third party for the acts of the agent.
E4(#$ %! C%#+",'*$"%#:
#ection 34: provides that Nno consideration is necessary to create an agencyN. This is due to the fact
that the principal has consented to be represented by the agent is a sufficient OdetrimentO and consideration to
support the promise by the agent to act in that capacity. !hen F employs G as his agent$ much of the affairs
of F are placed in the hands of G. F suffers a detriment$ and so no further consideration in the form of
remuneration is to be present. &n other words$ a gratuitous contract of agency is fully valid$ and an agent
under it will be as much bound by his contract as a paid agent.
A5#$ *#, S'7*#$
The difference between a servant and an agent$ is that a servant is completely under the control of the
master$ and he has no discretion. %ut an agent is responsible only for the final results of the transaction and
is not controlled by the principal. &n other words$ a principal has the right to direct the agent what work is to
be done$ while a master has the further right to direct the servant how the work is to be done.
'n agent as such is not a servant$ but a servant is generally his masterOs implied agent$ the e*tent of
agency banking upon the obligation and position of the servant. This is why an agent is known as a Osuperior
servantO.
A5#$ *#, I#,/#,#$ C%#$'*)$%'
The difference between an agent and an independent contractor is that an agent is bound to e*ercise
his authority according to the lawful instructions and control of the principal$ while an independent
contractor merely undertakes to carry out certain specified work without the employerOs control or
interference.
CREATION OF AGENC1
'n agency may be constituted:
,3- by e*press agreement$ or ,6- by implication of law$ or ,9- by ratification$ or ,=- by operation of law.
A5#)6 06 E8/'++ A5'(#$:
'n e*press agency is created when a principal appoints an agent either by word of mouth or by an
'greement in writing L#ec. 345M. The usual mode of a written contract of agency is the power of an attorney
on a stamped paper.
A5#)6 06 I(/4")*$"%#:
'gency by implication of law may arise by conduct$ situation of parties$ or necessity of the case
L#ec. 345M. &mplied agency consists of: ,a- 'gency by estoppelH ,b- 'gency by holding outH ,c- 'gency by
necessity.
,a- Agenc% !% Estoppel: &n the words of Lord 1alsbury$ N.stoppel arises when you are precluded from
denying the truth of anything which you have represented as a fact$ although it is not a factN. Thus$ where '
allows third parties to believe that % is acting as his authorised agent$ he will be estopped from denying the
agency if such third parties relying on it make a contract with %$ even when % has no authority at all.
#ection 695 of the 0ontract 'ct lays down$ N!hen an agent has$ without authority$ done acts or
incurred obligations to third persons on behalf of his principal$ the principal is bound by such acts or
obligations$ if he has by his words or conduct induced such third persons to believe that such acts and
obligations were within the scope of the agents authorityN.
,b- Agenc% !% *olding O$t: 'gency by holding out is also a part of the law of estoppel and resembles it. &n
this case$ a prior positive or affirmative act on the part of the principal is necessary to establish an agency
subseCuently. The common e*amples of this type of agency are a servant$ wife$ etc.
E8*(/4: ' allows his servant$ F to habitually buy articles for him on credit from % and pays for them. Dn
one occasion$ ' pays F cash to buy the articles. F misappropriates the money and buys articles on credit
from %. % can recover the price from ' as he had held out his servant F as his agent on a prior occasion.
,c- Agenc% !% Necessit% =4ees. 344 and 348M: 7enerally an agent has to conduct the principalOs business in
accordance with the latterOs instructions. 1owever$ in certain cases a person who has been entrusted with
anotherOs property$ may have to incur unauthorized e*penses to protect or preserve it. #uch an agency is
known as an agency by necessity. This doctrine applies only when there is a real emergency$ and when the
agent is not in a position to get instructions from the principal and acts bona fide in the best interests of the
principal.
E8*(/4: ' deserted wife forced to live apart from the husband can pledge her husbandOs credit to buy all
necessaries of life in accordance with the position of the husband even against his wishes.
A5#)6 06 R*$"!")*$"%# HS+. 1>=F2??I:
#ection 38; provides that Nwhere acts done by one person on behalf of another but without his
knowledge or authority$ he may elect to ratify or to disown such acts. &f he ratifies them$ the same effect will
follow as if they had been carried out by his knowledge or authorityN. This kind of agency is called e* post
facto agency or agency arising after the event.
#uch an agency will be taken to have come into e*istence from the time the agent first acted$ and not
from the date of the principalOs ratification. &t is said that. the ratification is tantamount to prior authority or
ratification relates back to the date of the act ratified.
A5#)6 06 O/'*$"%# %! L*-:
!hen a company is first established$ the promoters are its agents. ' partner is the agent of the firm
for the purpose of the business of the firm. &n all these cases$ agency is implied by the operation of law.
DIFFERENT 3INDSKT1PES OF MERCANTILE AGENTS
P Factors
P %rokers
P 'uctioneers
P %ankers
P <artners
P 2el credere agents
1. F*)$%'+: ' factor is a mercantile agent to whom goods or bills of lading or other documents of title are
consigned for sale by a merchant. 1e is entrusted with the possession of goods. 1e is the apparent owner of
the goods in his custody and can sell them in his own name. 1e has an insurable interest in the goods. 1e
has also a lien in respect of any claim he may have$ arising out of the agency.
2. B'%C'+: ' broker is a mercantile agent who is employed to buy or sell articles on behalf of another. 1e
usually brings contractual relations between the principal and the third parties. The acts are in the name of
the principal. 1e has no lien over the goods as he is not in possession of them.
:. A.)$"%#'+: 'n auctioneer is an agent appointed by a seller to sell his goods by auction$ i.e.$ to the
highest bidder in a public competition. 1e acts for a reward generally in the form of commission. 1e has no
authority to warrant his principalOs title to the goods. 1e is an agent for the seller$ but after the goods have
been knocked down he is an agent for the buyer.
;. B*#C'+: The relationship between a banker and his customer is that of debtor and creditor. &n addition$ a
banker is an agent of his customer when he purchases or disposes of securities$ collects cheCues$ dividends$
bills or promissory notes on behalf of his customer.
<. P*'$#'+: &n a partnership$ every partner is an agent of the firm and his copartners for the purposes of the
business of the firm.
=. D4 C',' A5#$+: ' del credere agent is one who in consideration of e*tra remuneration called the del
credere commission$ guarantees to his principal that third persons with whom he enters into contract shall
perform their obligation. &n the event of a third party failing to pay$the del credere agent is bound to pay his
principal the sum owed by the third party.
AGENTS AUTHORIT1
The authority of an agent may be brought under three heads. They are: ,a- actual or real authority ,b-
ostensible authority ,c- authority in an emergency.
(*) A)$.*4 %' R*4 A.$&%'"$6: 'n actual authority of an agent maybe e*press or implied L#ec. 34;M. 'n
authority is said to be e*press when it is given by words$ spoken or written. 'n authority is said to be
implied when it is to be inferred from the circumstances of the case.
(0) O+$#+"04 A.$&%'"$6: #ection 344 provides that Nan agent having an authority to do an act has authority
to do everything lawful which is necessary for the purpose or usually done in the course of conducting
businessN. #uch an authority is called Dstensible authority.
()) A.$&%'"$6 "# *# E('5#)6: #ection 348 states that an agent has authority$ in an emergency to do all
such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary
prudence$ in his own case$ under similar circumstances.
DELEGATION OF AUTHORIT1
The contract of agency is fiduciary in nature. &t is based on a confidence$ reposed by the principal in
the agent. The rule of law$ therefore$ is that an agent cannot delegate his powers or duties to another without
the consent of the principal. This principle is e*pressed by the Latin ma*im Ndelegatus non potest delegateN
a delegate cannot further delegate. 'n agent being himself a delegate of his principal$ cannot pass on that
delegated authority to someone else. The basic reason behind this doctrine is that the authority given to an
agent is personal and cannot be e*ercised through another.
#ection 38A of the 0ontract 'ct lays down that Nan agent cannot lawfully appoint a subagent to do
acts which he has undertaken to do personallyN. To this rule there are certain e*ceptions:
!here the custom of the trade permits the appointment of a subagent.
!here the nature of work is such that further delegation is essential. 'part from these$ there are some
more e*ceptions recognised by the .nglish Law and which are accepted in &ndia. They are:
!here the act to be d.o..ne is purely ministerial and not involving any skill or confidenceH
TERMINATION OF AGENC1
' contract of agency may come to an end by the operation of law or by the act of the parties.
<rovisions on this point are dealt with in #ection 6A3 of the 0ontract 'ct$ but it is incomplete. They are:
3. %y agreement between the principal and the agent.
6. %y the performance of the contract of agency.
9. %y the death of the principal or the agent.
=. %y the insanity of either the principal or the agent.
:. %y the e*piration of the period fi*ed for the contract of agency.
;. %y the renunciation of his authority by the agent.
5. %y the revocation of authority by the principal.
4. %y the destruction of the sub"ectmatter L#ec. :;M.
WHEN AGENC1 IS IRRE2OCABLE?
Bevocation of agency is impossible in the following circumstances.
+", Agenc% 2o$pled ith Interest:
'n agency is said to be coupled with interest where authority is given for securing some advantage
to the agent or effecting any security or protecting any interest of the agent. .ven the death or insanity of the
principal does not terminate the authority in this case.
+), Ghere the agent has inc$rred personal lia!ilit%.
,9- !here the agent has partly e*ercised the authority$ it is irrevocable$ in particular with regard to the
obligations which arise from the acts already done L#ec. 6A=M.
WHEN TERMINATION OF AGENC1 TA3ES EFFECT
The termination of agency is complete$ as regards the agent$ when it comes to the knowledge of the
agent. 's regards the third persons$ it takes effect when it becomes known to them L#ec. 6A4M.
&f an agent whose authority has been terminated$ knowingly enters into a contract with a third person
who deals with him bona fide the agent will bind the principalby his act.
The termination of agentOs authority$ terminates the authority of the sub agent too L#ec. 63A-.
DUTIES OF AN AGENT
3. 3$t% to 7ollo Instr$ctions
'n agent should act within the e*tent of authority conferred upon him and follow strictly the
instructions of the principal.
). 3$t% to 7ollo 2$stoms in the A!sence of Instr$ctions
&n the absence of e*press instructions$ an agent must act as per the custom prevailing in the same
kind of business at the place where he conducts such business.
(. 3$t% to Exercise 4#ill and 3iligence
'n agent is bound to e*ercise reasonable skill and diligence in the business of agency.
6. 3$t% to Render Acco$nts
'n agent is bound to render proper accounts to his principal on demand.
5. 3$t% to 2omm$nicate
&f there is difficulty$ the agent must communicate with the principal and get his instructions.
H. 3$t% not to 3eal ith his On Acco$nt
'n agent must not deal on his own account without the consent of the principal. &f the agent has been
acting privately in the business of agency$ the principal has the right$ on discovering this fact$ either to claim
the profit in case the particular transaction has been profitable or to disown the losses in case it has ended in
loss.
I. 3$t% to Ca% over All /one%
'n agent must pay to his principal all sums received on his account.
9. 3$t% not to ma#e secret profit.
8. 2uty to protect and preserve the interests of the principal in the case of his death or insolvency L#ec. 6A8M.
"0. 3$t% not to set $p an adverse title.
33. 3$t% not to delegate a$thorit%. This is sub"ect to certain e*ceptions as per #ec. 38A.
RIGHTS OF THE AGENT
#ections 635 to 669 deal with the rights of the agent. They are:
3. Right of Retainer
The agent has a right to retain his principalOs money until his claims in conducting the business of
agency are paid.
). Right to Rem$neration
!here the services rendered by the agent are not gratuitous$ he is entitled to receive the agreed
remuneration or if nothing has !een agreed, a reasonable remuneration. <ayment for the performance of any
work is not due until the completion of such a work unless otherwise provided L#ec.638M. 'n agent who is
guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of
the business which he has mis conducted L#ec. 66AM.
(. Right of ;ien
'n agent is entitled to retain goods until the amount due to him has !een paid or accounted for.
6. Right of Indemnification
's the agent represents the principal$ the agent has a right to be indemnified by the principal against
all charges$ e*penses and liabilities properly incurred him in the by business of agency.
5. Right to 2ompensation
'n agent has a right to claim compensation for the in"ury caused to him by the principalOs neglect or
want of skill.
RIGHTS L DUTIES OF PRINCIPAL
The rights of the agent will be the duties of the principal and the duties of the agent will be the rights
of the principal.
D.$"+ %! P'"#)"/*4
Betainer
Bemuneration
Lien
&ndemnification
0ompensation
R"5&$+ %! P'"#)"/*4
&nstructions
0ustoms in the 'bsence of &nstructions
.*ercise #kill and 2iligence
Bender 'ccounts
0ommunicate
2eal with his Dwn 'ccount
<ay over 'll /oney
/ake secret profit.
#et up an adverse title.
2elegate authority
LIABILITIES OF AN AGENT TO THIRD PARTIES
3. !here the contracts e*pressly provideH
6. !here according to trade usage an agent is personally liable in that kind of businessH
9. !here the agent signs a negotiable instrument in his own name without making it clear that he is
signing it only as an agentH
=. !here an agent acts for a foreign principalH
:. !here an agent acts for a principal who cannot be sued ,e.g.$ minor-H
;. !here an agency is coupled with interestH
5. !hen there is breach of warranty of authority. !here an agent enters into a contract purporting to do
so on behalf of the principal$ if it is found that the agent has no authority to do so and the principal
refuses to ratify the act$ the party has a right to proceed against the agent and claim damages
4. !here an agent receives money by mistake or by fraud from the third partiesH
8. !here an agent acts for an undisclosed principalH
3A. 'n agent is also liable to his torts committed in the course of agency.
LIABILITIES OF PRINCIPAL TO THIRD PARTIES
3. The principal must be liable to third parties by all acts of the agent within the extent of actual$ ostensible
or emergency authority.
6. The principal must be liable to misrepresentation or fraud of the agent committed in the course of
employment in matters falling within the authority of the agent even though it is for the agentOs benefit.
9. The principal is liable to any notice given or information obtained by the agent in the course of business
as per the principle of constructive notice.
=. &n the case of undisclosed principal third parties can$ on discovering the name of the undisclosed
principal$ proceed against him for the contract entered into by the agent.
:. The principal is liable where he has by words or conduct induced the third party to believe that the act of
agent was within the scope of his authority. The liability of principal in this case is not based on any real
authority$ but is by estoppel.
;. !here an agent e*ceeds his authority and it is separable$ the principal is liable to that part which is within
his authority.
!here an agent e*ceeds his authority and it is inseparable from that which is within his authority$ the
principal is not liable. 1e is in such a case entitled to repudiate the whole transaction.
THE NEGOTIABLE INSTRUMENTS ACT, 1881
WHAT IS MEANT B1 ANEGOTIATIONB?
M*#"#5 %! N5%$"*$"%#: 'ccording to #ection 3= of the (egotiable &nstrument 'ct$ 3443 when a
promissorynote$ bill of e*change or cheCue is transferred to any person so as to constitute that person the
holder thereof$ the instrument is said to be negotiated. ' negotiable instrument may be transferred in either
of two ways$ viz.
,i- by negotiation under this 'ct ,#ection 3=$ =;$ =5$ =4-. ' negotiable instrument may be negotiated either
by delivery$ when it is payable to bearer or by endorsement and delivery when it is payable to orderH or
,ii- by assignment of the instrument: !hen a person transfer his right to receive the payment of a debt$
)assignment of the debt+ lakes place. Thus where the holder of an instrument transfers it to another so as to
confer a right on the transferee to receive the payment of the instrument$ transfer by assignment takes place.
,The (egotiable &nstruments 'ct does not deal with transfer of negotiable instruments by assignment-.
EJPLAIN THE ESSENTIAL ELEMENTS OF A PROMISSOR1 NOTE.
E++#$"*4 E4(#$+ %! * P'%("++%'6 N%$:
3. &t must be in writing.
6. <romise to pay: The instrument must contain an e*press promise to pay.
9. 2efinite and unconditional: The promise to pay must be definite and unconditional. &f it is uncertain or
conditional$ the instrument is invalid.
=. #igned by the maker: The instrument must be signed by the maker$ otherwise it is incomplete and of no
effect. .ven if it is written by the maker himself and his name appears in the body of the instrument$ his
signature must be there. 'n agent of a trading firm can sign a promissory note on behalf of the firm
,/eenakshi v. 0hettiar-.
:. 0ertain parties: The instrument must point out with certainty as to who the maker is and who the payee is.
!hen the maker and the payee cannot be identified with certainty from the instrument itself$ the instrument$
even if it contains an unconditional promise to pay$ is not a promissory note.
;. 0ertain sum of money: The sum payable must be certain and must not be capable of contingent additions
or subtractions$
5. <romise to pay money only: The payment must be in the legal tender money of &ndia.
M*#"#5 %! MN5%$"*04 I#+$'.(#$M
#imply stated$ a negotiable instrument is one which entitles a person to a sum of money and which
can be transferred from one person to another either by mere delivery$ or by endorsement and delivery.
'ccording to #ection 39 of the 'ct$ a negotiable instrument means$ Ja promissor% note, !ill of
exchange or che1$e pa%a!le either to order or !earer, hether the ords JorderJ or J!earerJappear on the
instr$ment or not. J
Thus$ the (egotiable &nstruments 'ct has mentioned only three types of instruments$ namely$ a
promissory note$ bill of e*change and cheCue. 1owever$ it does not e*clude the other types of instruments
which satisfy the characteristics of negotiability$ as detailed below:
,a- &t must be transferable by delivery or by endorsement and delivery.
,b- The property in it must pass to a !onafide transferee for value$ free from any defect in the title of the
transferor.
,c- The holder must be able to sue upon it in his own name
'ccordingly$ #hare !arrants$ Bailway %onds$ <ort Trust BeceiptsH 2ebentures$ Bailway Beceipts$
etc.$ are considered eCuivalent to negotiable instruments either by custom or by the provisions of enactments
like the 0ompanies 'ct.
ESSENTIAL CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
,i- 7ree transfera!ilit%:
' negotiable instrument can be freely transferred from one person to another by endorsement and
delivery in case of Norder instrumentsN$ or by mere delivery in the case of Nbearer instrumentsN. (o
formalities need to be complied with for making such transfer. The transferee not only gets the right of
possession but also the right to property contained therein. /oreover$ the negotiable instrument can be
transferred ad infinit$m.
,ii- *olderKs title free from defects:
' holder &n due course gets a good title not withstanding any defect in the title of the previous
holder. The term Nholder in due courseN means a holder who has acCuired a negotiable instrument for value$
in good faith and before its maturity. &t is this feature which distinguishes negotiability from transferability.
,iii- Recover%:
The holder in due course is entitled to sue on the instrument in his own name. 1e need not give any
notice of transfer to the person liable for payment on the instrument. There is no need for the transferee to
implead all the parties to the instrument.
,iv- Cres$mptions of 4ections 334 and 338:
The following legal presumptions are always applicable to a negotiable instrument unless the
contrary is proved:
,a- 3ate: &t is considered to have been made or drawn on the date which appears on it. &t does not
matter whether the instrument is antedated$ postdated$ drawn on a public holiday$ etc.
,b- &ime of acceptance: &t is deemed to be accepted within a reasonable time after being made$ and
before maturity.
,c- &ime of transfer: .very transfer of a negotiable instrument is presumed to have been made before
its maturity.
,d- Order of endorsements: .ndorsements appearing upon a negotiable instrument are presumed to
have been made in the order in which they appear.
,e- 4tamp: !here an instrument has been lost$ it is presumed to have been duly stamped
,f- *older in d$e co$rse: .very holder of a negotiable instrument is presumed to be a holder in due
course.
,g- 2onsideration: .very negotiable instrument is presumed to be drawn$ accepted$ endorsed$ made$
or transferred for consideration.
ENDORSEMENT: 'ccording be #ection 3:$ endorsement is Kthe signing !% the ma#er or holder of his
name on a negotia!le instr$ment for the p$rpose of its negotiation to another person: @sually$ the signing
for the purpose of endorsement is done on the back of the instrument. 1owever$ it may also be done on the
face of the instrument or even on a slip of paper called an NallongeN$ which is then attached to the negotiable
instrument. The person signing the instrument is called an OendorserO and the person to whom the instrument
is transferred is called theO endorseeO. The endorsement is completed by delivering the instrument to the
endorsee.
WHO CAN ENDORSE?
". Ca%ee: 1e is the rightful person to make the first endorsement
). Endorsee: any person$ who has become the holder of the negotiable instrument$ may endorse the same.
0onseCuently$ a person who steals or finds a lost instrument cannot endorse$ as he is not a holder.
(. /a#er or draer: Drdinarily$ the maker of a pronote or the drawer of a bill cannot endorse. %ut if anyone
of them has become the holder in his own right$ he can endorse.
3"#,+ %! E#,%'+(#$:
'. ,lan3 or %eneral Endor#ement 4Section '56'789
&f the endorser signs his name only$ the endorsement is said to be in blank. 1e does not mention the
name of the endorsee. #ection := provides that such an endorsement makes an order instrument payable to
the bearer$ and the property therein can be transferred by mere delivery.
EJAMPLE: ' bill of e*change is payable to F. F signs only his name at the back of bill. This is a blank
endorsement.
:. Special or f"ll Endor#ement 4Section '56'789
&n it$ the endorser besides affi*ing his own signature adds the name of the person to whom$ or to
whose order the amount of the instrument shall be paid. ' blank endorsement can easily be convened into
a special endorsement by any holder of the negotiable instrument.
EJAMPLE: % holds a bill. Dn its back$ he writes the words O<ay to ' or orderO and signs at its foot &t is an
instance of full endorsement.
C%#7'+"%# %! B4*#C #,%'+(#$ "#$% S/)"*4 E#,%'+(#$
The holder can$ convert blank endorsement into special endorsement by writing above the endorserOs
signature a direction to pay to any other person as endorsee and the holder thereby will not incur the
responsibility of an endorser L#ection =8M. The instrument will then become Npayable to orderN in place of
Npayable to bearerN.
EJAMPLE: ' endorses a bill of e*change in blank by signing his name at its back and delivers it to %.
'bove 'Os signature$ % writes the words$ O<ay to 0 or orderO. &t converts the blank endorsement into
Oendorsement in fullO. % will not be liable on the instrument as he has not signed it.
E!!)$ %! !.44 #,%'+(#$ !%44%-"#5 * 04*#C #,%'+(#$: !here a blank endorsement is followed by
full endorsement$ it still remains payable to bearer and negotiable by mere delivery as against all parties
prior to endorsement in full. 1owever$ the endorser in full is liable only to the holder who gets the title
directly through this person and also to the person deriving his title through such endorsee in full.
EJAMPLE: ' is the payee and holder of a bill of e*change. 1e endorses it in blank and delivers it to %. %
also endorses in blank and delivers it to 0. 0 endorses it in full to A or order. o delivers the bill to . without
any endorsement. &n this case$ . can sue the drawer$ acceptor and ' or %. %ut he cannot recover it from 0 or
A because 0 is the endorser in full and A is the endorsee from 0. =4mith vs. 2lar#e ,385=- <eake 68:M
). Re#tricti+e Endor#ement9 &t is an endorsement which prohibits the endorsee from negotiating the
instrument. &t merely entitles the holder of the instrument to receive the amount on the instrument for a
specific purpose.
;. $artial Endor#ement9 !hen an endorsement purports to transfer to the endorsee only a part of the
amount of the instrument$ is said to be a partial endorsement. #uch endorsement$ however$ is not valid as it
may lead to plurality of action and may also interfere with its free circulation.
EJAMPLE: F holds a bill for Bs 3AAA. 1e endorses it as O<ay to % or order Bs :AAO. This is a partial
endorsement and hence invalid.
#ometimes$ part payment of the instrument may have already been made. &n such a case$ a note to that effect
must be made on the instrument. &t may then be negotiated for the balance amount. L#ec. :;M
<. Conditional Endor#ement9 'ccording to #ection 46$ where the endorser makes his liability on the
instrument conditional on the happening of a particular event$ it is called conditional endorsement though
such event may never happen. &n a way$ it limits or negatives the liability of the endorser.
E!!)$ %! E#,%'+(#$ HS). :?I
'n l3nconditional endorsement completed by delivery of the instrument shall have the following effects:
,i- The ownership of the instrument is transferred from the endorser to the endorsee.
,ii- The endorsee gets the right of further negotiation.
,iii- The endorsee can bring an action for recovery against all the parties whose names appear on the
instrument.
LIABILIT1 OF PARTIES
'. Liability of legal repre#entati+e 4Sec. 2>I: ' legal representative of a deceased person$ who signs on a
negotiable instrument$ shall be personally liable thereon unless he had e*pressly limited his liability to the
e*tent of assets received by him. 1e can limit his liability by signing with the words Nwithout recourse to
meN or Nwithout personally liabilityN.
:. Liability of dra!er of a bill of e=c>ange or of a c>e?"e 4Sec. )*89 The drawer of a bill of e*change or
cheCue in the case of dishonour by drawee or acceptor thereof$ shall be liable to compensate the holder
provided due notice of dishonour has been given to or received by drawer. (o notice of dishonour is
reCuired on the case of an accommodation bill. L#ec. 84M
Dn dishonour of a bill of e*change by nonacceptance followed by a notice of dishonour to the
drawer$ the drawer becomes immediately liable. The drawer cannot reCuire the holder to wait till the date of
maturity to see whether it will be dishonoured by nonpayment. =Ghitehead vs. Gal#er ,34=6- 8/ Q !
:A;M. %ut the liability of drawer is sub"ect to contract to the contrary.
). Liability of dra!ee of c>e?"e 4Sec. :1I: The drawee of the cheCue is always a banker. &t is the duty of the
banker to pay the cheCue provided the following conditions are satisfied:
,a- there are sufficient funds of the drawer in the hands of the banker$ and
,b- the funds are properly applicable to the payment.
&f the banker refuses payment without sufficient cause$ it will be liable to compensate the drawer for any
loss caused by such refusal. The bank is not liable to the holder of the cheCue because of absence of privity
of contract between the holder and the drawee banker.
The liability of the banker is not limited to monetary loss only. Bather$ it e*tends to loss of reputation$
too. The principle of compensation is that lesser the value of the cheCue dishonoured$ the greater shall be the
damage to the credit of the drawer.
;. Liability of ma3er of note and acceptor of bill 4Sec. ):89 The maker of a pronote and acceptor of a bill
are primarily responsible for the payment due on the instrument. Their liability is absolute and
unconditional. (o n8tice of dishonour is necessary to the maker of note and the acceptor of a bill. The maker
of a note cannot make his liability conditional. 'cceptor may$ however$ give a Cualified acceptance and his
liability is limited to that e*tent.O
<. Liability of endor#er 4Sec. )<89 'n endorser is liable to every subseCuent holder if the following
conditions are satisfied:
,i- 1e must have endorsed and delivered the negotiable instrument
,ii- 1e must not have e*cluded his liability or made it conditional.
,iii- The drawee or acceptor who were primarily liable must have dishonoured the negotiable instrument.
,iv- (otice of dishonour must have been given to or received by him.
,v- There should not be a contract to the contrary.
,vi- The holder shoOlld not have destroyed or impaired the endorserOs remedy without the consent of the
endorser against a prior party otherwise he will be discharged from liability to the holder to the same e*tent
as if the instrument has been paid at maturity ,#ec. =A-.
EJAMPLE: F is the holder of a bill which is payable to OG or orderO. The bill contains three endorsements.
First endorsement: GH #econd endorsement: RH Third endorsement /. F sues / and strikes off the rest of the
endorsements without /Os consent. F cannot recover anything from /.
5. Liability of prior partie# to >older in d"e co"r#e 4Sec. )589 .very prior party to a negotiable instrument is
liable to a holder in due course until the instrument is duly satisfied. &t may be noted that if the holder of an
accepted bill of e*change agrees to release him from liability$ then all the other parties shall be discharged
from liability to the holder. 1owever$ in such cases$ the holder may e*pressly reserve his right against other
parties. L#ection 98M
@. Liability inter #e 4See#.:7 and )A89 The maker of a note or a cheCue$ or the drawer of a bill before
acceptance$ and the acceptor after acceptance$ are liable as principal debtors. The other parties to the
instrument are liable as sureties. Their liability arises only on the failure of the principal debtors.
's regards the liabilities of sureties inter se, each party is liable as principal debtor to each
subseCuent party L#ec. 94M.
EJAMPLE: ' draws a bill payable to his own order on % who accepts. ' endorses the bill to 0$ 0 to 2 and
2 to .. %etween . and %$ % is the principal debtor and 0 and 2 are sureties for %. 's between . and '$ ' is
the principal debtor and 0 and 2 are sureties. 's between . and 0$ 0 is the principal debtor and 2 is his
surety.
ENFORCEMENT OF SECONDAR1 LIABILIT1
HOLDER IN DUE COURSE
&t means Jan% person ho for consideration !ecame the possessor of promissor% note, !ill of exchange or
che1$e if pa%a!le to !earer or the pa%ee or endorsee thereof, if pa%a!le to order !efore the amo$nt
mentioned in it !ecame pa%a!le and itho$t having s$fficient ca$se to !elieve that an% defect existed in the
title of the person from hom he derived his titleJ.
'. 0"#t be a >older of t>e in#tr"ment9 1e must be entitled to the possession of the instrument and to
recover the amount due thereof from the parties thereto. &n other words$ he must be the bearer$ payee$ or
endorsee of the instrument.
:. 0"#t be a >older for +al"able con#ideration9 The instrument must have been acCuired for a valuable and
lawful consideration. %ut consideration in the case of a negotiable instrument is different from that in the
case of a simple contract. Firstly$ consideration is presumed in case of negotiable instruments. #econdly$ it
does not matter from whom the consideration has moved. Thirdly$ part consideration is sufficient to support
a contract in a bill$ or a note. Lastly$ the party liable on the instrument cannot plead any defect in the
consideration. %ut if the instrument has been obtained by way of gift$ the person concerned cannot Cualify as
a holder in due course. %ut if the donor is a holder in due course$ the donee shall ipsofacto become a holder
in due course by virtue of #ec. :9 of the 'ct.
). 0"#t >a+e obtained t>e in#tr"ment before mat"rity9 &f a person obtains a negotiable instrument after its
maturity$ or even on the date in which it is payable$ he cannot become a holder in due course. ' demand
promissory note$ cheCue or demand bill is current as long as no demand for payment is made. &f an
instrument has been paid off but it has not been withdrawn from circulation$ there is nothing to prevent the
person to whom it has been endorsed for value from becoming a holder .in due course provided he had no
knowledge of its payment.
For instance$ in <opa;anvs. ;a#sminarsamma '&B 38=A /ad ;93$ a promissory note was left in the
hands or a payee even after its payment. The payee endorsed it to another who had no knowledge that the
payment due on the instrument has been made. 1eld that the endorsee was a holder in due course and could
recover the amount from the payee and the maker.
;. 0"#t >a+e obtained t>e in#tr"ment in good fait> and !it> rea#onable ca"tion9 &n .nglish law$ the
e*istence of good faith is considered sufficient to constitute a person a holder in due course. %ut in the
&ndian law$ it must also be shown that the instrument has been obtained without having sufficient cause to
believe that any defect e*isted in the title of the person from whom he had derived his title =$. Connappa
/oothan 4ons vs. 2atholic 4%rian Ban# '&B 3883 #0 ==3M. The circumstances leading to a suspicion may
include inter alia alteration in payeeOs endorsement$ torn bill pasted together ,i.e. a multilated negotiable
instrument-$ incomplete bill$ etc. Taking of an instrument inspite of the e*istence of various defects shall
amount to gross negligence and disentitle the person from claiming himself to be a holder in due course.
NOTICE OF DISHONOUR: #ection 89 makes it obligatory for the holder of an instrument to give a
notice of dishonour to every party whom he wants to make liable. 1owever$ no such notice need be given to
the maker of a note$ or acceptor of a bill$ or drawee of a cheCue$ as they are the principal debtors. !here two
or more persons are "ointly liable as drawers or as endorsers$ notice to anyone of them is sufficient. Dn the
death of a pers on$ notice may be given to his legal representative. &n the event of his insolvency$ the notice
may be given to the official assignee. &n any case$ it must be given within a reasonable time$ at the place of
business or residence of the party for whom it is intended.
EFFECT OF FAILURE TO GI2E NOTICE: .*cept for cases mentioned in #ection 84$ failure to give
notice of dishonour to the party entitled thereto shall discharge him of his liability.
1>en Notice of i#>ono"r i# /nnece##ary:
'ccording to #ection 84$ notice of dishonor is not necessary in the following cases:
,i- !hen it is dispensed with by the party entitled thereto.
,ii- !hen the drawer has countermanded payment.
,iii- !hen the party charged could not suffer damage for want of notice$ e.g., when the drawer did not have
any funds with the drawee at the time when the instrument was drawn.
,iv- !hen the party entitled to notice cannot$ after due search$ be found$ or the party bound to give notice is
for any other reason such a serious illness accident$ unable to give it.
,vii- !hen the party entitled to notice$ knowing the facts$ promises to pay the amount unconditionally.
SPECIAL RULES FOR CHE9UE AND DRAFTS:
' bill of e*change drawn on a specified banker payable on demand. ' cheCue is a species of a bill of
e*change but it has two additional Cualifications$ ,a- it is always drawn on a specified banker and ,b- it is
always payable on demand.
MAR3ING OF CHE9UES: /arking is Nthe writing on a cheCue by the drawee banker that it would be
honoured when duly presented for paymentN. The marking of a cheCue is made by the drawee bankers at the
instance of the drawer$ or the holder or the collecting banker. ' cheCue may be marked in a variety of ways.
&t may be marked with the words OapprovedO or OgoodO. #ometimes the drawee banker simply initials the
cheCue. #uch cheCues are also called certified cheCue. The effectofmarking is that the payee is certain to get
the payment. Therefore$ the draweebanker ,paying banker- sets side the reCuired amount for the payment of
such cheCues from the accounts of the drawer.
CROSSING OF CHE9UES: 0heCues are either open cheCues or crossed cheCues. Dpen cheCue is one
which is paid over the counter of the bank. !hen such a cheCue is in circulation$ there is every possibility
that it may be stolen or lost. The finder or thief can$ therefore$ get it encashed at the bank unless the drawer
has in the meantime stoppedthe payment. To avoid such possibilities cheCues are crossed.
' cheCue is said to be crossed when two parallel transverse lines are drawn across the face of it.
@sually$ the parallel lines are drawn on the left hand top comer of the cheCue. The payment of such a cheCue
can be obtained only by opening an account with a bank. The uniCue ob"ect of the crossing of a cheCue is to
assure that only the real holder obtains the payment of the cheCue.
T1PES OF CROSSING OF THE CHE9UE
There are two modes of crossing$ namely$ 7eneral crossing and #pecial crossing.
G#'*4 C'%++"#5: ' cheCue is said to be crossed generally where it bears across its face an addition of: ,i-
the words and company or any abbreviation thereof$ between two parallel transverse lines$ either with or
without the words Onot negotiableO$ or ,ii- two parallel transverse lines simply$ either with or without the
words Onot negotiableO.
The payment of a cheCue containing general crossing is always collected by the payee through some
banker.
S/)"*4 C'%++"#5: !hen a cheCue bears across its face an addition of the name of a banker either with or
without the words Onot negotiableO the cheCue is deemed to be crossed specially.
Transverse lines are not necessary for a special crossing. #pecial crossing is safer than general
crossing. !hen a cheCue is crossed specially$ the drawee banker will pay the amount only to the bank
specified in the crossing.
S/)"(# %! S/)"*4 C'%++"#5: The words KAle <ayeeO on a cheCue are a direction to the collecting banker
to credit the proceeds of the cheCue only to the account of the drawee or to the specified person.
The effect of the addition of the words Onot negotiableO on a crossed cheCue is that when such a
cheCue is endorsed$ the endorsee cannot get a better title than that of the endorser L#ec. 39AM. &n other words$
Onot negotiable crossingO materially reduces the negotiable value of the cheCue$ in the sense that the person
taking it shall get only the rights of the transferor$ but no better rights.
WHO CAN CROSS A CHE9UE?
' cheCue may be crossed by:
3. The drawer.
6. Theholder$ &n the case of an open cheCue$ a holder can cross it generally or specially. &f it is crossed
generally$ he can cross it specially. 1e can also add words like KALc <ayeeO Onot negotiableO in a crossed
cheCue.
9. The %anker$ &f a specially crossed cheCue is sent to a banker for collection$ he can cross it again specially.
P*6"#5 *#, C%44)$"#5 B*#C+ %! * C'%++, C&@.:
' banker who honours his customersO cheCue is known as the Opaying bankerO. ' banker who collects
payment on behalf of its customer is known as the Ocollecting bankerO.
&f a banker has paid a crossed cheCue in accordance with the direction in the cheCue$ the banker is
discharged from liability as if the cheCue has been paid to and received by the rightful owner thereof. %ut
the banker is liable to the rightful owner if the crossed cheCue is paid contrary to the direction given by the
crossing.
' banker receiving payment ,i.e.$ collecting bank- in good faith and without negligence for a
customer of a crossed cheCue is not liable to the rightful owner in case the title of the cheCue is defective. '
bank will be guilty of negligence when it ignores a direction on the cheCue like Oaccount payeeO or if it fails
to note the difference between the name of the payee as given in the cheCue and in the endorsement.
EJPLAIN THE DIFFERENT MODES OF DISCHARGE OF A NEGOTIABLE INSTRUMENT
UNDER THE NEGOTIABLE INSTRUMENTS ACT. 1881.
D"+)&*'5 %! * P*'$6 $% * N5%$"*04 I#+$'.(#$ $): 'n instrument is said to be discharged only when
the party who is ultimately liable thereon is discharged from liability. Therefore$ discharge of a party to an
instrument does not discharge ,he instrument itself. 0onseCuently$ the holder in due course may proceed
against the other panics liable for me instrument. For e*ampleH the endorser of a bill may be discharged from
his liability$ but even then acceptor may be proceeded against. Dn the other hand$ when a bill has been
discharged by payment$ all lights thereunder are e*tinguished even a holder in due course cannot claim any
amount under the bill.
D"+)&*'5 %! *# I#+$'.(#$:
1. AB6 /*6(#$ "# ,. )%.'+: The. instrument is discharged by payment made in due course by the party
who is primarily liable to pay$ or by a person who is accommodated in case the instrument was made or
accepted for his accommodation$ The payment must be made at or after the maturity to the holder of the
instrument if the maker or acceptor is to be discharged. ' payment by a party who is secondarily liable does
not discharge the
instrument.
2. B6 /*'$6 /'"(*'"46 4"*04 06 0)%("#5 &%4,' (S)$"%# >?): &f the maker of a note or the acceptor of a
bill becomes its holder at or after its maturity in his own right$ the instrument is discharged.
:. B6 8/'++ -*"7': !hen the holder of a negotiable instrument at or after its maturity absolutely and
unconditionally renounces in writing or gives up his rights against all the parties to the instrument$ the
instrument is discharged. The renunciation must be in writing unless the instrument is delivered upto the
party primarily liable.
;. B6 C*#)44*$"%#: !here an instrument is intentionally cancelled by the holder or his agent and the
cancellation is apprent thereon$ the instrument is discharged. 0ancellation may take placeH by crossing out
signatures on the instrument$ or by physical destruction of the instrument with the intention of putting an end
to the liability of the parties to the instrument.
<. B6 ,"+)&*'5 *+ * +"(/4 )%#$'*)$: ' negotiable instrument may be discharged in rile same way as any
other contract for the payment of money. This includes for e*ample$ discharge of an instrument by novation
or rescission or by e*piry of period of limitation.
#ec. 338. &nstrumentH how discharged. ' negotiable instrument is discharged:
,a- %y payment in due course by or on behalf of the principal debtorH
,b- %y payment in due course by the party accommodated$ where the instrument is made or accepted for his
accommodationH
,c- %y the intentional cancellation thereof by the holderH
,d- %y any other act which will discharge a simple contract for the payment of moneyH
,e- !hen the principal debtor becomes the holder of the instrument at or after maturity in his own right.
P*6(#$ B6 T&"', P'+%#+
P &f payment is made by a third person$ the instrument is not discharged because payment is not made by the
person principally liable
P (ot any one who desires may pay the instrument and then recover of the maker. 1e must be a person who
has in some way made himself liable for the payment of the instrument.
P .*ception: where an instrument has been protested and someone voluntarily makes payment supra protest
or for honor. 'nd if the instrument was to give money in payment$ the instrument is discharged.
S.((*'6 O! D"+)&*'5 B6 P*6(#$
3. <ayment by a person ultimately liable$ whatever his position in the paper$ is a discharge of the instrument
6. <ayment by an accommodation party isn+t a discharge of the instrument$ whatever his position thereon
and whether the indorsement be regular or anomalous
9. <ayment by the drawer or indorser is not a discharge of the instrument
P'"#)"/*4 D0$%'
P <erson ultimately bound to pay the debt
DISCHARGE B1 OPERATION OF LAW
#ec. 36A. !hen persons secondarily liable on the instrument are discharged. ' person secondarily liable on
the instrument is discharged:
,a- %y any act which discharges the instrumentH
,b- %y the intentional cancellation of his signature by the holderH
,c- %y the discharge of a prior partyH
,d- %y a valid tender or payment made by a prior partyH
,e- %y a release of the principal debtor unless the holderOs right of recourse against the party secondarily
liable is e*pressly reservedH
,f- %y any agreement binding upon the holder to e*tend the time of payment or to postpone the holderOs right
to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of
recourse against such party is e*pressly reserved.
IN WHAT WA1 DOES A APROMISSOR1 NOTEB DIFFER FROM A ABILL OF EJCHANGEB?
M*#"#5 %! /'%("++%'6 #%$ L ,"+$"#)$"%# -"$& 0"44 %! 8)&*#5:
' promissory note is an instrument in writing ,not being a bank note or a currency note- containing an
unconditional undertaking$ signed by the maker$ to pay a certain sum of money only to$ or to the order of a
certain person$ or the bearer of the instrument. ,#ection =: The (egotiable &nstruments 'ct$ 3443-.
DISTINCTION: (P'%("++%'6 #%$+ *#, 0"44 %! 8)&*#5)
3. There are two parties in a <romissory (ote K maker and the payee. &n a bill there are three parties the
drawer$ the drawee and the payee.
6. <romissory (ote contains an unconditional promise to pay. ' %ill of .*change contains an unconditional
older to pay.
9. /aker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who
directs the drawee ,his debtor- to pay.
=. /aker of a note corresponds in general to the acceptor of a bill. %ut the maker of the note cannot
undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the
originator of the bill.
:. The liability of a maker of a note is primary and absolute$ whereas the liability of the drawer of a bill is
secondary and conditional ,#ection 9A and 96-H
;. ' note cannot be made payable to the maker himself$ whereas in a bill the drawer and the payee may be
one and the same person.
5. ' note reCuires no acceptance and it is signed by the person who is liable to pay. ' bill payable after sight
or after a certain period must be accepted by the drawee before it is presented for payment.
4. ' note cannot be drawn payable to bearer. ' bill can be so drawn. %ut in no case can a note or bill be
drawn )payable to bearer on demand+.
STATE THE PRI2ILEGES OF A AHOLDER IN DUE COURSEB. (NO2EMBER 2??1)
The )holder+ of a negotiable instrument means any person entitled in his own name:
,i- to the possession thereof$ and
,ii- to receive or recover the amount due thereon from the parties threat.
!here the instrument is lost or destroyed$ its holder is the person so entitled at the lime of such loss of
destruction.
P'"7"45+ %! * H%4,' "# D. C%.'+:
3. ' person signing and delivering to another a stamped but otherwise inchoate instrument is debarred from
asserting$ as against a holder in due course$ that the instrument has not been filled in accordance with the
authority given by him$ the stamp being sufficient to cover the amount$ ,#ection 6A-.
6. &n case of a bill of e*change is drawn payable to the drawer+s order in a fictitious name and is endorsed by
the same hand as the drawer+s signature$ it is not permissible for acceptor to allege as against the holder in
due course mat such name is fictitious. ,#ection =6-.
9. &n case of a bill or note is negotiated to a holder in due course$ the other parties to the bill or note cannot
avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only
,#ection =6 and =5-.
=. The person liable in a negotiable instrument cannot set up against the holder in due course the defences
that the instrument had been lost or obtained from the former by means of an offence or fraud or for an
unlawful consideration ,#ection :4-.
:. )(o maker of a promissory note$ and no drawer of a bill or cheCue and no acceptor of a bill for the honour
of the drawer shall$ in a suit thereon by a holder in due course he permitted to deny the validity of the
instrument as originaity made or drawn. ,#ection 36A-.
(o maker of a promissory note and no acceptor of a bill payable to order shall$ in a suit thereon by a holder
in due course$ be permitted 3A deny the payee+s capacity at the date of the note or bill$ to endorse the same
,#ection 363-. &n short$ a holder in due course gets a
good title to the bill.
WHO IS A HOLDER IN DUE COURSE OF A NEGOTIABLE INSTRUMENT? IN WHAT
RESPECTS DOES HE DIFFER FROM A HOLDER? 'nswer
H%4,' I# D. C%.'+: &t means any person who$ for consideration became its possessor before the amount
mentioned in it became payable. &n the case of an instrument payable to order$ Oholder in due courseO means
any person who became the payee or endorsee of the instrument before the amount mentioned in it became
payable. &n both the cases$ he must receive the instrument without having sufficient cause to believe that any
defect e*isted in the title of the person from whom he derived his title. &n other words$ holder in due course
means a holder who takes the instrument bona fide for value before it is overdue$ and without any notice of
defects in the title of the person$ who transferred it to him. Thus a person who claims to be Oholder in due
courseO is reCuired to prove that:
3. Dn paying a valuable consideration$ he became either the possessor of the instrument if payable to orderH
6. 1e had come into the possession of the instrument before the amount due there under became actually
payableH and
9. 1e had come to possess the instrument without having sufficient cause to believe that any defect e*isted
in the title of transferorOs from whom derived his title.
D"+$"#)$"%# 0$-# H%4,' L H%4,' "# D. C%.'+:
3. ' holder may become thepossessor or payee of an instrument even without consideration$ whereas a
holder in due course is one who acCuires possession for consideration.
6. ' holder in due course as against a holder$ must become the possessor payee of the instrument before the
amount thereon become payable.
9. ' holder in due course as against a holder$ must have become the payee of the instrument in good faith
i.e.$ without having sufficient cause to believe that any detect e*isted inthe transferorOs title.
DEFINE A BILL OF EJCHANGE AS PER THE NEGOTIABLE INSTRUMENTS ACT, 1881 AND
EJPLAIN ITS SALIENT FEATURES.
S)$"%# < %! $& N5%$"*04 I#+$'.(#$+ A)$, 1881, ,!"#+ * B"44 %! E8)&*#5 *+ .#,':
' bill of e*change is an instrument in writing containing an unconditional order$ signed by$ the maker$
directing a certain person to pay a certain sum of money only to$ or to the order of a certain person or to the
bearer of the instrument.
.*ample: )'+ wrote and signed an instrument ordering )%+ to pay Bs.:AA to )0+ This is a %ill of .*change.
S*4"#$ !*$.'+ %! * B"44 %! E8)&*#5:
,3- The bill of e*change must be in writing. &t should not be oral one.
,6- The bill of e*change must contain an e*press order to pay.
,9- The order to pay must be unconditional. The order to pay must not depend upon a condition or on
happening or an uncertain event.
,=- &t must contain an order to pay in terms of money only.
,:- &t must contain an order to pay a definite ,i.e. certain- amount of money.
,;- The parties to a bill of e*change must be certain. @sually there are three parties to a bill of e*change$
money drawer$ drawee and payee. 1owever$ in some cases drawer and drawee may be same persons.
,5- &t must be signed by the drawer.
,4- &ntention to make a bill of e*change and its delivery are other additional reCuirements.
,8- &t must be delivered to the payee. Dtherwise it will be an inchoate instrument.
WHEN IS AN ALTERATION OF AN INSTRUMENT TREATED AS A MATERIAL ALTERATION
UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881? WHAT IS THE EFFECT OF SUCH AN
ALTERATION?
/aterial alteration: 'n alteration is material whichS
,i- alters the character or identity of the instrumentTor which shakes the very foundation of the instrument$ or
,ii- changes the rights and liabilities of the parties$ any of the parties to the instrumentH or
,iii- alters the operation of the instrument.
The following alterations are material and vitiate the instrument$ viz alterations of
,i- 2ate ,ii- #um payable ,iii- Time of payment
,iv- <lace of payment ,v- Bate of interest ,vi- 'ddition of place of payment
The following alterations$ though material$ are permitted by the (egotiable &nstruments 'ct$
3443 and do not invalidate the instrument:
3. Filling blanks of inchoate instruments. ,#ection 6A-
6. 0onversion of a blank indorsement into an indorsement in full ,#ection =8-
9. ?ualified acceptance ,#ection 4;-
=. 0rossing of cheCues ,#ection 36:-
E!!)$ %! (*$'"*4 *4$'*$"%#:
The effect of a material alteration of a negotiable instrument is only to discharge those who become
parties thereto prior to the alterationH %ut if an alteration is made in order to carry out the common
intention of the original parties$ it does not render the instrument void. 'ny material alteration$ if
made by an indorsee$ discharges his indorser from all liability to him in respect of the consideration
thereof. ,#ection 45-.
The alteration must be so material that it alters the character of the instrument to a great e*tent. &n
1ongkong and #hanghai %ank v. Lee #hi ,3864- '.0. 343$ it has been held that an accidental
alteration will not render the instrument void. &t is necessary to show that the alteration has been
made improperly and intentionally. The effect of making the material alteration without the consent
of the party bound is e*actly the same as that of cancelling the deed.
WHEN A BILL OF EJCHANGE MA1 BE DISHONOURED B1 ANONFACCEPTANCEB AND ANONF
PA1MENTB UNDER THE PRO2ISIONS OF NEGOTIABLE INSTRUMENTS ACT, 1881?
' bill of e*change may be dishonoured either by nonacceptance or by nonpayment:
D"+&%#%.' 06 #%#F*))/$*#) :
#ection 83 of the (egotiable &nstrument 'ct$ 3443 enumerate the following circumstances when a bill will
be considered as dishonoured by nonacceptance.
,i- when the drawee either does not accept the bill within forty eight hours or presentment or refuse to accept
it.
,ii- when one of several drawees$ not being partners$ makes default in acceptance.
,iii- when the drawee gives a Cualified acceptance.
,iv- when presentment for acceptance is e*cused and the bill remains unacceptedH
,v- when the drawee is incompetent to contract.
,vi- presentment in not necessary where the drawee after diligent search cannot be discovered$ or where the
drawee is incompetent to contract or the drawee is a fictitious person. !hen a bill has been dishononred by
nonacceptance$ it gives the holder an immediate right to have recourse against the drawer or the endorser.
#ince the dishonour by nonacceptance constitutes a material ground entitling the holder to take action
against the drawer$ he need not wait till the maturity of the bill for it to be dishonoured on presentment for
payment ,Bam Bav"i Uanhekar %. <ruthaddas 6A %om 399-
D"+&%#%.' 06 #%#F/*6(#$ (S)$"%# >2 *#, 7=)
' negotiable instrument is said to be dishonoured by nonpayment when the maker$ acceptor or drawee$ as
the case may be$ makes default in payment upon being duly reCuired to pay the same ,section 86- 'lso a
negotiable instrument is dishonoured by nonpayment when presentment for payment is e*cused and the
instrument remains unpaid after maturity ,section 5;-.
ON WHAT BASIS THE CHE9UES HAS BEEN DISHONOUR?
D"+&%#%.' %! )&@. 06 0*#C': ' banker is "ustified to dishonour a cheCue in the following
circumstances:
3. &f a cheCue is undated.
6. &f it is stale i.e. not been presented within reasonable period.
9. &f the instrument is inchoate or not free from reasonable doubt.
=. !hen cheCue presented before ostensible date.
:. !hen customer+s funds are not properly applicable.
;. !hen customers draws cheCue upon another branch of the same bank.
5. &f the banker receives notice of customer+s insolvency or lunacy.
4. &f the customer countermands the payment of cheCue.
8. &f the court has given order to the %anker not to make payments.
3A. &f the customer dies and there is notice to the %anker.
33. &f notice in respect of closure of the account is served by either party on the other.
36. &f it contains material alteration.
STATE THE CASES IN WHICH A BAN3ER IS JUSTIFIED OR BOUND TO DISHONOUR
CHE9UES.
&n the following cases in which a banker is bound or "ustified to dishonour cheCues:
,i- ' banker is "ustified to dishonour a cheCue in reference to payment of a postdated cheCue presented for
payment before its ostensible dateH
,ii- The banker is bound to pay a cheCue only when it has )sufficient funds of the drawer in his hands+
otherwise not.
,iii- The banker is bound to honour his customer+s cheCue only when the funds of the customers in his
hands are )properly applicable to the payment of such cheCues+ otherwise not.
,iv- ' banker is "ustified in refusing to honour a cheCue which is irregular$ or ambiguous$ or drawn in a form
of doubtful legalityH
,v- ' banker is "ustified in refusing payment of a cheCue drawn by a customer having credit with one branch
of the bank$ where the cheCue is drawn upon another branch in which he has no account or in which his
account is overdrawn.
,vi- !hen the customer becomes insolvent$ or an order of ad"udication has been made against him$ all his
assets vest in the official assignee$ and the banker should thereafter refuse to pay his customer+s cheCues.
,vii- The duty and authority of a banker to pay a cheCue drawn on him by his customer is determined by the
customer countermanding paymentH
,viii- (otice of death of the customer determines the authority of the banker to dishonour a cheCue$ but if the
banker pays a cheCue before he receives notice of his customer+s death$ payment is valid.
,i*- &f garnishee or other legal order from a court attaching or otherwise dealing with money in the hands of
the banker$ is served on the banker.
,*- &f it contains material alterations$ irregular signature or irregular endorsement.
,*i- &f it is stale$ that is if it has not been presented within reasonable period.
(UNIT I COMPLETED)
UNITFII
COMPAN1 ACT LAW, 1><=
I#$'%,.)$"%#:
The 0ompany Legislation in &ndia has developed on the lines almost parallel to the .nglish 0ompany
Law. The 0ompanies 'ct$ passed from time to tome in &ndia have been following the .nglish 0ompanies
'ct with certain modifications to suit &ndian conditions. The .nglish 0ompanies 'ct of 34== is trated to be
the first enactment on modern system of "oint stock enterprises. Dn that very line$ the first &ndian
0ompanies 'ct providing for the registration of "oint stock companies was passed in the year 34:A.
T& C%(/*#"+ A)$, 1><=
The &ndian 0ompanies 'ct$ 3839 was repealed the present 0ompanies 'ct of 38:; which came into
force on 3
st
'pril$ 38:;. The present 0ompanies 'ct is based largely on the recommendations of the
0ompany Law 0ommittee ,%habha 0ommittee- which submitted its report in /arch$ 38:6. This 'ct is the
largest statute ever passed by our <arliament. &t consists of ;:4 sections and 36 schedules. The 'ct was
amended several times since 38:;. The latest amendments were effected in 6AAA and 6AA3.
D!"#"$"%# %! C%(/*#6
'ccording to section 9,3- ,i- of the 0ompanies 'ct$ 38:; a company means$ ' company formed
and registered under this 'ct or e*isting company. 'n e*isting company means a company means a
company formed and registered under any of the previous 0ompanies Law.
'ccording to Lord Uustice Lindley a company is$ 'n association of many persons who contribute
money+s or money+s worth to a common stock and employed for a common purpose. The common stock so
contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it
belongs are members. The proportion of capital to which each member is entitled is his share. #hares are
always transferable although the right to transfer them is often more or less restricted.
' company$ thus may be defined as an incorporated association$ which is an artificial person$ having
an independent legal entity$ with a perpetual succession$ a common seal$ a common stock capital comprised
of transferable shares and carrying limited liability in relation to its members.
C%'/%'*$"%# %' B%,6 C%'/%'*$.
' corporation sole is a corporation and constituted in a single person who$ in right of some office or
function$ has corporate status. .*amples of corporate sole are to be perpetual offices such as the president$
7overnors$ 0rown$ /inisters$ a public trustee. ' corporation sole is not a body corporate for the purpose
of the 0ompanies 'ct 38:;. &t is still a legal person and as such can be member of a company. ' corporation
aggregate consists of a group of persons contemporaneously associated so that they form a single person$
e.g.$ a limited company$ a municipality$ or a municipal corporation.
NATURE OF COMPAN1:
B%,6 C%'/%'*$
' corporation or body corporate is a legal person created and recognised by the law. &n this sense it is an
artificial legal person as opposed to individuals who are known as natural persons. 's a person$ a company
has:
the rights to take legal action
the rights to hold property
with powers and liabilities as an individual but is distinguished from the members it may have from
time to time: 4alomon v 4alomon M 2o ;td +"98I, A2 )).
S."#5 *#, B"#5 S.,
%ecause a company is a separate legal entity it follows that it may enforce rights by suing and conversely it
may incur liabilities and be sued by others. &n fact the rule in 7oss v *ar!ottle +"96(, ) *are 6H"0 HI ER
"98 reCuires the company itself to be the person enforcing the rights. /embers generally cannot do this on
their company+s behalf although a company may sue and be sued by its own members.
P'/$.*4 S.))++"%#
' company does not die but continue to e*ist until its name is struck off or dissolved through a legal process
known as winding up or liCuidation even though without any directors$ members$ employees$ business etc.
Re Noel &edman *oldings Ct% ;td +"8HI, Nd R 5H". &ts members may come and go but this does not affect
the legal personality of the company: A!d$l AOiO Bin Atan M 9I Ors v ;adang &engo /ala% Estate 4dn Bhd
+"895, ) /;5 "H5.
C%((%# S*4
' company is reCuired to have a common seal: +)$"%# 1= (<). 't common law$ a company could enter into a
contract only if there was a contractual document bearing the impression of the company seal. @sually$ the
articles of a company provide that the seal can only be used with the authority of the board of directors:
article 8;$ Table '. #ection 9:,=- alters the common law so that a person with the reCuisite authority can
enter into a contract on behalf of a company as if it were a natural person without the company+s seal. Thus
companies can enter into oral contracts or written contracts without the common seal where the law of
contract and agency allows. #ome documents such as share certificates and instrument of transfer of land
reCuire the seal of the company.
P%-' $% O-# P'%/'$6
' company may own property distinct from the property of its members. The members only own shares in
the company but do not have a proprietary interest in the property of the company: /aca$ra v Northern
Ass$rance 2o ;td +"8)5, A2 H"8. Therefore$ a change in membership of a company will have no effect on
the ownership of the company+s assets.
L"*0"4"$6 %! M(0'+
#ection 3;,:- states that members of a company have such liability to contribute to the assets of the
company in the winding up$ as is provided by the 't. The companyOs debts are separate from the debts of its
members. For a company limited by shares the liability of members is limited to the amount$ if any$ unpaid
on the nominal value of their shares: +)$"%# 21; (1)(,).
T& C%(/*#6 *+ * S/*'*$ L5*4 E#$"$6
' company has a dual nature$ as an association of its members but also as a person separate from its
members. 's soon as necessary formalities of incorporation are satisfied$ a new entity comes into e*istence
which is separate and distinct from its directors and shareholders.
T1PESK3INDS OF COMPANIES
ON THE BASIS OF INCORPORATION:
1. C&*'$', C%(/*#"+:
The 0rown$ in the e*ercise of the royal prerogative$ has power to create a corporation by the grant of
charter to persons assenting to be incorporated. #uch companies or corporations are known as chartered
companies. .*amples of this type of companies are %ank of .ngland$ .ast &ndia 0ompany$ <eninsular and
Driental #team (avigation 0ompany ,34=A- etc.$ The powers and the nature of business of a chartered
company are defined by the charter which incorporated it.
2. S$*$.$%'6 C%(/*#"+:
' company may be incorporated by means of a special 'ct of the parliament or any legislature. #uch
companies are called #tatutory 0ompanies. They are generally formed to carry out some special public
undertaking. For e*ample railway$ waterworks$ gas$ electricity generation etc.$ &nstances of statutory
companies$ ,which are also known as <ublic 0orporations- in &ndia are Beserve bank of &ndia ,B%&-$ The life
&nsurance 0orporation of &ndia ,L&0-$ The Food 0orporation of &ndia ,F0&-$ @nit Trust of &ndia,@T&-$ #tate
Trading 0orporation ,#T0- etc.$#tatutory companies are governed by the 'cts creating them.
They are not reCuired to have any memorandum or articles of association. 0hanges in their structure
are possible only by amendment in the 'cts creating them. The annual report on the working of each
statutory company is reCuired to be placed before the <arliament or the #tate Legislature as the case may be.
' statutory company though owned by the 7overnment has a separate legal entity. &t cannot be
regarded as a department of the 7overnment. The provisions of the 0ompanies 'ct$ 38:; apply to the
statutory companies e*cept where the said provisions are inconsistent with the provisions of the 'ct creating
them.
Type# of Companie#
&ncorporated 0ompanies @nincorporated 0ompanies
0hartered #tatutory Begistered
3. %ased on Legislation under which companies were registered

(ewly formed companies .*isting companies

6. %ased on liability

0ompanies limited by shares companies limited by guarantee unlimited
companies
9. %ased on members

<rivate companies <ublic companies

:. R5"+$', C%(/*#"+:
0ompanies registered under the companies 'ct$ 38:;$ or the earlier companies 'ct are called registered
companies. #uch companies come into e*istence when they are registered under the 0ompanies 'ct and a
certificate of incorporation is granted to them by the Begistrar. #ection 36 ,6- provides that a company
registered under the 'ct may be ,a- a company limited by shares$ ,b- a company limited by guarantee$ and
,c- an unlimited company.
C%(/*#"+ 4"("$, 06 S&*'+: 0ompanies limited by shares are the most common type of
companies. This is a company where the liability of its members is limited to the amount fi*ed by
the memorandum of the company$ if any$ unpaid on the shares respectively held by them. The
liability can be enforced during the e*istence of the company as well as during the winding up.
!here the shares are fully paid up$ no further liability rests on them.
C%(/*#"+ 4"("$, 06 G.*'*#$: This is a company where the liability of its members is limited
to such amounts as they may respectively undertake as fi*ed by the memorandum to contribute to the
assets of the company in the event of its being wound up. &n the case of such companies$ as in the
case of companies limited by shares$ the liability of its members is limited$ but it is limited to the
amount of guarantee undertaken by them. For e*ample the /adras #tock .*change is a company
limited by guarantee.
' company limited by guarantee may or may not have a share capital. &f it ha a share capital$
the liability of the members is twofoldH ,i- liability to pay the share amount and ,ii- the amount
guaranteed. ' guarantee company may not be suitable for ordinary business purposes. 0lubs$ trade
associations$ research associations and societies for promoting various ob"ects are the e*amples of
guarantee companies. /any such companies obtain permission of the 0entral 7overnment to
dispense with the word )limited+.
U#4"("$, C%(/*#"+: &t is a company where the liability of its members is not limited at all. &n
such a company$ the liability of each member be entitled to claim ratable contribution from other
members. The articles shall state the number of members with which the company is to be registered
and if the company has a share capital$ the amount of share capital with which the company is to be
registered. 'n unlimited company may be converted into a limited company either limited by shares
or limited by guarantee.
;. F%'"5# C%(/*#"+
&t means a company incorporated outside &ndia and having a place of business in &ndia. The
0ompanies 'mendment 'ct$ 385= provides that where not less than :AV of the share capital is held by
&ndian citizens andTor companies incorporated in &ndia it shall have to comply with such of the provisions of
the 'ct as may be prescribed as if it were a company incorporated in &ndia.
3. D%).(#$+ : .very foreign company shall$ within 9A days of the establishment of the business in
&ndia$ furnish with the Begistrar for registration of the following documents : ,i- ' certified copy of
the charter$ statute memorandum and articles of the company$ containing the constitution of the
company and if the instrument is not in .nglish language a certified translate thereof$ ,ii- The full
address of the registered or principal office of the comp ,iii- ' list of the directors and secretary of
the company with particulars name$ nationality etc. ,iv- The names and addresses of any person or
perH resident$ in &ndia$ authorised to accept service of legal processes and notice on behalf of the
company$ ,v- The full address of the principal place of business in &ndia. ,#ec:86- !here any change
occurs in the above particulars$ the company shall file with the Begistrar a return of such alterations
within the prescribed time. ,#ec :89-.
6. A))%.#$+ : .very foreign company$ unless e*empted by the 0entral 7overnment$ shall file with the
Begistrar every year three copies of its %alance #heet and <rofit and Loss 'ccount and other
documents reCuired under the 'ct. #uch documents must be in .nglish language. 'part from these
document it shall also send to the Begistrar$ three copies of a list in the prescribed form of all places
of business established by the company in &ndia. ,#ec :8=-$
9. N*(+: .very foreign company shall e*hibit on the outside of every office or place of business its
name and the country of incorporation in .nglish and in one of the local languages. &t shall also have
the name of the company and the country of incorporation stated in .nglish on business letters$ hill
heads$ and letter papers and on all notices and other official publications of the company
=. W"#,"#5 ./: 'll foreign companies carrying on business in &ndia may be wound up by an order of
the 0ourt as unregistered companies. &t can also be wound up even if it has been dissolved or cease
to e*it according to its own law of incorporation ,#ec :4=-.
ON THE BASIS OF CONSTITUTION:
1. P.04") C%(/*#6:
' public company means a company which is not a private company. There must be at least seven
persons to form a public company. 1owever$ there is no ma*imum limit as to its number of shareholders or
members. &t is the essence of a public company that its articles do not contain provisions restricting the
number of its members or e*cluding generally the transfer of its shares to the public or prohibiting any
invitation to the public to subscribe for its shares or debentures. 7enerally speaking and member of the
public may acCuire shares in a public company on payment of the share money. The articles of a public
company may$ however$ contain restrictions on the issue or transfer of shares. The company remains a
public company despite such restrictions. Dnly the shares of a public company are capable of being dealt in
on a stock e*change.
6. P'"7*$ C%(/*#6: ' private company means a company which by its articles ,i- restricts the rights to
transfer its shares$ ,ii- limits the number of its members to fifty ,e*cluding members who are or were in the
employment of the company-$ and ,iii- prohibits any invitation to the public to subscribe for any shares or
debentures of the company. ,iv- <rohibit an invitation or acceptance of deposits from persons other than its
members$ directors or their relatives.
P'"7"45+ %! * P'"7*$ C%(/*#6:
The <rovisions of the 0ompanies 'ct apply to public and private companies alike. %ut certain provisions
of the companies 'ct do not apply to a private company but are applicable to public companies. These may
be regarded as the privileges or advantages of a private which are as under:
' private company may consist of two members only.
' private company is entitled to commence business immediately on incorporation.
' private company may allot shares without issuing a prospectus or delivering to the Begistrar a
statement in lieu of prospectus.
' private company is not reCuired to hold a statutory meeting or file a statutory report with the
Begistrar.
' private company can have a minimum of two directors.
The provisions of section 43 as regards further issue of capital do not apply to a private company.
' private company may issue not only eCuity and preference shares but also deferred shares or any
other kind of shares with disproportionate voting rights as it may think fit.
0opies of %alance #heet and Front and Loss 'ccount filed with the Begistrar cannot be inspected by
the public.
' director of a private company need not hold the share Cualification.
Bestrictions in regard to overall managerial remuneration imposed by #ection 9A8 do not apply to a
private company.
'n interested director can participate in the %oard proceedings and e*ercise his vote.
The privileges mentioned above are not available to a private company which is a subsidiary of a
public company. &t also applies to a private company which becomes a deemed public company by virtue of
#ection =9'.
C%#7'+"%# %! P'"7*$ C%(/*#6 "#$% P.04") C%(/*#6
C%#7'+"%# 06 )&%"):
' private company may deliberately choose to become a public company. &f a private company
deletes from its articles the reCuirements of section 9 by passing a special resolution$ the company will cease
to be a private company from date of the alteration of the articles. !hen a private company chooses to
become a public company$ it will have to comply with all the provisions of the 0ompanies 'ct$ applicable to
a public company. !ithin 9A days of its becoming a public company$ it shaft file with the Begistrar a
prospectus or a statement in lieu of prospectus.
C%#7'+"%# 06 ,!*.4$:
' private company is entitled to certain privileges and e*emptions. &t can en"oy those privileges as
long as it complies with the reCuirements of its definition as given in #ection 9,i-,iii-. !here any default is
made in complying with these provisions ,viz$ restriction on transfer of shares$ limitation of the number of
members to :A and prohibition of invitation to public to buy shares and debentures-$ the company loses the
privileges and the e*emptions and the provisions of the 'ct apply to the company as if it was not a private
company. 1owever$ the company may be relieved of the conseCuences on an application made to the court$
and the court is satisfied that the failure to comply with the conditions is not willful or that it is "ust and
eCuitable to grant relief. ,#ec. =9-.
C%#7'+"%# 06 $& %/'*$"%# %! 4*-:
<rivate companies are e*empted from the operation of several provisions of the 'ct and en"oy certain
privileges principally on the ground that they are family concerns in which the public is not directly
interested. 's public money is invested in such companies$ there is no reason for treating such companies as
private companies. The law tries to tackle the problem by creating another type of company viz.$
D(, P.04") C%(/*#6:
&t is a private company which$ under certain circumstances$ can be treated by the laws as the public
company. Firstly where a private company is a subsidiary of a public company$ it is dealt with as a public
company for all purposes of the 'ct.
' private company shall also be deemed as a public company in the following cases: ,a- !here it
invites public deposits through an advertisementH ,b- it holds 6:V or more of the paid up share capital of a
public company$ ,c- it has public company,ies- or deemed public cotnpany,ies- as its shareholdersO holding
in aggregate 6:V or more of its paidup share capitalH ,d- its averageW 'nnual turnover for the last three
consecutive financial years is Bs. 6: crore or more. ' private company which has become a public company
by virtue of these provisions shall continue to be so until it has$ with the approval of the 0entral 7overnment
and in accordance with the provisions of the 'ct$ again become a private company. <rovisions regarding
Odeemed public companiesO are deleted by the 0ompanies 'mendment 'ct$ 6AAA.
C%#7'+"%# %! /.04") )%(/*#6 "#$% /'"7*$ )%(/*#6:
' public company may be converted into a private company by altering the articles incorporating the
restrictions mentioned in #ection 9,i-,iii-. #uch alteration of articles will be made by a special resolution and
the approval of the 0entral$ 7overnment is necessary for such alteration. ' copy of the special resolution has
to be filed with the Begistrar within 9A days and when the approval of the 0entral 7overnment for
conversion of a public company into private company is obtained$ a copy of such approval shall also be filed
within one month. #uch printed copy of the articles as altered shall be filed by the company with the
Begistrar within one month of the date of receipt of the order of approval.
ON THE BASIS OF CONTROL:
1. H%4,"#5 C%(/*#6 *#, S.0+","*'6 C%(/*#6
' company which controls another company is known as the Oholding companyO and the company so
controlled is termed as Osubsidiary companyO. ' holding company is one of it controls the composition of
board of directors of another companyH or holds more than half of the nominal$ value of eCuity share capital
of another company or controls more than 3T 6 of the total voting power of the other company$ it is a
subsidiary of any company which is in turn a subsidiary of another company. For e*ample 0ompany % is a
subsidiary of company '$ and company 0 is a subsidiary of company %. 0ompany 0 will be a subsidiary of
company.
2. G%7'#(#$ C%(/*#6:
#ec ;35 of the 0ompanies 'ct defines a government company as a company in which not less than
fifty one per cent of the paid up share capital is held by the 0entral 7overnment$ or by any #tate
7overnment$ or 7overnments$ or partly by the 0entral 7overnment and partly by one or more #tate
7overnments. &t also includes a company which is a subsidiary of a 7overnment company.
0ertain special provisions have been laid down in the 'ct regarding a government company. They
are discussed below:
The auditor of a 7overnment company shall be appointed or reappointed by the 0entral
7overnment on the advice of the 0omptroller and 'uditor 7eneral ,7'7- of &ndia.
The auditor will submit a copy of the audit report to the 0'7 of &ndia who may comment upon or
supplement the audit report in such manner as he may think fit. #uch a comments or supplementary
report shall be placed before the annual generaW meeting along with the audit report. ,#ection ;38-.
!here the 0entral 7overnment is a member of the 7overnment company it shall cause an annual
report on the working and affairs of the company to be prepared and laid before both 1ouses of
<arliament along with the audit report and the comments$ if any$ of the 0omptroller and 'uditor 7eneral
of &ndia. The report shall be prepared within 9 months of the 'nnual 7eneral /eeting. !here the #tate
7overnment is also a member$ the report shall also be laid before the #tate legislature.
:. O#F(*# C%(/*#6 *#, F*("46 C%(/*#6: These are companies in which one man holds virtually the
whole of the share capital with a few e*tra members holding the remainder$ who may be his relations or
nominees. %eing the largest holder$ such a person is generally the sole or the managing director and en"oys
complete control over the company. This is done with a view to fulfill the statutory reCuirement of at least
seven members in the case of a public company and at least two members in the case of a private company.
1e is$ thus$ in a position to en"oy the profits of the business with limited liability. #uch types of companies
are perfectly valid and not illegal.
;. L")#+, C%(/*#"+ (%' C%(/*#"+ #%$ !%' P'%!"$):#ec 6: of the 0ompanies 'ct relates to licensed
company. These licensed companies are formed for a nontrading ob"ect or for a noble cause$ like the
promotion of art$ science$ education$ commerce$ etc. 0haritable associations$ sports clubs$ trade associations$
chambers of commerce$ etc$ are e*amples of companies not for profit. #uch companies can be formed only
on obtaining the license from the 0entral 7overnment or #tate 7overnment i.e. they can be registered only
after such license. The 7overnment has power to revoke the license granted to such companies if it thinks fit
on giving the company notice and after an opportunity to ob"ect.
<. I445*4 A++%)"*$"%#+: #ec 33 of the 'ct provides that no company$ association or partnership consisting of
more than 3A persons in case of banking business and of more than 6A persons in the case of any other
business which has for its ob"ects the acCuisition of gain$ can be legally formed unless it is registered under
the 0ompanies
'ct or is formed in pursuance of some other &ndian law. &f they are not so registered$ they would be
considered as illegal associations. The law does not recognise them being illegal.
E!!)$ %! *# I445*4 A++%)"*$"%#: 'n association or partnership which is not registered under #ec 33 can
have no legal recognition as a separate legal entity. The result of this is ,a- #uch an association cannot enter
into any binding contractH ,b- &t cannot sue or be sued. %ut such an association may get itself registered and
enforce its claims$ ,c- #uch an association cannot be dissolved under the 'ct either at the instance of a
creditor$ a member$ or the association itself. .very member of such an association shall be personally liable
for all liabilities incurred in such business and shall also be liable to a fine which may e*tend up to Bs.
3$AAA.
D%).(#$+ $% 0 F"4,: The application for registration of a company should be presented to the Begistrar
of 0ompanies of the #tate in which the business office of the company is to be situated. The application
shall be accompanied with the following documents.
The /emorandum of 'ssociation
The 'rticles of 'ssociation$ if any$ duly signed by the subscribers or the /emorandum.
' statement of the nominal or authorized capital.
' notice of address of the registered office of the company this may be done within 9A days of
registration if it cannot be filed at the time of registration.
' list of directors and their consent to act as such$ signed by each.
'n undertaking in writing signed by each such director to take and pay for their Cualification shares.
' declaration that all the reCuirements ,provisions- of the 0ompanies 'ct have been complied with.
#uch a declaration may be signed by an advocate of the #upreme 0ourt or 1igh 0ourt an attorney or
pleader entitled to appear before a 1igh 0ourt$ or a 0hartered 'ccountant practicing in &ndia$ who is
engaged in the formation of the company$ or by a person named in the articles as director$ manager or
secretary of the company.
&tems number : and ; listed above are not reCuired to be filed in the case of a private company. &f the
Begistrar is satisfied that all the reCuisite documents delivered to him are in order$ he shall register
the /emorandum and the 'rticles if any provided he is satisfied on the following points:
o ,a- the relevant provisions of the 'ct have been complied with$
o ,b- the ob"ects of the company are lawful
o ,c- the reCuisite number of persons reCuired under the 'ct have subscribed and duly signed$
,d- the /emorandum and the 'rticles comply in all respects with theprovisions of the 'ct$
,e- the name selected by the company is acceptableH and
o ,f- the statutory declaration has been properly made. &f the Begistrar of 0ompanies is satisfied
that all the aforesaid reCuirements have been complied with$ he will register the company and
place its name on the register of companies. &t is clear that once the statutory reCuirements
have been complied with$ the Begistrar has no option but no register it. Dn refusal to register
a company on improper grounds$ he may be compelled by a !rit of /andamus.
D"+$"#)$"%# 0$-# /'"7*$ *#, /.04") )%(/*#6
S.N
O
,ASIS OF
ISTINCTIO
N
$RIBATE CO0$AN2 $/,LIC CO0$AN2
1. /inimum (o of
members
/inimum two members. /inimum 5 members
2. /a*imum no.
of members
Fifty ,e*cluding employeemembers- (o restriction
:. /inimum no. of
directors
Two Three
;. 0apital &t cannot invite the public to buy
shares or debentures of the company.
&t is free to invite the public to buy its
shares and debentures.
<. <rospectus &t need not issue any prospectus. &t has to issue prospectus.
=. Transfer of
shares
#hare transfer is restricted. There is no restriction on share transfer.
7. &ncorporation &t is$ relatively speaking$ a simple and
Cuick affair.
&t is Cuite complicated and time
consuming.
8. 0ommencement
of business
&t can commence business soon after
incorporation. &t does not need any
certificate to commence business.
%usiness cannot be commenced after
incorporation. &t can be done only after
the receipt of the certificate of
commencement of business.
>. 'llotment of
shares
&t can begin allotting shares
straightway only after incorporation.
Baising minimum subscription is no
precondition.
'llotment can begin only after the
minimum subscription has been received.
1?. #tatutory
meeting
#tatutory meeting need not be held. #tatutory meeting must be held and the
statutory report must be filed with the
register.
11. /anagerial
remuneration
Bestrictions contained in the
0ompanies 'ct on such remuneration
do not apply.
/anagerial remuneration can be paid only
according to the provisions of the
0ompanies 'ct.
12. (ame The words )<rivate Ltd+ must be used
as part of the name.
The word )Limited+ must be used as the
part of the name.
1:. BeCuired
Cuorum for
meetings
Three members. Five members.
COMPANIES AND PARTNERSHIPS COMPARED
The ma"or difference between companies and partnerships may be considered under the following
headings :
F%'(*$"%#: ' company is created by registration under the 0ompanies 'ct. ' partnership is created by
agreement which may be e*press or implied from the conduct of the partners and is sub"ect to the &ndian
0ontract 'ct and the &ndian <artnership 'ct. (o special form is reCuired $ though partnerships articles are
usually written.
S$*$.+ A$ L*-: ' company is an artificial legal person with perpetual succession. Thus a company may
property $ make contracts and sue and be sued. &t is an entity distinct from its members. ' partnership is not
a legal though it may sue and be sued in the firm+s name. Thus the partners own the property of the firm and
are liable for the contracts of the firm "ointly as well as severally.
T'*#+!' O! S&*'+: #hares in a company are freely transferable unless the company+s constitution
otherwise providesH restrictions may $ of course $ appear in the articles of a private company. ' partner can
transfer his shares in the firm $ but the assignee does not thereby become a partner and is merely entitled to
the assigning partner+s share of the profits.
N.(0' O! M(0'+: ' private company must have at least two members and ma*imum :A members. '
partnership cannot consist of more than 6A persons ,3A persons in case of banking business-.
M*#*5(#$: /embers of a company are not entitled to take part in the management of the company
unless they become directors. <artners are entitled to share in the management of the firm unless the articles
provide otherwise.
A5#)6: ' member of a company is not an agent of the company or that of other members $ and he cannot
bind a company by his acts. .ach partner is an agent of the firm and his partners$ and nay bind the firm by
his acts.
L"*0"4"$6 O! M(0'+: The liability of a member of a company may be limited by shares or by guarantee.
The liability of a partner is unlimited.
P%-'+: The affairs of accompany are closely controlled by the 0ompanies 'ct$ 38:; and the company can
only operate within the ob"ects laid down in the memorandum of association$ though these can be altered to
some e*tent by special resolution. <artners may carry on any business as they please so long as it is not
illegal and make whatever arrangements they wish with regard to the running of the firm from time to time.
T'("#*$"%#: (o one member of a company can wind up the company$ and the death$ bankruptcy or
insanity of a member does not mean that the company must be wound up. ' partnership may be dissolved by
any partner at any time unless the partnership is entered into for a fi*ed period of time. ' partnership is also
dissolved by the death or bankruptcy of a partner.
FORMATION OF A COMPAN1
H%- "+ * )%(/*#6 !%'(, .#,' $& C%(/*#"+ A)$, 1><=?
F%'(*$"%# %! * )%(/*#6:
3. <romotion of a company
6. &ncorporation of a company
9. 0ertificate of incorporation
=. 0apital subscription
:. 0ommencement of business
PROMOTION OF A COMPAN1
' company comes into e*istence when a number of persons come together with a view to e*ploit
some business opportunity. These persons are called promoters. @nder sce.36$ any seven or more persons ,6
or more in the case of private company- may form incorporated company for a lawful purpose subscribing
their names to the memorandum of association and complying with other reCuirements in respect of
registration. #uch an incorporated company may be a company limited shares$ limited by guarantee or an
unlimited company.
The promoter has to take the following preliminary steps in this connection:
'scertainment of availability of the proposed name of the company.
'pplication for license.
#.%&+s approval to draft prospectus.
<repare and finally get printed the company+s /emorandum and 'rticles of association.
Fi*ation of the underwriters$ brokers$ auditors$ etc.
T& /'%(%$'+ &*7 )'$*"# 0*+") ,.$"+ $%-*',+ $& )%(/*#6 !%'(, :F
3. 1e must not make any secret profit out of the promotion of the company. #ecret profit is made by
entering into a transaction on his own behalf and then sell to concerned property to the company at a
profit without making disclosure of the profit to the company or its members. The promoter can
make profits in his dealings with the company provided he discloses these profits to the company and
its members. !hat is not permitted is making secret profits i.e. making profits without disclosing
them to the company and its members.
6. 1e must make full disclosure to the company of all relevant facts including to any profit made by
him in transaction with the company.
I# )*+ %! ,!*.4$ %# $& /*'$ %! $& /'%(%$' "# !.4!"44"#5 $& *0%7 ,.$"+, $& )%(/*#6 (*6 :F
3. Bescind or cancel the contract made and if he has made profit on any related transaction$ that profit
also may be recovered
6. Betain the property paying no more for it then what the promoter has paid for it depriving him of the
secret profit.
9. &f these are not appropriate ,eg cases where the property has altered in such a manner that it is not
possible to cancel the contract or where the promoter has already received his secret profit-$ the
company can sue him to for breach of trust. 2amages up to the difference between the market value
of the property and the contract price can be recovered from him.
A /'%(%$' (*6 0 '-*',, 06 $& )%(/*#6 !%' !!%'$+ .#,'$*C# 06 &"( "# !%'("#5 $& )%(/*#6
"# +7'*4 -*6+. T& (%' )%((%# %#+ *' :F
3. The company may to pay some remuneration for the services rendered.
6. The promoter may make profits on transactions entered by him with the company after making full
disclosure to the company and its members.
9. The promoter may sell his property for fully paid shares in the company after making full
disclosures.
=. The promoter may be given an option to buy further shares in the company.
:. The promoter may be given commission on shares sold.
;. The articles of the 0ompany may provide for fi*ed sum to be paid by the company to him. 1owever$
such provision has no legal effect and the promoter cannot sue to enforce it but if the company
makes such payment$ it cannot recover it back.
&f the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a
false statement in the prospectus whereby the person relying on that statement makes a loss$ he will be liable
to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the
prospectus. ' person who subscribes for any shares or debenture in the company on the faith of the untrue
statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the
result of such untrue statement.
INCORPORATION OF A COMPAN1
&n addition to the above preliminary steps the promoter will have to take the following steps to get
the company incorporated:
Filing of the necessary documents.
<ayment of the necessary fees.
Dbtaining the certificate of incorporation.
CERTIFICATE OF INCORPORATION: Dn registration the registrar will issue a certificate of
incorporation whereby he certifies that the company is incorporated and in the case of a limited company$
that the company is limited. From the date of incorporation mentioned in the certificate$ the company
becomes a legal person separate from its shareholders.
COMMENCEMENT OF BUSINESS: ' private company may commence its business immediately on
incorporation but a public company cannot commence business immediately after incorporation unless it has
obtained a certificate of commencement of business from the Begistrar.
' private company or a company having no share capital can commence its business immediately
after it has been incorporated. 1owever$ other companies can commence their activities only after they have
obtained 0ertificate of 0ommencement of %usiness. For this purpose$ the following additional formalities
have to be complied with :
3. &f a company has share capital and has issued a prospectus$ then :
a. #hares upto the amount of minimum subcription must be alloted
b. .very director has paid to the company on each of the shares which he has taken the same
amount as the public have paid on such shares
c. (o money is or may become payable to the applicants of shares or debentures for failure to
apply for or to obtain permission to deal in those shares or debentures in any recognised stock
e*change.
d. ' statutory declaration in Form 38 signed by one director or the employee company
secretary or a 0ompany secretary in whole time practice that the above provisions have been
complied with must be filed
6. &f a company has share capital but has not issued a prospectus$ then :
a. &t must file a statement in lieu of prospectus with the Begistrar of 0ompanies
b. .very director has paid to the company on each of the shares which he has taken the same
amount as the other members have paid on such shares
c. ' statutory declaration in Form 6A signed by one director or the employee company
secretary or a 0ompany secretary in whole time practice that the above provisions have been
complied with must be filed
MEMORANDUM OF ASSOCIATION
M*#"#5: /emorandum of 'ssociation is one of the core documents which have to be filed with the
Begistrar of 0ompanies at the time of incorporation of a company. &t is a document which sets out the
constitution of the company and is really the foundation on which the structure of the company is based. &t
contains the fundamental conditions upon which alone the company is allowed to be incorporated. '
company may pursue only such ob"ects and e*ercise only such powers as are conferred e*pressly in the
memorandum or by implication there from i.e. such powers as are incidental lo the attainment of the ob"ects
' company cannot depart from the provisions contained in its memorandum$ however$ great the
necessity may be. if it does$ it would be ultra vires the company$ and therefore wholly void. &t defines its
relation with the outside world and the scope of its activities. The purpose of the memorandum is to enable
shareholders$ creditors and those who deal with the company lo know what is the permitted range of the
activities of the enterprise.
C%#$#$+ %! M(%'*#,.(
'ccording to #ection 39$ the /emorandum of 'ssociation of every company must contain the following
clauses:
3. The (ame of the company with OLimitedO as the last word of the name in the case of a public limited
company and with O<rivate LimitedO as the last word in the case of a private limited company.
6. The #tate in which the registered office of the company is to be situated.
9. The ob"ects of the company to be classified as
,i- The main ob"ects of the company to be pursued by the company on its incorporation and ob"ects
incidental the attainment of the main ob"ects
,ii- Dther ob"ects not included above.
=. The Liability of members is limited if the company is limited by shares or by guarantee.
:. &n the case of a company having a share capital$ the amount of share capital with which the company
proposes to be registered and its division into shares of a fi*ed amount: 'n unlimited company need not
include items = and : in its memorandum. ' brief discussion of the various clauses is as follows:
N*( )4*.+: ' company may be registered with any name it likes. %ut no company shall be registered by a
name which in the opinion of the 0entral 7overnment is undesirable and in particular which is identical or
which too nearly resembles the name of an e*isting company. .very public company must write the word
OlimitedO after its name and every private limited company must write the Nprivate limited3 after its name. '
company cannot adopt a name which violates the provisions of the .mblems and (ames ,<revention of
&mproper @se- 'ct 38:A. .very company is reCuired to publish its name outside its registered office$ and
outside every place where it carries on business$ to have its name engraved on a seal and to have its name on
all business letters$ bill heads$ notices and other official publications of the company ,#ection 3=5-.
R5"+$', O!!") )4*.+: This clause states the name of the #tate where the registered office of the
company is situated. The registered office clause is important for two reasons. Firstly$ it ascertains the
domicile and nationality of a company. This domicile clings to it throughout its e*istence$ #econdly$ it is the
place where various registers relating to the company must be kept and to which all communications and
notice must be spent.
O0G)$+ )4*.+: The ob"ects clause is the most important clause in the memorandum of association of a
company. &t is not merely a record of what is contemplated by the subscribers$ but it serves a twofold
purpose
,a- &t give an idea to the prospective shareholders the purposes for which their money will be utilized$
,b- &t enables the persons dealing with the company to ascertain its powers. &n case of companies which
were in e*istence immediately before the commencement of the 0ompanies ,'mendment- 'ct 38;:$ the
ob"ects clause has simply to state the ob"ects of the company. %ut in the case of a company to be registered
after the amendment$ the ob"ects clause must state separately.
,i- /ain Db"ects: This subclause has to state the main ob"ects to be pursued by the company on its
incorporation and ob"ects incidental or ancillary to the attainment of the main ob"ects.
,ii- Dther ob"ects: This subclause shall state other ob"ects which are not included in the above clause.
L"*0"4"$6 C4*.+: This clause states that the liability of the members of the company is limited. &n the case
of a company limited by shares$ a member is liable only to the amount unpaid on the shares taken by him. &n
the case of a company limited by guarantee$ the members are liable to the amount undertaken lo be
contributed by them to the assets of the company in the event of its being wound up. 1owever$ this clause is
omitted from the memorandum of association of the unlimited companies.
C*/"$*4 C4*.+: The memorandum of a company limited by shares must state the authorized or nominal
share capital$ the different kinds of shares$ and the nominal value of each share. The chief point to consider
in regard to this class is what funds are necessary lo set the business going or$ if it is proposed lo by an
e*isting concern$ what sum is needed to pay its price and what$ in addition$ is wanted to keep the business
going. &t is generally advisable to have a reasonable amount of more capital and have some shares in reserve
as un issued so that further capital may be raised as and when reCuired.
A++%)"*$"%# %' S.0+)'"/$"%# )4*.+: This clause provides that those who have agreed to subscribe to the
memorandum must signify their willingness to associate and form a company. 'ccording to #ection 36 of
the 'ct$ at least seven persons are reCuired to sign the memorandum in the case of pubic company$ and at
least two persons in the case of private company. The memorandum has to be signed by each subscriber in
the presence of at least one witness who must attest the signatures. .ach subscriber must write opposite his
name the number of shares he shall take. (o subscriber of the memorandum shall take less than one share.
This clause need not be numbered.
DOCTRINE OF THE ULTRAF2IRES:
The term )@ltra+ means )beyond+ and )>ires+ means )powers+. The term ultra vires a company means
that the doing of the act is beyond the legal power and authority of the company.
'ny transactions which are outside the scope of the powers specified in the ob"ects clause of the /'
and are not reasonable incidentally or necessary to the attainment of ob"ects is ultravires the company and
therefore void. (o rights and liabilities on the part of the company arise out of such transactions and it is a
nullity even if every member agrees to it.
Con#e?"ence# of an "ltra+ire# tran#action9.
3. The company cannot sue any person for enforcement of any of its rights.
6. (o person can sue the company for enforcement of its rights.
9. The directors of the company may be held personally liable to outsiders for an ultra vires
1owever$ the doctrine of ultravires does not apply in the following cases :
3. &f an act is ultravires of powers the directors but intravires of company$ the company is liable.
6. &f an act is ultravires the articles of the company but it is intravires of the memorandum$ the articles
can be altered to rectify the error.
9. &f an act is within the powers of the company but is irregualarly done$ consent of the shareholders
will validate it.
=. !here there is ultravires borrowing by the company or it obtains deliver of the property under an
ultravires contract$ then the third party has no claim against the company on the basis of the loan but
he has right to follow his money or property if it e*ist as it is and obtain an in"unction from the 0ourt
restraining the company from parting with it provided that he intervenes before is money spent on or
the identity of the property is lost.
:. The lender of the money to a company under the ultravires contract has a right to make director
personally liable.
L"*0"4"$6 C4*.+
This clause states that the liability of the members of the company is limited. &n the case of a
company limited by shares$ the shareholder is liable$ only to the amount unpaid on the shares taken by him.
&n the case of a company limited by guarantee the members are liable to the amount undertaken to be
contributed by them to the assets of the company in the event of its being wound up.
' declaration that the liability of the members is limited in case of the company limited by the shares
or guarantee must be given. The /' of a company limited by guarantee must also state that each member
undertakes to contribute to the assets of the company such amount not e*ceeding specified amounts as may
be reCuired in the event of the liCuidation of the company. ' declaration that the liability of the members is
unlimited in case of the unlimited companies must be given. The effect of this clause is that in a company
limited by shares$ no member can be called upon to pay more than the uncalled amount on his shares. &f his
shares are already fully paid up$ he has no liability towards the company.
The following are e*ceptions to the rule of limited liability of members:
3. &f a member agrees in writing to be bound by the alteration of /' T '' reCuiring him to take more
shares or increasing his liability$ he shall be liable up to the amount agreed to by him.
6. &f every member agrees in writing to reregister the company as an unlimited company and the
company is reregistered as such$ such members will have unlimited liability.
9. &f to the knowledge of a member$ the number of shareholders has fallen below the legal minimum$
,seven in the case of a public limited company and two in case of a private limited company - and the
company has carried on business for more than ; months$ while the number is so reduced$ the
members for the time being constituting the company would be personally liable for the debts of the
company contracted during that time.
C*/"$*4 C4*.+
The memorandum of a company limited by shares must state must state the authorized or nominal
share capital$ the different kinds of shares$ the nominal value of each share. The chief point to consider in
regard to this clause is what funds are necessary to set the business going or$ if it is proposed to by an
e*isting concern what sum is needed to pay its price and what$ in addition$ is wanted to keep the business
going. &t is generally advisable to have a certain reasonable amount of more capital and have some shares in
reserve as unissued so that further capital may be raised as and when reCuired.
ALTERATION OF MEMORANDUM
The /emorandum of association of a company being its charter$ the right of the company to alter its
contents is rigidly limited by the provisions of the 'ct. #ection 3; of the 'ct provides that a company shall
not alter the conditions contained in its memorandum e*cept in the cases$ in the manner and to the e*tent
provided in the 'ct.
C&*#5 %! N*(: ' company can change its name. For this purpose it must first pass a special resolution
and then obtain approval of the 0entral 7overnment in writing. 1owever$ no such approval is necessary for
merely including or deleting the word O<rivateO conseCuent on the conversion of the public company into
private company and vice versa. ,#ec63-.The Begistrar shall enter the new name the register in place of
former name and shall issue a fresh certificate or incorporation. (ecessary alteration shall also be made in
the memorandum by the Begistrar. The change of name shall be complete and effective only on the issue of
such a certificate. The rights and obligations of a company will not be affected on the change of its name
,#ec 69-.
C&*#5 %! R5"+$', O!!"): ' company can shift its registered office from one place to anotherH within
the same city$ town or village$ provided a notice of change is given to the Begistrar within 9A days of such
change. %ut$ where the registered office is to be changed outside the local limits of any city$ town or village
in the same #tate$ special resolution to that effect must be passed. 1owever$ the alteration of the change of
the place of the registered office of a company from one state to another shall take effect only on the
confirmation by the 0ompany Law %oard on petition. ' notice of such change shall also be given to the
Begistrar within 9A days of the change. These two changes in the registered office do not involve alteration
of memorandum.
P'%),.' !%' +&"!$"#5 '5"+$', %!!") !'%( %# +$*4 $% *#%$&'
' company can change its registered office from one #tate to another only for purpose specified in of the
0ompanies 'ct$ 38:; and for no other purpose.
R+%4.$"%# %! $& B%*', %! D"')$%'+: The first step in changing registered office is that the board of
directors must adopt a resolution to that effect.
#pecial resolution: ' special resolution must be passed by the company in the general body
3. /eeting of share holdersTmembers. 0onfirmation by the 0L%: the change shall not take effect
unless and until it is confirmed by the 0L% on a petition by the company 0onseCuent to the
0ompanies ,'mendment- 'ct$ 388;H the change of registered office reCuires no confirmation by
0L%.
6. (otice to affected parties: %efore confirming the change the 0L% shall ensure that sufficient notice
has been given to every person whose interest will be affected by the change and that the consent of
the creditors of the company has been obtained or their debts or claims have been discharged or
secured. ,#ec. 35,9--
9. (otice to Begistrar: The 0L% shall cause notice of the petition for confirmation of the change to be
served on the Begistrar. The Begistrar shall also be given a reasonable opportunity to appear before
the 0L% and state his ob"ections and suggestions$ if any$ with respect to the confirmation of the
alteration. ,#ec. 35,=--.
=. The 0L% as it may think fit impose such terms and conditions.
:. 0opy of the order to be filed with BD0Os: ' certified copy of the order confirming the alteration$
together with a printed copy of altered memorandum shall be filed by the company with the registrar
of each of the states who shall registrar the same. 'll the records of the company shall be transferred.
C&*#5 %! R5"+$', O!!") -"$&"# * S$*$
,3- (o company shall change the place of its registered office from one place to another within a #tate
unless such change is confirmed by the Begional 2irector.
,6- The company shall make an application in the prescribed form to the Begional 2irector for
confirmation under subsection.
,9- The confirmation referred to in subsection ,&-$ shall be communicated lo the company within four
weeks from the date of receipt of application for such change.
.*planation For the purposes of this section$ it is hereby declared that the provisions of this
section shall apply only to the companies which change the registered office from the "urisdiction
of one Begistrar of 0ompanies to the "urisdiction of another Begistrar of 0ompanies within the
same state.
,=- The company shall file$ with the Begistrar a certified copy of the confirmation by the Begional
2irector for change of its registered office under this section$ within two months from the date of
confirmation$ together with a printed copy of the memorandum as altered and the Begistrar shall
register the same and certify the registration under his hand within one month from the date of filing
of such document.
,:- The certificate shall be conclusive evidence that all the reCuirements of this 'ct with respect to the
alteration and confirmation have been complied with and hence forth the memorandum as altered$
shall be the memorandum of the companyN.
C&*#5 %! $& O0G)$+ )4*.+: #ec35 of the 'ct only gives a limited right to the company to alter its
ob"ects clause. This section provides specific purposes that the ob"ects clause can be altered only if the
change enables the company:
,a- To carry on its business more economically or more efficiently.
,b- To attain its main ob"ect by new or improved means.
,c- To enlarge or change the local area of its operation.
,d- To carry on some business$ which under e*isting circumstances may be conveniently or
advantageously combined with the business of the companyE
,e- To restrict or to abandon any of the ob"ects specified in the memorandum.
;. /eeting of share holdersTmembers.
0onfirmation by the 0L%: the change shall not take effect unless and until it is confirmed by the
0L% on a petition by the company 0onseCuent to the 0ompanies ,'mendment- 'ct$ 388;$ the
change of registered office reCuires no confirmation by 0L%.
5. (otice to affected parties: %efore confirming the change the 0L% shall ensure that sufficient notice
has been given to every person whose interest will be affected by the change and that the consent of
the creditors of the company has been obtained or their debts or claims have been discharged or
secured. ,#ec. 35,9-
4. (otice to Begistrar: The 0L% shall cause notice of the petition for confirmation of the change to be
served on the Begistrar. The Begistrar shall also be given a reasonable opportunity to appear before
the 0L% and state his ob"ections and suggestions$ if any$ with respect to the confirmation of the
alteration. ,#ec. 35,=-.
8. The 0L% as it may think fit impose such terms and conditions.
3A. 0opy of the order to be filed with BD0Os: ' certified copy of the order confirming the alternation$
together with a printed copy of altered memorandum shall be filed by the company with the registrar
of each of the states who shall registrar the same. 'll the records of the company shall be transferred.
The company can alter its ob"ects clause only to the above named purposes. The 0ompany Law
%oard has no "urisdiction to confirm any alteration which is not covered by #ec35,i-. The alteration must
leave the business of the company substantially the same what it was before with only such changes in the
mode of conducting it as will enable it to be carried on more economically or more efficiently. The additions
or alterations should be a step in aid to improve efficiency and generate more resources.
H
P'%),.': %efore the company can alter ob"ect clause$ it shall pass a special resolution$ sanctioning the
alteration. ' copy of the special resolution shall be filed with the Begistrar with in 9A days of its passing. %ut
the alteration$$ shall not lake effect unless it is confirmed by the 0ompany law %oard on petition. %efore
confirming$ the 0ompany Law %oard ,0L%- shall see that sufficient notice of the petition has been given to
all persons whose interests are likely to be affected by ,he proposed alteration. &t may confirm the alteration
either wholly or in part and on such terms and conditions as it may think fit.
' certified copy of the order of the 0ompany Law %oard together with a printed copy of the altered
memorandum must be filed with the Begistrar within three months of the order$ who shall register the same
and issue a certificate of registration within one month. &f the copy of the order is not registered within the
prescribed period$ the proceedings connected with the order will become void and inoperative. 1owever$ the
%oard may revive the order on an application made within one month of its lapse.
C&*#5 %! L"*0"4"$6 )4*.+: Drdinarily the liability clause cannot be altered so as to make the liability of
members unlimited. 'ny alteration in the memorandum will be void if the effect of the alteration is the
enhancement of the liability of members. This provision however$ will not apply to a case where the
members agree in writing to be bound by the alteration. ' limited company$ if authorized by its articles by a
special resolution$ may alter its memorandum to make the liability of its directors or manager unlimited.
This rule applies to future appointees only. #uch alteration will however not affect the e*isting directors and
managers unless they have accorded their consent.
C&*#5 %! $& C*/"$*4 )4*.+:
' limited company$ having a share capital may alter its capital clause sub"ect to the provisions of its
articles by a resolution in the general meeting. The confirmation of the court is not reCuired if alteration is
made for any of the following purposes:
,i- To increase its share capital
,ii- To consolidate and divide its capital into shares of larger amount
,iii-To convert its fully paid shares into stock and reconvert the stock into fully paid up shares.
,iv-To sub divide its shares into shares of smaller amount$ and
,v- To cancel its shares. %ut for reduction of share capital$ special resolution and confirmation by the court
are necessary.
ARTICLES OF ASSOCIATION
M*#"#5: The word O'rticlesO means the 'rticles of association of a company as originally framed or
as altered from time to time in pursuance of any previous companies law or of this 'ct. The 'rticles of
association are the rules and regulations of a company framed for the purpose of internal management of its
affairs. &t deals with the rights of the members of the company interse. The articles are framed for carrying
out the aims and ob"ects of the /emorandum of 'ssociation. The articles of association of a company are
subordinate to and are controlled by the /emorandum of 'ssociation.
1owever$ a private company$ a company limited by guarantee and an unlimited company must
register their articles along with the /emorandum. &n the case of an unlimited company$ the 'rticles shall
state the number of the numbers$ with which the company is to be registered$ and if it has a share capital$ the
amount of share capital with which it is to be registered. &n the case of a company limited by guarantee$ the
'rticles shall state the number of members with which the company is to be registered.
&n the case of a private company$ the 'rticles must contain provisions which restrict the right lo
transfer its shares limit the number of its members to fifty e*cluding past and the present employees of the
company$ prohibit any invitation to the public to subscribe for any shares in or debentures of the company.
The 'rticles must be printed and divided into paragraphs$ numbered consecutively. The articles must be
signed by each subscriber of the memorandum in the presence of at least one witness who will atleast the
signature and likewise add his address$ description and occupation$ if any.
C%#$#$+ %! A'$")4+: .*clusion wholly or in part of Table '$ 'doption of preliminary contracts$ (umber
and value of shares$ 'llotment of shares$ 0alls on shares Lien on shares$ Transfer and transmission of shares$
Forfeiture of shares$ 'lteration of share capital$ #hare certificates$ 0onversion of shares into stock$ >oting
rights and pro*ies$ Bules of conducting /eetings$ 2irectors$ their appointment etc.$ %orrowing powers$
'ccounts and audit$ 2ividends and reserves$ !inding up.
A4$'*$"%# %! A'$")4+: 0ompanies have wide powers to alter their 'rticles. 'ny restriction on the e*ercise
of their powers will be invalid. 'rticles of 'ssociation may be altered by a company by passing a special
resolution to that effect. The altered 'rticles will bind the members in the same way as did the original
'rticles. The company must file with the Begistrar a copy of the special resolution within one month from
the date of its passing. The alteration must be effected sub"ect to the following limitations:
The alteration must not e*ceed ,he powers given by /emorandum or conflict with ,he provisions &t
must not be inconsistent with any provisions of the 0ompanies 'ct or any other statute.
&t must not be illegal.
&t should not be in fraud of a minority or inflict a hardship on a minority sub"ect to an important
provision that whatever is done in the interest of the company can never be regarded as oppressive to
the minority$ however$ hurtful it may be to the minority.
The alteration must not be inconsistent with an order of the 0ourt. !here a company is compelled by
a 0ourtOs order of change its 'rticles in cases of oppression or mismanagement any subseCuent
alteration thereof which is inconsistent with such an order can be made by the company only with the
leave of the 0ourt.
&t may be regarded as having a retrospective effect so long as it does not affect the things already
done by the company
&f a public company is converted into a private company then the approval of the 0entral
7overnment is necessary .<rinted copy of altered articles shall be filed with the Begistrar within one
month of date of the 0entral 7overnmentOs approval.
&t may further be noted than an in"unction cannot be granted to prevent the adoption of new articles
which constituted a breach of contract. %ut if the company acts on them it may be liable to damages
'n alteration that has the effect of increasing the liability of a member to contribute to the company
is not binding on a present member unless he has agreed there to in writing
' reserve liability once created cannot be undone but may be cancelled on a reduction of capital
'ny irregular alternations which have been made and acted upon for many years are binding.
The doctrine is however$ sub"ect to the following e*ceptions:
3. 3#%-4,5 %! "''5.4*'"$6: ' person$ who deals with the company and who has knowledge
in its internal management in connection with the sub"ectmatter of his dealings$ cannot claim the
benefit of the rule in TurCuandOs case.
6. N54"5#): ' person cannot claim the benefit of the rule in TurCuandOs case in
circumstances under which he would have discovered the irregularity if he had made proper
inCuiries.
9. F%'5'6: The rule in TurCuandOs case will not apply where a document on which the person
seeks to rely is a forgery.
=. A)$+ %.$+", $& *//*'#$ *.$&%'"$6: The rule in TurCuandOs case does not apply where a
person acting on behalf of the company e*ceeds any actual or ostensible authority given to him.
:. N% 3#%-4,5 %! $& )%#$#$+ %! $& *'$")4+: ' person who has not actually read the
/emorandum and 'rticles of a company and who was not at the time$ he entered into the contract$
aware of their contents$ cannot seek to rely on statement contained therein. The doctrine of indoor
management is based on the principle of estoppel$ and therefore$ it cannot be invoked in favour of a
person who has not consulted the companyOs /emorandum and 'rticles of association
DISTINGUISH BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF
ASSOCIATION.
S.NO ,ASIS OF
ISTINCTION
0E0ORAN/0 OF
ASSOCIATION
ARTICLES OF ASSOCIATION
1. 0ontents and #cope &t is the charter of the company
and defines the scope of its
activities.
&t is a document which regulates the
internal management of the company.
These are the rules made by the company
for carrying out the ob"ects of the
company as set out in the /emorandum.
2. Belationship &t defines the relation of the
company with the outside world.
&t deals with the rights of the members of
the company interse and also establishes
the relationship of the company with the
members.
:. 'lteration &t cannot be altered e*cept in the
manner and to the e*tent
provided by the 'ct.
Dnly the byelaws of the company can be
altered by a special resolution.
;. #upremacy &t is a supreme document of the
company.
'rticles are subordinate to the
/emorandum. They cannot alter or
control the /emorandum.
<. 'doption .very company must have its
own /emorandum.
' company limited by shares need not
register its 'rticles.
W&*$ ,% 6%. (*# 06 ,%)$'"# %! "#,%%' (*#*5(#$? W&*$ *' "$+ 8)/$"%#+?
D DOCTRINE OCTRINE OF OF I INDOOR NDOOR M MANAGEMENT ANAGEMENT
The 2octrine of &ndoor /anagement is an e*ception to the rule of constructive notice. ' person
dealing with a company is deemed to have company. #o$ if he enters into a transaction with the company
which is ultravires of the /emorandum or 'rticles$ he cannot treat the transaction as binding on the
company. Dn the other hand if the transaction appears to be proper one$ when compared with the
/emorandum and 'rticles$ it would be grossly unfair if the company could escape liability it by showing
that there was some irregularity in the conduct of the company+s affairs leading up to the transaction$ when
the other party did not know of the irregularity and had no means of discovering it. This rule has been
described by Lord 1atherley as the doctrine of &ndoor /anagement. &t means that an outsider dealing with
the company is entitled to assume that everything has been regularly done so far its internal proceeding are
concerned.
The directors of the bank issued a bond to /r. TurCuand. The 'rticles provided that the directors had
the power to issue bond if authorized by a proper resolution of the company. (o such resolution was passed.
&t was observed that persons dealing are not inconsistent therewith. %ut they are not bound to do more$ they
need not inCuire into the regularity of internal proceedings.
The doctrine of indoor management is eminently practical and is based on business convenience$ for
business could not be carried smoothly if a person dealing with the company was compelled to call for
evidence that all internal regulations have been duly observed.
E EJCEPTIONS JCEPTIONS: :
1. 3#%-4,5 %! I''5.4*'"$6: ' person$ who deals with the company and who has knowledge of the
irregularity in its internal management in connection with the sub"ectmatter of his dealings$ cannot claim
the benefit of the rule. This e*ception is not confined to a person dealing with the company. .ven a company
may have notice of irregularity in the internal management of another company with which it had been
dealing.
2. N54"5#): ' person cannot claim the benefit of the rule in TurCuand+s case in circumstances under
which he would have discovered the irregularity if he had made proper inCuires. Further$ whether the
circumstances surrounding the transaction are suspicious$ and therefore invite inCuiry$ the outsider cannot
claim the benefit of this rule.
:. 2%", %' "445*4 .5. F%'5'6: The rule in TurCuand+s case will not apply where a document on which the
person seeks to rely is a forgery. The doctrine of indoor management applies to irregularities which
otherwise might affect genuine transactions. &t cannot apply to a forgery.
;. A)$+ %.$+", $& *//*'#$ *.$&%'"$6: The rule in TurCuand+s case does not apply where a person acting
on behalf of the company e*ceeds any actual or ostensible authority given to him. ' person$ who enters into
a transaction with a official of the company$ who has acted beyond his powers$ such a person will not be
protected by the rule of indoor management.
<. N% C#%-4,5 %! $& C%#$#$+ %! $& A'$")4+: ' person who has not actually read the /emorandum
and 'rticles of a company and who has seek to the time$ he entered into the contract$ aware of their contents$
cannot seek to rely on statement contained therein. The doctrine of indoor management is based on the
principle of estoppel$ and therefore$ it cannot be invoked in favour of a person who has not constituted the
company+s /emorandum and 'rticles of 'ssociation. (o one can rely and act upon something with he was
in fact completely ignorant.
PROSPECTUS
' public company may raise its capital by issuing shares or debentures. The public is invited lo subscribe
for its shares or debentures. The invitation containing the offer states the prospectus of the company and the
purposes for which the capital is reCuired. The document inviting the public to purchase the shares or
debentures of the company is called a <rospectus.
D!"#"$"%# %! P'%+/)$.+ : #ection 6,9;- defines a prospectus as Nany document described or issued as a
prospectus and includes any notice$ circular$ advertisement or other document inviting deposits from the
public or inviting offer from the public for the subscription or purchase of any shares in. or debentures of$ a
body corporateN ' prospectus is usually a circular or newspaper advertisement published by the promoters
after the formation of the company to induce the public to take up shares in the company. The invitation
must be sent to the public if the document is to be a prospectus.
FORMALITIES IN ISSUING A PROSPECTUS
3- .very prospectus issued by or on behalf of a company must be dated and that date shall unless the
contrary is proved$ be regarded as the date of its publication.
6- ' copy of the prospectus signed by every director or proposed director or by his agent must be
delivered to the Begistrar on or before the date of publication. The prospectus issued to the public
should mention that a copy of the prospectus issued to the public should mention that a copy of the
prospectus along with the specified documents have been filed with the Begistrar.
9- #.%&Os 0onsent or authorisation i.e. acknowledgement from #ecurities .*change %oard of &ndia.
=- .very form of application for subscribing the shares or debentures of ' company shall not be issued$
unless it is accompanied by a copy of the prospectus.
:- ' prospectus must contain the necessary information to enable the public to decide whether or not to
subscribe for its shares or debentures. .very prospectus shall stale the particulars specified in pan &
and && of #chedule 1.
DISCUSS IN DETAIL THE CONTENTS AND THE FORM OF A PROSPECTUS?
C%#$#$+ %! /'%+/)$.+:
&n order to protect the interests of the investing public against the fraud of the promoters$ etc.
0ompanies 'ct has provided for a large number of regulations seeking the fullest disclosure of all material
and essential particulars in the prospectus. .very prospectus issued by a company must state the matters
specified in <art & of the #econd schedule to the 'ct and contain information and reports specified in <art &&
of the #chedule$ and that the said <arts & and && shall have effect sub"ect to the provisions contained in <art
&&& of the #chedule.
The main contents are given below:
P*'$ I %! S)&,.4 II
1. G#'*4 "#!%'(*$"%#:
3. (ame the address of registered office of the company.
6. (ame of Begional #tock .*changes and other stock e*changes where application has been made for
listing of present issue.
9. #tatement T declaration about refund of the issue if minimum subscription of 8AV is not received
within 8A days from closure of the issue.
=. 2eclaration about the issue of allotment lettersT refunds within a period of 3A weeks and interest in
case of any delay in refund at the prescribed rate.
:. 2ate of opening of the issue.
;. 2ate of closing of the issue.
5. 2ate of earliest closing of the issue.
4. (ame and address of auditors and lead managers.
8. (ame and address of trustee under debenture trust deed ,incase of debenture issue-.
2. C*/"$*4 +$'.)$.' %! $& )%(/*#6:
3. 'uthorized$ issued$ subscribed and paidup capital.
6. #ize of present issue giving separately reservation for preferential allotment to promoters and others.
9. <aid up capital:
'fter the present issue.
'fter conversion of debentures ,if applicable-.
:. T'(+ %! $& /'+#$ "++.:
3. Terms and payments.
6. Bights of the instrument holders.
9. 1ow to applyavailability of forms$ prospectus and mode of payment.
;. P*'$").4*'+ %! $& "++.:
3. Db"ects
6. <ro"ect cost
9. /eans of financing ,including contribution of promoters-.
<. C%(/*#6, (*#*5(#$ /'%G)$:
3. 1istory$ main ob"ects and present business of the company.
6. #ubsidiary of the company$ if any.
9. <romoters and their background.
=. (ames$ addresses and occupations of managers$ managing directors and other directors including
nominee. directors$ whole time directors.
:. Location of the pro"ect.
;. <lant and machinery$ technology$ process$ etc.
5. &nfrastructure facilities for new materials and utilities like water$ electricity$ etc.
=. I#!%'(*$"%# '5*',"#5 )%(/*#6 *#, %$&' 4"+$, )%(/*#"+ .#,' $& +*( (*#*5(#$:
The following particulars in regard to company and other listed companies under the same management
which made any capital issue during the last 9 years has to be given:
3. (ame of the company.
6. Gear of issue.
9. Type of issue.
=. 'mount of issue.
:. 2ate of closure of issue.
;. 2ate of completion of delivery of shareT debenture certificate.
5. 2ate of completion of pro"ect where the ob"ect of the issue is financing of the pro"ect and
4. Bate of dividend paid.
P*'$ II %! S)&,.4 II
1. G#'*4 I#!%'(*$"%#
3. 0onsent of 2irectors$ 'uditors$ 'dvocates$ /anagers to &ssue$ Begistrar of &ssue$ %ankers to the
0ompany$ %ankers to the &ssue and .*perts.
6. .*pert opinion obtained$ if any.
9. 0hange$ if any$ in directors and auditors during the last three years$ and reasons thereof.
=. 'uthority for the issue and details of resolution passed for the issue.
:. <rocedure and time schedule for allotment and issue of certificates.
;. (ames and addresses of the 0ompany #ecretary$ Legal 'dvisors$ Lead /anagers$ /anagers$
'uditors$ %ankers to the 0ompany$ %ankers to the &ssue and %rokers to the &ssue.
2. F"#*#)"*4 I#!%'(*$"%#
' report by the auditors of the company with respect to the profits and losses for the five financial
years preceding the issue of prospectus. The report should also show the rates of dividend paid on each class
of shares for each of the said years. &f the company has been carrying on business for less than five years$
the figures are to be given for the actual period.
&f the company proposes to acCuire any business$ a report by a 0hartered 'ccountant$ upon the
profits and losses of the business for each of the five financial years preceding the issue of prospectus and
the assets and liabilities of business.
:. S$*$.$%'6 *#, %$&' I#!%'(*$"%#
3. /inimum subscription
6. .*penses of the issue giving separately fee payable to:
a. 'dvisors
b. Begistrars to the issue
c. /anagers to the issue
d. Trustees for the debentures and holders
9. @nderwriting commission and brokerage
=. <revious issue for cash
:. 0ommission or %rokerage on previous issue
;. &ssue of shares otherwise than for cash
5. 2etails of directors$ proposed directors$ wholetime directors$ their remuneration$ appointment and
remuneration of managing directors$ interests of directors$ their borrowing powers and Cualification
shares.
P*'$ III %! S)&,.4 II
The provisions of this part apply to part & and <art & of schedule &&$ given above. These provisions are
summarized below:
3. &n the case of a company which has been carrying on business for less than five financial years$ the
reference in <art && of the schedule for : financial years will mean only for the years for which the
company has been carrying on business.
6. 'ny report by accountant$ reCuired by <art && shall be made by accountant,s-$ Cualified under the
0ompanies 'ct for appointment as 'uditors,s- of the company.
9. The time and place at which copies of all balance sheets and profit and loss accounts$ material
contracts and document etc. can be inspected should also be specified under this part.
=. The prospectus must end with the declaration that all relevant provisions of the 0ompanies 'ct$
38:;$ and the guidelines issued by the 7overnment have been compiled with and no statement made
in the prospectus in contrary to the provisions of the 0ompanies 'ct$ 38:; and the rules there under.
STATEMENT IN LIEU OF PROSPECTUS, (SECTION 7?)
S$*$(#$ "# 4". %! P'%+/)$.+ H+)$"%# 7?I
&n some cases$ companies are able to raise the original capital without inviting the public to
subscribe. &n such cases$ the company need not issue a prospectus. !here a public company which has a
share capital does not issue a prospectus on its formation it cannot allot any shares without first filing with
the Begistrar a document called )4tatement in lie$ of Crospect$s+.
This document must be in the form set out in #chedule &&& and must contain practically the same
information as is reCuired in the prospectus.
The document shall be delivered to the Begistrar at least 9 days before the first allotment of shares.
The statement must be signed by every directors or proposed director or his agent.
&t should contain all the information like the prospectus.
&t should not be issued to the public.
&f a company fails to deliver a statement in lieu of prospectus$ it cannot allot shares or debentures.
'n allotment$ if made is voidable if the allottee notifies the company within 6 months after the
statutory meeting or in cases where there is no such meeting within two months after allotment.
&f a company fails to fulfill the above conditions$ the company and every director who has been
knowingly a party to this contravention shall be liable for fine up to Bs.3AAA.
&f a statement in lieu of prospectus delivered to the Begistrar contains an untrue i.e. a misleading
statement$ even person who authorized the delivery of the statement shall be liable to imprisonment
for 6 years and fine of Bs.:AAA.
WHO ARE LIABLE FOR MISSTATEMENTS IN A PROSPECTUS? EJPLAIN THE EJTENT OF
CI2IL AND CRIMINAL LIABILIT1 FOR SUCH CIRCUMSTANCES?
&f there is any misstatement of a material fact in a prospectus or if the prospectus is wanting
,inadeCuate- in any material fact$ there may arise
Liability for mi##tatement# in pro#pect"#

0ivil Liability 0riminal Liability
'gainst the company 'gainst the directors$ promoters and e*perts
!here an untrue or fraudulent statement occurs in a prospectus there may be
,a- civil liability$ and ,b- criminal liability. The liability for fraudulent or misstatement in a #tatement
in lieu of <rospectus is the same as in the case of prospectus.
0ivil Liability
' person who has been induced to subscribe for shares in a company on the strength of misstatement
or omission in the prospectus may have a remedy either against the company or against the promoters or
directors or e*perts.
R(,"+ *5*"#+$ $& )%(/*#6: ' person who has been induced to subscribe for shares may ,a-
rescind the contract to lake the sharesH ,b- claim damages.
(*) R+)"++"%# %! )%#$'*)$: !here a person has purchased the shares of a company on the faith of a
prospectus which contained an untrue or misleading$ bul nol necessarily fraudulent statement$ he
can seek rescission of the contract i.e.$ return the shares allotted to him get back his purchase
money with interest and get his name removed from the register of members. This remedy is
available only to those persons who subscribed for any shares on the faith of the prospectus.
(0) D*(*5+: 'ny person induced by fraud to take up shares is entitled 3A sue the company for
damages provided he has rescinded his contract in lime. 3 le cannot both retain the shares and get
damages against the company. The company is liable in damages where the misrepresentation is
an innocent one$ unless ii proves that it had reasonable grounds to believe.
R(,"+ *5*"#+$ $& ,"')$%'+, /'%(%$'+ *#, 8/'$+: 'ny person who has purchased shares or
debentures on the faith of the prospectus containing the untrue statement may sue ,a- every directorH ,b-
every person whose name appeared in the prospectus as a proposed directorH ,c- every promoterH and ,d-
every person who authorised the issue of the prospectusH The aggrieved person may claim ,&- compensation
under #ection ;6H ,6- damages for noncompliance with the reCuirements of #ection :;H ,9- damages under
the general law.
D!#)+ *7*"4*04 $% * ,"')$%' : ' director may escape liability if he proves: ,i- that the prospectus
was issued without his knowledge or consent and that on becoming aware of its issue$ he gave reasonable
public notice to that effectH ,ii- that after the issue of prospectus and before allotment$ he on becoming aware
of the untrue statement in it$ withdrew his consent and gave reasonable public notice of the withdrawal and
the reasons for itH ,iii- that he had reasonable grounds to believe and did believe upto the time of allotment of
shares or debentures that the statement was trueH ,iv- that he made the statement upon the authority of an
e*pert whom he had reasonable ground to believeH ,v- that the statement was a correct and true copy of an
official document.
C'"("#*4 4"*0"4"$6 %! ,"')$%'+: .very person who authorised the issue of a prospectus containing an untrue
statement shall be punishable with imprisonment which may e*tend to two years or with fine which may
e*tend to Bs :$AAA or with both. The accused person$ however$ may not be liable if he provesH ,a- that the
statement was immaterial$ or ,b- he had reasonable ground to believe and did believe upto the time of the
issue of the prospectus that the statement was true. ,#ection ;9-. The punishment for issuing an application
for shares or debentures which is not accompanied by a prospectus is a fine upto Bs. :$AAA.
POWERS OF DIRECTORS:
The directors+ powers are normally set out in the articles. The shareholders cannot control the way in
which the %oard of 2irectors act provided its actions are within the powers given to the %oard. #ection 683
of 0ompanies 'ct$ 38:; provides for general powers of the %oard of directors. &t mandates that the %oard is
entitled to e*ercise all such powers and do all such acts and things$ sub"ect to the provisions of the
0ompanies 'ct$ as the company is authorized to e*ercise and do.
1owever$ the %oard shall not e*ercise any power and do any act or things which is reCuired whether
by the 'ct or by the memorandum or articles of the company or otherwise to be e*ercised or done by the
company in general meeting. <ower of the individual directors . @nless the 'ct or the articles otherwise
provide$ the decisions of the %oard are reCuired to be the ma"ority decisions only. &ndividual directors do not
have any general powers. They shall have only such powers as are vested in them by the /emorandum and
'rticles.
#ection 686,3- of the 0ompanies 'ct$ 38:; provides that the %oard of directors of a company shall e*ercise
the following powers on behalf of the company and it shall do so only by means of resolution passed at
meeting of the %oard:
(*) the power to make calls on shareholders in respect of money unpaid on their sharesH ,aa-the power to
authorize the buyback referred to in the first proviso to clause ,b- of subsection ,6- of section 55'H
(0) the power to issue debenturesH
()) the power to borrow moneys otherwise than on debenturesH
(,) the power to invest funds of the companyH and
() the power to make loan.
DUTIES OF DIRECTORS:
1. S$*$.$%'6 D.$"+:
(A) T% !"4 '$.'# %! *44%$(#$: #ection 5: of the 0ompanies 'ct$ 38:; reCuires a company to file with the
Begistrar$ within a period of 9A days$ a return of the allotments stating the specified particulars. Failure to
file such return shall make the directors liable as .officer in default.. ' fine up to Bs. :AAAT per day till the
default continues may be levied.
(B) N%$ $% "++. "'',(*04 /'!'#) +&*' %' +&*'+ %' +&*' ',(*04 *!$' 2? 6*'+: #ection
4A$ as amended by 'mendment 'ct$ 388;$ forbids a company to issue irredeemable preference shares or
preference shares redeemable beyond 6A years. 2irectors making any such issue may be held liable as
officer in default. 'nd may be sub"ect to fine up to Bs. 3A$AAAT.
(C) T% ,"+)4%+ "#$'+$ (S)$"%# 2>>F:??): &n respect of contracts with director$ #ection 688 casts an
obligation on a director to disclose the nature of his concern or interest ,direct or indirect-$ if any$ at a
meeting of the %oard of directors. The said #ection provides that in case of a proposed contract or
arrangement$ the reCuired disclosure shall be made at the meeting of the %oard at which the Cuestion of
entering into the contract or agreement is first taken into consideration. &n the case of any other contract or
arrangement$ the disclosure shall be made at the first meeting of the %oard held after the director become
interested in the contract or arrangement. .very director who fails to comply with the aforesaid reCuirements
as to disclosure of concern or interest shall be punishable with fine$ which may e*tend to Bs. :A$AAAT.
(D) T% ,"+)4%+ ')"/$ !'%( $'*#+!' %! /'%/'$6 (+). :1>): 'ny money received by the directors from
the transferee in connection with the transfer of the company property or undertaking must be disclosed to
the members of the company and approved by the company in general meeting. Dtherwise$ the amount shall
be held by the directors in trust for the company. This money may be in the nature of compensation for loss
of office but in essence may be on account of transfer of control of the company. %ut if it is bona fide
payment of damages for the breach of contract$ then it is protected by sec. 963,9-. .ven no director other
than the managing director or whole time director can receive any such payment from the company itself.
(E) T% ,"+)4%+ ')"/$ %! )%(/#+*$"%# !'%( $'*#+!' %! +&*'+ (S).:2?): &f the loss of office results
from the transfer ,under certain conditions- of all or any of the shares of the company$ its directors would not
receive any compensation from the transferee unless the same has been approved by the company in general
meeting before the transfer takes place. &f the approval is not sought or the proposal is not approved$ any
money received by the directors shall be held in trust for the shareholders$ who have sold their shares. 'ny
such director$ who fails to take reasonable steps as aforesaid$ shall be punishable with fine$ which may
e*tend up to Bs. 6:AAT.
(F) D.$6 $% *$$#, B%*', ($"#5+: ' number of powers of the company are e*ercised by the %oard of
directors in their meetings held from time to time. 'lthough a director may not be able to attend all the
meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months
whichever is longer$ without permission of the %oard$ his office shall automatically fall vacant L#ection
649,3-,g-M.
(G) T% )%#7# +$*$.$%'6$ 'nnual 7eneral meeting ,'7/- and also e*traordinary general meetings
L #ection 3;:$3;; Q3;8M
(H) To prepare and place at the '7/ along with the balance sheet and profit Q loss account a report on the
company affairs including the report of the %oard of 2irectors ,#ection 359$ 63A Q 635-.
,&- To authenticate and approve annual financial statement ,#ection 63:-.
,U- To appoint first auditor of the company ,#ection 66=-.
,I- To appoint cost auditor of the company ,#ection 699%-.
,L- To make a declaration of solvency in the case of /embers. voluntary winding up ,#ection =44-.

2. G#'*4 D.$"+:
(A) D.$6 %! 5%%, !*"$&: The directors must act in the best interest of the company. &nterest of the company
implies the interest of the present and future members of the company on the footing that company would be
continued as going concern.
(B) D.$6 %! )*': ' director must display care in performance of work assigned to him. 1e is$ however$ not
e*pected to display an e*traordinary care but that much care which a man of ordinary prudence would take
in his own case. 'ny provision in the company 'rticles or in any agreement that e*cludes the liability of the
directors for negligence$ default$ misfeasance$ breach of duty or breach of trust$ is void. The company cannot
even indemnify the directors against such liability.
(C) D.$6 #%$ $% ,45*$: 2irector being an agent is bound by the ma*im delegates non protest delegate.
which means a delegate cannot further delegate. Thus$ a director must perform his functions personally.
1owever$ he may delegate his in certain conditions.
LIABILITES OF DIRECTORS:
1. L"*0"4"$6 $% $& )%(/*#6:
(A) B'*)& %! !",.)"*'6 ,.$6: where a director acts dishonestly to the interest of the company$ he will be
held liable for breach of fiduciary duty. /ost of the powers of directors are .powers in trust. and therefore$
should be e*ercised in the interest of the company and not in the interest of the directors or any section of
members.
(B) U4$'* 7"'+ *)$+: 2irectors are supposed to act within the parameters of the provisions of the 0ompanies
'ct$ /emorandum and 'rticles of 'ssociation$ since these lay down the limits to the activities of the
company and conseCuently to the powers of the %oard of directors. Further$ the powers of the directors may
be limited in terms of specific restrictions contained in the 'rticles of 'ssociation. The directors shall be
held personally liable for acts beyond the aforesaid limits$ being ultra vires the company or the directors.
(C) N54"5#): 's long as the director+s act within their powers with reasonable skill and care as e*pected
of them as prudent businessman$ they discharge their duties to the company. %ut where they fail to e*ercise
reasonable care$ skill and diligence$ they shall be deemed to have acted negligently in discharge of their
duties and conseCuently shall be liable for any loss or damage resulting there from.
(D) M*4* !", *)$+: 2irectors are the trustee for the moneys and property of the company handled by them$
as well as e*ercises of the powers vested in them. &f they dishonestly or in a mala fide manner$ e*ercise their
powers and perform their duties$ they will be liable for breach of trust and may be reCuired to make good the
loss or damage suffered by the company by reason of such mala fide acts. They are also accountable to the
company for any secret profits they might have made in course of performance of duties on behalf of the
company. 2irectors can also be held liable for their acts of .misfeasance. i.e.$ misconduct or willful misuse
of powers.
L"*0"4"$6 $% $&"', /*'$"+:
L"*0"4"$6 .#,' $& C%(/*#"+ A)$:
(A) P'%+/)$.+: Failure to state any particulars as per the reCuirement of the section :; and #chedule && of
the act or misstatement of facts in prospectus renders a director personally liable for damages to the third
party. #ection ;6 provides that a director shall be liable to pay compensation to every person who subscribes
for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by
reason of any untrue or misleading statement included therein.
(B) W"$& '5*', $% *44%$(#$: 2irectors may also incur personal liability for:
(*) &rregular allotment$ i.e.$ allotment before minimum subscription is received ,#ection ;8-$ or
without filing a copy of the statement in lieu of prospectus ,#ection 5A- L#ection 53,9-M @nder section
53,9-$ if any director of a company knowing contravenes or willfully authorizes or permits the contravention
of any of the provisions of section ;8 or 5A with respect to all allotment$ he shall be liable to compensate the
company and the allottee respectively for any loss$ damages or costs which the company or the allottee may
have sustained or incurred thereby.
(0) For failure to repay application monies in case of minimum subscription having not been
received within 36A days of the opening of the issue: @nder section ;8,:- read with #.%& guidelines$ in case
moneys are not repaid within 39A days from the date of the issue of the prospectus$ the directors of the
company shall be "ointly and severally liable to repay that money with interest at the rate of ; V per annum
on the e*piry of 39Ath day. 1owever$ a director shall not be liable if he proves that the default in repayment
of money was not due to any misconduct or negligence on his part.
()) Failure to repay application monies when application for listing of securities are not made or is
refused: @nder section 59,6- . where the permission for listing of the shares of the company has not been
applied or such permission having been applied for$ has not been granted$ the company shall forthwith repay
without interest all monies received from the applicants in pursuance of the prospectus$ and$ if any such
money is not repaid within eight days after the company becomes liable to repay$ the company and every
director of the company who is an officer in default shall$ on and from the e*piry of the eighth day$ be
"ointly and severely liable to repay that money with interest at such rate$ not less than four per cent and not
more than fifteen per cent$ as may be prescribed$ having regard to the length of the period of delay in
making the repayment of such money.
(C) U#4"("$, 4"*0"4"$6: 2irectors will also be held personally liable to the third parties where their liability
is made unlimited in pursuance of section 966,i.e.$ vide /emorandum- or section 969,i.e.$ vide alterations
of /emorandum by passing special resolution-. %y virtue of section 966$ the /emorandum of a company
may make the liability of any or all directors$ or manager unlimited. &n that case$ the directors$ manager and
the member who proposes a person for appointment as director or manager must add to the proposal for
appointment as a statement that the liability of the person holding the office will be unlimited. (otice in
writing to the effect that the liability of the person will be unlimited must be given to him by the following
or one of the following person$ namely: the promoters$ the directors$ manager and officers of the company
before he accept the appointment.
Further$ in case of limited liability 0ompany$ the company may$ if authorized by the articles$ by
passing resolution alter its /emorandum so as to render the liability of its directors or of any director or
manager unlimited. %ut the alteration making the liability of director or directors or manager unlimited will
be effective only if the concerned officer consents to his liability being made unlimited. This alteration also$
unless specifically consented to by any or all directors will not have any effect until e*piry of the current
term of office.
(D)F'*.,.4#$ $'*,"#5: 2irectors may also be made personally liable for the debts or liabilities of a
company by an order of the court under section :=6. #uch an order shall be made by the court where the
directors have been found guilty of fraudulent trading. #ection :=6,3-$ in this regard$ provides that if in the
course of the winding up of a company$ it appears that any business of the company has been carried on$
with intent to defraud creditors of the company or any other person$ or for any fraudulent purpose$ the court$
on the application of the Dfficial LiCuidator$ or the liCuidator or any creditor or contributory of the company
may if it thinks it proper so to do$ declare that any persons who were knowingly parties to the carrying on
business in the manner aforesaid shall be personally responsible without any limitation of liability$ for all or
any of the debts or other liabilities of the company as the court may direct.
Further$ section :=6,9- provides that every person who was knowingly a party to the carrying on of
the business in the manner aforesaid$ shall be punishable with imprisonment for a term which may e*tend to
two years$ or with fine which may e*tend to fifty thousand rupees$ or with both.
L"*0"4"$6 !%' 0'*)& %! -*''*#$6:
2irectors are supposed to function within the scope of their authority. Thus$ where they transact any
business in respect of matters$ ultra vires the company or ultra vires the articles$ they may be proceeded
against personally for any loss sustained by any third party.
L"*0"4"$6 !%' 0'*)& %! +$*$.$%'6 ,.$"+:
The 0ompanies 'ct$ 38:; imposes numerous statutory duties on the directors under various sections of the
'ct. 2efault in compliance of these duties attracts penal conseCuences. The various statutory penalties
which directors may incur by reason of noncompliance with the reCuirements of 0ompanies 'ct are
referred to in their appropriate places.
L"*0"4"$6 !%' *)$+ %! )%F,"')$%'+:
' director is the agent of the company e*cept for matters to be dealt with by the company in general meeting
and not of the other members of the %oard. 'ccordingly$ nothing done by the %oard can impose liability on
a director who did not participate in the %oard action or did not know about it. To incur liability he must
either be a party to the wrongful act or later consent to it. Thus$ the absence of a director from meeting of the
%oard does not make him liable for the fraudulent act of a codirector on the ground that he ought to have
discovered the fraud.
C'"("#*4 4"*0"4"$6:
'part from the civil liability under that 'ct or under the common law$ directors of a company may also incur
criminal liability. #ome of the provisions of the 0ompanies 'ct$ which make directors criminally liable$ are
as follows:
(") #ection ==,=- . Filing of prospectus or statement in lieu of prospectus containing untrue statement.
<enalty . Two years imprisonment or T and fine up to Bs. :AAAA.
("") #ection :4',:- . Failure to repay deposits within the prescribed time limit as specified under sub
sections ,9- and ,=- of section :4'. <enalty @p to five years imprisonment and fine.
(""") #ection :4',;- 'ccepting deposits or inviting deposits in e*cess of the prescribed limits. <enalty up
to five years imprisonment and fine.
("7) #ection ;9 &ssuing a prospectus containing untrue statement. <enalty &mprisonment upto two years orT
and fine upto Bs. :AAAA.
(7) #ection ;4 Inowingly making a false$ deceptive or misleading statement and there by inducing
persons to invest money. <enalty . &mprisonment upto five years orT and fine upto Bs. 3$AA$AAA.
(7") #ection 59 . Failure to repay e*cess application money. <enalty . 2efault in repayment of application
money and interest is punishable with fine upto Bs. :AAAA but if repayment is not made within si* months
from the e*piry of eight day$ also with imprisonment for a term upto one year.
(7"") #ection 4=,9- . Fraudulently renewing a share certificate or issuing a duplicate share certificate.
<enalty . &mprisonment upto si* months orT and fine upto Bs.3$AA$ AAA.
(7""") #ection 3A: . 0oncealing name of creditor or misrepresenting the nature and the amount of the debt or
claim of any creditor. <enalty . &mprisonment upto one year orT and fine or both.
("8) #ection 6A6,3- . @ndischarged insolvent acting as director. <enalty &mprisonment upto two years orT
(8) #ection 6A5 . 2efault in distributing dividends. <enalty . #imple imprisonment upto three years and fine
up to Bs. 3AAA for every day during which the default continues.
(8") #ection 6A8' . Failure to assist Begistrar or any officer so authorized by 0entral 7overnment in
inspection of books of account$ etc.$ of the company. <enalty . &mprisonment for a term not e*ceeding one
year and fine to be not less than Bs. :AAAA.
(8"") #ection 63A,:- . Failure to lay balance sheet$ profit Q loss account$ etc.$ at the annual general meeting.
<enalty . &mprisonment upto si* months orT and fine upto Bs. 3AAAA.
(8""") #ection 633,4- . Failure to comply with section 633 regarding form of balance sheet and matters to be
stated therein and the content and disclosures to be made in the profit and loss account. <enalty .
imprisonment upto si* months orT and fine upto Bs. 3AAAA.
(8"7) #ection 635,:- . Failure to attach to balance sheet a report of the %oard of directors. <enalty .
&mprisonment upto si* months or T and fine upto Bs. 6AAAA.
(87) #ection 663,=- . Failure to supply information to auditors. <enalty . &mprisonment upto si* months or T
(87") #ection 699%,33- . 'udit of cost account of the company 2efault in complying with the reCuirements
of the section. <enalty . &mprisonment for a term that may e*tent to three years or with fine which may go
upto Bs. :AAAA or with both.
(87"") #ection 6:A,8- . Failure to honour restrictions upon shares and debentures imposed by the 0L%.
<enalty . &mprisonment upto si* months or T and fine upto Bs. :AAAA.
(87""") #ection 689',:- . 0ontribution to political party or for political purpose in contravention of section
689'. <enalty . &mprisonment upto three years and fine.
(8"8) #ection 68:,=- . 7rant of loan to directors without obtaining previous approval of the 0entral
7overnment. <enalty . #imple imprisonment upto si* months or fine upto Bs. :AAAA.
(88) #ection 688,=- . Failure to disclose interest in a contract or arrangement. <enalty . Fine which may
e*tend to Bs. :AAAA.
(88") #ection 9A4,9- . Failure to disclose shareholdings. <enalty . &mprisonment upto two years or T and fine
upto Bs. :AAAA.
(88"") #ection 953 . 7iving loans to other bodies corporate in e*cess of the limit prescribed under section
95A. <enalty . Fine upto Bs. :AAAA or simple imprisonment upto si* months.
(88""") #ection =A5 . 'ny person$ whose agreement has been terminated or set aside under section =A6$
knowingly acts as a managing or other director before e*piry of a period of five years from the date of
termination$ without approval of the 0L%$ attracts criminal liability. <enalty . &mprisonment upto one year or
T fine upto Bs. :AAAA L#ection =A5,6-M.
(88"7) #ection =44,9- . False declaration of company.s solvency. <enalty . &mprisonment upto si* months
or T and fine up to Bs. :AAAA.
(887) #ection 6A8,4- . (oncompliance with the reCuirement of maintenance of proper books of account.
<enalty . fine not less than Bs. :AAAA and also with imprisonment not e*ceeding one year for each offence
committed.
WINDING UP
D!"# W"#,"#5 ./.
!inding up is a process whereby the life of a company is ended as its priority administered for the
benefit of it creditors and members. 'n administrator$ called liCuidator is appointed and he takes the control
of the company$ collects its assets$ profits and debts and finally distributes any surplus among the members
in accordance with their rights.
XXXXXXXP'%!. G%-'.
STEPS IN2OL2ED IN THE PROCESS OF WINDING UP ARE GI2EN BELOW:
3. 'ppointment of LiCuidator
6. <ayment of 2ebts and Liabilities
9. 2istribution of surplus
=. Bemoval of the (ame from the Begister
EJPLAIN THE MODES OF WINDING UP?
I. C%(/.4+%'6 -"#,"#5 ./:
' company may be wound by an order of the Tribunal. This is called 2omp$lsor% Ginding $p.
#ection =99 lays down $& !%44%-"#5 )"').(+$*#)+ !%' $& -"#,"#5 ./ %! * )%(/*#6 by the Tribunal.
#pecial resolution of the company Lsec.=99 ,a-M
2efault in holding statutory meeting Lsec. =99 ,b-M
Failure to commence or suspension of business Lsec. =99 ,c-M
Beduction of members below minimum Lsec. =99 ,d-M
&nability to pay debts Lsec. =99 ,d-M
Uust and .Cuitable Lsec. =99 ,f-M
II. 2%4.#$*'6 -"#,"#5 ./:
The ob"ect of a voluntary winding up is that the company and its creditors are left to settle their
affairs without going to the Tribunal$ but they may apply to the Tribunal for any or orders if and when
necessary. This form of winding up is by far the most common and the most popular form.
C"').(+$*#)+ !%' 2%4.#$*'6 W"#,"#5 U/
' company may be wound up voluntarily when K
The period fi*ed by the 'rticles for the company has e*pired.
The company has for any cause whatever passed a special resolution to wind up voluntarily.
T6/+ %! 2%4.#$*'6 W"#,"#5 ./:
' voluntary winding up is of two types. They are:
1. M(0'+B 7%4.#$*'6 -"#,"#5 ./: &t is already stated that a members voluntary winding up is possible
only when the company is solvent and is able to pay its debts in full. &n this case$ it is not necessary for the
members to consult the creditors or to call their meeting. ' declaration of solvency should be made by the
directors.
L5*4 P'%7"+"%#+:
D)4*'*$"%# %! S%47#)6: &t is the declaration made by the directors stating that the company has no debts or
that it will be in a position to pay its debts in full.
H%4,"#5 %! 5#'*4 ($"#5: 'fter filing the declaration of solvency$ the 2irectors should arrange to
convene a meeting of the company and a resolution should be passed to this effect.
A//%"#$(#$ %! L"@.",*$%' (+). ;>?): The company in general meeting shall appoint one or more
liCuidators for winding up the affairs of a company and for distributing the assets.
N%$") %! A//%"#$(#$ %! L"@.",*$%' $% R5"+$'*' (+). ;>:): The 0ompany shall give notice to the
Begistrar of the appointment of a liCuidator within 3A days of such appointment.
B%*',B+ /%-'+ $% )*+ (+) ;>1): Dn the appointment of a liCuidator all the powers of the %oard of
directors and other managerial personal shall come to an end.
S$$4(#$: The liCuidator shall take in charge of all the assets of the company$ convert them into cash and
pay the money first to the creditors and then others based as their preference.
G#'*4 ($"#5: !here the process of liCuidation continues for more than one year$ the liCuidator must
call for general meeting at the end of the first year and submit the accounts as the programme of winding up.
F"#*4 ($"#5: 's soon as the affairs of the company are fully wound up$ the liCuidator must call for a
general meeting by giving onemonth notice to the members. The liCuidator should submit an account
showing the disposal of assets$ settlements of the liabilities and the procedure have been followed for
winding up.
2. C',"$%'+ 2%4.#$*'6 W"#,"#5 U/:
0reditors voluntary winding up takes place only when the company is an insolvent condition and so$
it is unable to discharge its liabilities in full. &n this case$ a declaration of solvency has not been made and
delivered to the registrar.
L5*4 P'%7"+"%#+:
C',"$%'+ M$"#5: ' meeting of creditors should be held and a special resolution for winding up should be
passed in the meeting. The creditors meeting should be conducted either on the same date of general meeting
or on the ne*t day of the general meeting.
P'%7"+"%#+ '5*',"#5 $& )',"$%'+ ($"#5: The notice of the meeting should be sent to each creditor. '
statement of affairs and the list of creditors and the amount due to items should be placed at the meeting.
A//%"#$(#$ %! L"@.",*$%': The liCuidator may be appointed by the creditors at their meeting. &f no
liCuidator is appointed by the creditors in their meeting$ he may be appointed by the members at their
meeting.
G#'*4 ($"#5 *#, )',"$%'+ ($"#5: !here the process of liCuidation continues for more than one
year. The liCuidator must call for general meeting and as meeting at the end of one year as submit the
statement of affairs in each meeting.
F"#*4 ($"#5: 's soon as the affairs of the company is fully wound up$ the liCuidator must make an
account of winding up$ showing how the winding up was conducted as how the property has been disposed
off. !ithin the week of the date of the meeting$ the liCuidator should send the copy of the statement of
affairs to the registrar and also to the official liCuidator.
III. W"#,"#5 ./ +.0G)$ $% $& +./'7"+"%# %! $& )%.'$:
!inding up sub"ect to the supervision of the court is not a separate category of winding up. &t is
actually$ a voluntary winding up$ and the process of winding up is carried up is carried on sub"ect to the
terms and conditions of the court. @nder this method$ a resolution has been passed at the general meeting to
wind up the company voluntarily. 'fter passing a resolution$ an application should be made to the court for
winding up by the creditors or members or any other contributory. The court may pass an order after getting
the approval is known as the supervision order.
(UNIT II COMPLETED)
UNIT III
FACTORIES ACT, 1>;8
DISCUSS THE MEANING, OBJECTI2E AND APPLICABILIT1 OF FACTORIES ACT, 1>;8?
I) I#$'%,.)$"%#:
The term )&ndustry+ connotes a steady and systematic activity in which a trade is organized or
arranged$ whereas a factory is the place where such activities are being carried on. Factories are governed by
the <rincipal 'ct 38=4$ amended 'ct ,an improved version of 389=-. This 'ct e*tends to the !hole of &ndia$
including Uammu Q Iashmir. @nless otherwise provided$ it also applies to factories belonging to the 0entral
and #tate governments ,#ec 33;-.
T& B&%/*4 T'*5,6 of 384=$ has created an awareness among the public for arresting pollution and this
has made the government to take steps in incorporating 0hapter &> ', #ec =3' K =3 1- pertaining to
provisions as regards hazardous processes.
F*)$%'6 S)$"%# 2((),
II) O0G)$ %! $& A)$:
To improve health$ wealth and safety of the workman.
To regulate by imposing restriction as to hours of work including rest Q provisions for availing leave.
To make stringent provisions in employing women Q young persons and durations of their work.
STATE SOME IMPORTANT DEFINITIONS IN THE FACTOR1 ACT, 1>;8
M*#"#5 N FACTOR1
Factory means any premises including the precincts ,Dpen area T Land enclosed by fence T wall- thereofS
3. !hereon $# %' (%' W%'C'+ areT were working on any day of the /'),"#5 $-47 (%#$&+ and in
any part of which * (*#.!*)$.'"#5 /'%)++ "+ 0"#5 )*''", %#-"$& $& *", %! /%-' or is ordinarily
carried on.
6. !hereon $-#$6 %' (%' -%'C'+ areT were working on any day of the /'),"#5 $-47 (%#$&+$ and
in any part of which * (*#.!*)$.'"#5 /'%)++ "+ 0"#5 )*''", %# -"$&%.$ $& *", %! /%-'$ or is
ordinarily so carried on.
M*#.!*)$.'"#5 P'%)++ S) 2(C)
/eans any process for
making$ altering$ repairing$ ornamenting$ finishing$ packing$ oiling$ washing$ cleaning$ breaking up$
demolishing$ or otherwise treating or adopting any article or substance with a view to its use$ sale$
transport$ delivery or disposal$ or
pumping oil$ water$ sewerage or any other substance$ or generating$ transforming or transmitting power
or
0omposing types for printing$ printing by letter press$ lithography$ taking photography and other similar
process or book binding.
0onstructing$ reconstructing$ repairing$ refilling$ finishing or breaking up ships or vessels or
<reserving or storing any article in cold storage.
P%-' FF S) 2 (5)
It means mechanical or electrical energy transmitted as a step or aid to carry out manufacture and not
energy generated by human or animal agency. /ere use of power not connected with activities of
manufacturing will not make the premises a factory K N- T*GM*&*4 H%$4 2+ I#+/)$%' %! F*)$%'"+,
1><=.
'ccording $% S) ;$ on application by the occupier of a factory$ different departments$ or branches of
the factory may be treated as separate factories. Likewise$ two or more factories specified by the occupier
can also be treated as a #ingle factory$ by the #tate government by passing suitable orders.
W%'C' FF S) 2(l)
/eans a person employed directly or through any agency withT without the knowledge of the
<rincipal employer$ whether for remuneration or not$ in any manufacturing process but does not include any
member of the armed forces of the @nion #ec 6,l-.
T% +*6 * P'+%# *+ * W%'C',
There must be employeremployee relationship.
.mployer should dictate what to do Q how to do a work to the employee.
L")#+"#5 *#, R5"+$'*$"%# %! F*)$%'"+ F S) =:
/ake rules regarding the submission of plans and approval$ licensing and registration of factories.
<rior approval in writing of the #tate 7overnment or 0hief &nspector of Factories$ for which$ the
applicant should comply with the direction of the government.
.very application should accompany with a certified plan$ registration fee, registration$ licensing or
renewal-
&f permission is not granted$ within 9 months after such application$ permission is assumed to have
been granted.
Befusing permission or license must be a speaking order K is an order passed after hearing both sides.
<ermission can not denied merely on the direction by the government without hearing the
applicant,#hihabudeenIun"u>s #tate of Ierala$ 384:-
@nder #ec 5$ the Dccupier must give 3: days notice before he begins to occupy or use any premises as
a Factory.
#uch (otice 0ontains: the name and situation of the factory$ the name and address of the occupier$ the
name and address of the owner of the building$ address for communication$ the nature of
manufacturing process during the ne*t 36 months.
.ven an acting /anager or a person not designated as /anager but controls and manages the factory is
deemed to be an Dccupier K 3*(*3"+&%'J&.#GH.#-*4*2+ P'+)'"0, A.$&%'"$6 1>7=.
I#+/)$"#5 S$*!! (S) 8 N 1?)
In#pector#9
The state government$ by notification$ in the Dfficial 7azette$ to appoint any person duly Cualified as a
0hief &nspector.
#upported by Uoint 0hief &nspectors$ 'dditional 0hief &nspectors$ assisted by 2eputy 0hief &nspectors
Q &nspectors.
They all have powers to e*ercise their authorities throughout the state as 0hief &nspector.
' 2istrict /agistrate is regarded as an &nspector of the district. !hen he e*ecutes his function as
&nspector$ he is only as an .*ecutive and (DT as the Uudicial Dfficer. G.G*,&*'L*C+&"("'*(2+
E(/'%' 1>;> N*5.
P%-'+ %! I#+/)$%'+ N S) >
'n &nspector may$ within the local limits for which he is appointed.
.nter the premises of a factory with assistants.
/ake e*amination of the premises$ plant$ machinery
&nCuire into any accidentsT dangerous occurrence of bodily in"ury$ disability or not and take on the spot
or statements of any person$ he who is necessary for such inCuiry
P#*4$6
&f an &nspector is preventedT obstructed$ such person shall be punished with &mprisonment for
;months or fine uptoBs 3AAAA or with both.
C'$"!6"#5 S.'5%#+ F S) 1?
?ualified /edical <ractitioners$ appointed by the #tate 7overnment for #pecified areas or factories.
!ith the approval of the #tate 7overnment$ he may authorize any Cualified /edical <ractitioner.
1owever$ an Dccupier or any person either directly or indirectly interested can not be appointed.
Bestrictions can be e*empted by passing orders in !riting.
D.$"+
.*amine and certify a person as a young <erson.
.*amine any person and issue fitness certificate either to do the work or resume the work.
2eclare a person either as sick or unfit to do any work.
.*amine any person engaged in dangerous operations.
Bight to supervise any place in the factory to say it as Bisk Free.
EJPLAIN THE HEALTH, SAFET1 AND WELFARE MEASURES PRO2IDED IN THE PRESENT
INDUSTRIAL SCENARIO IN THE FACTORIES ACT 1>;8.
The factories 'ct$ in &ndia$ was first passed in 3443. aimed at protecting 0hildren from e*ploitation and
providing some health and safety measures for all workers
The 389= 'ct was to implement the recommendations of the Boyal 0ommission on Labor in &ndia and
the conventions of &LD.
The Factories 'ct$ 38=4 made detailed provisions regarding health$ safety and welfare of the workers
and other aspects of work in the factories.
&t came into force on 'pr 38=8. &ts ob"ect is to implement many of the provisions of the &LD+s code on
&ndustrial hygiene.
1. HEALTH MEASURES (S) 11 N 2?)
C4*#4"#++: #ec 33 K
1ouse keeping$ it means keeping the factory premises clean and tidy. Bemoval of dirt and refuse alone is not
enough$ but they have to be disposed of in a suitable manner$ without$ causing detriment to the residents of
the locality.
The Floor must not be wet and must be free from moisture. !ater should not stagnate and suitable
arrangements for draining.
0onstantly$ detergent and disinfectants must be used for washing.
I) D"+/%+*4 %! -*+$+ *#, !!4.#$+ (S) 12)
#hould be disposed of in order to maintain the hygiene inside the factory
#uch waste can not be let out without treatment$ because wastes would pollute the surroundings.
II) 2#$"4*$"%# *#, T(/'*$ (S) 1:)
#hould ensure normal health to the workman.
For this purpose$ the interior walls and roof must be designed and provided with heat resisting or heat
proof materials by way of installation.
III) D.+$ *#, F.(+ FS) 1;
<revent workers inhaling dust$ fumes and other impurities which can not be seen through naked eye in
the air.
0ontrol devices ,use of .*haust fans- are highly recommended.
I2) A'$"!")"*4 H.(","!")*$"%# N S) 1< N
7overnment (orms to be followed for increasing or decreasing or maintaining such artificial
humidification.
1umidifiers for keeping air moisture at even level shall be provided.
2) O7' C'%-,"#5 N S) 1=F
.very worker reCuires at least 9AA cubic feet ,now$ it is :AA cubic feet- to work with ease and comfort
ensuring mobility.
'ggregate space is more than 3= feet. The 0hief &nspector of Factories may specify the number of
persons to be employed in a room.
2I) L"5&$"#5 N S) 17F
Too much light throws glare on normal vision. 1ence$ the reCuired light with minimum power must
be provided.
7lazed windows and sky lights must constantly be cleaned. 7lares and shadows must be avoided
from distorting the vision. Dtherwise$ workman would strain$ their eyes leading to risks.
2II) D'"#C"#5 W*$' N S) 18
<otable$ pure or wholesome drinking water at convenient points.
The (otice /ust 0ontain the 0aption +2rinking !ater+ in local language. &f the strength is beyond
6:A$ cool water eCuipment to ensure supply of chilled water.
2III) L*$'"#+ *#, U'"#*4+ F S) 1>F
For a human being$ two places have to be kept clean and tidy.
Latrines and @rinals
<laces where people rest and rela*.
Factories where more than 6:A workers employed must follow the prescribed sanitary type.
IJ) S/"$$%%#+ N S) 2? N
're the pots$ the workers having to spit.
To maintain the cleanliness and hygiene of the factory.
#ufficient number of spittoons$ taking in to account the number of the persons provided.
' fine of Bs : would be imposed.
2.SAFET1 MEASURES N (S) 21 F;?)
I) F#)"#5 %! M*)&"#'6 N S) 21 N &n every factory the following namely$
every moving part of a prime moverT every flywheel$
every part of an electric generator$ a motor or
every part of transmission machinery
/achines must constantly be e*amined to ensure smoothness.
Lubrication must be done only by the adult male workers with tight fitting clothes$ supplied by the
occupier.
'n adult worker can not handle any belt which is less than 3: cms width.
(orms with regard to the fitment of pulleys$ footholds and handholds etc.
II) E(/4%6(#$ %! 1%.#5 P'+%#+ %# D*#5'%.+ M*)&"#+ N S) 2:
Goung persons not allowed. Dn the other hand$ if he has fully instructed$ given proper training and
the precautionary steps have to be taken$ then only young persons could be employed to work on dangerous
machines.
III) S$'"C"#5 5*' *#, ,7")+ !%' ).$$"#5 %!! /%-' N S) 2;
#uitable$ efficient mechanical device must be provided for instantaneously stopping the machines. #ec
6=,6- necessitates the provision of this device in every work room.
#ec 6= ,9- states not only provision for cutting off power is enough$ but also arrangements should be
made for locking these devices in a safe position.
I2) S4!F*)$"#5 M*)&"#+ NS) 2<
Traversing part of self acting machinery shall be allowed to traverse both outward and inward directions
only beyond a distance of =: cms from any fi*ed structure.
The fi*ed structure shall not be part of the machine.
2) C*+"#5 %! #- (*)&"#'6 N S) 2=
<ower driven machinery$ spindle wheel should be properly encased$ i.e. covered and guarded
effectively.
#pur wheel$ worm wheel$ fly wheel which are in constant motion should be safely encased.
2I) P'%&"0"$"%# %! E(/4%6(#$ %! -%(# *#, C&"4,'# #*' C%$$%# O/#'+ N S) 27
!omen and 0hildren are generally prohibited. &f the feed end of a cotton opener is portioned by a separate
wall$ then women and children could be employed on the side of the feeding end and definitely not at the
delivery end.
2II) H%"+$ *#, 4"!$+ N S) 28F
&f lifts are in use$ their construction must have been done to withstand the strain of weight.
Lift should be fitted with gates and enclosures.
Thorough e*amination by competent persons at least once in si* months.
Begister must be maintained.
2III) L"!$"#5 (*)&"#+, )&*"#+, '%/+ *#, 4"!$"#5 $*)C4+ N S) 2>
Lifting machines$ cranes must be properly fastened and strongly coupled with chains and ropes.
These chains and ropes tied up with the hoists sufficiently protect lifts and cranes in contingencies like
power failure$ mechanical failure.
IJ) R7%47"#5 M*)&"#'6 N S) :?
&n case of grinding machines$ the optimum speed should be indicated for the safe working of the
machines.
Signify the ma*imum speed$ the optimum speed must be written on the machine for the safe use of it.
J) P'++.' P4*#$ (S) :1)
Safe )working pressure+ must be ensured in every part of the plant or machinery used in a factory. To install
eCuipment to indicate the pressure limit so that automatic corrections could be made.
JI) F4%%'+, +$*"'+ *#, (*#+ %! *))++ N S) :2)
#uitable foothold and handhold shall be provided to the workers whenever necessary where it is unsafe to
pass through a place$ railings may be provided.
JII) P"$+, S.(/+, O/#"#5 "# F4%%'+, $) (S) ::)
'll the said should be properly fenced on all sides. <referably$ it would be better if they are closed with lids.
JIII) E8)++"7 W"5&$+ N S) :;
Every employee shall not be allowed to carry on heavy load which is beyond the prescribed limit.
JI2) P'%$)$"%# %! E6+ N S) :<
The occupier should provide screens or suitable goggles to the workers and must be placed in the
vicinity of the workmen in the work spot. The workers must not only be informed about their whereabouts
but they must be compelled to make use of the goggles ,Finch >s Telegraph 0onstruction Q /aintenance
0o Ltd$ 38::-.
J2) P')*.$"%# *5*"#+$ ,*#5'%.+ !.(+ N S) :=
(o person in a factory is permitted to enter any pipe or other confined space in which dangerous
fumes are likely to be present.
J2I) P')*.$"%#+ *5*"#+$ 8/4%+"7+ %' "#!4*((*04 ,.+$, 5*+ $) N S) :7
<lant and machinery used in such process shall be effectively secured by enclosures. Dne way of
preventing such e*plosions should be to remove the dust$ gas and fume.
J2II) P')*.$"%# "# )*+ %! F"' N S) : :T&factory authority must provide such number of e*it doors to
facilitate persons to escape. #uitable audible alarm bell or siren for alerting the workers. Fire e*tinguishers
and foam sprayers should be provided. #uitable training must have been given for handling this eCuipment.
J2III) S*!$6 O!!")'+ N S) ;?B
1is primary duty is to create awareness among workers for working safely.
!here more than 3AAA workers and involving any risk health and safety of persons.
:. WELFARE OF WOR3ERS:
AA44 -%'C, N% /4*6O M*C+ J*)C * ,.44 0%6B.A+ %/"#, 06 H'$P0'5, providing congenial atmosphere
for the workers is of primary importance.
I) W*+&"#5 F*)"4"$"+ N S) ;2 N The places where such facilities are available should be accessible.
The must be kept clean.
II) F*)"4"$"+ !%' S$%'"#5 *#, ,'6"#5 )4%$&+ N S) ;: N .nable the workers to keep their clothes safe so
that there is no risk of theft in that place. #pace must be provided for drying wet clothing.
III) S"$$"#5 !*)"4"$"+ N S) ;;
Arrangements shall be made for workers to sit and take rest where their work involves a standing
posture. (o hard and fast rule to work in standing posture.
0hief &nspector is opined that a work could be carried out in a sitting postureH he may instruct T order
I2) F"'+$ *", *//4"*#)+ N S) ;<
0ontaining essential medicines$ including cotton must be provided for every department with not less
than 3:A !orkers.
First aid bo*es must be maintained in charge of a responsible person$ holding a certificate in first aid
0ourse.
2) C*#$# N S) ;=
!here 6:A or more workers shall provide one or more canteens as per rules of the #tate 7overnment.
#hould be managed by a managing 0ommittee K 0onsisting of representatives of employees and
employers.
2I) S&4$'+, '+$ '%%(+ *#, 4.#)& '%%(+ N S) ;7
!here 3:A or more workers employed$ it shall be provided.
The workers shall not eat their food in any other place other than the lunch room if it has been provided.
2II) C'Q)&+ FF S) ;8F "+ * '%%( !%' *))%((%,*$"#5 )&"4,'# 04%- $& *5 %! +"8.
<roperly lighted and adeCuately ventilated.
Trained women assistants should be employed to attend to the 0hildren and maintain them clean and
healthy.
2III) W4!*' O!!")'+ N S) ;> N
!here :AA or more workers$ there shall be such number of Cualified !elfare Dfficers.
1e must ensure that welfare measures envisaged under the Factories 'ct are implemented and
maintained properly.
'ddress their daytoday problems connected with their welfare and solve accordingly.
' factory such as sugar factories is seasonal in its operations functioning for a few months in a year
such a factory employing :AA or more workers shall appoint their prescribed number of welfare officers.
LIST OUT THE HARARDOUS PROCESSES CHARACTERISED B1 THE FACTORIES ACT, 1>;8
C&*/$' I2 N A
L"+$ %! I#,.+$'"+ I#7%47"#5 H*P*',%.+ /'%)++:
3. Ferrous /etallurgical &ndustries K &ron Q #teel$ Ferroalloys.
6. (on Ferrous metallurgical &ndustries K <rimary metallurgical &ndustries$ namely$ Rinc$ Lead$ 0opper$
/anganese .tc.
9. 0oal &ndustries.
=. <ower 7enerating &ndustries
:. Fertilizer &ndustries
S"$ A//'*"+*4 C%(("$$ N S) ;1A N 0onstituted by the #tate 7overnment for e*amination of application
of 'pplication for establishment of factories.
/ake recommendations to the #tate government within 8A days from the date of the application.
!hile considering 0entral or #tate 7overnment companies$
&t may include some scientists along with
1. C&"! I#+/)$%' %! $& S$*$ *+ C&*"'(*#
2. R/'+#$*$"7+ %! S$*$ *#, C#$'*4 B%*', %! /'7#$"%# *#, C%#$'%4 %! *"', -*$' /%44.$"%#.
:. R/'+#$*$"7 !'%( $& ,/*'$(#$ %! E#7"'%#(#$.
;. R/'+#$*$"7 !'%( $& S$*$ T%-# P4*##"#5.
<. E8/'$ "# $& !"4, %! O))./*$"%#*4 &*4$& $) N $%$*446 1; ((0'+.
D"+)4%+.'+ 06 $& O))./"' S) ;1 B N #hould disclose the measures taken to overcome such
hazards.#hall intimate the <olicy followed by them in handling these materials.
E('5#)6 /4*# *#, ,"+*+$' )%#$'%4 (*+.'+ K !orkers and the general public residing in the vicinity
of the factory may adopt such safety measures as may be reCuired.
R+/%#+"0"4"$6 %! $& O))./"' "# '+/)$ %! HARARDOUS PROCESS N S) ;1C
'ccurate and uptodate health records and medical reports shall be maintained by the occupier.
#uch records must be made accessible not only to the &nspecting #taff from the government but also to
the workers.
I#@."'6 C%(("$$ N S) ;1D N &n case of calamity$ such as %hopal Tragedy$ the 0entral 7overnment to
enCuire into the #tandards of health$ and safety observed in the factory.0ommittee shall have a 0hairman
and Two other members.The term shall be decided by the 7overnment.
E('5#)6 S$*#,*',+ N S) ;1 E N This direction is applicable only in cases where e*isting standards of
health and safety is found to be inadeCuate or where no standards at all have been fi*ed.
P'("++"04 4"("$+ S) ;1 F K The #econd #chedule added by the 'ct of 3845 lays down the permissible
level known as the ma*imum permissible threshold limits regarding e*posure of chemicals and to*ic
chemicals in the manufacturing process.
W%'C'+B /*'$")"/*$"%# "# S*!$6 M*+.'+ N S) ;1 G:
The Dccupier shall constitute a #afety 0ommittee consisting eCual number of !orkers and
/anagement #taff to promote 0ooperation in the matter of maintaining #afety$ 1ealth at work.
#uitable training and review of #afety measures at periodicals intervals shall be given due
importance.
S$*$ G%7'#(#$ (*6 8(/$ *#6 !*)$%'6 !'%( +$$"#5 ./ S*!$6 C%(("$$.
W*'#"#5 *0%.$ "(("##$ D*#5' N S) ;1 HF Likelihood of imminent danger to the lives and health of
the workers employed$ the workers have every right to bring such danger to the notice of the occupier either
directly ,thru #afety 0ommittee- or indirectly$ he shall take remedial action.
&f he is not satisfied$ he shall refer the matter to the nearest inspector of factories. The decision of the
&nspector is said to be final.
DEFINE THE WOR3ING HOURS, HOLIDA1S L ANNUAL LEA2E AS MENTIONED IN THE
FACTORIES ACT, 1>;8?
A,.4$ F S) 2(*) NIs a person who has completed the age of 34.
A,%4+)#$ N S) 2 (0) K is a person who has completed the age of 3: but has not completed the age of 34.
C&"4, S) 2()) F is a person who has not completed the age of 3:.
'ccording to #ec ;5$ a 0hild who has not completed the age of 3= can not be employed to work in a factory.
W%'C"#5 H%.'+ (S) <1)
(o adult worker shall be reCuired or allowed to work in a factory for more than =4 hours in a week.
D*"46 H%.'+ (S) <;)
(o adult worker shall be reCuired or allowed to work in a factory for more than 8 hours in any day
and =4 hours in a week.
I#$'7*4 %! R+$ N S) <<
(o adult worker shall work for more than : hours unless he is given an interval of rest for at least
half an hour at the end of five hours of continuous work.
N"5&$ S&"!$ F S) <7
Worker works on a shift which e*tends beyond midnight K after ;pm to ;am.
1is weekly or 0ompensatory off for a whole day (*#+ a period of 6= consecutive hours beginning
when his shift endsH and
The following day for him is the period of 6= hours beginning when such shift ends$ and the hours he
has worked after midnight shall be counted in the previous day.
P'%&"0"$"%# %! O7'4*//"#5 %! S&"!$+ F (S) <8)
Dne shift of workers should not be asked to work more than in one shift.
7overnment or the 0hief &nspector can grant e*emption.
E8$'* -*5+ !%' O7'$"( (S) <>)
' worker is entitled to twice his ordinary rate of wages when he has worked for more than 8 hours in
any week in a factory.
O',"#*'6 '*$ %! -*5+:
means the basic wages plus such allowances including the cash eCuivalent of the advantage accruing
through the concession sale of food grains to workers and other articles as the work is for the time
being entitled to.
&t does not include a bonus and wages for overtime work.
D%.04 E(/4%6(#$ FR+$'")$"%#+ (S) =?)
(o adult worker shall be reCuired or allowed to work in any factory on any day on which he has
already been working in any other factory e*cept in such circumstances as may be prescribed.
N%$") %! P'"%,+ %! -%'C !%' *,.4$+ N (S) =1)
&n every factory$ (otice shall be displayed both in .nglish and as well as in the local language$ as
understood by ma"ority of the workers$ clearly showing the periods during which adult workers may
be reCuired to work for every day.
#uch (otice shall be kept at a prominent place$ preferably at the main entrance of the factory #ec
;3,3-.
R5"+$' %! A,.4$ W%'C'+ N (S) =2)
Begisters disclosing the particulars of adult workers working in the factory shall be maintained by
the manager incorporating the changes from time to time.
Begisters shall show:
The name of each adult worker in the factory.
The nature of his work.
P%-' $% (*C 8(/$"#5 '.4+ *#, %','+ (S) =;)
<rovisions of ,#ec :3 K ;;- not to apply to certain defined persons such persons who hold positions
of supervision or management or employed in a confidential position in a factory or who are so
declared by the 0hief &nspector.
Bules can not be made in the provisions relating to restrictions of employment of women between
pm and ;am.
H%4",*6+ (S)$"%# <2 L <:)
(o adult worker shall be reCuired or allowed to work in a factory$ on the first day of the week which
is a #un day. This would mean that a worker shall have a holiday for every si* days of continuous
work.
1owever$ the manager may call upon a worker to work on a #un day. &n such cases$ one day holiday$
must be given either out of the 9 days proceeding the #un day or out of the 9 days succeeding the
#un day.
%efore changing holiday to the workers$ a manager must deliver notice to the office of &nspector
e*pressing his intention to that effect.
#un day$ where any worker works on a #un day for the purpose of calculating weekly hours of work
be included in the preceding week.
C%(/#+*$%'6 H%4",*6+:
&t is mandatory that a worker shall be allowed compensatory holidays of eCual number to the
holidays so lost.
The compensatory holidays must be allowed to the workers within 6 months or within a month in
which the substitution of such holidays becomes due.
A##.*4 L*7 -"$& W*5+ (S) 7> F82)
R.4+ '4*$"#5 $% A##.*4 L*7 -"$& -*5+ (S) 7>)
3. ' worker must be worked for 6=A days or more during the 0alendar Gear.
6. 2uring that year$ for every 6A days of actual work put in by him$ a workman becomes eligible
for one day rest leave in the succeeding year.
I# case a worker is dischargedT dismissed T Cuits or superannuated$ he is entitled to receive the *'#,
-*5+ )*4).4*$, *$ $& '*$ %! %# ,*6 !%' $-#$6 ,*6+ %! -%'C /'!%'(,. The earned leave of
such workers must be settled before the e*piry of the #econd working day from the date of such
discharge$ dismissal or Cuitting.
Second working day means 6
nd
working day for the factory from the beginning of the month.
I! * -%'C' ("5&$ #%$ &*7 )%(/4$, 2;? ,*6+ "# * C*4#,*' 6*'$ the legal representative or
nominee of such worker shall be entitled to )4*"( +.)& *'#, -*5+ /'%/%'$"%#*$46 before the
e*piry of the second working day from the date of such discharge or dismissal or Cuitting.
However$ if a worker has been superannuated or has e*pired$ then such earned wages must be settled
before the e*piry of 6 months form the date of such superannuation or death #ec 58,6-.
&n calculating leave period$ fraction of leave of half a day or more shall be treated as one full day)s leave.
The .#*7*"4, 4*7 by a worker shall be )*''", !%'-*', $% $& +.)),"#5 6*', provided #% such
accumulation of unavailed leave +&*44 8), :? ,*6+ "# * 6*'.
W*5+ ,.'"#5 4*7 /'"%, N#ec 4A.
#uch wages will not include Dvertime wages.
The worker is entitled for wages eCual to daily average wages.
O$&' /'%7"+"%#+ %! C&*/$' 2III (S) 81 F8;)
' worker who has been allowed .arned Leave for not less than = days in the case of an adult and : days in
the case of a 0hild$ they shall be paid the wages due for the period before their Leave begins respectively.
&f such payment is not made$ it shall be recoverable as delayed wages under the provisions of payment of
wages 'ct 389;.
P%-' $% (*C '.4+: S) 8:
The #tate 7overnment may make rules directing managers of factories to keep registers containing
prescribed particulars and reCuiring the register to be available for e*amination by &nspectors.
P%-' $% 8(/$ !*)$%'"+ (S) 8;)
The #tate 7overnment may e*empt any factory from the operation of the Leave Bules$ if it is satisfied
that its own Leave Bules provide benefits which are (DT less favorable to the workers than that of the
#tatutory Leave Bules.
PA1MENT OF WAGES ACT, 1>:=
HA)$ N%. ; %! 1*' 1>:=I
'n 'ct to regulate the payment of wages of certain classes of =emplo%ed persons>. !hereas it is e*pedient
to regulate the payment of wages to certain classes ofLemployed personsMH
&t is hereby enacted as follows:
1. S&%'$ $"$4, 8$#$, )%((#)(#$ *#, *//4")*$"%#
This 'ct may be called the <ayment of !ages 'ct$ 389;.
&t e*tends to the whole of &ndia.
&t shall come into force on such date as the 0entral 7overnment may$ by notification in the Dfficial
7azette$ appoint.
&t applies in the first instance 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 or$ either
directly or through a subcontractor$ by a person fulfilling a contract with a railway administration$
and to persons employed in an industrial or other establishment specified in subclauses ,a- to ,g- of
clause ,ii- of section.
The #tate 7overnment may$ after giving three months+ notice of its intention of so doing$ by
notification in the Dfficial 7azette$ e*tend the provisions of this 'ct or any of them to the payment of
wages to any class of persons employed in any establishment or class of establishments specified by
the 0entral 7overnment or a #tate 7overnment under subclause ,h- of clause ,ii- of section 6.
<rovided that in relation to any such establishment owned by the 0entral 7overnment no
such notification shall be issued e*cept with the concurrence of that governments.
(othing in this 'ct shall apply to wages payable in respect of a wageperiod which$ over such wage
period$ average one thousand si* hundred rupees a month or more.
2. D!"#"$"%#+
&n this 'ct$ unless there is anything repugnant in the sub"ect or conte*t$
,i- Nemployed personN includes the legal representative of a deceased employedpersonH
,ia- NemployerN includes the legal representative of a deceased employerH
,ib- NfactoryN means a factory as defined in clause ,m- of section 6 of the Factories'ct$ 38=4 ,;9 of
38=4- and includes any place to which the provisions of that 'cthave been applied under subsection ,3- of
section 4: thereofH
,ii- Nindustrial or other establishmentN means any
,a- tramway service $ or motor transport service engaged in carrying passengers orgoods or both by
road for hire or rewardH
,aa- air transport service other than such service belonging to$ or e*clusivelyemployed in the
military$ naval or air forces of the @nion or the 0ivil 'viation2epartment of the 7overnment of &ndiaH
,b- dock$ wharf or "ettyH
,c- inland vessel$ mechanically propelledH
,d- mine$ Cuarry or oilfieldH
,e- plantationH
,f- workshop or other establishment in which articles are produced$ adapted ormanufactured$ with a view to
their use$ transport or saleH
,g- establishment in which any work relating to the construction$ development ormaintenance of buildings$
roads$ bridges or canals$ or relating to operationsconnected with navigation$ irrigation$ or to the supply of
water or relating to thegeneration$ transmission and distribution of electricity or any other form of power is
being carried on.
,h- any other establishment or class of establishments which the 0entral7overnment or a #tate 7overnment
may$ having regard to the nature thereof$ theneed for protection of persons employed therein and other
relevant circumstances$specify$ by notification in the Dfficial 7azette.
,iia- NmineN has the meaning assigned to it in clause ,"- of subsection ,3- of section6 of the /ines 'ct$ 38:6
,9: of 38:6-H
,iii- NplantationN has the meaning assigned to it in clause ,f- of section 6 of the<lantations Labour 'ct$ 38:3
,;8 of 38:3-
,iv- NprescribedN means prescribed by rules made under this 'ctH
,v- Nrailway administrationN has the meaning assigned to it in clause ,;- of section 9of the &ndian Bailways
'ct$ 348A ,8 of 348A-H and
,vi- NwagesN means all remuneration ,whether by way of salary$ allowances$ orotherwise- e*pressed in terms
of money or capable of being so e*pressed whichwould$ if the terms of employment$ e*press or implied$
were fulfilled$ be payable to aperson employed in respect of his employment or of work done in such
employment$and includes
,a- any remuneration payable under any award or settlement between the parties ororder of a courtH
,b- any remuneration to which the person employed is entitled in respect of overtimework or
holidays or any leave periodH
,c- any additional remuneration payable under the terms of employment ,whethercalled a bonus or
by any other name-H
,d- any sum which by reason of the termination of employment of the personemployed is payable
under any law$ contract or instrument which provides for thepayment of such sum$ whether with or without
deductions$ but does not provide forthe time within which the payment is to be madeH
,e- any sum to which the person employed is entitled under any scheme framedunder any law for the
time being in force$but does not include
,3- any bonus ,whether under a scheme of profit sharing or otherwise- which doesnot form part of the
remuneration payable under the terms of employment or whichis not payable under any award or settlement
between the parties or order of acourtH
,6- the value of any houseaccommodation$ or of the supply of light$ water$ medicalattendance or other
amenity or of any service e*cluded from the computation ofwages by a general or special order of the #tate
7overnmentH
,9- any contribution paid by the employer to any pension or provident fund$ and theinterest which may have
accrued thereonH
,=- any travelling allowance or the value of any travelling concessionH
,:- any sum paid to the employed person to defray special e*penses entailed on himby the nature of his
employmentH or
,;- any gratuity payable on the termination of employment in cases other than those
specified in subclause ,d-.
:. R+/%#+"0"4"$6 !%' /*6(#$ %! -*5+
.very employer shall be responsible for the payment to persons employed by him ofall wages reCuired to be
paid under this 'ct:
<BD>&2.2 that$ in the case of persons employed ,otherwise than by a contractor-
,a- in factories$ if a person has been named as the manager of the factory underLclause ,f- of subsection ,3-
of section 5 of the Factories 'ct$ 38=4 ,;9 of 38=4-MH
,b- in industrial or other establishments$ if there is a person responsible to theemployer for the supervision
and control of the industrial or other establishmentsH
,c- upon railways ,otherwise than in factories-$ if the employer is the railwayadministration and the railway
administration has nominated a person in this behalffor the local area concerned.
The person so named$ the person so responsible to the employer$ or the person sonominated$ as the case may
be 34Lshall also be responsibleM for such payment.
;. F"8*$"%# %! -*5F/'"%,+
,3- .very person responsible for the payment of wages under section 9 shall fi*periods ,in this 'ct referred
to as wageperiods- in respect of which such wages shallbe payable.
,6- (o wageperiod shall e*ceed one month.
<. T"( %! /*6(#$ %! -*5+
,3- The wages of every person employed upon or in
,a- any railway$ factory or Lindustrial or other establishmentM upon or in which lessthan one thousand
persons are employed$ shall be paid before the e*piry of theseventh day$
,b- any other railway$ factory or Lindustrial or other establishmentM$ shall be paidbefore the e*piry of
the tenth day$after the last day of the wageperiod in respect of which the wages are payable:
L<BD>&2.2 that in the case of persons employed on a dock$ wharf or "etty or in amine$ the balance
of wages found due on completion of the final tonnage account ofthe ship or wagons loaded or unloaded$ as
the case may be$ shall be paid before thee*piry of the seventh day from the day of such completion.M
,6- !here the employment of any person is terminated by or on behalf of theemployer$ the wages$ earned by
him shall be paid before the e*piry of the secondworking day from the day on which his employment is
terminated:
L<BD>&2.2 that where the employment of any person in an establishment isterminated due to the
closure of the establishment for any reason other than aweekly or other recognised holiday$ the wages earned
by him shall be paid beforethe e*piry of the second day from the day on which his employment is
soterminatedM
,9- The #tate 7overnment may$ by general or special order$ e*empt$ to such e*tentand sub"ect to such
conditions as may be specified in the order$ the personresponsible for the payment of wages to persons
employed upon any railway,otherwise than in a factory - Lor to persons employed as dailyrated workers in
the<ublic !orks 2epartment of the 0entral 7overnment or the #tate 7overnmentM fromthe operation of this
section in respect of wages of any such persons or class of suchpersons:
L<BD>&2.2 that in the case of persons employed as dailyrated workers asaforesaid$ no such order
shall be made e*cept in consultation with the 0entral7overnment.M
,=- #ave as otherwise provided in subsection ,6-$ all payments of wages shall bemade on a working day.
=. W*5+ $% 0 /*", "# ).''#$ )%"# %' ).''#)6 #%$+
'll wages shall be paid in current coin or currency notes or in both:
L<BD>&2.2 that the employer may$ after obtaining the written authorisation of theemployed person$
pay him the wages either by cheCue or by crediting the wages inhis bank account.M
7. DEDUCTIONS WHICH MA1 BE MADE FROM WAGES
2eductions from the wages of an employed person shall be made only inaccordance with the provisions of
this 'ct$ and may be of the following kinds only$namely:
,a- !"#+S
,b- ,,.)$"%#+ !%' *0+#) !'%( ,.$6S
,c- ,,.)$"%#+ !%' ,*(*5 $% %' 4%++ %! 5%%,+ e*pressly entrusted to the employedperson for custody$ or
for loss of money for which he is reCuired to account$ wheresuch damage or loss is directly attributable to
his neglect or defaultH
,d- ,,.)$"%#+ !%' &%.+F*))%((%,*$"%# supplied by the employer or bygovernment or any housing board
set up under any law for the time being in force,whether the government or the board is the employer or not-
or any other authorityengaged in the business of subsidising house accommodation which may bespecified
in this behalf by the #tate 7overnment by notification in the Dfficial 7azetteH
,e- ,,.)$"%#+ !%' +.)& *(#"$"+ *#, +'7")+ supplied by the employer as the#tate 7overnment Lor any
officer specified by it in this behalfM may$ bygeneral or special order$ authorise.
Explanation: The word NservicesN in Lthis clauseM does not include the supply oftools and raw
materials reCuired for the purposes of employmentH
,f- ,,.)$"%#+ !%' ')%7'6 %! *,7*#)+ of whatever nature ,including advances fortravelling allowance or
conveyance allowance-$ and the interest due in respectthereof$ or for ad"ustment of overpayments of wagesH
,ff- ,,.)$"%#+ !%' ')%7'6 %! 4%*#+ made from any fund constituted for the welfareof labour in
accordance with the rules approved by the #tate 7overnment$ and theinterest due in respect thereofH
,fff- ,,.)$"%#+ !%' ')%7'6 %! 4%*#+ 5'*#$, !%' &%.+F0."4,"#5 or other purposesapproved by
the #tate 7overnment and the interest due in respect thereofH
,g- ,,.)$"%#+ %! "#)%(F$*8 /*6*04 by the employed personH
,h- ,,.)$"%#+ '@."', $% 0 (*, 06 %',' %! * )%.'$ or other authority competentto make such orderH
,i- ,,.)$"%#+ !%' +.0+)'"/$"%#+ to$ and for repayment of advances from anyprovident fund to which the
<rovident Funds 'ct$ 386: ,38 of 386:-$ applies or anyrecognised provident fund as defined in 6=Lsection
:4' of the &ndian &ncome Ta* 'ct$3866 ,33 of 3866-M$ or any provident fund approved in this behalf by the
#tate7overnment$ during the continuance of such approvalH
,"- ,,.)$"%#+ !%' /*6(#$+ to cooperative societies approved by the #tate7overnment Lor any officer
specified by it in this behalfM or to a scheme ofinsurance maintained by the &ndian <ost Dffice$ and
,k- ,,.)$"%#+, (*, -"$& $& -'"$$# *.$&%'"+*$"%# of the person employed forpayment of any premium
on his life insurance policy to the Life &nsurance0orporation 'ct of &ndia established under the Life
&nsurance 0orporation 'ct$ 38:;,93 of 38:;-$ or for the purchase of securities of the 7overnment of &ndia or
of any#tate 7overnment or for being deposited in any <ost Dffice #avings %ank infurtherance of any
savings scheme of any such government.
,kk- deductions$ made with the written authorisation of the employed person$ forthe payment of his
contribution to any fund constituted by the employer or a tradeunion registered under the Trade @nion 'ct$
386; ,3; of 386;-$ for the welfare ofthe employed persons or the members of their families$ or both$ and
approved bythe #tate 7overnment or any officer specified by it in this behalf$ during thecontinuance of such
approvalH
,kkk- deductions$ made with the written authorisation of the employed person$ forpayment of the
fees payable by him for the membership of any trade unionregistered under the Trade @nion 'ct$ 386; ,3;
of 386;-H
,l- ,,.)$"%#+, !%' /*6(#$ %! "#+.'*#) /'(".( on Fidelity 7uarantee %ondsH
,m- ,,.)$"%#+ !%' ')%7'6 %! 4%+++ +.+$*"#, 06 * '*"4-*6 administration onaccount of acceptance by
the employed person of counterfeit or base coins ormutilated or forged currency notesH
,n- deductions for recovery of losses sustained by a railway administration onaccount of the failure of the
employed person to invoice$ to bill$ to collect or toaccount for the appropriate charges due to that
administration whether in respect offares$ freight$ demurrage$ wharfage and cranage or in respect of sale of
food incatering establishments or in respect of sale of commodities in grain shops orotherwiseH
,o- deductions for recovery of losses sustained by a railway administration onaccount of any rebates or
refunds incorrectly granted by the employed person wheresuch loss is directly attributable to his neglect or
defaultH
,p- deductions$ made with the written authorisation of the employed person$ forcontribution to the <rime
/inister+s (ational Belief Fund or to such other Fund as the0entral 7overnment may$ by notification in the
Dfficial 7azette$ specifyH
,C- deductions for contributions to any insurance scheme framed by the 0entral7overnment for the benefit
of its employees.
,9- (otwithstanding anything contained in this 'ct$ the total amount of deductionswhich may be made under
subsection ,6- in any wageperiod from the wages of anyemployed person shall not e*ceed
,i- in cases where such deductions are wholly or partly made for payments to cooperativesocieties under
clause ,"- of subsection ,6-$ seventyfive per cent of suchwages$ and
,ii- in any other case$ fifty per cent of such wages:
8. F"#+
,3- (o fine shall be imposed on any employed person save in respect of such actsand omissions on his part
as the employer$ with the previous approval of the #tate7overnment or of the prescribed authority$ may have
specified by notice under subsection6.
,6- ' notice specifying such acts and omissions shall be e*hibited in the prescribedmanner on the premises
in which the employment is carried on or in the case ofpersons employed upon a railway ,otherwise than in
a factory-$ at the prescribedplace or places.
,9- (o fine shall be imposed on any employed person until he has been given anopportunity of showing
cause against the fine$ or otherwise than in accordance withsuch procedure as may be prescribed for the
imposition of fines.
,=- The total amount of fine which may be imposed in any one wageperiod on anyemployed person shall
not e*ceed an amount eCual to Lthree per centM of thewages payable to him in respect of that wageperiod.
,:- (o fine shall be imposed on any employed person who is under the age of fifteenyears.
,;- (o fine imposed on any employed person shall be recovered from him byinstallments or after the e*piry
of si*ty days from the day on which it was imposed.
,5- .very fine shall be deemed to have been imposed on the day of the act oromission in respect of which it
was imposed.
,4- 'll fines and all realisations thereof shall be recorded in a register to be kept bythe person responsible for
the payment of wages under section 9 in such form asmay be prescribedH and all such realisations shall be
applied only to such purposesbeneficial to the persons employed in the factory or establishment as are
approvedby the prescribed authority.
Explanation :!hen the persons employed upon or in any railway$ factory orLindustrial or other
establishmentM are part only of a staff employed under thesame management$ all such realisations may be
credited to a common fundmaintained for the staff as a whole$ provided that the fund shall be applied only
tosuch purposes as are approved by the prescribed authority.
>. D,.)$"%#+ !%' *0+#) !'%( ,.$6
,3- 2eductions may be made under clause ,b- of subsection ,6- of section 5 only onaccount of the absence
of an employed person from the place or places where$ bythe terms of his employment$ he is reCuired to
work$ such absence being for thewhole or any part of the period during which he is so reCuired to work.
,6- The amount of such deduction shall in no case bear to the wages payable to theemployed person in
respect of the wageperiod for which the deduction is made in alarger proportion than the period for which
he was absent bears to the total period$within such wageperiod$ during which by the terms of his
employment$ he wasreCuired to work:
<BD>&2.2 that$ sub"ect to any rules made in this behalf by the #tate 7overnment$ iften or more
employed persons acting in concert absent themselves without duenotice ,that is to say without giving the
notice which is reCuired under the terms oftheir contracts of employment- and without reasonable cause$
such deduction fromany such person may include such amount not e*ceeding his wages for eight days
asmay by any such terms be due to the employer in lieu of due notice.
=Explanation :For the purposes of this section$ an employed person shall bedeemed to be absent from
the place where he is reCuired to work if$ althoughpresent in such place$ he refuses$ in pursuance of a stayin
strike or for any othercause which is not reasonable in the circumstances$ to carry out his work.M
1?. D,.)$"%#+ !%' ,*(*5 %' 4%++
,3- ' deduction under clause ,c- or clause ,o- of subsection ,6- of section 5 shallnot e*ceed the amount of
the damage or loss caused to the employer by the neglector default of the employed person.
,3'- ' deduction shall not be made under clause ,c- or clause ,m- or clause ,n- orclause ,o- of sub
section ,6- of section 5 until the employed person has been givenan opportunity of showing cause against
the deduction or otherwise than inaccordance with such procedure as may be prescribed for the making of
such deduction.
,6- 'll such deduction and all realisations thereof shall be recorded in a register to bekept by the person
responsible for the payment of wages under section 9 in suchform as may be prescribed.
11. D,.)$"%#+ !%' +'7")+ '#,',
' deduction under clause ,d- or clause ,e- of subsection ,6- of section 5 shall not bemade from the wages of
an employed person$ unless the houseaccommodationamenity or service has been accepted by him$ as a
term of employment orotherwise$ and such deduction shall not e*ceed an amount eCuivalent to the value
ofthe houseaccommodation amenity or service supplied and$ in the case of deductionunder the said clause
,e-$ shall be sub"ect to such conditions as the #tate7overnment may impose.
12. D,.)$"%#+ !%' ')%7'6 %! *,7*#)+
2eductions under clause ,f- of subsection ,6- of section 5 shall be sub"ect to thefollowing conditions$
namely:
,a- recovery of an advance of money given before employment began shall be madefrom the first payment
of wages in respect of a complete wageperiod$ but norecovery shall be made of such advances given for
travellinge*pensesH
,aa- recovery of an advance of money given after employment began shall besub"ect to such
conditions as the #tate 7overnment may imposeH
,b- recovery of advances of wages not already earned shall be sub"ect to any rulesmade by the #tate
7overnment regulating the e*tent to which such advances maybe given and the instalments by which they
may be recovered.
1<. 12A. D,.)$"%#+ !%' ')%7'6 %! 4%*#+
2eductions for recovery of loans granted under clause ,fff- of subsection ,6- ofsection 5 shall be sub"ect to
any rules made by the #tate 7overnment regulating thee*tent to which such loans may be granted and the
rate of interest payable thereon.
1:. D,.)$"%#+ !%' /*6(#$+ $% )%F%/'*$"7 +%)"$"+ *#, "#+.'*#)+)&(+
2eductions under clause ,"- 65Land clause ,k-M of subsection ,6- of section 5 shall besub"ect to such
conditions as the #tate 7overnment may impose.
1<.1:A. M*"#$#*#) %! '5"+$'+ *#, ')%',+
,3- .very employer shall maintain such registers and records giving such particularsof persons employed by
him$ the work performed by them$ the wages paid to them$the deductions made from their wages$ the
receipts given by them and such otherparticulars and in such form as may be prescribed.
,6- .very register and record reCuired to be maintained under this section shall$ forthe purposes of this 'ct$
be preserved for a period of three years after the date ofthe last entry made therein.
1;. I#+/)$%'+
,3- 'n &nspector of Factories appointed under 93Lsubsection ,3- of section 4 of theFactories 'ct$ 38=4 ,;9
of 38=4-M$ shall be an &nspector for the purposes of this 'ctin respect of all factories within the local limits
assigned to him.
,6- The #tate 7overnment may appoint &nspectors for the purposes of this 'ct inrespect of all persons
employed upon a railway ,otherwise than in a factory- towhom this 'ct applies.
,9- The #tate 7overnment may$ by notification in the Dfficial 7azette$ appoint suchother persons as it thinks
fit to be &nspectors for the purposes of this 'ct$ and maydefine the local limits within which and the class of
factories and Lindustrial or otherestablishmentsM in respect of which they shall e*ercise their functions.
,=- 'n &nspector may$
,a- make such e*amination and inCuiry as he thinks fit in order to ascertain whetherthe provisions of
this 'ct or rules made thereunder are being observedH
,b- with such assistance$ if any$ as he thinks fit$ enter$ inspect and search anypremises of any railway$
factory or Lindustrial or other establishmentM at anyreasonable time for the purpose of carrying out the
ob"ects of this 'ctH
,c- #upervise the payment of wages to persons employed upon any railway or in anyfactory or
Lindustrial or other establishmentMH
,d- reCuire by a written order the production at such place$ as may be prescribed$ ofany register
maintained in pursuance of this 'ct and take on the spot or otherwisestatements of any persons which he
may consider necessary for carrying out thepurposes of this 'ctH
,e- seize or take copies of such registers or documents or portions thereof as he mayconsider relevant
in respect of an offence under this 'ct which he has reason tobelieve has been committed by an employerH
,f- e*ercise such other powers as may be prescribed:
<BD>&2.2 that no person shall be compelled under this subsection to answer anyCuestion or make
any statement tending to incriminate himself.
,='- The provisions of the 96L0ode of 0riminal <rocedure$ 3859 ,6 of l85=-Mshall$ sofar as may be$ apply to
any search or seizure under this subsection as they apply toany search or seizure made under the authority
of a warrant issued under 99Lsection8=M of the said 0odeM.
,:- .very &nspector shall be deemed to be a public servant within the meaning of the&ndian <enal 0ode$
34;A ,=: of 34;A-.
1<.1;A. F*)"4"$"+ $% 0 *!!%',, $% I#+/)$%'+
.very employer shall afford an &nspector all reasonable facilities for making anyentry$ inspection$
supervision$ e*amination or inCuiry under this 'ct.
1<. C4*"(+ *'"+"#5 %.$ %! ,,.)$"%#+ !'%( -*5+ %' ,4*6 "# /*6(#$ %!-*5+ *#, /#*4$6 !%'
(*4")"%.+ %' 78*$"%.+ )4*"(+
,3- The #tate 7overnment may$ by notification in the Dfficial 7azette$ appoint apresiding officer of any
Labour 0ourt or &ndustrial Tribunal$ constituted under the&ndustrial 2isputes 'ct$ 38=5 ,3= of 38=5-$ or
under any corresponding law relatingto the investigation and settlement of industrial disputes in force in the
#tate or any0ommissioner for !orkmen+s 0ompensation or other officer with e*perience as aUudge of a
0ivil 0ourt or as a #tipendiary /agistrate to be the authority to hear anddecide for any specified area all
claims arising out of deductions from the wages$ ordelay in payment of the wages$ of persons employed or
paid in that area$including all matters$ incidental to such claims:
<BD>&2.2 that where the #tate 7overnment considers it necessary so to do$ it mayappoint more
than one authority for any specified area and may$ by general orspecial order$ provide for the distribution or
allocation of work to be performed by them under this 'ct.
,6- !here contrary to the provisions of this 'ct any deduction has been made fromthe wages of an
employed person$ or any payment of wages has been delayed$ suchperson himself$ or any legal practitioner
or any official of a registered trade unionauthorised in writing to act on his behalf$ or any &nspector under
this 'ct$ or anyother person acting with the permission of the authority appointed under subsection,3-$ may
apply to such authority for a direction under subsection ,9-:
<BD>&2.2 that every such application shall be presented within Ltwelve monthsMfrom the date on
which the deduction from the wages was made or from the date onwhich the payment of the wages was due
to be made$ as the case may be:
<BD>&2.2 F@BT1.B that any application may be admitted after the said periodLtwelve monthsM
when the applicant satisfies the authority that he had sufficientcause for not making the application within
such period.
,9- !hen any application under subsection ,6- is entertained$ the authority shallhear the applicant and the
employer or other person responsible for the payment ofwages under section 9$ or give them an opportunity
of being heard$ and$ after suchfurther inCuiry ,if any- as may be necessary$ may$ without pre"udice to any
otherpenalty to which such employer or other person is liable under this 'ct$ direct therefund to the
employed person of the amount deducted$ or the payment of thedelayed wages$ together with the payment of
such compensation as the authoritymay think fit$ not e*ceeding ten times the amount deducted in the former
case andLnot e*ceeding twentyfive rupees in the latter$ and even if the amount deductedor the delayed
wages are paid before the disposal of the application$ direct thepayment of such compensation$ as the
authority may think fit$ not e*ceeding twentyfiverupeesM:
<BD>&2.2 that no direction for the payment of compensation shall be made in thecase of delayed
wages if the authority is satisfied that the delay was due to
,a- a bona fide error or bona fide dispute as to the amount payable to the employedperson$ or
,b- the occurrence of an emergency$ or the e*istence of e*ceptional circumstances$such that the
person responsible for the payment of the wages was unable$ thoughe*ercising reasonable diligence$ to make
prompt payment$ or
,c- the failure of the employed person to apply for or accept payment.
,=- &f the authority hearing an application under this section is satisfied
,a- that the application was either malicious or ve*atious$ the authority may directthat a penalty not
e*ceeding fifty rupees be paid to the employer or other personresponsible for the payment of wages by the
person presenting the applicationH or
,b- that in any case in which compensation is directed to be paid under subsection,9-$ the applicant
ought not to have been compelled to seek redress under thissection$ the authority may direct that a penalty
not e*ceeding fifty rupees be paid tothe #tate 7overnment by the employer or other person responsible for
the paymentof wages.
,='- !here there is any dispute as to the person or persons being the legalrepresentative or representatives
of the employer or of the employed person$ thedecision of the authority on such dispute shall be final.
,=%- 'ny inCuiry under this section shall be deemed to be a "udicial proceedingwithin the meaning of
sections 389$ 638 and 664 of the &ndian <enal 0ode ,=: of 34;A-.
,:- 'ny amount directed to be paid under this section may be recovered
,a- if the authority is a /agistrate$ by the authority as if it were a fine imposed byhim as /agistrate$
and
,b- if the authority is not a /agistrate$ by any /agistrate to whom the authoritymakes application in
this behalf$ as if it were a fine imposed by such /agistrate.
1=. S"#54 *//4")*$"%# "# '+/)$ %! )4*"(+ !'%( .#/*", 5'%./
,3- .mployed persons are said to belong to the same unpaid group if they are borneon the same
establishment and if 3:Ldeductions have been made from their wages incontravention of this 'ct for the
same cause and during the same wageperiod orperiods or if their wages for the same wageperiod or
periods have remained unpaidafter the day fi*ed by section :.
,6- ' single application may be presented under section l: on behalf or in respect ofany number of employed
persons belonging to the same unpaid group$ and in suchcase every person on whose behalf such application
is presented may be awardedma*imum compensation to the e*tent specified in subsection ,9- of section 3:.
,9- The authority may deal with any number of separate pending applications$presented under section 3: in
respect of persons belonging to the same unpaidgroup$ as a single application presented under subsection
,6- of this section$ andthe provisions of that subsection shall apply accordingly.
17. A//*4
3- 'n appeal against an order dismissing either wholly or in part an applicationmade under subsection ,6-
of section 3:$ or against a direction made under subsection,9- or subsection ,=- of that sectionM may be
preferred$ within thirty days ofthe date on which Lthe order or directionM was made$ in a <residencytown
before the 0ourt of #mall 0auses and elsewhere before the 2istrict 0ourt
,a- by the employer or other person responsible for the payment of wages undersection 9$ if the total sum
directed to be paid by way of wages and compensatione*ceeds three hundred rupees 3:Lor such direction has
the effect of imposing on theemployer or the other person a financial liability e*ceeding one thousand
rupeesM$ or
,b- by an employed person or any legal practitioner or any official of a registeredtrade union authorised in
writing to act on his behalf or any &nspector under this 'ct$or any other person permitted by the authority to
make an application under subsection,6- of section 3:$ if the total amount of wages claimed to have been
withheldfrom the employed person e*ceeds twenty rupees or from the unpaid group to whichthe employed
person belongs or belonged e*ceeds fifty rupees$ or
,c- by any person directed to pay a penalty under subsection ,=- of section 3:.,3'- (o appeal under clause
,a- of subsection ,3- shall lie unless thememorandum of appeal is accompanied by a certificate by the
authority to the effectthat the appellant has deposited the amount payable under the direction appealed
against.
,6- #ave as provided in subsection ,3- any order dismissing either wholly or inpart an application made
under subsection ,6- of section 3:$ or a direction madeunder subsection ,9- or subsection ,=- of that
section shall be final.
,9- !here an employer prefers an appeal under this section the authority againstwhose decision the appeal
has been preferred may$ and if so directed by the courtreferred to in subsection ,3- shall$ pending the
decision of the appeal$ withholdpayment of any sum in deposit with it.
,=- The court referred to in subsection ,3- may if it thinks fit submit any Cuestionof law for the decision of
the 1igh 0ourt and$ if it so does$ shall decide the Cuestionin conformity with such decision.
1;.17A. C%#,"$"%#*4 *$$*)&(#$ %! /'%/'$6 %! (/4%6' %' %$&' /'+%#'+/%#+"04 !%' /*6(#$ %!
-*5+
,3- !here at any time after an application has been made under subsection ,6- ofsection 3: the authority$ or
where at any time after an appeal has been filed undersection 35 by an employed person or 33Lany legal
practitioner or any official of aregistered trade union authorised in writing to act on his behalf or any
&nspectorunder this 'ct or any other person permitted by the authority to make an applicationunder sub
section ,6- of section 3:M the 0ourt referred to in that section$ is satisfiedthat the employer or other person
responsible for the payment of wages undersection 9 is likely to evade payment of any amount that may be
directed to be paidunder section 3: or section 35$ the authority or the court$ as the case may be$e*cept in
cases where the authority or court is of the opinion that the ends of "usticewould be defeated by the delay$
after giving the employer or other person anopportunity of being heard$ may direct the attachment of so
much of the property ofthe employer or other person responsible for the payment of wages as is$ in
theopinion of the authority or court$ sufficient to satisfy the amount which may bepayable under the
direction.
,6- The provisions of the 0ode of 0ivil <rocedure$ 38A4 ,: of 38A4-$ relating toattachment before "udgement
under that 0ode shall$ so far as may be$ apply to anyorder for attachment under subsection ,3-.
18. P%-'+ %! *.$&%'"$"+ *//%"#$, .#,' +)$"%# 1<
.very authority appointed under subsection ,3- of section 3: shall have all thepowers of a civil court under
the 0ode of 0ivil <rocedure$ 38A4 ,: of 38A4-$ for thepurpose of taking evidence and of enforcing the
attendance of witnesses andcompelling the production of documents$ and every such authority shall be
deemedto be a civil court for all the purposes of section 38: and of =AL0hapter FF>& of the0ode of
0riminal <rocedure$ 3859 ,6 of 385=-.M
1>. P%-' $% ')%7' !'%( (/4%6' "# )'$*"# )*++ HR/*4, 06 $&P*6(#$ %! W*5+ (A(#,(#$)
A)$, 1>=; (<: %! 1>=;), -..!. 1+$.F0'.*'6, 1>=<I
2?. P#*4$6 !%' %!!#)+ .#,' $& A)$
,3- !hoever being responsible for the payment of wages to an employed personcontravenes any of the
provisions of any of the following sections$ namely$ Lsection: e*cept subsection ,=- thereof$ section 5$
section 4 e*cept subsection ,4- thereof$section 8$ section 3A e*cept subsection ,6- thereof$ and section 33 to
39M$ bothinclusive$ shall be punishable with fine Lwhich shall not be less than two hundredrupees but which
may e*tend to one thousand rupees.M
,6- !hoever contravenes the provisions of section =$ Lsubsection ,=- of section :$section ;$ subsection ,4-
of section 4$ subsection ,6- of section 3AM or section 6:shall be punishable with fine which may e*tend to
Lfive hundred rupees.M
,9- !hoever being reCuired under this 'ct to maintain any records or registers orto furnish any information
or return
,a- fails to maintain such register or recordH or
,b- wilfully refuses or without lawful e*cuse neglects to furnish such information orreturnH or
,c- wilfully furnishes or causes to be furnished any information or return which heknows to be falseH or
,d- refuses to answer or wilfully gives a false answer to any Cuestion necessary forobtaining any information
reCuired to be furnished under this 'ct$shall$ for each such offence$ be punishable with fine Lwhich shall not
be less thantwo hundred rupees but which may e*tend to one thousand rupeesM.
,=- !hoever
,a- wilfully obstructs an &nspector in the discharge of his duties under this 'ctH or
,b- refuses or wilfully neglects to afford an &nspector any reasonable facility formaking any entry$
inspection$ e*amination$ supervision$ or inCuiry authorised by orunder this 'ct in relation to any railway$
factory or 36Lindustrial or otherestablishmentMH or
,c- wilfully refuses to produce on the demand of an &nspector any register or otherdocument kept in
pursuance of this 'ctH or
,d- prevents or attempts to prevent or does anything which he has any reason tobelieve is likely to prevent
any person from appearing before or being e*amined byan &nspector acting in pursuance of his duties under
this 'ctHshall be punishable with fine =:Lwhich shall not be less than two hundred rupees butwhich may
e*tend to one thousand rupees.M
,:- &f any person who has been convicted of any offence punishable under this 'ct isagain guilty of an
offence involving contravention of the same provision$ he shall bepunishable on a subseCuent conviction
with imprisonment for a term Lwhich shallnot be less than one month but which may e*tend to si* months
and with fine whichshall not be less than five hundred rupees but which may e*tend to three
thousandrupeesM:
<BD>&2.2 that for the purpose of this subsection no cognizance shall be taken ofany conviction
made more than two years before the date on which the commissionof the offence which is being punished
came to the knowledge of the &nspector.
,;- &f any person fails or wilfully neglects to pay the wages of any employed personby the date fi*ed by the
authority in this behalf$ he shall$ without pre"udice to anyother action that may be taken against him$ be
punishable with an additional finewhich may e*tend to Lone hundred rupeesM for each day for which such
failure orneglect continues.M
21. P'%),.' "# $'"*4 %! %!!#)+
,3- (o court shall take cognizance of a complaint against any person for an offenceunder subsection ,3- of
section 6A unless an application in respect of the factsconstituting the offence has been presented under
section 3: and has been grantedwholly or in part and the authority empowered under the latter section or the
appellate 0ourt granting such application has sanctioned the making of thecomplaint.
,6- %efore sanctioning the making of a complaint against any person for an offenceunder subsection ,3- of
section 6A$ the authority empowered under section 3: orthe appellate 0ourt$ as the case may be$ shall give
such person an opportunity ofshowing cause against the granting of such sanction$ and the sanction shall not
begranted if such person satisfies the authority or 0ourt that his default was due to
,a- a bona fide error or bona fide dispute as to the amount payable to the employedperson$ or
,b- the occurrence of an emergency or the e*istence of e*ceptional circumstances$such that the
person responsible for the payment of the wages was unable$ thoughe*ercising reasonable diligence$ to make
prompt payment$ or
,c- the failure of the employed person to apply for or accept payment.
,9- (o 0ourt shall take cognizance of a contravention of section = or of section ; orof a contravention of any
rule made under section 6; e*cept on a complaint made byor with the sanction of an &nspector under this
'ct.
,9'- (o 0ourt shall take cognizance of any offence punishable under subsection,9- or subsection
,=- of section 6A e*cept on a complaint made by or with thesanction of an &nspector under this 'ct.
,:- &n imposing any fine for an offence under subsection ,3- of section 6A the courtshall take into
consideration the amount of any compensation already awardedagainst the accused in any proceedings taken
under section 3:.
22. B*' %! +."$+
(o 0ourt shall entertain any suit for the recovery of wages or of any deduction fromwages in so far as the
sum so claimed
,a- forms the sub"ect of an application under section 3: which has been presentedby the plaintiff and which
is pending before the authority appointed under thatsection or of an appeal under section 35H or
,b- has formed the sub"ect of a direction under section 3: in favour of the plaintiffHor
,c- has been ad"udged$ in any proceeding under section 3:$ not to be owed to theplaintiffH or
,d- could have been recovered by an application under section 3:.
1<.22A. P'%$)$"%# %! *)$"%# $*C# "# 5%%, !*"$&
(o suit$ prosecution or other legal proceeding shall lie against the government or anyofficer of the
government for anything which is in good faith done or intended to be done under this 'ct.
2:. C%#$'*)$"#5 %.$
'ny contract or agreement$ whether made before or after the commencement of this'ct$ whereby an
employed person relinCuishes any right conferred by this 'ct shallbe null and void in so far as it purports to
deprive him of such right.
;8.2;. A//4")*$"%# %! A)$ $% '*"4-*6+, *"' $'*#+/%'$ +'7")+, ("#+ *#,%"4!"4,+
The powers by this act conferred upon the #tate 7overnment shall$ in relation toLrailwaysM$ Lair transport
services$M mines and oilfields$ be powers of the 0entral7overnment.M
2<. D"+/4*6 06 #%$") %! *0+$'*)$+ %! $& A)$
The person responsible for the payment of wages to persons H Lemployed in afactory or an industrial or other
establishmentM shall cause to be Ldisplayed in suchfactory or industrial or other establishmentM a notice
containing such abstracts of this'ct and of the rules made thereunder in .nglish and in the language of the
ma"orityof the persons employed Lin the factory$ or industrial or other establishmentM$ asmay be prescribed.
<:.2<A. P*6(#$ %! .#,"+0.'+, -*5+ "# )*+ %! ,*$& %! (/4%6, /'+%#
,3- #ub"ect to the other provisions of the 'ct all amounts payable to an employedperson as wages shall$ if
such amounts could not or cannot be paid on account of hisdeath before payment or on account of his
whereabouts not being known$
,a- be paid to the person nominated by him in this behalf in accordance with therules made under this
'ctH or
,b- where no such nomination has been made or where for any reasons suchamounts cannot be paid
to the person so nominated$ be deposited with theprescribed authority who shall deal with the amounts so
deposited in such manner asmay be prescribed.
,6- !here$ in accordance with the provisions of subsection ,3-$ all amounts payableto an employed person
as wages
,a- are paid by the employer to the person nominated by the employed personH or
,b- are deposited by the employer with the prescribed authority$the employer shall be discharged of
his liability to pay those wages.
2=. R.4F(*C"#5 /%-'
,3- The #tate 7overnment may make rules to regulate the procedure to be followedby the authorities and
courts referred to in sections 3: and 35.
,6- The #tate 7overnment may$ by notification in the Dfficial 7azette$ makerules for the purpose of carrying
into effect the provisions of this 'ct.
,9- &n particular and without pre"udice to the generality of the foregoing power$ rulesmade under subsection
,6- may
,a- reCuire the maintenance of such records$ registers$ returns and notices as arenecessary for the
enforcement of the 'ct :=Lprescribe the form thereof and theparticulars to be entered in such registers or
recordsMH
,b- reCuire the display in a conspicuous place on premises where employment iscarried on of notices
specifying rates of wages payable to persons employed on suchpremisesH
,c- <rovide for the regular inspection of the weights$ measures and weighingmachines used by
employers in checking or ascertaining the wages of personsemployed by themH
,d- prescribe the manner of giving notice of the days on which wages will be paidH
,e- prescribe the authority competent to approve under subsection ,3- of section 4acts and omissions
in respect of which fines may be imposedH
,f- prescribe the procedure for the imposition of fines under section 4 and for themaking of the
deductions referred to in section 3AH
,g- prescribe the conditions sub"ect to which deductions may be made under theprovison to sub
section ,6- of section 8H
,h- prescribe the authority competent to approve the purposes on which theproceeds of fines shall be
e*pendedH
,i- prescribe the e*tent to which advances may be made and the instalments bywhich they may be
recovered with reference to clause ,b- of section 36H
,ia- prescribe the e*tent to which loans may be granted and the rate of interestpayable thereon
with reference to section 36'.
,ib- prescribe the powers of &nspectors for the purposes of this 'ctHM
,"- regulate the scale of costs which may allowed in proceedings under this 'ctH
,k- prescribe the amount of courtfees payable in respect of any proceedings underthis 'ct$
,l- prescribe the abstracts to be contained in the notices reCuired by section 6:H
,la- prescribe the form and manner in which nominations may be made for thepurposes of
subsection ,3- of section 6:'$ the cancellation or variation of any suchnomination$ or the making of
any fresh nomination in the event of the nomineepredeceasing the person making nomination$ and
other matters connected with suchnominationsH
,lb- specify the authority with whom amounts reCuired to be deposited under clause,b- of
subsection ,3- of section 6:' shall be deposited$ and the manner in whichsuch authority shall deal
with the amounts deposited with it under that clauseHM
,m- provide for any other matter which is to be or may be prescribed.
,=- &n making any rule under this section the #tate 7overnment may provide that acontravention of the rule
shall be punishable with fine which may e*tend to twohundred rupees.
,:- 'll rules made under this section shall be sub"ect to the condition of previouspublication$ and the date to
be specified under clause ,9- of section 69 of the7eneral 0lauses 'ct$ 3485 ,3A of 3485-$ shall not be less
than three months fromthe date on which the draft of the proposed rules was published.
,;- .very rule made by the 0entral 7overnment under this section shall be laid$ assoon as may be after it is
made$ before each 1ouse of <arliament while it is insession for a total period of thirty days which may be
comprised in one session or inLtwo or more successive sessions$M and if$ before the e*piry of the
sessionLimmediately following the session or the successive sessions aforesaid$M both1ouses agree in
making any modification in the rule$ or both 1ouses agree that therule should not be made$ the rule shall
thereafter have effect only in such modifiedform or be of no effect$ as the case may beH so however$ that any
such modificationor annulment shall be without pre"udice to the validity of anything previously done under
that rule.
INDUSTRIAL DISPUTES ACT 1>;7
DEFINE THE TERM INDUSTRIAL DISPUTES ACT 1>;7?
I#$'%,.)$"%# :
The &ndustrial growth again rests on industrial peace. The (ational 0ommission on Labor viewed the term
)&ndustrial <eace+ in a negative and restrictive sense. 'bsence of strike$ struggle and dispute between the
employer and employee is said to be the foundation for industrial peace.
1ealthy industrial growth depends upon smooth Q cordial relationship between .mployer Q
.mployee and .mployee Q .mployees. 1ence$ it is important to have$ the &ndustrial 2ispute 'ct for
promoting harmony between employer and employee.
B'"! H"+$%'6:
The earlier 'ct dealing with settlement of &ndustrial disputes was the .mployer and the !orkman+s 2ispute
'ct of 34;A Q it was more favorable to the employers. #o$ this was replaced by the Trade 2isputes 'ct of
3868. &t provided measures regarding avoidance of strike in public utility services ,<aper$ /ilk$ Train
#ervice- and 0onciliation machinery to bring about harmony between employees and employer. &n this
connection$ the !hitely 0ommission underlined the importance of creating a suitable work environment$ by
which you could arrest &ndustrial unrest$ 2isputes Q 0onflicts$ etc.
1owever$ Bule 43' of the 2efense of &ndia Bules making mandatory to refer the matter for settlement
or ad"udication. ' total ban on #trike was also imposed. &t provided speedy remedies for &ndustrial 2isputes.
!ith the termination of the #econd !orld !ar$ Bule 43' was subseCuently withdrawn.
's a conseCuence of which$ the present &ndustrial 2ispute 'ct emerged with a view to removing the
defects in Trade 2isputes 'ct$ 3868.
O0G)$+ %! $& "#,.+$'"*4 ,"+/.$ *)$, 1>2>
3. To promote measure for securing$ preserving and encouraging harmony and amicable relation
between the management Q the workman.
6. To investigate and settle the &ndustrial 2ispute between employer Q employer$ employees Q
employees Q between employer and workmen$ empowering the workmen to establish their rights
through registered trade unions.
9. To prevent illegal #trikes or Lockout.
D!"#"$"%# %! I#,.+$'6:
S)$"%# 2 G %! I#,.+$'"*4 D"+/.$ A)$, 1>;7$ defines the term &ndustry as follows: DI#,.+$'6 (*#+
*#6 0.+"#++, $'*,, .#,'$*C"#5, (*#.!*)$.' %' )*44"#5 %! (/4%6'+ *#, "#)4.,+ *#6 )*44"#5,
+'7"), (/4%6(#$, &*#,")'*!$ %' "#,.+$'"*4 %))./*$"%# %' *7%)*$"%# %! W%'C(#E.
The 'mendment 'ct of 3846 came into force after the %angalore !ater #upply and #ewerage %oard case. '
perusal of the definition )&ndustry+ would reveal that it has two segments.
T>e Fir#t Segment of the definition highlights the importance of the employers without whom these
activities could not be carried out.
T& Second Segment completely views that matter from the angle of the employees. %usiness signifies
activities of buying or selling. Trade means barter i.e. e*changing of goods either for money or commodities.
@ndertaking signifies any work or "ob undertaken which includes business$ pro"ects$ enterprise$ etc. 0alling
denotes necessitating profession or trade. 'vocation signifies$ a specialized work such as carpentry$
goldsmith$ blacksmith and weaving.
L"#)&/"# %! D!"#"$"%#:
&n order to understand$ any activity$ or activities of the above mentioned nature$ partaking in business
or trade must be rooted in the idea of making profit. !here the ob"ective of such activity is charity$ then it
would not be construed ,@nderstand- as &ndustry.
C%#)/$ %! I#,.+$'6 ',!"#,:
To sum up$ the entire concept$ &ndustry was reviewed and revamped by a redefining the term as followsH
&ndustry meansH
3. ' steady and systematic activity$
6. &n which a trade is organized or arranged$
9. &nvolving capital$ labor and skill,directly$ indirectly or without any of it-$
=. &t should be based on employeremployee relationshipH and
:. #o as to cater human needs.
3. S)$"%# (G)A&ndustry+ means any systematic activity carried on by 0ooperation between an employer and
his workman ,!hether such workmen are employed by such employer directly or by or through any
agency including a contractor- for the production$ supply or distribution of goods or services with a view
to satisfy human wants or wishes ,not being wants or wishes which are merely spiritual or religious in
nature- whether of not$
3. 'ny 0apital has been invested for the purpose of carrying on such activity.
6. 'ny activity relating to the promotion of sales or but does not include K
i. 'ny agricultural operationH or 1ospitals or 2ispensariesH or .ducational$
#cientific$ Besearch or Training institutionsH or &nstitutions owned or managed by organizations
wholly or substantially engaged in any charitable$ social service etc.$Ihadi or >illage industries
S$*$ %' G%7'#(#$ A)$"7"$"+ N W&$&' $&6 *' "#,.+$'"+
!hether 7overnmental activities$ be it 0entral or #tate could be termed as &ndustry. &n this case$ a
relevant point was raised whether /unicipality or 0orporation discharging their duties respectively should
be termed as )&ndustry.
1. S%7'"5# L R5*4 F.#)$"%#+:#overeign Function signifies$ discharge of duties from the point of view
of administration of the government.
6. W4!*' A)$"7"$"+: 7overnment #ector @nits K They are primarily meant for serving the <ublic in a
speedy and economic manner K Transport activities$ %anking$ &nsurance and some trade entities functioning
under the 7overnment
:. O'5*#"P, A)$"7"$6: !e have to find out whether such activities are of a commercial nature or in the
alternative found to be of charitable one. #ometimes$ diversified activities$ undertaken as welfare activities
like education$ charitable institutions$ recreational Q research institutions$ hospitals and even professional
activities may come under section 6,"-.
;. R+",.*'6 A)$"7"$6: #preading over a wide area. 1ere also one has to "udge and correctly assess whether
such activities$ with their widest range$ resemble that of a trade$ business or economic venture aiming at
profits or benefits in which case such activities would be treated as industry.
<. C&*'"$*04 A)$"7"$"+ :0haritable institutes sometimes are treated as &ndustry even when not based on
trading nature.
WRITE DOWN SOME IMPORTANT TERMS UNDER INDUSTRIAL DISPUTES ACT, 1>;7
W%'C M*#: S)$"%# 2 (+).
!ork man means any person,including an apprentice- employed in any industry to do any manual$
unskilled $ skilled$ technical$ operational$ clerical or supervisory work for hire or reward$ whether the terms
of employment be e*press or impliedY but ,%+ #%$ "#)4., any such person K
3. !ho is sub"ect to the 'ir Force 'ct 38:A or the 'rmy 'ct 38:A$ or the (avy 'ct 38:5.
6. !ho is employed in the <olice #ervice or as an Dfficer or other employee of a person or
9. !ho is employed mainly in a managerial or administrative capacity or
=. !ho$ being employed in a supervisory capacity$ draws wages e*ceeding one thousand #i* 1undred
rupees ,Bs. 3;AA.AA- per month$ or e*ercises functions mainly of managerial nature.
!hether a person is a workman or not$ depends on the establishment of /aster #ervant relationship. The
/aster K #ervant relationship is said to prevail upon a workman.
3. !hen the /aster is able to dictate not only what "ob has to be doneH
6. but also dictates how it has to be done.
'n &ndependent 0ontractor is not a workman because the independent contractor satisfies only the
first condition$ but does not satisfy the second condition.The term !orkman as used in the &ndustrial 2ispute
'ct is wider$ because it includes an apprentice also. %ut section of the 'pprentice 'ct of 38;3$ stated that an
apprentice is not a worker. 'n )apprentice+ who is registered as per procedure under the 'pprentice 'ct
before the 'pprenticeship 'dvisor under a 0ontract.
I#,.+$'"*4 D"+/.$ (S)$"%# 2(C))
&ndustrial 2ispute means any dispute$ or difference between K
3. .mployer and .mployers or
6. .mployers Q !orkman or
9. !orkmen and !orkmen$ which is connected with K
The employment or non K employment.
The terms of employment$ or
The conditions of labor$ of any person.
2ispute means conflict or controversy or difference of views which should be of a substantial nature
between the employer and employee. The difference of views must be of such persisting and continuing
nature which if not settled$ would be detrimental to industrial peace and harmony of the community.
E(/4%6'+ *#, E(/4%6':
The &ndustrial 2isputes may be between employer and employer. &nvariably$ the employers also have to
observe a code of discipline. They should not indulge in malafide practices of trying to fish out or entice
the employees belonging to their competitors by patently offering attractive salaries.
E(/4%6'+ *#, W%'C(*#:
' 2ispute may arise between employer and workman which is said to be more freCuent and common.
(ormally$ &ndustrial 2isputes occur when there is lack of 0ooperation between employer and employee.
These disputes give room for violation of standing rules and regulations$ as per the #tanding Drders 'ct
38=;. For .*ample$ (on achievement of tasks in production$ indiscipline among workers$ absence workers$
absence from duty$ #trike$ retrenchment$ 0losure$ unfair trade practice would give rise to &ndustrial 2isputes
between .mployer and employee.
E(/4%6 *#, E(/4%6:
2isputes may also arise among employee and employees. 'n &ndividual unit where divergent activities are
to be converged and synchronized with 0ooperation of employers in a 0oordinated fashion. Dutput of one
unit becomes inputTraw material for another. This may give rise to inter departmental factions and rivalries.
Furthermore$ practice of non 0ooperation by one set of workers would result in non function of the
industrial activities.
N*$.' %! I#,.+$'"*4 D"+/.$+:
The 2ispute may be in the nature of employmentT non employment or terms of employment or with
conditions of Labor.
T+$ %! I#,.+$'"*4 D"+/.$+:
To find out whether a dispute is an individual dispute or not$ is to ascertain whether ma"ority or large
number of workman are involved in the dispute. ' 2ispute between employer and a single workman by
himself will not give room for an industrial dispute$ unless it is supported and backed up by a larger section
of workman or by a registered Trade @nion.
&n order to raise a dispute as an &ndustrial 2ispute$
3. The !orkman must be a member of Trade @nion$
6. The Trade @nion must represent the cause of the aggrieved worker$ and then alone such
disputes will be treated as &ndustrial 2ispute.
C%44)$"7 D"+/.$:
.very industrial dispute is a collective dispute for the simple reason that the dispute is taken up either by the
Trade @nion or by largest section of workers.
2ismissal of a !orkman.
' 2ispute as to %onus.
' 2ispute as to compensation for wrongful dismissal.
' 2ispute as to whether a Lockout declared by an .mployer is "ustified and whether the !orkmen are
entitled to wages for the period of Lockout.
' 2ispute as to modification or revision of a certified #tanding Drder.
I#,"7",.*4 D"+/.$ (S)$"%# 2A)
3ismissal, etc., of an individ$al or#man to !e deemed to !e an Ind$strial disp$te :
&n other words$ though it is an individual dispute and even though larger group of workman and Trade
@nions do not take up the cause of his termination$ yet$ such individual dispute is regarded as a deemed
&ndustrial 2ispute. &n other words$ a deemed &ndustrial 2ispute must have resulted on account of termination
of an employee by dismissal or retrenchment.
To sum up$ the entire dispute under the 'ct$ has to be viewed under three categories.
'n &ndustrial 2ispute which is of a collective nature$ sponsored by Trade @nions or larger !orkman$
'n &ndustrial 2ispute known as deemed &ndustrial 2ispute ,section 6'- arising out of termination of an
employee by dismissal or retrenchment,though not taken up by @nion or group of !orkmen-
WHAT ARE THE SETTLEMENT OF DISPUTES K PROCEDURES?
S$$4(#$ K S)$"%#+ 18(1) L 18(:).
'ccording to #ection 6,p- a settlement means$
3. a settlement arrived at in the court of conciliation proceedings ,which may be held by a 0onciliation
Dfficer or %oard of 0onciliation- and includes$
6. a !ritten agreement between the employer and workman arrived at otherwise than in the course of
0onciliation proceedings where such agreement has been signed by the parties thereto and a copy
thereof has been sent to an officer authorized in this behalf by the appropriate 7overnment and the
0onciliation Dfficer.
'ny settlement brought about by force is invalid. &t must have resulted out of free will and volition. 's
mentioned above$ settlement is possible by two ways. #ettlement brought about by agreement based on
negotiations and settlement arrived at in the course of conciliation. The former results on account of
negotiation and the latter is the outcome of 0onciliation through the mediation of the Dfficer.
DIFFERENCE BETWEEN SETTLEMENTS B1 NEGOTIATION AND SETTLEMENT B1
CONCILIATION.
B6 N5%$"*$"%# B6 C%#)"4"*$"%#
3. Dnly two parties involved. There is no 9
rd
parties interference
6. #ettlement arrived by /utual 0onsent.
9. <arties involved in the agreement would be
bound by it.
=. <eriod of operation of settlement would be
governed as per the terms X conditions. &f no
such period is mentioned$ it will be in
operation for si* months from the date on
which it was signed.
:. #ettlement could be terminated by issuing
two month+s notice before the e*piry of the
said period.
;. &t has no legal #anctity. 'greement could be
challenged on the ground of mistake$
misrepresentation$ undue influence and
coercion etc.
#ettlement is arrived at only through
#ettlement arrived through the
(ot only the parties to the 2ispute Q those
who appeared before the proceedings$
present and future employees also. &t is
eCually binding on the employers$ his
heirs$ successors and assigns.
#ettlement shall be in operation for such
period as agreed upon by the parties and if
no such period is mentioned it shall be in
force for a period of si* months.
#ame condition applies.
&t has some legal sanctity. (ormal
0ircumstances can not be assailed on the
ground of vitiating circumstances.
A-*', 06 A,G.,")*$"%#: S)$"%# 1?.
D!"#"$"%#:
'ward according to +)$"%# 2(0-$ 'ward means an interim or a final determination of any industrial
dispute or of any Cuestion relating to by any Labor 0ourt$ &ndustrial Tribunal$ (ational Tribunal and
includes an arbitration award made under #ection 3A '.
I#$'"( A-*',:'n &nterim award is only a temporary or provisional award passed by the Labor 0ourt$
&ndustrial Tribunal$ and (ational Tribunal in favor of parties in the interest of Uustice$ eCuity and good
0onscience till the dispute is finally settled by determination.
A-*', 06 *,G.,")*$"%#:
&s an award which has been given by way of "udgment by the Labor 0ourt$ &ndustrial Tribunal or
(ational Tribunal on account of reference under section 3A,3-. 'n award is nothing but the findings of the
Labor 0ourt$ &ndustrial Tribunal or (ational Tribunal duly signed by the presiding officer$ including
arbitration. The award shall be published within a period of 9A days from the date of its receipt by the
appropriate government by way of Dfficial (otification. &t shall be final and shall not be called in Cuestion
by any 0ourt
S) 17(1) L17(2).
C%((#)(#$ %! $& *-*',:
'n award including arbitration shall become enforceable on the e*piry of 9A days from the date of its
publication. &f the government is of the opinion an award affecting the national economy and social "ustice
by giving effect to the operation of the award either in part or full$ the 0entral 7overnment by notification
shall declare that the said award shall not become enforceable on the e*piry of 9A days from the date of
publication.
/erely making declaration is not enough. The 0entral 7overnment within 8A days from the date of
publication of the award should make an order re"ecting or modifying the same and should place the award
together with a copy of the order before the Legislature or before the parliament where the 0entre is a party.
The award which is laid before the LegislatureT <arliament shall become enforceable on the e*piry of 3:
days from the date on which it was so laid.
O/'*$"%# %! $& *-*',:
1. 'n award is said to be binding on all parties ie. .mployers ,including heirs$ successors$ assigns Q
e*ecutors- and .mployees ,including past$ present and future-.
2. 'n award shall remain in operation for a period of one year from the date of which it becomes
enforceable. 1owever$ the appropriate government may reduce the period if it so thinks.
:. The appropriate 7overnment has power to e*tend the operation of the award for a period not e*ceeding
3 year at a time and however$ the total period of operation of any award should not e*ceed 9 years from
the date on which$ it has come into operation.
A-*', 06 A'0"$'*$"%# F S)$"%# 1? A
D!"#"$"%#:
The decision arrived at by the findings of an arbitrator$ appointed by the mutual consent of both
employer and employee is known as an award by arbitration. &n settlement$ both management and the
laborers agree on certain issues$ whereas in case of arbitration$ the above said parties mutually agree to abide
by the findings of the common arbitrator$ instead of directly negotiating with each other.
!hen any &ndustrial 2ispute arrived if they agree to have the dispute referred to an 'rbitrator$ to be
heard and decided$ they can enter into an agreement in writing to that effect.
This must be done before the dispute is referred to the Labor 0ourt$ &ndustrial Tribunal or (ational
Tribunal for ad"udication.
'n arbitrator may have to be chosen by the parties to the dispute by mutual consent who may be
presiding officer of the Labor 0ourts$ &ndustrial Tribunal or (ational Tribunal or any person form the list
of approved arbitrator authorized by the 7overnment.
!hen two arbitrators appointed and differ with each other$ the dispute will be referred to an @mpire and
his findings shall be final and conclusive. 'n @mpire also has to be chosen by mutual consent of the
parties to the dispute.
The arbitrator agreement shall be drafted in the prescribed form.
0opy of the findings shall be forwarded to the 7overnment and the 7overnment shall publish the same
within 9A days. The award by arbitration shall come into force after the e*piry of 9A days from the date
of publication.
&f any further$ dispute or clarification is sought$ it shall again be referred to the same arbitrator for
determination of the Cuestion involved in the findings. &f the same arbitrator is not available$ a fresh
person has to be chosen by the parties concerned by mutual consent.
FORUM UNDER THE INDUSTRIAL DISPUTES ACT
For #ettlement For 'rbitration For 'd"udication
3. 7rievance #ettlement 'uthority 'rbitrator Labor 0ourt
6. !orks 0ommittee
9. 0onciliation Dfficer &ndustrial Tribunal
=. %oard of 0onciliation
:. 0ourt of &nCuiry. (ational Tribunal
1igh 0ourt
(W'"$ J.'"+,")$"%#)
1. G'"7*#) S$$4(#$ A.$&%'"$6 L0hapter && % #ec 8 ,c- M
The basic forum for settlement.
.very industrial establishment$ in which :A or more workmen are employed.+
2isputes may be of either of collective or noncollective nature affecting largerT small section of
labor force.
@nder sec 8 ,0- sub clause 6$ makes it mandatory.
(o reference shall be made under sec 3A directly without e*hausting the remedies before the
7rievance #ettlement 'uthority.
2. W%'C+ C%(("$$ (S) :)
.very industrial establishment$ which employees not less than 3AA workman on any day$ in the
preceding 36 months should constitute a !orks 0ommittee consisting of representatives of
employers and workman engaged in the same establishment in the prescribed manner as per
7overnment Drder.
O0G)$+: &s to promote industrial harmony to secure amity Q good relation between employer and
workman.
&s to solve the day Ktoday problems pertaining to their "obs and work situation.
D.$"+: to promote steps for cordial relationship.
To comment up on matters of common interest of the workman concerned.
To endeavor to reconcile materials differences on matters pertaining to welfare$ recreation$
hospitalization$ wages$ hours of work$ bonus$ gratuity$ holidays with pay etc.
To smoothen the daytoday differences between the parties$. &t should not be misunderstood that the
works committee has been designed for promoting collective bargaining. 'ny decision arrived at by
the works committee is only recommendatory.
C*+: C&(")*4 M*P%%'S*#5&2+ 3(/ L C% L$,.( 1><; F<<) 7 F J R 21:.
:. C%#)"4"*$"%# O!!")' ( S) ;)
A//%"#$(#$: The appropriate government$ by notification in the Dfficial 7azette$ appoints such
number of persons as it thinks fit to be 0onciliation Dfficers. The main duty is to act as a mediator for
patching the differences between employer and employees.
The 7overnment may appoint one T more officers for specified industries or in some specified area for
one or more group of industries$ either permanent or for a shorter duration.
1e is a <ublic #ervant as per #ec 63 of &ndian <enal 0ode$ 34;A.
D.$"+: To conduct proceedings regarding disputes.
To investigate the disputes.
To submit a report ,/emorandum of #ettlement- pertaining to the 7overnment.
To forward report to the 7overnment on the circumstances under which settlement could not be
effected.
The report should be submitted within 3= days after the commencement of the 0onciliation
proceedings.
The 0onciliation Dfficer is not ?uasi Uudicial authorityH he is only an administrative authority. Dnce a
report has been submitted by him$ can not withdraw by him.
(on #ettlement of a dispute under sec 36,=-$ subseCuently the parties appear before the officer and
arrived at settlement$ but the conciliation officer could not submit a report under sec 36,9-
superseding the earlier (on settlement report.
Get$ in another case$ the Labor minister took up the matter and by his interference$ was able to bring
about a settlement. 1e could be treated as the settlement @nder #ec 34,6-. %ut$ the 0ourt held that this
kind of settlement will not be deemed as #ettlement before the 0onciliation Dfficer. &t is only an
agreement finalized between the employee and employer. &t is not an agreement before 0onciliation
Dfficer. /inister is not a 0onciliation Dfficer.
1e has not power to pass any orders directing the parties to the dispute to act in a particular matter.
P%-'+: 1e can enter into any premises for an enCuiry after notice.
1e may call for his inspection of any records T documents.
1e can obtain any statement on declaration of Dath from the <arties concerning for solving the dispute.
;. B%*', %! C%#)"4"*$"%# ( S) <)
&f an industrial 2ispute has to investigated and enCuired into$ by more than one person.
0hairman Q Two or four other members in eCual number to represent the parties to the dispute.
The %oard of can function even in the absence of 0hairman$ but not in the vacancy of the 0hairman.
The %oard can take cognizance of the &ndustrial 2ispute referred only by the 7overnment.
The %oard can make a full statement of facts along with its recommendation for determination of the
dispute.
#ubmit its report within two months after the dispute was referred to it.
The report shall be in writing$ signed by all the members of the %oard.
'ny member record a note of dissent., #ec 3; Q 35-
#trikes are always illegal during the proceedings ,whether by public @tility service or others- but
before a conciliation Dfficer$ they are only illegal when it relates to a public @tility service.
D.$"+: To take all efforts to bring about a settlement of disputes. 'fter the investigation$ the %oard
shall do all such things as it thinks fit for the purpose of inducing the parties to come to a fair Q
amicable settlement.
&f the %oard is successful in bringing about a settlement$ it shall submit a memorandum of settlement
signed by both parties.
&f no settlement arrived$ it can forward its recommendations to the 7overnment for the determination
of the dispute.
Dn Beceipt of the (on settlement report$ if it is not a fit matter for reference to Labor 0ourt or
&ndustrial Tribunal T (ational Tribunal$ then the 7overnment shall communicate by notice to the
parties concerned. 'nd it shall also record the reasons for not referring to Labor 0ourt$ &ndustrial
Tribunal or (ational Tribunal.
<. C%.'$ %! I#@."'6 (S) =)
0onstituted by the 7overnment when a certain issue has to be e*amined in depth.
Two or more members$ one of them being a 0hairman.
(ecessary$ although in agreement on all mattersT yet on certain issues may be at loggerheads.
<arties to the dispute may also apply "ointly and severally to the 7overnment to refer the dispute to the
court of inCuiry.
D.$"+: ,#ec 3=- submit its report within ; months.
'ny such member may record his minute of dissent.
The 7overnment has to publish the report including the note of dissent of any member from the date of
its receipt.
P%-'+: ,#ec 33- any rulesT procedure shall follow as it may think fit.
' member can enter the premises after notice.
II L*0%' C%.'$ ,#ec 5-
A//%"#$(#$: %y notification in the Dfficial 7azetteH
/ay constitute one T more Labor 0ourts relating to any matter specified in the #econd #chedule.
#hall consist of one person only to be appointed by the appropriate 7overnment.
' <erson shall not be Cualified K @(L.## K
1e is $ or has been a "udge of a 1igh 0ourtH or
1e has$ for a period of not less than three years been a 2istrict T an 'dditional 2istrict UudgeH
1e has held any "udicial office for not less than seven yearsH.
1e has been the <residing Dfficer of a Labor 0ourt under any provincial 'ct or #tate 'ct for not less
than five years.
D"+@.*4"!")*$"%#: if he is not an independent <erson
1e has attained the age of ;: years.
J.'"+,")$"%#:T& S)%#, S)&,.4
'n Drder passed by an employer under the #tanding Drders.
The application Q &nterpretation of #tanding Drders.
2ischarge T dismissal of !orkman including reinstatement or$ grant of relief to workman wrongfully
dismissed.
!ithdrawal of any customary concession or <rivilegeH
&llegality or otherwise of a strike or LockoutH and
D.$"+: it has to ad"udicate matters specified under #chedule &&
&t has to give its finding within the scope of reference only.
&t has to conduct such proceedings as necessary and give its findings known as award within the
stipulated period. The award shall be signed publish the same within a period of 9A days from the date
of its receipt.
P%-'+: The <residing Dfficer can enter into any premises after notice.
' Labor 0ourt e*ercises the same powers as are vested in a 0ivil 0ourt under the 0ode of 0ivil
<rocedure$ 38A4.
&t could enforce attendance of any person
0ompelling for production of documents T /aterials
&ssuing commission for e*amination of witness$ etc.
I#,.+$'"*4 T'"0.#*4 (#ection 5 '-
A//%"#$(#$: by notification in the Dfficial 7azette.
/ay constitute one T more &ndustrial Tribunal matters specified in the #econdT Third #chedule as the
case may be.
/ay be for a limited period or a permanent one.
The 7overnment has power to constitute a new Tribunal$ if the e*isting tribunal failed to dispose of the
matter within the specified period.
The (ew Tribunal either 0ontinue the proceedings where it was left or to hear the whole dispute
afresh.
0onsist of one person only to be appointed by the 7overnment.
'ccording to #ec 5' ,9-$ a person shall not be Cualified for appointment as the <residing Dfficer K
@(L.## K he is T has been a Uudge of a 1igh 0ourtH
1e has for a period of not less than 9 years been a 2istrictT an 'dditional 2istrict Uudge.
The appropriate 7overnment may$ it it so thinks fit$ appoint 6 persons as assessors to advice the
Tribunal in the proceeding before it.
D"+@.*4"!")*$"%#: (o person shall be appointed or is to continue in the office of the <residing Dfficer
of the Tribunal if
1e is not an independent and he has attained the age of ;: years.
J.'"+,")$"%#: T& T&"', S)&,.4:
!ages$ including the period Q mode of payment
0ompensatory Q other allowances
1ours of work$ Q Best &ntervals.
Leave with wages Q 1olidaysH
%onus$ profit sharingH <rovident Fund Q 7ratuityH
#hift working otherwise than in accordance with #tanding Drders.
0lassification by gradesH
Bules of 2iscipline.
Betrenchment of workmen and closure of establishmentH and
'ny other matter that may be prescribed.
D.$"+: (#ec 3:-
&t shall refer its findings by way of submission of award within the specified period stipulated by the
7overnment. The award should contain the signature of the <residing Dfficer and the 7overnment
shall publish such award within 9A days of its receipt.
The findings shall pertain to relevant facts and decision should be arrived at purely on merits of the
case.
P%-'+: 'ccording to #ec 33,3-$ the <residing Dfficer$ can enter into any premises or after notice. #ub
0lause,6- : &t en"oys the same power as are vested in a 0ivil 0ourt:
.nforce attendance of any personH
0ompel production of documents and material ob"ects.
&ssue commission for .*amination of !itnesses
The Tribunal can appoint one or more assessors having special knowledge to advice$ and assist in the
proceedings. The Tribunal has power to award costs against such party and conditions under which
they have to be paid.
N*$"%#*4 T'"0.#*4: (#ection 5 %-
The 0entral 7overnment by notification in the Dfficial 7azette.
/ay constitute one T more (ational &ndustrial Tribunals$ involve Cuestions of (ational &mportance or
are of such a nature that industrial .stablishment situated in more than one state are likely to interested
in such disputes$ or affected by them.
A//%"#$(#$: 0onsist of one person.
#hall not be Cualified for appointment @(L.## he is$ or has been$ a "udge of a 1igh 0ourt.
The 0entral 7overnment may$ if it so thinks fit$ appoint two persons as assessors to advise the (ational
Tribunal in the proceedings before it.
(ormally$ the sub"ect matter involved in the dispute is one of national importance$ affecting the larger
interests of the public. The sub"ect matter may fall either under #econd or Third schedule.
D"+@.*4"!")*$"%#: he is not an independent personsH
he has obtained age of ;: years.
J.'"+,")$"%#: is very wide so as to include matters not only falling under #chedule &&& but also such
other matters which are specifically referred to it by the government for ad"udication.
D.$"+: (ot only ad"udicating from the point of view of national interest but also strictly in conformity
with the terms of reference made to it by the government.
1old the proceedings according to the guidelines prescribed.
#hall complete the proceedings within the specified period.
The award must be signed by the <residing Dfficer and shall be submitted to the 7overnment. The
7overnment has to publish the award within 9A days from the date of its receipt.
P%-'+: The same as mentioned in &ndustrial Tribunal.
Findings of facts by a Labor 0ourt$ &ndustrial Tribunal and (ational Tribunal normally can not be
interfered with by a 1igh 0ourt.
@nder #ec 33 '$ the Labor 0ourt is considered to be an appellate authority which has got power$ to
e*amine the gravity of punishment awarded by the management. The Labor court can also cancel$
reduce or remit the matters pertaining to the dispute. The #upreme 0ourt would refuse to interfere with
the order of the Labor 0ourt involving termination or punishment of the workman.
0ase : /anagement of 1industan /achine Tools Ltd >s/ohommed@sman$ 3849 $ Lab & 0 3598,#.0-
N%$") %! C&*#5 "# )%#,"$"%#+ %! S'7"):
,0hapter && ' #ec 8' Q 8%-
'n employer who wants to effect a 0hange in the conditions of service applicable to workman in
respect of matters covered under the Fourth #chedule shall not effect such change without giving
previous notice to the !orkman 0oncerned. 63 days of prior (otice must be given.
(o notice is reCuired where settlement or award arrived at.
(otice Df change is not reCuired for a workman to whom fundamental and supplementary 0ivil
#ervice Bules and &ndian Bailway establishment rules are applicable.
F%.'$& S)&,.4:
!ages$ including the period Q mode of payment.
0ontribution paid$ or payable$ by the employer to any provident fund or pension fund or for the benefit
of the workman under any law for the being in forceH
0ompensatory and other allowances
1ours of work and Best &ntervalsH
Leave with wages and holidaysH
#tarting$ alteration or discontinuation of shift working otherwise than in accordance with #tanding
DrdersH
!ithdrawal of any 0ustomary concession or privilege or 0hange in usageH
&ntroduction of new rules of discipline or alternation of e*isting rulesH
Bationalization$ #tandardization$ or improvement of plant or techniCue which is likely to lead
retrenchment of workmenH
'ny increase or reduction ,other than 0asual- in the number of persons employed or to be employed in
any occupation or process or department or shift,where the employer has no control-
P%-' %! G%7'#(#$ $% 8(/$ (/4%6'+ !'%( 5"7"#5 #%$") %! C&*#5:
#ection 8' ,demanding for issue of notice- to any class of industrial establishment or workman would affect
the amicable relation between employer and employee. (otice may be given sub"ect to certain conditions to
a particular class of workers or sub"ect to such conditionH it may pass an order accordingly.
PA1MENT OF BONUS ACT 1>=<
EJPLAIN THE PA1MENT OF BONUS ACT 1>=<?
I#$'%,.)$"%#
%onus 'ct came into force on 6:th #ept 38;:.
This amendment removed the concept of A0%#.+ *+ * ,!'', -*5B
The government has to roll back "$+ %'"5"#*4 /'%/%+*4 %! 4"#C"#5 0%#.+ -"$& /'%,.)$"%#.
Thus$ the concept of minimum bonus of 4.99V for the accounting year commencing on any day
in the year 385; has come to stay.
The statutory force was incorporated in the %onus amendment act 3855.
'mended in the following years K 3854$ 384A and 384:.
The ceiling limit was raised from Bs 3;AA K Bs.6:AA in 384:. Further$ raised to Bs.9:AA K #ec
6,39- and 36.
H"+$%'6 %! $& B%#.+ ACT:
The concept of bonus was emerged in 3835$ which was considered to be period of First !orld !ar.
The credit of paying bonus should go to Te*tile industries at %ombay and 'hmedabad.
>oluntarily %onus ,an increase of 3A 3:V of their wages- was paid. N*(, *+ W*' B%#.+.
However$ this was N%$ 0*+, %# C.+$%(*'6 %' 45*4 %' @."$*04 /'"#)"/4+.
During the #econd !orld !ar$ workers were motivated to get !ar %onus. .*traordinary profits
earned during the First !orld !ar were used for paying bonus.
'lthough several employers paid bonus voluntarily$ yet many of them did not pay bonus.
T& B%#.+ F%'(.4* :
A subtle Cuestion came up for consideration about the @.*#$.( %! +&*' $&*$ +&%.4, 0 (*,
*7*"4*04 $% $& -%'C(*# *#, $&*$ $%% .#,' -&*$ )"').(+$*#)+.
T& )40'*$, )*+ of /ill Oner's Association, Bom!a% EsRashtri%a /ill /aOdoor4angh,
Bom!a% "850 *#+-', $& *0%7 +*", @.+$"%#+.
&t is also known as AF.44 0#)& !%'(.4*B %' A*7*"4*04 +.'/4.+ !%'(.4*B
F'%( $& P'%!"$, $& !%44%-"#5 ,,.)$"%#+ &*7 $% 0 (*,:
provision for depreciation$provision for rehabilitation$
a return of si* percent on the paid up capital H and
a return on the working capital *$ * 4%-' '*$ $&*# $& '$.'# %# $& /*", $& ./ )*/"$*4.( 4++
$&*# = /' )#$).
C'$*"# )%#,"$"%#+ *' $% 0 !.4!"44, !%' (*C"#5 * ,(*#, !%' 0%#.+:
0ompany had made profit during the relevant year$
&f the company has incurred loss$ a demand for bonus will not be "ustified.
O0G)$ %! $& A)$ :
&t imposes a statutory liability upon employers.
&t defines the principles in accordance with the prescribed formula.
A//4")*$"%# %! $& A)$ :
The 'ct e*tends to the whole of &ndia.&t applies to every factory ,as defined under the factories
'ct-
an amendment act of 385;$ brought such establishments(4++ $&*# 2? 0.$ N%$ 4++ $&*# 1?) in to
the net. This was considered to be boon for the employees of small concerns.
O#) $& A)$ "+ *//4")*04$ it shall continue to be in force "''+/)$"7 %! $& !*)$ %!
+.0+@.#$ ',.)$"%# "# $& #.(0' %! (/4%6+ !*44"#5 4++ $&*# 2?.
E(/4%6(#$ %! 2? %' (%' /'+%#+, 7# %# * ,*6 during the accounting year "+ (%' $&*#
+.!!")"#$ !%' *//4")*0"4"$6 %! $&"+ #*)$(#$.
A)$ NOT $% *//46 K S) :2
.mployees of general insurance business and the L&0 of &ndia.
employees under the 2ock !orkers 'ct 38=4$
employees by contractors in building construction$ .mployees of B.%. &$
S%( "(/%'$*#$ ,!"#"$"%#+:
A))%.#$"#5 1*' N S) 2(1) N (*#+,
in relation to a 0orporation K the year ending on the day on which the books and accounts of the
corporation are to be closed and balanced$
in relation to a company$ the period in respect of which any profit and loss of the company laid
before it in annual general meeting is made up$ whether that period is a year or notH
E(/4%6 N S) 2(1:),
'ny person ,other than apprentice- employed on a salary or wage ,Bs. 9:AA- per men sumH whether
the terms of employment be e*press or impressed.
E(/4%6' N S) 2(1;) (*#+,
The Dwner or Dccupier including the agent of such Dwner or Dccupier$ the legal representative of
a deceased owner or occupier and the manager of the factory.
The person$ who has the ultimate control over the affairs.
S*4*'6 %' W*5 S) 2(21),
all remuneration ,%$&' $&*# '(.#'*$"%# "# '+/)$ %! %7'$"( -%'C- and "$ "#)4.,+
dearness allowance paid on account of rise in cost of living and 0.$ ,%+ #%$ "#)4.,
'ny concessional supply of food grains$ any traveling concession$ incentive$ production Q
attendance bonus etc.
E4"5"0"4"$6 !%' B%#.+ N S) 2(1:) *#, 12
must be an employee drawing N%$ (%' $&*# R+.:<??KF
#hould have worked for a period #%$ 4++ $&*# :? ,*6+ "# $&*$ 6*'.
(ote: Latest amendment in 6AA5 raised the salary limit to Bs.3AAAA per month eligible for annual bonus.
,#ource: The 1indu : A6.3A.6AA5-
D"+@.*4"!")*$"%#: &f he has been terminated by$for fraud$for riotous or violent behavior$
For theft$ misappropriation$ sabotage of any property etc.
D$'("#*$"%# %! B%#.+: The 7ross <rofit has to be computed by calculation strictly in conformity with the
!"'+$ +)&,.4 ,#ec ='- !%' 0*#C"#5 )%(/*#"+ and in accordance with the +)%#, +)&,.4 ,#ec =%- for
nonbanking companies.
COMPUTATION OF GROSS PROFIT N A2AILABLE SURPLUS L ALLOCABLE SURPLUS:
The establishment has to prepare a balance sheet and profit Q loss account of the year and calculate
the )G'%++ P'%!"$B, AA7*"4*04 S.'/4.+B *#, AA44%)*04 S.'/4.+B as per the method and formula given in
%onus 'ct.
The following items should be e*cluded while arriving at 7ross <rofit:
all 0apital Beceipts T 0apital .*pensesT 0apital <rofits and Losses$
all profitTloss on foreign business$
%onus paidT payable debited to < Q L account.
A7*"4*04 S.'/4.+:
7ross <rofit M"#.+
2epreciation as per &ncome Ta* 'ct$
2evelopment Bebate$
2irect Ta*es on %onus components$
4.:V dividend on eCuity.,5.:V in case of banking company-$
A44%)*04 S.'/4.+:
;AV of 'vailable #urplus in the case of banking companies$
;5V in the case of nonbanking companies.
N%$: T&"+ &*+ $% 0 ,"+$'"0.$, *(%#5 (/4%6+ "# /'%/%'$"%# $% $& +*4*'6K -*5+. H%-7', $&"+ "+
+.0G)$ $% ("#"(.( 8.::T *#, (*8"(.( 2?T.
M"#"(.( B%#.+: S) 1?
.very employer shall be bound to pay a minimum bonus which shall be 4.99V of the salary earned
during the accounting year or Bs 3AA whichever is higher$
'nd in the case of employees below 3: years of age Bs ;A should be paid.
M*8"(.( B%#.+ S) 11
&s payable only when the allocable surplus is said to be in e*cess of 4.99V of the annual salary$
namely$ minimum bonus.&s sub"ect to a ma*imum of 6AV.
C*4).4*$"%# %! B%#.+ -"$& '5*', $% E(/4%6+: S) 2 (1:)
The 'ct is applicable to employees earning up to Bs.9:AAT. 1ere$ #alary means %asic <ay plus
2earness 'llowance. #uch of those persons who are drawing a salary of Bs.9:AAH their salary will be
treated as Bs.6:AA K ,#ec 36-
S$ %!! L S$ O# P'"#)"/4 N (S) 1<)
&f the 'llocable #urplus is more than the amount paid to employees as %onus ,even after 6AV bonus
paid- then such e*cess 'llocable #urplus will be carried forward to ne*t year for calculation purposeH
S$ %!!.
If the 'llocable #urplus is not sufficient$ to pay a minimum bonus$ then such shortfall will also be
carried forward to ne*t year. K S$ O#
THE FIRST SCHEDULE: S S) ;(*)
C%(/.$*$"%# %! G'%++ P'%!"$ %! B*#C"#5 C%(/*#6:
Items to be added back to (.T <BDF&T:
<rovision for %onus$ <rovision for 2epreciation$<rovision for development rebate reserve$
The amount debited in respect of 7ratuity paid$
0apital .*penditure Q Losses$
&tems to be deducted:
0apital Beceipts and 0apital <rofits$<rofits of any business outside &ndia$
&ncome from investments outside &ndia$
THE SECOND SCHEDULE: S S) ;(0)
C%(/.$*$"%# %! G'%++ P'%!"$ %! N%# FB*#C"#5 C%(/*#6:
I$(+ $% 0 *,,, 0*)C $% NET PROFIT:
<rovision for %onus$<rovision for 2epreciation$
<rovision for 2irect Ta*es$<rovision for development rebate reserve$
I$(+ $% 0 ,,.)$,:
0apital Beceipts and 0apital <rofits$
<rofits of any business outside &ndia$
&ncome from investments outside &ndia$
D,.)$"%#+ (#$"%#, "# $& THIRD SCHEDULE: S S)$"%# =(,)
The sums mentioned ,prior charges to be deducted from 7ross <rofit-
I# '+/)$ %! * )%(/*#6 %$&' $&*# * 0*#C"#5 )%(/*#6:
2ividends payable to on its preference #hare 0apital$4.: per cent of its paidup capital$
; per cent of its reserves.
I# '+/)$ %! * 0*#C"#5 )%(/*#6:
The dividends payable on its preference #hare 0apital$
5.: <er cent of its paidup eCuity$: per cent of its reserves.
N%$: T& above deductions are applicable to the foreign banks situated in &ndia.
I# '+/)$ %! * C%'/%'*$"%#:
8.< per cent of its paid up capital$= per cent of its reserves.
I# '+/)$ %! * C%F%/'*$"7 S%)"$6:
8.< per cent of the capital invested$
A#6 %$&' (/4%6' #%$ !*44"#5 .#,' *#6 %! $& *!%'+*", )*$5%'"+:
8.< per cent of the capital invested by him.
DETERMINATION OF A2AILABLE SURPLUS N (SEC <)
'fter determination of 7ross <rofit by using First #chedule ,%anking 0ompanies- or #econd #chedule ,for
nonbanking companies-$ the ne*t step is to calculate 'vailable #urplus.
'vailable #urplus can be derived after deducting the following:
S.(+ ,,.)$"04 !'%( G'%++ P'%!"$ N S) =
Any amount by way of depreciation$'ny amount by way of development rebate or investment$
'ny direct ta*$'ny other sums specified in the $&"', +)&,.4.
D"+@.*4"!")*$"%# !%' B%#.+ N S) >
&f he is dismissed from #ervice$
a- For fraud$ b- riotous or violent behavior$ and c- theft$ misappropriation or sabotage of any property.
P'%/%'$"%#*$ R,.)$"%# "# B%#.+F S) 1:
!hen an employee has not worked for all the working days in an accounting year$ he shall be
paid in proportion to the actual days of work.
A,G.+$(#$ %! C.+$%(*'6 %' I#$'"( 0%#.+ *5*"#+$ B%#.+ N S) 17
D,.)$"%#+ !'%( B%#.+ S) 18
&f an employee is found guilty misconduct causing financial loss to the employer.
&t must be noted that deduction is permissible only in relation to the accounting year during which
the loss was caused to the employer.
T"( 4"("$ !%' /*6(#$ %! B%#.+ S)1>
&f that disputed settled$ it has to be paid within a month from the date on which it comes into
operation&f any other case$ bonus must be paid within a period of 4 months from the close of the
accounting year i.e. (ovember.
P#*4$6 U S) 28
O!!#)+ S) 2> F:1
(UNIT III COMPLETED)
UNIT I2
INDIRECT TAJATION
CENTRAL SALES TAJ ACTF 1><=
INTRODUCTION
0entral #ales Ta* is an indirect ta* which is levied by central government on ta*able turnover of
inter state sale of goods made by a registered dealer during the prescribed period in the course of his
business. The 0entral #ales Ta* 'ct was passed in the year 38:; to levy central sales ta* on inter state sale
of goods. This act came into effect from :
th
Uanuary 38:5.
WHAT THE OBJECTI2ES OF THE CENTRAL SALES TAJ ACT, 1><=?
3. To formulate principles for determining when a sale T purchase of goods takes place:
a. &n the course of interstate trade or commerce
b. Dutside the state
c. &n the course of import T e*port from T outside &ndia
6. To provide for:
a. Levy and collection of ta*
b. 2istribution of ta* on sale of goods in the course of interstate trade or commerce
9. 2eclared goods:
To declare certain goods to be of special importance in the course of interstate trade or commerce.
=. Ta*ation of declared goods:
To specify the restrictions and conditions for imposing ta*es on the sale or purchase of declared
goods in the course of interstate trade or commerce.
:. To provide for collection of ta* from companies in the event of liCuidation.
MENTION THE SCOPE OF THE CENTRAL SALES TAJ ACT, 1><=?
a. The 0entral #ales Ta* 'ct$ 38:; deals with K
b. &nterstate sales
c. #ale or purchase of goods taking place outside a state
d. #ale or purchase in the course of e*port and import
e. Liability and charge to sales ta*
f. Begistration of dealers
g. 2etermination of ta*able turnover
h. Levy and collection of ta*
i. Dffences
". 2eclared goods
WHAT ARE THE ELEMENTS OR INGREDIENTS WHICH ARE NECESSAR1 TO CONSTITUTE
A SALE?
#ale of goods consists of various elements T ingredients which are:
a. ' bargain or a contract of sale
b. The payment or promise of payment of price
c. The delivery of goods
d. <assing of the title
.ach of these elements is necessary to constitute a sale.
INCIDENCE OF CST:
's per the constitution ta* on &nter #tate #aleT<urchase can be levied only by @nion government.
0#T 'ct has been enacted for this purpose. .very dealer shall be liable to pay ta* under this act on all sale of
goods other than electrical energy effected by him in the course of inter state trade or commerce. The ta*
burden falls on the consumer #ec ;,3- is called as 0harging section as it imposes levy on sale of goods on
&nter#tate sale.
WHAT ARE THE DIFFERENT FEATURES OF CENTRAL SALESFTAJ LAW?
A//4")*0"4"$6:
The 0entral #ales ta* 'ct e*tends to the whole of &ndia.
R5"+$'*$"%# 06 ,*4':
The 0entral #ales Ta* 'ct states that every dealer making an N&nter #tate #aleN must be registered
dealer.
D*4' $% P*6 S*4+ T*8:
The registered dealer$ who makes an interstate sale$ is liable to pay central sales ta*.
D!"#"$"%# %! T'(+:
.*planation to saleT<urchase of goods in the course of inters state trade or commerce$ and import into
and e*port out of the territory of &ndia and 7oods are defined in the 0#T 'ct.
S"#54 *#, M.4$"/4 R*$+ %! C#$'*4 S*4+ T*8:
7enerally central sales ta* is assessed at a single point but in some cases there can be multiple point
ta* due to subseCuent sale.
C#$'*4 S*4+ T*8 $% 0 * $.'#%7':
0entral sales ta* is levied for any amount of turnover made into each course of interstate sale.
C#$'*4 S*4+ T*8 $% 0 /*6*04 !'%( $& +$*$ %! +*4 %! 5%%,+:
0entral sales ta* is payable in the state$ from where the goods were sold.
C#$'*4 S*4+ $*8 $% 0 )%44)$, 06 $& S$*$+:
0entral salesta* is levied by the 0entral 7overnment but is collected by the state 7overnment
from where the goods have been sold.
A,%/$"%# %! R.4+ 06 S$*$ G%7'#(#$:
The central sales ta* rules have been framed by the 0entral 7overnment but the #tate
7overnments are allowed to adopt such rules.
R.4+ !%' '$.'#+ *#, P*6(#$ %! T*8 *+ /' S$*$ S*4+ T*8 )4*-+:
Bules regarding submission of returns$ <ayment of ta*$ appeals$ etc. are not framed by the 0entral
#ales Ta* 'ct. Therefore rules framed by #tate 7overnment in respect of its own salesta* laws will be
followed.
BRIEFL1 EJPLAIN THE PRINCIPLES WHICH DETERMINE THE SALE AS AN INTERSTATE
SALE. OR WHEN A SALE IS SAID TO BE AINTERSTATE SALEB UNDER SECTION F: OF CST
ACT?
' sale or purchase of goods shall be deemed to take place in the course of &nterstate trade or
commerce if the sale or purchase K
Dccasions the movement of goods from one state to another or
&t is effected by a transfer of documents of title to the goods during their movement from one state to
another.
A. M%7(#$ %! 5%%,+ !'%( %# +$*$ $% *#%$&' +$*$ HS).: (*)I
&t is an interstate sale. The essential conditions for a sale to be in the course of interstate trade are:
a. 0ompleted sale of goods: Transfer of property in goods by one person to another.
b. The contract of sale to provide that goods be moved from one state to another.
S*4 $% "#)4., *5'(#$ $% +44:
!here there is a stipulation regarding the movement of the goods from one state to another$ in
pursuance of which the goods have actually moved$ and sale ultimately takes place in the state to which
goods are sent.
S/)"*4 )*++ %! I#$'F+$*$ +*4:
7oods sent through agent T branch to buyer shall be called interstate trade.
/oving of goods by buyer outside the state of sale under the contract of sale is also interstate sale.
S"$.*$"%#+ -&' $&' "+ #% "#$'F+$*$ +*4:
7oods sent by a dealer from head office T factory to a branch in another state.
7oods sent to commission agent in another state for an on account sale.
7oods sent to a dealer in another state on consignment basis
7oods imported by a dealer on behalf of another dealer.
B. S*4 06 T'*#+!' %! D%).(#$+:
&nter state sale also occurs by effecting it through transfer of documents of title to the goods.
.ssential conditions to treat transfer of documents of title to the goods as sale in the course of interstate
trade are as under:
3. /ovement of goods from one state to another.
6. The property in goods should pass by transfer of documents of title after commencement of the
movement of goods but before its conclusion.
9. 2ocuments of title: ,a- Bailway receipts ,BB-$ ,b- Lorry receipts ,LB-$ ,c- 'irways bill ,'%-$
,d- %ill of Lading ,%L-
WHAT ARE THE DIFFERENCES BETWEEN INTERFSTATE SALE AND INTRAFSTATE SALE?
I#$'F+$*$ S*4 I#$'*FS$*$ S*4
3. This is governed by 0#T 'ct 38:;. This is governed by respective state 'cts.
6. 0#T rates are uniform through the country.
9. For interstate trade transactions$ the rates are
levied by the 0entral 7overnment.
=. <ossibilities are remote to pay sales ta* at
more than one stage.
:. &n this case 0#T is levied when goods move
from one state to another state.
;. Through interstate sale there is a possibility
for e*portT import activities.
#tate sales ta* rates differ from state to state.
The rates are determined by the respective state
governments.
There may be negotiations to pay sales ta* at more
than one stage.
&n this case local ta* is levied when saleTpurchase
takes place with in the state.
@nder intrastate sale$ there is no possibility for
e*portT import activities.
PRACTICAL IMPLICATIONS
E8/4*"# $& /'%7"+"%#+ '5*',"#5 $&
A. S*4 %' /.')&*+ %! 5%%,+ %.$+", * +$*$(+).;)
B. S*4 %' /.')&*+ %! 5%%,+ "# $& )%.'+ %! "(/%'$ %' 8/%'$ (+).<)
C. P#.4$"(*$ +*4 !%' 8/%'$ (+).<(:) $& )+$ *)$. O'
E8/4*"# $& !*$.'+ *#, /'%7"+"%#+ %! "#$' +$*$ *#, "#$'* +$*$ +*4+.
A. S*4 %' P.')&*+ %! 5%%,+ %.$+", * +$*$
!hen a sale or purchase of goods takes place inside a state then it is deemed to have taken place
outside all other states. Thus sale or purchase of goods outside a state is not directly defined by the 0#T 'ct.
&n the case of sale inside a state$ the goods are classified under two heads:
S/)"!") %' *+)'$*"#, 5%%,+.
&n the case of specific goods$ the sale or purchase shall be deemed to take place inside a state if the
goods were within the state when the contract of sale is made.
U#*+)'$*"#, %' !.$.' 5%%,+.
&n the case of future goods the state in which goods are ascertained is the state in which the sale takes
places.
B. S*4 %' /.')&*+ %! 5%%,+ "# $& )%.'+ %! "(/%'$ %' 8/%'$ (S).<)
's per 0#T 'ct the sale or purchase of goods in the course of import or e*port takes place in the
following situations:
E8/%'$ %! G%%,+
7oods to cross the customs frontiers of &ndia:
' sale or purchase of goods shall be deemed to take place in the course of e*port of the goods out of
the territory of &ndia only if the sale or purchase either occasions such e*port or effected by a transfer of
documents of title to the goods after the goods have crossed the customs frontiers of &ndia.
I(/%'$+
%efore the goods crossed the customs frontiers of &ndia:
' sale or purchase of goods shall be deemed to take place in the course of the import of the goods
into the territory of &ndia only if the sale or purchase either occasions such import or is effected by a transfer
of documents of title to the goods before the goods have crossed the customs frontiers of &ndia.
9. The last sale or purchase of any goods preceding the sale or purchase occasioning the e*port of
those goods out of the territory of &ndia shall also be deemed to be in the course of such e*port.
=. The above provision shall not apply to any sale or purchase of goods unless the dealer selling the
goods furnishes to the prescribed authority a declaration duly filled and signed by e*porter.
C. P#.4$"(*$ +*4 !%' E8/%'$
<enultimate sale means the sale preceding the sale occasioning e*port.
The last sale or purchase of any goods preceding e*port sale is deemed to be in the course of such
e*port. Last sale or purchase is done for satisfying the order of e*port or agreement of e*port.
EJPLAIN THE EJEMPTIONS A2AILABLE FOR SALES UNDER THE CST ACT.
E8(/$"%# !'%( )#$'*4 +*4+ $*8
(*) A ,*4' "+ #%$ 4"*04 $% /*6 C#$'*4 S*4+ T*8 "# $& !%44%-"#5 $-% )*++.
#ale of electrical energy
#ale to an e*porter for the purpose of e*port
(0) E8(/$"%# !'%( )#$'*4 +*4+ $*8 %# +.0+@.#$ +*4
!here a sale of any goods is in the course of interstate trade or commerce by direct sale or by
transfer of documents of title$ any subseCuent sale during the movement of goods from one state to another
effected by transfer of documents of title to such goods shall be e*empt from ta* in the following cases:
7oods are transferred to 7overnment.
7oods are transferred to a registered dealer.
C%#,"$"%#+ $% 0 +*$"+!", !%' 8(/$"%# %! C#$'*4 S*4+ T*8
3. First sale to be an &nter #tate #ale.
6. !hen goods are in movement from one state to another$ subseCuent sale is effected.
9. #ubseCuent sale being effected by transfer of documents of title to such goods.
=. #ubseCuent sale being made by one registered dealer to another registered dealer or to the
7ovt.
:. .*emption is sub"ect to reCuisite forms being obtained and submitted to the appropriate
authorities
;. #ale of any goods in the course of &nterstate trade or commerce to any official$ personnel$
consular or diplomatic agent of K
,a- 'ny foreign diplomatic mission or consulate in &ndia or
,b- @nited (ations or any other similar international body.
()) T'*#+!' %! 5%%,+ %$&'-"+ $&*# 06 -*6 %! +*4
' dealer who transfers goods to any other place of his business or to his agent or principal$ from one
state to another may claim that he is not liable to pay 0entral #ales ta*.
The registered dealer transfering the goods must obtain )Form F+ from the person to whom goods
have been transferred and submit the form to the assessing authority within the prescribed time along with
evidence of despatch of such goods.
WHATT ARE THE PRO2ISIONS REGARDING THE REGISTRATION OF DEALERS UNDER
CST ACT?
R5"+$'*$"%# %! D*4'+
.very dealer who is liable to pay 0entral #ales Ta* shall apply for registration and get himself
registered. There are two types of registration.
3. 0ompulsory registration under section 5,3-
6. >oluntary registration under section 5,6-
(1) C%(/.4+%'6 R5"+$'*$"%#
The dealer liable to pay 0entral #ales ta* is under obligation to register himself with sales ta*
authority of the particular state authorised by 0entral 7overnment. @nregistered dealers are liable to pay
penalty under section3A.
(2) 2%4.#$*'6 '5"+$'*$"%#
's per section 5 ,6- a dealer may apply for registration in the following situations.
3. ' dealer is a registered dealer under sales ta* law of the state but not liable to pay central sales ta*.
6. There is no sales ta* law in a state while a dealer carries on his business in that state.
9. ' dealer is dealing in ta* free goods in a state.
=. ' dealer purchases goods from another state and sells the goods within the state.
WHAT ARE THE PROCEDURES FOR REGISTRATION OF DEALERS UNDER CENTRAL
SALES TAJ ACT?
Bule 9 of the 0entral #ales Ta* 'ct lays down the following procedure for registration:
3. The dealer should apply for registration in )Form '+ to the notified authority.
6. The dealer should forward the application to authority which may either be sales ta* officer or the
assistant sales ta* of the ward within whose "urisdiction the dealer+s place of business or head office is
situated.
9. The application form for registration may be signed by:
,a- 2ealer$ who is an individual
,b- Iarta or manager of hindu undivided family
,c- <artner in the case of a firm
,d- 2irector or principal officer there of in the case of a company.
,e- <rincipal officer managing the business in the case of any other association.
,f- Dfficer duly authorised in the case of 7overnment.
=. 'n application should be made not later than 9A days from the date on which the dealer is liable to
pay central sales ta*.
:. The application for registration has to be accompanied by a fee of Bs.6: payable in cash or by way
of court fee stamp.
;. Begistration is compulsory$ even if interstate sales is very small Cuantum.
5. The sales ta* authority may impose a condition for issue of certificate of registration by asking to
furnish security for registration.
4. &n the case of compulsory registration an amount eCual to the ta* payable by the dealer for the
current year is to be paid as security. &n the case of voluntary registration an amount eCual to ta* leviable
under 0#T act is to be paid as securtiy.
8. &f the authority is satisfied that application for registration is complied with all provisions$ it shall
grant certificate of registration.
3A. The sales ta* authority may refuse registration after the dealer is given an opportunity of being
heard.
33. 'mendment of 0ertificate of Begistration:
The certificate may be amended in the following cases:
,a- 0hange of name$ place or nature of business by the dealer
,b- 0hange of class or classes of goods in which business is carried on
,c- For any other reason
E!!)$"7 ,*$ %! '5"+$'*$"%#
0ompulsory registration is effective from the date of inter state sale if the registration is made within
9A days of making the inter state sale.
>oluntary registration will be effective from the date of making the application for registration.
WHAT ARE THE PRO2ISIONS IN THE CST ACT REGARDING CANCELLATION OF
REGISTRATION OF DEALERS?
The certificate of registration can be cancelled by the authority )suomotto+ or on application made by
the registered dealer.
,&- 0ancellation of Begistration by the authority
The authority can cancel the registration in the following cases:
3. !hen the dealer ceases to carry on business
6. !hen the dealer ceases to e*ist
9. !hen the dealer fails to comply with provisions regarding security
=. !hen the dealer fails to pay ta* or penalty
:. !hen the dealer under voluntary registration has ceased to be liable to pay ta*
;. For any other reason
,&&- 0ancellation on an 'pplication by the dealer himself:
' registered dealer may apply in the prescribed manner to the authority for cancellation of
registration along with original certificate and the copies thereof. The authority shall cancel the registration
accordingly unless the dealer is liable to pay ta* under 0#T.
WHAT ARE THE BENEFITS OF REGISTRATION OF DEALERS UNDER CST ACT?
(*) B#!"$+ $% /.')&*+"#5 ,*4':
Begistered dealers who buy goods for manufacturing or resale purpose have to pay central sales ta*
Z =V provided that they buy goods against )0 Form+. They would otherwise pay ta* Z 3AV. 'll
subseCuent sales also would be e*empt in certain cases.
(0) B#!"$+ $% +44"#5 ,*4':
#elling dealer has no direct benefit for registration.
The selling dealer cannot make an interstate sale unless he gets himself registered. The indirect
benefits flowing to a registered dealer$ who made an interstate sale:
,a- The seller can recover 0#T payable by him from the purchasing dealer.
,b- The seller+s subseCuent sale of goods purchased by him will be e*empt from 0#T if the following
conditions are satisfied:
,i- The sale is effected by transfer of documents of title to the goods while the goods are in
movement from one state to another.
,ii- The transferee is a registered dealer.
EJPLAIN LE21 AND COLLECTION OF TAJ UNDER SECTION > OF CST ACT?
@nder the 0#T 'ct ta* will be levied by the government of &ndia but ta* so levied will be
collectedthe state 7overnments from where the movement of goods commenced.Though the ta* is levied as
0#T$ it is administered by the respective state government.The ta* collected in a state is retained by the state
itself.

WHAT ARE THE POWERS OF THE AUTHORITIES IN APPROPRIATE STATES IN RELATION
TO CST?
'ccording to #ec.8,3- 7overnment of &ndia is empowered to levy and collect the central sales ta*
payable by the any dealer. 1owever$ appropriate state governments are empowered under #ec.8,6- to assess$
reassess$ collect and enforce payment of 0entral #ales ta*$ and any penalty payable by a dealer on behalf of
7overnment of &ndia.
A//'%/'"*$ G%7'#(#$ $% )%44)$ CST:
0#T is to be collected by the state government from which the movement of goods commenced even
if the sales have been effected by the transfer of documents of title to the goods$ when the goods are still in
the movement from one state to another.
.*amples: ,3- #enthil of Tamil nadu sends goods to his branch at %angalore: !hile the goods are
still in transit #enthil transfers the documents of title to the goods to %anu of %angalore. &n this case 0#T
will be collected by state of Tamil nadu.
,6- #ankar of Tamil nadu sold goods to Ba"esh of /umbai who is a registered dealer. !hile the
goods are still in movement$ Ba"esh$ transfer the documents of title to /anish of Ierala a registered dealer.
2uring the movement of goods manish also transferred the document of title to 7owda of Iarnataka who is
also a registered dealer. &n this case salesta* will be collected by state of Tamil nadu as all subseCuent sale
by transfer of documents by registered dealers are e*empt.
C%44)$"%# %! CST "! +.0+@.#$ +*4+ "+ #%$ 8(/$:
&f the subseCuent sale of goods is by transferring the documents of title to the goods and the
subseCuent sale is not to 7overnment or to a registered dealer$ the central sales ta* on the subseCuent sale is
collected by the dealer in the appropriate state as follows:
3. !hen the subseCuent sale is done by a registered dealer: &n this situation the appropriate state for
collection of ta* is the state from which the purchasing dealer has made the subseCuent sale.
6. !hen the sale is made by an unregistered dealer: &n the case of subseCuent sale$ while the goods
are still in movement$ if the sale is made by an unregistered dealer by transfer of documents of title to the
goods$ the central sales ta* is collected in the state where subseCuent sale has been made.
P%-'+ %! $& *.$&%'"$"+ %! *//'%/'"*$ +$*$+:
The authorities of the appropriate state who are empowered under the central sales ta* are entrusted
with the functions on behalf of 7overnment of &ndia:
3. 'ssessment of 0entral #ales Ta*
6. Beassessment of 0entral #ales Ta*
9. 0ollection of 0#T
=. .nforcement of payment of 0#T
:. .nforcement of interest payable by a dealer.
;. .nforcement of penalty by a dealer
5. 'll the powers generally e*ercised by authorities in relation to general sales ta* law of their state .
L"*0"4"$6 $% /*6 I#$'+$
&f the 0#T is not paid in time the dealer is liable to pay interest for delayed payment of such ta*. The
provisions of general sales ta* regarding the following will apply:
,a- 2elayed payment of ta*.
,b- 2ue date of payment of ta*
,c- Bate of interest for delayed payment of ta*
,d- 'ssessment and collection of interest for delayed payment of ta*
R*$+ %! T*8: The rate of 0#T to be levied is based on the following factors:
3. Iinds of goods sold
6. <erson buying the goods
9. #ales ta* rate as per general sales ta* rules of the state in which goods are sold.
=. !hether registration certificate is applicable to the goods purchased by the registered dealer or
not.
LIST OUT THE DECLARED GOODS AND UNDECLARED GOODS UNDER CST ACT?
'ccording to 0#T act there are two types of goods:
,3- 2eclared goods
,6- @ndeclared goods
(1) D)4*', 5%%,+:
2eclared goods means goods declared uTs 3= to be of special importance in interstate trade or
commerce. The following goods are declared to be of special importance uTs 3= of the act:
3. 0ereals i.e. paddy$ rice$ wheat etc.
6. 0oal: 0oal including coke but e*cluding char coal
9. 0otton: 0otton in manufactured form e*cept cotton waste
=. Fabrics: 0otton fabrics$ cotton yarn.
:. Dil: 0rude oil
;. Fuel: 'viation turbine fuel sold to a turboprop air craft
5. 1ides and skins: 1ides and skins whether in raw or dressed state.
4. &ron and steel
8. Uute
3A. Dil seeds including ground nut$ sesame$ cotton seed$ soyabean$ mustard$ binseed$ castor$ coconut$
sunflower$ neem$ kusum etc.
33. <ulses: <ulses including gram$ tur$ moong$ masur$ urad$ moth etc.
36. /an made Fabrics: 'rtificial te*tile materials$ polyester filament yarn$ staple fibres$ etc.
39. #ugar including Ihandsari sugar
3=. Tobacco: @nmanufactured tobacco$ tobacco refuse$ cigars$ cigarettes$ manufactured tobacco$
chewing tobacco.
3:. !ool: !oven fabrics of wool.
(2) U#,)4*', G%%,+:
@ndeclared goods are sub"ect to 0entral #ales Ta* Z 3AV or at local rate applicable to such goods
inside the appropriate state$ whichever is higher. %ut if the undeclared goods are sold to a registered dealer
against prescribed form issued by the registered dealer the 0#T rate will be at =V instead of normal rate.
EJPLAIN THE DIFFERENT CATEGORIES OF TRANSACTIONS EJEMPTED FROM CST.
.*emption from central #ales ta* are broadly classified under ; categories:
1. S.0+@.#$ +*4 06 $'*#+!' %! ,%).(#$+
The 0entral #ales ta* 'ct provides for a single point sales ta* levy at the point of first sale.
#ubseCuent sales are e*empt from ta* to avoid multiple ta* incidence. .*emption on subseCuent
sale is sub"ect to the following conditions:
,a- The first sale should be inter state sale
,b- The subseCuent sale is done by transfer of documents
,c- The subseCuent sale is done during the movement of goods from one state to another.
,d- The subseCuent sale is made to K
,i- The government or
,ii- Begistered dealer
,e- 2eclaration in the prescribed form shall be submitted to the prescribed authority with in the
prescribed time.
2. E8(/$"%# %! +*4 !'%( G#'*4 S*4+ $*8 %! $& +$*$:
&f sale inside the state is generally e*empt or sub"ect to ta* at lower than =V$ then ta* on interstate
sale shall be )nil+ or the lower rate as applicable for sale inside the state.
:. E8(/$"%# 06 N%$"!")*$"%#:
' state 7overnment can provide e*emption by issue of notification. The e*emption may be total or
partial. &t may be granted to any dealer. The e*emption is sub"ect to the following conditions:
,a- #ale is made to a registered dealer or
,b- #ale is made to the central or state government and
,c- The purchaser has given declaration in )Form 0 or 2+ as the case may be.
;. S*4 "# $& )%.'+ %! I(/%'$ %' E8/%'$
#ale in the course of import or e*port is not chargeable to ta*.
<. S*4 $% .#"$+ 4%)*$, "# S/)"*4 E)%#%(") R%#
#ale to registered dealer will be e*empted from 0#T if the following conditions are satisfied:
3. #ale is made in the course of interstate trade or commerce by any dealer
6. #ale is made to a registered dealer
9. 7oods sold shall be specified in the certificate of registration of the registered dealer.
=. /anufacturing shall be done in a unit located in any #.R.
:. 2eclaration shall be obtained in )Form 1+ from the registered dealer by the selling dealer.
=. S*4 $% * !%'"5# ,"/4%(*$") ("++"%#
#ale to a foreign diplomatic mission is e*empted by 0entral 7overnment by notification sub"ect to
the following conditions:
,a- #ale to any official or personnel of any foreign diplomatic mission.
,b- #ale to any official or personnel of a @nited (ations Drganisations.
,c- #ale to any diplomatic agent of any mission or @(D.
WHAT IS MEANT B1 ATAJABLE TURNO2ERB UNDER CST ACT?
C%(/.$*$"%# %! T*8*04 $.'#%7'
0entral sales ta* is charged on the basis of turnover. Turnover is based on sale price. 1owever$
0entral #ales ta* is not on the aggregate selling price of the goods.
2eductions from the 'ggregate sales price:
Four deductions are made from the aggregate sale price of the goods to ascertain turnover of the
dealer:
3. 0entral sales ta* included in the aggregate sale price$ if it was separately charged. <rocedure
for reduction of sales ta* included in the sale price is as follows:
Bate of ta* F 'ggregate of the sale price
3AA [ Bate of ta*
6. 7oods returned within si* months: From the aggregate of sale price$ the sale price of the goods
returned to the dealer within si* months from the date of delivery is reduced. &f goods are returned in the
subseCuent year$ then the deduction is not allowed.
9. Be"ected goods: The time limit of si* months is not applicable in the case of re"ection of goods.
=. Dther 2eductions prescribed by the 0entral 7overnment: The 0entral 7overnment may decide
any other deduction having implication to the following:
a. /arketing conditions
b. To facilitate trade in the interest of consumer.
RATES OF CENTRAL SALES TAJ
T6/+ %! 5%%,+ S*4 $% G%7'#(#$
(S$*$ %' C#$'*4
G%7'#(#$)
S*4 $% * R5"+$', D*4'
!%' RF+*4 %' .+ "#
(*#.!*)$.'"#5 $).
S*4 $% *# .#'5"+$',
D*4' %' %$&' /.')&*+'
3. 2eclared
7oods
9V or #tate salesta* rate
which ever is lower on
submission of )2+ Form
9V or #tate sales ta* rate$
which ever is lower on
submission of )0+ form
provided purchase of goods is
covered in the registration
certificate of the 2ealer.
0entral #ales Ta* will be
charged at )Twice+ the
7eneral #ales ta* rate of the
state. #ince the state sales
ta* rate can not e*ceed 9V
the ma*imum rate will be
;V.
6. @ndeclared
goods
9V on submission of )2+
Form$ but if the 7eneral
#ales ta* rate of
appropriate 7overnment is
less than =V then it will be
charged at such lower rate.
,i- #ame as above
,ii- &f 7eneral sales ta* rate is
nil$ it will be charged at nil
rate.
,i- = V or #alesta* rate of
appropriate state government$
which ever is higher.
,ii- &f 7eneral #ales ta* rate
of the state is nil the ta* rate
chargeable is nil.
7oods allowed to be purchased at concessional rate on providing Form )0+: ,3- 7oods for resaleH
,6- 7oods for manufacture$ processing T mining T generating powerH ,9- 0ontainers and materials for
packing goods.
&n the case of 7overnment any type of goods can be purchased against Form )2+.
&f reCuired form is not submitted 0#T Bate is 9V or Local 7ovt. sales ta* rate whichever is higher.
The above rates of =V will be 6V w.e.f. such date as may be notified by the 0entral 7overnment after
>'T is introduced.
WHAT ARE THE OFFENCES AND PENALTIES UNDER SECTION 1? OF THE CST ACT?
<unishment up to ; months of simple imprisionment or fine or both can be imposed in respect of the
offences mentioned below.
I! *#6 /'+%#
6. Inowingly furnishes false declkarationin respect of sratutoru forms.
9. Fails to get himself registered
=. %eing a registered dealer falsely represents when ppurchasing any class of goods.
:. Falsely represents that he is a registered dealer
;. 0ollects any amount by way of ta* in contravention of the provisions in #ec. 8'.
I(/%+"$"%# /#*4$6 "# 4". %! P'%+).$"%#:
The #ection 3A ' authorises imposition of penalty in lieu of punishment in respect of offences
mentioned below.
3. %eing a registered dealer falsely represents that goods purchased are covered under his certificate of
registration.
6. Falsely represents when purchasing goods in the course of inter state trade or commerce that he is a
registered dealer.
9. /isuses or uses for different purposes the goods obtained under form 0.
The penalty cannot e*ceed one and half imes the ta* which would have been levied @T# 4,6- in respect
of sale to him.
WHAT IS MEANT B1 2ALUE ADDED TAJ (2AT)?
>alue 'dded Ta* ,>'T- is a ta* on the value added to the inputs received from others payable at the
time of sale of final products. >alue added may be by any economic action i.e. be it at the manufacturing$
wholesale or retail level to commodities and to the services rendered. ' comprehensive form of >'T covers
the value added at all the three levels$ that is manufacturing wholesaling and retailing. >'T is levied on both
goods and services. >'T is not a new kind of ta* levied but merely the administration of ta* in different
form.
BRIEFL1 EJPLAIN THE DIFFERENT OBJECTI2ES OF 2AT.
S"(/4 $*8 +6+$(:
To have a relatively simple ta* system to administer and to achieve complete compliance of books of
account.
U#"!%'( $*8 0*+:
To implement a uniform ta* base throughout the country.
M)&*#"+( $% )%44)$ $*8+:
To provide a mechanism to collect ta*es with reference to locations of economic activities.
U#"!%'( '.4+ %! $*8*$"%#:
To have uniform rules of ta*ation on international flow of goods across the nation.
A.,"$ T'*"4:
To facilitate ta* enforcement by providing audit trail through different stages of production and sales.
DIFFERENTIATE 2AT FROM SALES TAJ.
S*4+ T*8 2AT
3. Levy of Ta*: #ales ta* is levied at the time of
first sale or at the final sale. 3. >'T is levied and collected at every point of sale.
6. Besale: Besale of goods on which sales ta* is
already collected do not attract ta*.
6. >'T is collected at every point of sale and ta* paid
by the dealer at the time of purchase will be deducted
from >'T paid at the ne*t sale.
9. Beturns: Beselling dealers do not collect ta* and
there by fire (il returns.
9. Beselling dealers have to collect >'T and file
returns and pay >'T at every stage of sale.
=. Ta* evasion: #ales ta* is not levied at the time
of purchase against statutory forms $ which may be
misused to evade ta*.
=. >'T does not reCuire any forms and moreover sets
off ta* paid at the time of purchase against the ta*
payable on sale.
:. 'ssessment: #ales ta* assessment is done by
sales ta* department.
:. >'T is assessed by dealers.
;. 7oods Q #ervices: #ales ta* is on goods only. ;.>'T is levied on goods and services.
WHAT ARTE THE DIFFERENT AD2ANTAGES AND DISAD2ANTAGES OF 2AT?
A,7*#$*5+ :
3. .*ports: .*ports are not burdened with domestic ta*es
6. Ta*ing consumption: >'T provides an instrument of ta*ing consumption of goods and services.
9. /inimum interference: /inimum interference is caused in market forces.
=. 'udit trail: .nforcement of ta* is made easier by introducing audit trail through different stages of
production and trade. >'T acts as a selfpolicing system.
E)%#%(") *,7*#$*5+:
3. %uoyant Bevenue: >'T fetches larger amount of revenue due to efficient ta* collection mechanism
and willingness of the payer to pay the ta* due to reduced ta* burden at each stage.
6. .fficient ta* collection: 'ccounts based on computerized information and enforcement of ta* by
providing audit trail through different stages of production and trade$ ta* collection becomes
efficient.
9. Beduction in ta* evasion: Beduced ta* burden and denial of >'T benefit for ta* evasion ,&f there is
ta* evasion$ the chain is brokenH >'T benefits on preceding transaction is not allowed- results in
reduction in ta* evasion.
=. &ncreased ta* base: #ince ta* enlarges and increases ta* base$ the reCuirement is lower ta* rates.
D"+*,7*#$*5:
#ince >'T is not a single point ta*$ there is enormous increase in paperwork and volume of
administrative work.
3. (umerous details to be prepared.
6. >'T results in inflation.
9. Ta* credit can not be availed if ta* is not payable on final product
WHAT ARE THE DIFFERENT T1PESK2ARIANTS OF 2AT?
>'T could be levied in three ways. These methods are derived from different concepts of
measurement of income.
C%#+.(/$"%# $6/ 2AT
>alue added is ascertained by reducing all purchases$ raw materials and capital items. 0onsumption
type >'T is adopted by most of countries for the following advantages: ,a- 'dministration of consumption
type of >'T is due to )0redit method+ ,b- 0onsumption type >'T does not make distinction between capital
intensive and labour intensive activities ,c- Ta* avoidance due to classifying capital goods as revenue
purchases is avoided ,d- 0onsumption type >'T is in harmony with the destination principle.
G'%++ /'%,.)$ $6/:
The >'T may be gross product type in which case capital outlays and depreciation allowance are
not deductible from the base value.
N$ I#)%( $6/:
>'T may be net income type where capital outlays and depreciation are deductible from the base value.
WHAT ARE THE METHODS OF IMPLEMENTATION OF 2AT?
There are two methods of implementation of >'T namely:
S.0$'*)$"%# ($&%,: @nder subtraction method purchases are reduced from sales and ta* is levied only on
value added.
D"')$ S.0$'*)$"%# M$&%,: &t is eCuivalent to a business transfer ta* whereby ta* is levied on the
difference between the aggregate ta*e*clusive value of sales and aggregate ta*e*clusive value of
purchases.
I#$'(,"*$ S.0$'*)$"%# M$&%,: &t is based on deduction of the aggregate ta*inclusive value of
purchases from the aggregate ta*inclusive value of sales ta*ing the differences between them.
T*8 )',"$ ($&%,: @nder ta* credit method ta* is levied on full sale price$ but credit is given for ta* paid
on purchases. Thus ta* is levied only on value added.
Ta* credit is better as audit control helps the control of ta* evasion. /oreover there is fle*ibility in
applying different ta* rates to different commodities. /ost of the countries follow ta* credit method for
implementation of >'T.
A,,"$"%# M$&%,: This method is based on the identification of value added which can be estimated by
summation of all the elements of value added. This method is known as addition method or income
approach. This is in line with the income method of calculating national income. The chief drawback of this
method is that it does not reCuire matching of invoices in order to check ta* evation.
WHAT ARE THE PROBLEMS FACED IN IMPLEMENTATION OF 2AT IN INDIA?
7overnment of &ndia has setup &ndirect ta*ation enCuiry committee in 385;. The committee has
strongly recommended adoption of >'T in &ndia. The committee has observed that administration of >'T in
&ndia is very difficult due to the following reasons:
D"!!").4$"+ *$ '$*"4 +$*5:
Betailers maintain primitive accounts and it is very difficult to maintain proper and detailed accounts
reCuired for >'T purpose.
N.('%.+ /'%,.)$+:
!holesaler and Betailers deal in numerous products$ with different rates. /atching of output and
input ta*es is difficult. >'T is to have very few rates$ which may not be possible.
T*8"#5 /%-' %! )#$' *#, +$*$:
&ndia has a federal structure and some ta*es can be levied only by state$ while others by centre. Thus
introduction of >'T will be difficult unless all state 7overnments agree.
The committee in its meetings held on 34 the Uune$ 6AA= has unanimously decided that value added
ta* would be introduced in all states and union territories with effect from 3
st
'pril$ 6AA:.
PRACTICAL IMPLICATION OF 2AT:
WHAT IS MEANT B1 CEN2AT? AND EJPLAIN THE FEATURES OF CEN2AT?
/D2>'T scheme is replaced by 0.(>'T from 3.=.6AAA. Finance 'ct 6AAA has brought in the new
0entral value added ta*. 0.(>'T is an input duty relief scheme under 0entral e*cise act. 0.(>'T is
framed to reimburse the manufacturer the duty paid on the input which is part of the purchase price to the
manufacturer.
F*$.'+ %! CEN2AT
1. R4"! $% (*#.!*)$.'':
0.(>'T enables the manufacturer to claim the duty paid by him in respect of inputs purchased for
making finished product.
2. N% ,"+$"#)$"%# 0$-# )*/"$*4 L '7#. 5%%,+:
0.(>'T has abolished distinction between capital goods and inputs for claiming duty credit. (ow
there is a single scheme for availing 0.(>'T credit in respect of inputs as well as capital goods.
:. N% +$"/.4*$"%# !%' '5"+$'*$"%#:
0.(>'T does not stipulate for registration of dealers. %ut the concepts of first and second stage
dealers continue to be same. The invoice issued by such dealers is accepted as valid document of duty
payment.
;. W",#, )%7'*5 %! "#/.$+:
The coverage of inputs for duty credit has been widened to include all items listed in the Tariff
schedule. &n other words 0.(>'T covers all inputs e*cept high speed diesel oil and motor spirit.
<. O#.+ %# (*#.!*)$.'':
The admissibility of 0.(>'T credit has to be proved by manufacturer. &n case credit is wrongly
availed or utilised$ it shall be recovered along with the interest.
DIFFERENTIATE MOD2AT FROM CEN2AT.
MOD2AT CEN2AT
S44' B.6'
S44"#5 P'")
(E8)4.,"#5 T*8) T*8 R*$
I#7%") 2*4.
(I#)4.,"#5 T*8) T*8 P*6*04
T*8
C',"$
N$ T*8
O.$!4%-
' % 3AA =V 0#T 3A= = A =
% 0 33= 36.:V >'T 364.6: 3=.6: A 3=.6:
0 2 36= 36.:V >'T 398.: 3:.: 3=.6: 3.6:
2 0onsumer 39= 36.:V >'T 3:A.5: 3;.5: 3:.: 3.6:
TOTAL TO GO2ERNMENT
2AT 1=.7<
CST ;
3. /odvat was introduced in 384; by amending
0entral .*cise 'ct. /odvat provides for giving
credit for duty paid on goods or in relation to
e*cisable goods manufactured.
3. 0envat was introduced in 6AAA by the Finance 'ct
to replace modvat. 0entral value added ta* is
introduced to simplify the procedure to claim credit
for duty paid.
6. /odvat scheme used to provide credit for inputs
and capital goods separately.
6. 0envat credit is provided for inputs as well as
capital goods.
9. &n order to claim modvat credit specific records
and returns were prescribed.
9. &n order to claim cenvat credit$ the manufacturer
need not maintain any special records. The records
maintained by the manufacturer in the course of
usual business are accepted.
=. ' declaration of modvat is to be filed by the
assessee with 'ssistant 0ommissioner of 0entral
e*cise.
=. 0redit in respect of 0envat of inputs can be
claimed immediately but in respect of 0apital goods
in two instalments without filling any declaration.
BRIEFL1 EJPLAIN THE AD2ANTAGES OF CEN2AT.
E*+ %! "(/4(#$*$"%#:
The Finance 'ct of 6AAA has framed simplified rules for manufacturers to claim 0envat credit in
respect of input and capital goods.
C4*"( %! )',"$ "# '+/)$ %! (%' "#/.$+:
The coverage of inputs has increased. 'll the inputs as per Tariff schedule are covered e*cept high
speed diesel oil and petrol.
N% '@."'(#$ %! S$*$.$%'6 B%%C+:
&n order to claim 0envat credit$ the records maintained by the manufacturer in the normal course of
business are acceptable to the e*cise department.
N% '@."'(#$ %! ,)4*'*$"%#:
(o declaration is reCuired to claim 0envat credit in respect of duty with regard to input and capital
goods.
A7*"4*0"4"$6 %! )',"$ "# '+/)$ %! J%0 -%'C:
/anufacturers are eligible to claim 0envat credit even in respect of inputs T capital goods supplied
for Uob work for further processing$ testing$ repair or for any other use without reversing credit eCuivalent to
3AV of the value of goods and also without giving intimation.
T'*#+!' %! )',"$:
@nder specified situations assessees are allowed to transfer credit without obtaining permission from
concerned authorities.
BRIEFL1 EJPLAIN THE SCOPE OF CEN2AT.
0.(>'T credit covers capital goods and inputs. &n the case of capital goods the following items are
covered for 0envat credit.
C*/"$*4 5%%,+:
3. 0omponents$ spares$ accessories$ moulds and dies.
6. Befractories and refractory materials.
9. Tubes$ pipes and fittings there of$ used in the factory.
=. #torage tank
:. <ollution control eCuipment used in the factory of manufacturer of any output.
0apital goods does not include any eCuipment and any applications used in an office.
I#/.$+:
The term )inputs+ means all goods used in or in relation to manufacture of final product whether
directly or indirectly and whether contained in the product or not$ includes the following:
3. <aint and making material
6. Fuel used for generation of electricity
9. Lubricating oil$ greases cutting oils and coolants
1igh speed diesel or motor spirit known as petrol shall not be treated as input.
EJPLAIN THE ORGANISATIONAL SETUP OF THE EJCISE DUT1 ADMINISTRATION AND
THE POWERS OF CENTRAL EJCISE BOARD?
&t is important to have an idea of administrative structure of department of central e*cise$ powers and
status of various authorities of the central e*cise department as prescribed by rules and procedures. The
administration of central e*cise is under ministry of Finance$ 7overnment of &ndia.
Organi#ation >ierarc>y of e=ci#e department i# #>o!n and e=plained belo!9
2entral Board of Excise and 2$stoms
The 0entral %oard of .*cise has been formed under 0entral %oards of Bevenue 'ct$ 38;9. The
1ead ?uarters is at (ew 2elhi. The 0entral e*cise and customs %oard has #i* T #even members$ headed by
chairman. The board has power to administer the e*cise 'ct.
P%-'+ %! C#$'*4 E8)"+ B%*',:
The board has the following powers:
,3- 'ppointment of officers: The Bules of central e*cise authorise the e*cise board to appoint central
e*cise officers.
,6- 2istribution of work: 0hairman of the board is empowered to distribute work among himself and
other members and specify cases which will be considered "ointly by board.
,9- &ssue of orders$ instructions and direction: #ection 95% of central e*cise 'ct authorises the %oard
to issue orders$ instructions and direction to central e*cise officers for purposes of uniformity.
,=- #pecification of "urisdiction: .*cise rules authorise the %oard to specify "urisdiction of chief
commissioner ,appeals-.
S$*$.+ %! 7*'"%.+ *.$&%'"$"+ %! )#$'*4 8)"+ ,/*'$(#$
3- 0hief commissioner of 0entral e*cise
6- 0ommissioner of 0entral e*cise
9- 'dditional commissioner of central e*cise
=- Uoint 0ommissioner
:- 2eputy 0ommissioner$ 'ssistant 0ommissioner$ 0ommissioner and #uperintendent
;- &nspectors
EJPLAIN THE 2ARIOUS PROCEDURES APPLICABLE FOR CEN2AT CREDIT?
C#7*$ )',"$ !%' "#/.$+:
0envat credit for inputs is granted immediately on receipts of inputs in the factory by manufacturers.
C#7*$ )',"$ !%' )*/"$*4 5%%,+:
0envat for capital goods received in the factory of manufacturer is granted in two instalments. :AV
of the duty paid is granted with 0envat credit in the 3
st
financial year in which goods are received. 0redit for
balance of duty paid is granted in the subseCuence year of capital goods received in the factory of the
manufacturer.
C#7*$ )',"$ #%$ 5'*#$, !%' ,/')"*$"%# )4*"(,:
0envat credit of specified duty paid on capital goods shall not be allowed in respect of that part of
the value of capital goods for which manufacturer has claimed depreciation.
R(%7*4 %! I#/.$+ K C*/"$*4 5%%,+ !%' J%0 -%'C:
&n the case of inputs and capital goods sent for "ob work$ 0envat credit is allowed$ if the
manufacturers are able to establish that receiving back of goods from the records$ challans or memos or
other documents. 0redit is also available for tools moulds and dies sent for "ob work provided they are
received back by manufacturer along with goods produced.
O04"5*$"%#+ %! (*#.!*)$.''+ "# '+/)$ %! ,.$"*04 *#, 8(/$, 5%%,+:
(A) R.4+ '5*',"#5 8(/$, 5%%,+:
0envat credit is not available in respect of inputs used for manufacture of e*empted goods e*cept in
the following cases:
3. &f the manufacturer avails 0envat credit in respect of any inputs which are chargeable to duty as
well as e*empted goods$ then the manufacturer is allowed 0envat credit in respect of Cuantity of input used
for dutiable goods.
6. The manufacturer is reCuired to maintain separate accounts for receipt$ consumption and inventory
of inputs meant for use in dutiable goods and e*empted goods.
9. &f the manufacturer does not maintain separate accounts$ he shall follow either of the following
conditions:
,a- The manufacturer shall pay an amount eCuivalent to the 0envat credit attributable to inputs used
in manufacture of final products at the time of their clearance from the factory or
,b- The manufacturer shall pay eight percent of total price$ e*cluding sales ta* and other ta*es$ if any$
paid on such goods ,which are e*empted products-
(B) R.4+ '5*',"#5 )*/"$*4 5%%,+:
0envat credit is not allowed as to specified duty of capital goods which e*clusively used in the
manufacture of e*empted goods.
WHAT ARE THE CONDITIONS TO BE SATISFIED FOR A2AILING CEN2AT CREDIT?
0onditions for availing the 0envat credit:
's per Bule = of 0envat$ following is the procedure for availing credit under 0envat scheme:
M*#.!*)$.'"#5 E4(#$:
&nputs are to be converted into final products through a manufacturing process.
A44 !"#"+&, 5%%,+ 4"5"04 !%' C#7*$ )',"$:
0envat credit is given to all finished e*cisable output.
C',"$ !%' +/)"!", ,.$"+:
0envat credit is allowed for specified duties paid on inputs or capital goods.
U$"4"+*$"%# %! "#/.$+:
The manufacturer should utilise the inputs in relation to manufacturing which includes packing
material$ fuel$ or for generation of electricity or steam.
C#7*$ )',"$ 0"#5 *7*"4*04 $% ,.$"*04 5%%,+:
0envat credit is available only if the final products are dutiable ones e*cept in respect of final
products cleared for e*port or used in Free Trade Rone or used in 3AAV .*port oriented units.
DISTINGUISH BETWEEN CEN2AT ON CAPITAL GOODS AND INPUTS?
C#7*$ %# I#/.$+ C#7*$ %# C*/"$*4 5%%,+
3. 'll inputs used in manufacturing are eligible
for 0envat credit ,.*cept diesel oil and petrol-.
Dnly specific capital goods like goods in the factory are
eligible for 0envat credit.
6. 'ssessee can avail 0envat credit in respect of
inputs 0envat credit in respect of inputs
immediately when input is received in the
factory.
&n the case of capital goods$ 0envat credit is received in
two instalments$ while :AV of credit is given in current
year remaining :AV is available in subseCuent financial
year.
9. 0envat credit is allowed if final product is
e*ported and assessee does not claim duty
drawback.
&n the case of capital goods credit for 0envat is allowed
without conditions as applicable in the case of inputs.
=. 0envat credit is available even if the inputs are
directly sent to place of work from the supplier.
0envat credit is allowed only if the goods are delivered
to the users factory.
WHAT ARE ALL THE DUTIES ELIGIBLE FOR CEN2AT CREDIT?
's per Bule 9$ 0envat credit is available in respect of the following duties:
3. %asic e*cise duty
6. #pecial e*cise duty
9. 0ountervailing duty
=. 'dditional e*cise duty paid on Te*tile products
:. 'dditional duty paid on goods of special importance
;. (ational calamity contingent duty
BRIEFL1 EJPLAIN THE CONDITION FOR A2AILING EJCISE CONCESSIONS FOR SMALL
SCALE INDUSTRIES (SSI).
0oncessions are granted to small scale industries to encourage their development and growth and
also on account of administrative inconvenience of collection of e*cise duty. .*cise duty is levied on
manufactured goods. 1ence$ it is payable by even small units. %ut the 7overnment policy is to promote the
growth of small units. &n addition to this$ it is administratively inconvenient and costly to collect ta* from
numerous small units would be very small compared to administrative cost involved.
SSI .#"$+ 4"5"04 !%' SSI )%#)++"%#+
The following units are eligible for ##& concessions
1. A44 I#,.+$'"+ -"$& +/)"!", T.'#%7':
'll &ndustries$ irrespective of their investment or number of employees are eligible for concession.
.ven a large industry is eligible if its annual turnover is less than Bs.6 crores.
2. R5"+$'*$"%# %! SSI .#"$ #%$ '@."',:
##& unit need not be registered with any authority.
:. G%%,+ *' $% 0 (*#.!*)$.', -"$& %-# 0'*#, #*(:
7oods are to be manufactured by ##& with own brand name. 7oods manufactured with other+s
brand name are not eligible.
;. C4.00"#5 %! T.'#%7':
&n case a manufacturer has more than one factory$ even at different places$ the turnover of all
factories is aggregated together for computing e*emption of Bs.3AA or 9AA lakhs.
<. G%%,+ #%$ 4"5"04 !%' SSI )%#)++"%#:
/ost of the goods manufactured by ##& are eligible for concession. #ome items of goods
manufactured are not eligible$ this is due to e*emption being eligible under other notifications or not e*empt
at all. 7oods not eligible for e*emption are:
,a- Tobacco$ matches
,b- <an masala
,c- !atches
,d- Te*tile products
,e- 'utomobiles
,f- <rimary iron and steel
=. T6/+ %! 8(/$"%#+:
##&s are given three types of e*emptions:
,a- Full e*emption upto Bs.3AA lakhs: ##& units can avail full e*emption upto Bs.3AA lakhs and pay
normal duty over Bs.3AA lakhs. These units can avail 0envat credit on inputs only reaching Bs.3AA lakhs in
the financial year.
,b- .*emption on all of its turnover: ##& units can avail 0envat credit on inputs on all of its turnover.
1owever$ they have to pay ;AV duty for first Bs.3AA lakhs and 3AAV duty for subseCuent clearances.
,c- 'vailing of 0envat credit only: ##& units can also pay full 3AAV duty and avail 0envat credit.
S."$*0"4"$6 %! %/$"%#+:
Dut of the above methods$ option of payment of duty may be suitable in following cases:
3. !hen buyer of ##& unit+s goods intends to claim 0envat credit. &n this case$ the effective duty will be
lower as ##& units can claim 0envat credit on inputs.
6. !hen ##& unit intends to e*port the products and has huge balance in 0envat credit account. &n this case$
##& unit pay duty and claim rebate after e*port of goods$ otherwise balance may be unutilized.
Dption to be indicated: The first type of nil duty upto Bs.3AA lakhs is automatic. 1owever$ the
second and third options are to be indicated to the department in writing.
O$&' )%#)++"%#+ $% SSI
%esides$ the above general e*emptions$ the other specific e*emption given to ##& units are as
follows:
3. .*emption from duty if goods are made without the aid of power: #ome of the goods manufactured
by ##& units are e*empted$ if manufacturing process is carried on without the aid off power.
6. 7oods made in rural areas by cooperatives: 7oods made by registered rural area cooperatives are
e*empt from e*cise duty.
9. 7enuine specified products of village industry: 0ertain items of goods produced by village industry
and marketed by or with the assistance of khadi and village industries commission are e*empt from
duty. The products include lac$ gum$ fireworks$ vegetable products$ resinacids$ articles of leather$
and articles of wood and ceramic products.
EJPLAIN THE CONDITIONS FOR THE GRANTING OF REBATE FOR EJPORT OF GOODS.
!here goods are e*ported$ the 0entral 7overnment may$ by notification$ grant rebate of duty paid on
such e*cisable goods or duty paid on material used in manufacturing of such goods.
0onditions sub"ect to which rebate of duty is granted
The rebate of e*cise duty is sub"ect to following conditions or limitations:
I. E8)"+ ,.$6 '0*$ %# 5%%,+ 8/%'$,
,a- .*port of goods on payment of duty: The e*cisable goods shall be e*ported after payment of duty
from factory or warehouse.
,b- .*port within ; months: The e*cisable goods are e*ported within ; months from the date of
clearance for e*port from factory or warehouse.
,c- Bebate claim: The rebate claim is to be done by filing electronic declaration.
,d- /arket price: The market price of e*cisable goods at the time of e*portation should not be less
than the amount of rebate of duty claimed.
,e- /inimum amount of rebate: The amount of rebate should not be less than Bs.:AAT
II. R0*$ %! ,.$6 %# 8)"+*04 (*$'"*4
Bebate of whole of duty paid on material used in the manufacture or processing of goods to be
e*ported outside &ndia is allowed sub"ect to following conditions:
(*) R0*$ %! *44 !"#"+&, 5%%,+: The benefit of input stage rebate can be claimed on e*port of all goods
whether e*cisable or not.
(0) P'%)++"#5 *4+% 4"5"04 !%' '0*$: 'ny processing not amounting to manufacture such as packing$
blending etc. will also be eligible for rebate.
()) A44 C"#,+ %! (*$'"*4 4"5"04 !%' '0*$: 'll types of raw materials$ consumables$ components$ semi
finished goods$ assemblies$ intermediate goods$ accessories$ parts and packing materials reCuired for
manufacturing or processing of e*port goods are eligible for rebate.
(,) M*#.!*)$.'' %' /'%)++'+ *4%# 4"5"04 !%' '0*$: Dnly a manufacturer or processor of finished
goods who e*ports goods can claim rebate of input stage. /erchant e*porters are not eligible for benefit of
input stage rebate.
() N%# *7*"4*0"4"$6 %! "#/.$ +$*5 '0*$: &nput stage benefit cannot be claimed in the following
situations:
Finished goods being e*ported under claim for duty draw back.
Finished goods being e*ported in discharge of e*port obligations like Cuantity based advance licence
or value based advance licence.
Facility of input stage credit being availed under 0envat credit rules.
/arket price of the goods is less than rebate amount.
The amount of rebate admissible is less than Bs.:AAT
(!) P'%),.' !%' )4*"("#5 %! '0*$: Bebate can be claimed by filing reCuired documents with 2eputy T
'ssistant 0ommissioner of central e*cise. The documents to be filed are:
BeCuest on the letter head: ' reCuest on the letter head of e*porter containing rebate claim
Driginal copy of the application: Driginal copy of 'B.3
#hipping bill: #elf attested copy of shipping bill
%ill of lading: #elf attested copy of bill of lading
2eclaration: 2eclaration in the case of input stage rebate describing the proposed finished goods
to be manufactured or processed along with rate of duty leviable and Cuantity or proportion in
which the materials are actually used.
(5) S*#)$"%#"#5 %! '0*$: 'fter satisfying himself that goods under claim for rebate were actually
e*ported$ the rebate sanctioning authority will sanction the rebate$ in part or full. &n case of reduction or
re"ection of the claim$ an opportunity shall be provided to the e*porter of being heard.
BRIEFL1 EJPLAIN THE RULES REGARDING EJPORTS TO SPECIAL ECONOMIC RONE:
The goods supplied by manufacturer in &ndia to #.R units are e*empt from e*cise duty because
goods supplied are treated as e*ports. 2omestic procurement certificate will be issued by #.R unit to
domestic manufacturer. The certificate is signed by superintendent of customs of #.R. The domestic unit
will clear goods to #.R on the basis of such certificate and 'B. 3 form.
EJPLAIN THE REMISSIONS A2AILABLE IN THE CENTRAL EJCISE ACT 1>;;.
R("++"%# %! E8)"+ ,.$6 (S)$"%# <)
7oods manufactured or produced attract e*cise duty. The e*cise duty liability is to be discharged at
the time of removal. The duty is liable on the entire goods manufactured and removed. Bemission is
necessary for any shortages.
The remission is given by the 0entral 7overnment on the basis of the following norms:
3. (ature of e*cisable goods manufactured T produced.
6. The (ature of processing undergone by the manufactured T produced goods.
9. #torage period.
=. Transit period.
:. Dther relevant considerations.
;. %ona fides of loss.
EJPLAIN THE EJEMPTIONS UNDER CENTRAL EJCISE ACT 1>;;.
E8(/$"%# !'%( 8)"+ ,.$6 +)$"%# <A:
0entral 7ovt. has power to e*empt goods from e*cise duty wholly or any part of the duty. The
e*emption is given by the central 7overnment by notification in the official 7azette. The e*emption may be
given either absolutely or sub"ect to fulfillment of conditions. The e*emption is given by the central
7overnment if it is satisfied$ in public interest$ either before clearance or after clearance of goods of any
specified description to the e*tent of whole duty or part of it.
E8(/$"%# %! 5%%,+ (*#.!*)$.', "# DTA H.K+ <FA (1)I:
The e*emption notified by the central 7overnment is applicable to e*cisable goods manufactured in
domestic tariff area ,2T'-$ goods produced in Free Trade Rone ,FTR- or goods manufactured in a #pecial
.conomic Rone ,#.R- and goods produced by 3AAV .D@ and marketed in any other place in &ndia.
2omestic Tariff 'rea goods are e*empted if they are covered by e*emption notification.
E8(/$"%# 06 +/)"*4 %',' (.K+ <FA (2)I:
The central 7overnment may grant e*emption by special order in respect of any goods of strategic
nature and in favour of any goods for charitable purpose.
L*6"#5 8(/$"%# #%$"!")*$"%# 0!%' /*'4"*(#$ (S)$"%# :8):
.very superior authority delegating the power would like to ensure that powers delegated are not
misused by the subordinates. <arliament is superior to the central 7overnment. The 0entral 7overnment is
reCuired to lay the following before parliament:
,i- .very e*emption notification @T# :',3-
,ii- .very special e*emption order @T# :',6- e*cept orders regarding goods of strategic$ secret$
individual or personal nature.
WHAT ARE THE RULES REGARDING THE CLAIM OF REFUNDS UNDER CENTRAL EJCISE
LAW?
C4*"( !%' '!.#, %! ,.$6 (S)$"%# 11B)
'ny person claiming refund shall use the following guidelines for claiming refund
3. 'pplication for refund of e*cise duty in a prescribed form is to be made.
6. The 'pplication is to be made to 'ssistant 0ommissioner of central e*cise or 2eputy
0ommissioner of central e*cise.
9. The 'pplication is to be made within one year from the relevant date. The limitation of one year
does not apply where duty has been paid under protest.
=. The application has to be enclosed with documentary proof including sale invoice.
:. Dn recent of such application$ if the 'ssistant 0ommissioner of central .*cise or 2eputy
0ommissioner of central e*cise is satisfied that whole or any part of the e*cise duty paid by the applicant is
refundable$ he may make an order accordingly and the amount so determined shall be credited to the fund.
&nstead of being credited to the fund$ the amount of duty of e*cise so determined$ be paid to the applicant$ if
such amount is relatable to
,a- Bebate of duty of e*cise on e*cisable goods e*ported out of &ndia or on e*cisable material used in
the manufacture of goods which are e*ported out of &ndia.
,b- @nspent advance deposits laying in balance in the applicants account current maintained with the
commissioner of central e*cise.
,c- Befund of credit of duty paid on e*cisable goods used as inputs in accordance with the rules
made$ or any notification issued$ under this 'ct.
,d- The duty of e*cise borne by the buyer$ if he had not passed on the incidence of such duty to any
other person.
,e- The duty of e*cise borne by any other such class of applicants as the central government$ by
notification in the official 7azette$ specifies.
I#$'+$ %# ,4*6, '!.#,+ .K+ 11BB
&f any duty ordered to be refunded under section 33% to any applicant is not refunded within three
months from the date of receipt of application$ the applicant will be paid interest at a rate not below five
percent and not e*ceeding thirty percent annum.
EJPLAIN DIFFERENT 3INDS OF ASSESSMENTS UNDER CENTRAL EJCISE ACT.
A. S4! A++++(#$:
@nder central e*cise the assessment is basically an invoice based self assessment$ e*cept in case of
cigarettes. 's per Bule ; of central e*cise rules the assessee himself assesses the duty payable on e*cisable
goods but in the case of cigarettes$ the superintendent of or &nspector of 0entral .*cise shall assess the duty
payable before removal of goods.
P'%),.' !%' +4! *++++(#$
3. S.0("++"%# %! (%#$&46 '$.'#: The assessee has to submit monthly return in .B3 form
6. S4! A++++(#$ M(%'*#,.(: The assessee has to submit self assessment memorandum declaring
that particulars in .B3 return are correctly stated$ duty has been correctly assessed as per section =
or =' of 0.' and TB; challans by which duty has been paid are genuine.
9. S)'.$"#6 %! R$.'#: The officers of the e*cise department will scrutinize the return. The term
scrutiny refers to close e*amination of details. The details verified include figures$ discrepancy if
any$ critical audit of private and statutory records of assessees by spot visit. The department officers
will carry out surprise checks also.
=. S&%- )*.+ #%$"): The officer will not )assess+ the duty. &f the officers are of the opinion that there
is short payment of e*cise duty$ show cause notice cum demand can be issued.
B. P'%7"+"%#*4 *++++(#$: <rovisional assessment can be reCuested by the assessee. The e*cise
department cannot order provisional assessment.
P'%),.' !%' /'%7"+"%#*4 *++++(#$
,i- <rovisional assessment only at reCuest of assessee:
The assessee can reCuest for provisional assessment in the following situations
,a- 'ssessee is unable to value the goods
,b- 'ssessee is unable to determine rate of duty
,ii- BeCuest for provisional assessment is to be made to 'ssistant T 2eputy 0ommissioner in writing.
,iii- Drder for payment of duty on provisional basis:
The 'ssistant$ 2eputy 0ommissioner will determine the rate or value at which the duty will be paid
on provisional basis.
,iv- Finalisation of provisional assessment:
The 'ssistant T 2eputy 0ommissioner may order the assessee to appear with all relevant information
within the time specified. The proper officer will finalise the provisional assessment.
,v- 2ifference of e*cise duty to be paid T refunded:
Dn finalization of provisional assessment the duty payable by the assessee is communicated to the
assessee ,when the duty is paid on provisional basis$ the assessee would have e*ecuted a bond in prescribed
form$ for payment of duty difference between duties provisionally assessed and finally assessed-. &f the duty
payable is more than the duty provisionally assessed difference will be paid by the assessee. &f the final duty
assessed is less$ the difference will be refunded.
C. B+$ J.,5(#$ *++++(#$:
.arlier central e*cise rules provided for )best "udgement assessment+. (ew rules make no provision
of )%est Uudgement 'ssessment+.
!here the assessee fails to provide records or information and department is unable to issue demand$
)best "udgement+ method may be used to raise demand on collateral evidence. &n case of suppression of facts
or clandestine removals$ there is no alternative but to go best "udgement.
INCOME TAJ
3- Find out the average rate of income ta* by dividing the income ta* determined under ,4- above by
the total income.
6- 'scertain the amounts included in total income which are e*empt from income ta* at the average
rate.
9- 0alculate the amount of rebate to be granted on the e*emptions at the average rate of income ta*
,share of a member from an association of persons or body of individuals- and deduct it from income
ta* calculated under ,4- above.
=- 'dd education cess on the amount of income ta*.
:- 2educt the following from the amount of ta* calculated under (o. ,36- above:
i- Bebate and relief
ii- Ta* deducted and collected at source.
iii- 'dvance ta* paid.
iv- 2ouble ta*ation relief.
v- 'mount of ta* paid under #ection 3=A' ,#elfassessment-.
;- The balance of amount left after deduction of items given in (o. ,39- above$ shall be the net ta*
payable by the assessee or if the aggregate of the amount to be deducted under item ,39- above$
e*ceeds the aggregate amount of ta* determined in (o. ,36- above$ the e*cess shall be the amount
refundable to assessee.
5- 'long with the amount of net ta* payable$ the assessee shall have to pay penalties or fines$ if any$
imposed on him under the &ncome Ta* 'ct. 3
C%(/.$*$"%# %! T%$*4 I#)%( *#, T*8 L"*0"4"$6 !%' $& A++++(#$ 1*' 2?1?F2?11
I) C%(/.$*$"%# %! T*8*04KT%$*4 I#)%(
i- &ncome from #alaries ,#ections 3: to 35-
ii- &ncome from 1ouse <roperty ,#ections 66 to 65-
iii- <rofits and 7ains of %usiness or <rofession ,#ections 64 to ==2-
iv- 0apital 7ains ,#ections =: to ::'-
v- &ncome from Dther #ources ,#ections :; to :8-
G'%++ T%$*4 I#)%(
L++: 2eductions ,#ection 4A0 to 4A@-

T%$*4 I#)%(
A,,: 'gricultural &ncome ,if any-
A55'
5*$KT%$*4 I#)%(
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'ggregateTTotal income is roundedoff to the nearest multiple of$ Bs.3A ,#ection 644-
II) C%(/.$*$"%# %! T*8 L"*0"4"$"+
i- Ta* on income liable to ta* at special rate:
a- 0asual income ,Lottery$ card game$ betting$ horse race$ etc.- Z 9AV
b- #hortterm 0apital 7ains uTs 333' Z 3:V
c- Longterm 0apital 7ains:
Dn listed securities or units of @T& or a /utual Fund 0omputed without
inde*ing the cost of acCuisition Z 3AV
Dther LT07 Z 6AV
ii- Ta* A33 otherTbalance income ,(ormal rates-: 's rateTslab prescribe by the Finance 'ct.
L'ggregate income &ncome in ,&- at normal ratesM
L++: Ta* on agricultural income
A,,: #urcharge ,as specified- and .ducation cess Z 9V
G'%++ T*8 P*6*04
L++:
i- Bebate and Belief ****
ii- Ta* deducted at #ource ****
iii- Ta* paid in 'dvance$ etc. ****
N$ T*8 P*6*04
(et Ta* <ayableTTa* Liabilities is roundedoff to the nearest multiple of Bs.3A ,#ection 644-
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HEADS OF INCOME:
&n the income ta*$ any income earned by a person to be ta*ed is broadly categorised into five heads of
income.
The five heads of income are:
1) I#)%( .#,' $& H*, S*4*'6: This head ta*es the income earned by an individual as salary from any
firm or organisation. ,#ee 3: to 35-
2) I#)%( !'%( H%.+ P'%/'$6: This head ta*es rental income received by any person from way of
renting of any immoveable property. ,#ee 66 to 65-
:) P'%!"$+ *#, G*"#+ %! B.+"#++ %' P'%!++"%#: This head of income broadly covers income earned by a
person as aresult of some business or professional setup by him. ,#ee 64 to ==2-
;) C*/"$*4 G*"#+: This head of income ta*es the income earned on sale of any investment in form of gold$
precious ornaments$ shares$ etc or immoveable property. ,#ec =: to ::-
<) I#)%( !'%( O$&' S%.')+: This head of income covers any income which is not chargeable to ta*
under any of the above heads of income. 'ny income including gambling or profitTloss on running of race
horses$ camels$ interest income$ etc are chargeable to ta* under this head of income. ,#ee :; to :8-.
INCOME UNDER THE HEAD SALAR1
/eaning of #alary: #ection35, 3- gives an inclusive definition ofO salaryO. #alary &ncludes:
3- !agesH
6- 'ny annuity or pensionH
9- 'ny gratuityH
=- 'ny fees$ commissions$ perCuisites or profits in lie$ of or in addition to any salary or wagesH
:- 'ny advance of salaryH
;- 'ny payment received by an employee in respect of any period of leave no availed by himH
5- The annual accretion to the balance at the credit of an employee participating in a recognized provident
fund$ to the e*tent to which it is chargeable to ta*H
4- The aggregate of all sums that are comprised in the transferred balance of an employee participating in a
recognized provident fund$ to the e*tent to which it is chargeable to ta*H
8- The contribution made by the central government or any other employer$ in the previous year$ to the:
account of an employee under a notified pension scheme referred to in #ection 4A002.
'lthough the above incomes are included in salary$ but there are certain incomes$ which are either
fully e*empt or e*empt$ upto a certain limit. The aggregate of above incomes$ after the e*emption,s-
available$ if any$ is known as O7ross #alaryO. From the gross salary$ the following two deductions are allowed
under #ection 3;
3- 2eduction for entertainment allowance L#ection 3;,ii-MH and
6- 2eduction on account of any sum paid towards ta* on employment L#ection 3;,iii-M.
The amount arrived at$ after allowing the above deductions$ is the income under the head O#alariesO.
B*+"+ %! C&*'5 %! S*4*'6 I#)%( HS)$"%# 1<I
'ny remuneration paid by the employer to his employee in consideration of their services is called salary. 's
per #ection 3:$ the following income shall be chargeable to incometa* under the head N#alariesN:
3- 'ny salary due from an employer or a former employer to an assessee in the previous$ whether paid in
that previous year or notH
6- 'ny salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer though not due in that previous year or before it became due to him.
9- 'ny arrears of salary paid or allowed to him in the previous year by or on b half of an employer or a
former employer$ if not charged to incometa* in any earlier previous year.
i- !here any salary paid in advance is included in the total income of any person for any previous
year$ it shall not be included again in the total income of the person when the salary becomes due.
ii- 'ny salary$ bonus$ commission or remuneration$ by whatever name call d$ due to or received by$ a
partner of a firm from the firm shall not be regarded as salary for the purpose of this #ection. The same shall
be ta*able under #ection 64.
iii- The e*pression paid includes every receipt by the employee from the employer whether it was
due to him or not. The e*pression allowed is of wider connotation and any credit to the employeeOs account
is covered$ thereby and it should imply that right is conferred on the employee in respect of the same.
iv- 'rrears of salary are ta*able on payment basis and not Oon due basis.
v- 'n employee is to be ta*ed on the salary income to which he is entitled to receive during the
relevant period. The reduction in his salary cannot be effected with retrospective effect. #uch reduction can
operate only prospectively.
A44%-*#)+: 'll monetary payments made by an employer to his employee$ other than salary$ are termed as
allowances. &t is fi*ed$ predetermined and given regularly in addition to salary in connection with the
services rendered by the employee. &t may be given in form of reimbursement of some e*penditure incurred
by the employee or may be given irrespective of actual e*penditure.
P'@."+"$+: <erCuisites are the benefit or amenities in cash or in kind$ or in money or moneyOs worth and
also amenities which are not convertible into money$ provided by the employer to the employee whether
cost or at a concessional rate. Their value$ to the e*tent these go to reduce the e*penditure that the employee
normally would have otherwise incurred in obtaining these benefits and amenities$ is regarded as part of the
ta*able salary.
#ection 35,6- of the &ncometa* 'ct$ 38;3 defines perCuisites as N<erCuisiteN includes:
3- The value of rentfree accommodation provided to the assessee by his employer.
6- The value of any concession in the matter of rent respecting any accommodation provided to the assessee
by his employer.
9- The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases:
i- %y a company to an employee who is director thereofH
ii- %y a company to an employee being a person who has a substantial interest in the companyH
iii- %y any employer ,including a company- to an employee to whom the provisions of ,a- and ,b-
above do not apply and whose income under the head NsalariesN ,whether due from$ or paid or allowed by$
one. Dr more employers- e*clusive of value of all benefits or amenities not provided for by way of monetary
payment$ e*ceeds Bs. :A$AAA.
=- 'ny sum paid by the employer in respect of any obligation which$ but for such payment$ would have been
payable by the assessee.
:- 'ny sum payable by the employer$ whether directly or through a fund$ other than a recognized provident
fund$ or an approved superannuation fund$ or a 2epositlinked &nsurance Fund to affect an assurance uHO the
life of the assessee or to affect a contract for an annuity.
;- The value of any other fringe benefit or amenity as may be prescribed.
P'("++"04 D,.)$"%# !'%( S*4*'6 I#)%(
From the gross salary so computed$ the following two deductions are allowed under #ection 3;:
3- .ntertainment 'llowance L#ection 3;,ii-M: .ntertainment allowance is first included in computation of the
gross salary. ' deduction is then allowed under #ection 3;,ii- if conditions prescribed have been satisfied.
6- Ta* on .mployment ,professional Ta*- #ection 3;,iii-: 's per the 0onstitution of &ndia$ the state
governmentsTlocal authorities are empowered to make law and collect ta*es on professions$ trades$ callings T
and employment. 1owever$ the total amount payable in respect of any one person shall not e*ceed Bs.6 :AA
per annum.
P'%7",#$ F.#,
<rovident fund scheme is a welfare scheme for the benefit of the employees. @nder this scheme$
certain sum is deducted by the employer from the employeeOs salary as his contribution to the provident fund
every month.
The employer also contributes a certain percentage of the salary of the employee to the provident
fund. These contributions are deposited or invested. The interest earned on these investments is also credited
to the provident fund account of the employees. The balance thus keeps accumulating year after year. 't the
time of retirementTresignation$ the accumulated amount is given to the employee$ if certain conditions are
satisfied. &n this regard$ it is pertinent to note the following facts:
l- The contribution made by the employees is out of their income and therefore$ there is no Cuestion of
ta*ing any contribution made by the employees because the entire amount of the income has already been
ta*ed. &n fact$ in such cases$ he is given adduction from his gross total income on account of the amount
contributed by him. .
6- The contribution made by the employer is over and above the salary of the employee and is therefore$ an
income deemed to be received by the employee though it is not immediately made available to him.
1owever$ it is e*empt upto certain limits.
9- The interest credited to the provident fund account of the employee is also an income of the employee
over and above his salary income. 1owever$ it is also e*empt upto certain limits.
INCOME FROM HOUSE PROPERT1
O&ncome from house propertyO is the second amongst the five heads of income. #ections 66 to 65 of
the &ncometa* 'ct$ 38;3 relate to this head of income. 'ccording to #ection 66$ NThe annual value of
property consisting of any buildings or lands appurtenant thereto$ of which the assessee is the owner$ shall
be chargeable to incometa* under the head O&ncome from house propertyO. %ut if any portion of such
property is occupied by the owner for the purposes of any business or profession carried on by him the
profits of which are chargeable to incometa*$ the annual value of such portion is not chargeable to income
ta* under this headN. .
B*+"+ %! C&*'5
'n income to be chargeable under the head O&ncome from house propertyO must satisfy the following
conditions:
1) I#)%( !'%( B."4,"#5+ %' L*#,+ A//.'$#*#$ $&'$%: &ncometa*O is Npayable by an assessee on the
income of any building or land appurtenant thereto. &ncome from an open land not attached to any building
is not chargeable to incometa* under this head. &ncome from open land will be ta*ed under this head only
when it is attached to a building. .
2) A++++ +&%.4, 0 $&V O-#' %! $& P'%/'$6: 'n assessee is chargeable to income ta* on income
from buildings or lands attached thereto if he is the owner of such buildings or lands attached thereto. Legal
Dwnership: Dwnership means the legal ownership and not beneficial ownership. The owner is that person
who can e*ercise the rights of the owner not on behalf of the owner but in his own right. &t is not necessary
that the owner of a house must also be the owner of the land on which the house is constructed. Thus$ the
person constructing a house on land taken on lease is deemed to be the owner of the house.
Thus$ it is clear that ta*liability on the income of the house property is of the owner of such house
property. &f any house property is mortgaged$ the mortgagor and not the mortgagee is the owner of the house
property.
D(, O-#'+&"/: 'ccording to #ection 65 of the 'ct$ the following persons are treated as deemed
owner of the house property:
i- Transfer without 'deCuate 0onsideration: 'n individual who transfers$ without adeCuate
consideration$ any house property to his or her spouse$ not being a transfer in connection with an agreement
to live apart$ or to a minor child not being a married daughter$ shall be deemed to be the owner of the house
property so transferred.
ii- 1older of an &mpartible .state: The holder of an impartible estate shall be deemed to be the
individual owner of all the properties comprised in the estate.
iii- 1ouse 'llotted or Leased under any 1ouse %uilding #cheme: ' member of a cooperative society$
company or other association of persons to whom a building or part thereof is allotted or leased under a
house building scheme of the society$ company or association$ as the case may be$ shall be deemed to be the
owner of that building or part thereof.
iv- <erson in <ossession of any %uilding: ' person$ who is allowed to take or to retain possession of
any building or part thereof in part performance of a contract$ shall be deemed to be the owner of that
building or part thereof.
v- 'cCuiring Bights in a %uilding: ' person who acCuires any rights ,e*cluding any right by way of a
lease from month to month or for a period not e*ceeding one year- in or with respect to Oany building or part
thereof$ shall be deemed to be the owner of that building or part thereof.
:) A##.*4 2*4.: &t is hot the rent received which is chargeable to ta* under the head O&ncome from house
propertyO but it is the annual value of the Nhouse property which is sub"ect to ta* under this head. 'nnual
value is that notional rent for which the property can reasonably be let out Ofrom year to year. Thus$ the
annual value of house property does not mean the rent received but it means the e*pected rent which can
reasonably be taken from the house property. 'nnual value of the ownership of property is charged to ta*$
irrespective of the fact whether or not any income was either actually received or had accrued to the
assessee.
;) P'%/'$6 "# O))./*$"%# %! O-#'V+ B.+"#++ %' P'%!++"%#: &f an assessee uses his own house property
or any portion of it for purposes of any business or profession carried on by him$ the profits of which are
chargeable to incometa*$ the income from such house property or from any portion of such house property
will not be chargeable to incometa*. Thus$ two things are important in order to e*empt the income from
house property on this ground:
i- The business or profession must be owned by the owner of house property$ and
ii- The profits of such business or profession must be chargeable to incometa* under &ncometa*
'ct$ 38;3. &f in any year$ there is loss in the said business or profession$ even then the income from house
property will not be chargeable to incometa*. %ut if any house property has been let out for the purposes of
business or profession$ the income from such house property shall be ta*able under the head O&ncome from
house propertyO.
A##.*4 2*4.
's per #ection 69,3-,a- the annual value of any property shall be the sum for which the property might
reasonably be e*pected to be let from year to year. &t may neither be the actual rent derived nor the
municipal valuation of the property. &t is something like notional rent which could have been derived$ had
the property been let.
D$'("#"#5 A##.*4 2*4.
&n determining the annual value there are four factors which are normally taken into consideration. These
are:
1) A)$.*4 R#$ R)"7, %' R)"7*04: 'ctual rent receivedTreceivable is an important factor in
determining the annual value of a property though this Ois not the only decisive factor. The actual rent could
be dependent upon various considerations. There could be circumstances where the owner agrees to bear
certain obligations of the tenant$ for e*ample$ the water and electricity bills of the tenant may be payable by
the owner. &n this case$ the de facto rent will be calculated by stepping down the rent receivedTreceivable by
the amount spent by the owner on meeting the obligation of the tenant. Dn the other hand$ if any obligation
of Othe owner is met by the tenant$ the de facto rent will be computed by stepping up the rent
receivedTreceivable by the amount spent by the tenant in discharging the obligation of the landlord.
'ny deposit received from the tenant for property is a capital receipt and thus$ it cannot be treated as
income. Further while determining the actual rent$ no notional interest on such deposit should be considered.
2) M.#")"/*4 2*4.: This is the value as determined by the municipal authorities for levying municipal
ta*es on house property. /unicipal authorities normally charge house ta*Tmunicipal ta*es on the basis of
annual letting value of such house property$ which is determined by it based upon many considerations.
:) F*"' R#$ %! $& P'%/'$6: Fair rent is the rent which a similar property can fetch in the same or similar
locality$ if it is let for a year.
;) S$*#,*', R#$: The standard rent is fi*ed under the Bent 0ontrol 'ct. &f the standard rent has been fi*ed
for any property under the Bent 0ontrol 'ct$ the owner cannot be e*pected to get a rent higher than the
standard rent fi*ed under the Bent 0ontrol 'ct. Therefore$ this is also an important factor in determining the
annual value.
's per the 'ct the annual value is the value after deduction of municipal ta*es$ if any$ paid by the
owner. %ut for sake of convenience$ the annual value may be determined in the following two steps:
#tep &: 2etermine the gross annual value.
#tep n: From the gross annual value computed in step &$ deduct municipal ta* paid by the owner
during the previous year. The balance shall be the net annual value which$ as per &ncome ta* acts is the
annual value.
PROFITS AND GAINS OF BUSINESS OR PROFESSION:
's per section 6,39- %usiness means the purchase and sales or manufacture of a commodity with a
view to make a profit. &t includes any trade$ commerce or manufacture of a commodity with a view to make
a profit. &t includes any trade commerce or manufacture or any adventure or concern in the nature of trade
commerce or manufacture. &t is not necessary that there should be a series of transaction in a business and
that it should be carried on permanently.
's per section 6,9;- <rofession means the activities for earning livelihood which reCuire intellectual
skill or manual skill ie the work of lawyer$ doctor$ auditor$ engineer consultant contractor and so on. This
section states that profession will include vocation.
-&he word profession implies professed attainment in special knowledge as distinguished from mere
skill. ' profession involves labor$ skill$ education and special knowledge and implies a vocation reCuiring
higher education and learning$ intellectual skill as distinguished from one that used an occupation for the
production or sale of commodities.N
' vocation as normally understood$ is a calling in which a person passes his life. &t may be stated to
be a way of living or a sphere of activity for which one has a special fitness$ though it is not necessary that
the activity should be indulged in for purposes of livelihood.
G#'*4 P'"#)"/4+
The general principles for assessing business or profession income are as follows:
1) B.+"#++ %' P'%!++"%# (.+$ 0 )*''", %# 06 $& A++++: &t is not necessary that business must be
carried on by the assessee himself. &t can be carried through his agent or servant. Further$ the person$ who is
liable to be assessed is generally the owner or proprietor of the business but sometimes a representative of
such owner may be assessed if such representative had a night to carry on the business and he did so carry
on as$ for e*ample$ a guardian of an infant conducting a business which belongs to the infant$ particularly
under the orders of court. The courts have pointed out that under #ection 64 the emphasis is on the person
carrying on the business$ not so much on the owner thereof.
2) B.+"#++ %' P'%!++"%# (.+$ 0 C*''", %# !%' +%( T"( ,.'"#5 $& P'7"%.+ 1*': &t is not
necessary for profits of the business to be ta*able that the business must be actively carried on for the whole
of the previous year$ or till the end of the previous year$ it is necessary that it must have been carried on by
the assessee at any time during the previous year$ i.e.$ the charge arises only if there is carrying of business
or profession for some time during the previous year$ however short it be .
:) P'%!"$+ %! $& P'7"%.+ 1*' *' C&*'5*04: The charge is in respect of the profits that have accrued to
the business during theO previous year. For purpose of computation of profits$ each year is a selfcontained
period of time and profits earned or losses sustained before its commencement ,or after its close- are
irrelevant. The profits of the annual period have to be computed in accordance with the method Oof
accounting regularly employed by the assessee on the basis of accrual of income or e*penditure or actual
receipts or disbursements as the case may be. !here the assessee maintains his accounts on the mercantile
basis$ income which has accrued but escaped assessment cannot be sought to be ta*ed in the year in which it
is received.
;) C&*'5 E8$#,+ $% *#6 B.+"#++ %' P'%!++"%# C*''", O#: This clause also laysdown that the profits
of each and every business carried on by the assessee will have to be separately computed$ but should
thereafter be all put together and aggregated to arrive at the profits and gains ta*able under this head.
<) L*+ %! C%((')"*4 A++$+: &t is well settled now that income from the e*ploitation of commercial
assets would be business income whether the e*ploitation is done directly or through some other agency. &f
the circumstances indicate an intention on the part of the lessor to e*ploit the commercial asset himself at
some point of time and the lease is only a temporary phase forced on him by financial or other limitations$
the income in his hands would be business income. Dn the other hand$ if his intention is to part with the
commercial asset as such and confine himself solely to deriving some income in view of his ownership
thereof by lease or otherwise$ the income would be assessable under #ection :;.
=) I#7+$(#$ %! S.'/4.+ F.#,+ "+ #%$ B.+"#++: /erely investing surplus funds instead of keeping them
idle and obtaining interest thereon would not constitute business and$ therefore$ the interest by the assessee
would not be assessable as business income.
7) P'%(%$'V+ B.+"#++ *#, P'FI#)%'/%'*$"%# P'%!"$+: !here the promoters of the company buys a
property or carry on business on behalf of the company$ which they intend to float$ the company has a right$
after its incorporation$ to either accept what had been done on its behalf by the promoters or to repudiate the
same. &f$ however$ the company accepts what the promoterOs had done$ it was held that it has a right to claim
from the promoters the entire income of the property since its purchase or entire income for the period
during which the business was carried on for the benefit of the company.
8) A)$"7"$"+ "# C%.'+ %! W"#,"#5F./ -&$&' B.+"#++: ' business is considered as ceased when it is
woundup. %ut this is not necessarily true. Trading in the course of windingup would constitute business
/ere realization of assessee by the liCuidator of a company winding up$ however$ cannot be said to be
carrying on of business. %ut if the liCuidator carries on business to facilitate winding up and realizes the
assets in a manner which bears characteristics of a continuing trading activity$ inference would be that the
business is carried on.
B*+"+ %! C&*'5KS)%/ %! I#)%( .#,' $& H*, P'%!"$+ *#, G*"#+ %! B.+"#++ %' P'%!++"%#V HS)$"%#
28I
The following incomes shall be chargeable to incometa* under the head OO<rofits and gains of business or
professionN:
3- The profits and gains of any business which was carried on by the assessee at any time during the previou
year. 'ny compensation or other payment due to or received by:
i- 'ny person in connection with terminationTmodification of his agreement for managing the whole
or substantially the whole of the affairs of an &ndian company or any other company.
ii- 'ny person holding an agency in &ndia for any part of the activities relating to the business of any
other person at or in connection with the termination or modification of the terms of the agency$
iii- 'ny person for or in connection with the vesting in the government$ or in any corporation owned
by or controlled by the government$ under any law for the time being imposed$ of the management of any
property or business.
6- &ncome derived by a trade$ professional or similar association from specific services performed for its
members. This is an e*ception to the general principle that$ a surplus arising to mutual association cannot be
regarded as income chargeable to ta*.
9- E8/%'$ "#)#$"7+ -&")& "#)4.,:
i- <rofits on sales of import licenses granted under &mports ,0ontrol- Drder on account of e*ports.
ii- 0ash assistance$ by whatever name called$ received or receivable against e*port.
iii- 2uty drawbacks of 0ustoms and 0entral .*cise 2uties.
iv- 'ny profit on the transfer of the 2uty .ntitlement <ass %ook #cheme$ being the 2uty Bemission
#cheme under the e*port and import policy formulated and announced under #ection : of the
Foreign Trade ,2evelopment and Begulation- 'ct$ 3886.
v- %y profit on the transfer of the 2uty Free Beplenishment 0ertificate$ being the 2uty Bemission
#cheme under the e*port and import policy formulated and announced under #ection : of the Foreign Trade
,2evelopment and Begulation- 'ct$ 3886. O
=- The value of any benefit or perCuisite$ whether convertible into money or not$ arising during the course of
the carrying on of any businessTprofession$ for e*ample$ the value of rent free residential accommodation
secured by an assessee from a company in consideration of the professional services as a lawyer rendered by
him to that company$ will be assessable in the hands of the assessee as his income under the head N<rofits
and 7ains of %usiness or <rofessionN.
:- 'ny interest$ salary$ bonus$ commission or remuneration due to or received by a partner of a firm from the
firm in which he is a partner. 1owever$ where any interest$ salary$ bonusH commission or remuneration by
whatever name called$ or any part thereof has not been allowed to be deducted under #ection =A,b-$ in the
computation of the income of the firm$ the income to be ta*ed shall be ad"usted to the e*tent of the amount
disallowed.
;- 'ny sum whether received or receivable in cash or in kind under an agreement for:
i- (ot carrying out activity in relation to any businessH or
ii- O(ot sharing any knowhow$ patent$ copyright$ trademark$ license$ franchise or any other business
of commercial right of similar nature or information or techniCue likely to assist in the manufacture
or processing of goods or provision for services.
5- 'ny sum received under a Ieyman &nsurance <olicy including the sum allocated by way of bonus on such
policy.
4- &ncome from speculative transaction.
CAPITAL GAIN:
<rofits or gains arising from the transfer of a capital asset made in a previous year is ta*able as capital gains
under the head 0apital 7ains. The important ingredients for capital gains are$ therefore$ e*istence of a
capital asset$ transfer of such capital asset and profits or gains that arise from such transfer.
C*/"$*4 A++$
0apital asset means property of any kind e*cept the following:
a- #tockintrade$ consumable stores or rawmaterials held for the purpose of business or profession.
b- <ersonal effects like wearing apparel$ furniture$ motor vehicles etc..$ held for personal use of the ta* payer
or any dependend member of his family. 1owever$ "ewellery$ even if it is for personal use$ is a capital asset.
The Finance 'ct$ 6AA5 has modified the definition of <ersonal effects w.e.f. 3.=.6AA4. )<ersonal effects+ now
include movable property including wearing apparel and furniture held for personal use by the assessee or
any member of his family dependent on him$ but e*cludes:
i- Uewellery
ii- 'rchaeological 0ollections
iii- 2rawings
iv- <aintings
B*+") %! C&*'5 HS)$"%# ;<(1)I
'ny profits or gains arising from the transfer of a capital asset effected in the previous year$ shall be
chargeable to income ta* under the head O0apital 7ainsO and shall be deemed to be the income of the
previous year in which the transfer took place unless such capital gain is e*empt @T# :=$ :=%$ :=2$ :=.0$
:=F$ :=7 or :=7'.
The following are the essential conditions for ta*ing capital gains:
3- There must be a capital assetH
6- The capital asset must have been transferredH
9- #uch transfer takes place during the previous year.
=- There must be profits or gains on such transfer$ which will be known as capital gainH
:- #uch capital gain should not be e*empt uTs :=$ :=%$ :=2$ :=.0$ O:=F$ :=7 or.:=7'.
I#)4.+"%# *#, E8)4.+"%# !'%( C*/"$*4 A++$+ (M*#"#5 %! C*/"$*4 A++$+) HS)$"%# 2(1;)I
0apital asset means property of any kind held by die assessee$ whetherO or not connected with his
business or profession. 0apital assets may be movable or immovable$ tangible or intangible$ fi*ed or
floating. ' capital asset includes goodwill$ leasehold rights$ "ewellary$ shares$ manufacturing license$ etc.
1owever capital asset does not include:
3- 'ny stockintrade$ consumable stores or raw materials heldO for the purposes of his business or
profession as these will be ta*ed under the head Nprofits and gains of business or professionN.
6- <ersonal effects$ i.e.$ movable property ,including wearing apparel and furniture-$ held for personal use
by the assessee or any member of his family dependent on him. 1owever$ the following assets shall not be
treated as personal effects though these assets are moveable and may be held for personal use:
i- Uewellery$ O
ii- 'rcheological collections$
iii- 2rawings$
iv- <aintings$
v- #culptures$ or
vi- 'ny work of art.
9- 'gricultural land in &ndia$ which is not an urban agricultural land. &n other words$ it must be a rural
agricultural land:
i- Bural agricultural land means an agricultural land in &ndia:
a- &f situated in any area which is comprised within the "urisdiction of a municipality
,whether known as a municipality$ municipal corporation$ notified area committee$ town
committee or by any other name- and its population should be less than 3A$AAA as per the last
published census$ or
b- &f situated outside the limits of municipality$ etc.$ it should be situated certain kilometers
away from the local limits of any municipality$ etc.$ as may be specified by the central
government in the official gazette.
ii- @rban agricultural land is although a capital asset but any capital gain arising from the
compulsory acCuisition of such land shall be e*empt as per #ection 3A,95- if certain conditions mentioned in
that section are satisfied.
=- ;.:V 7old %onds$ 3855$ 5V 7old %onds$ 384A or (ational 2efense 7old %onds$ 384A issued by the
central government.
:- #pecial %earer %onds$ 3883$ issued by the central government.
;- 7old 2eposit %onds issued under the 7old 2eposit #chem; 3888.
N%$:
1) P'%/'$6 %!FA#6 3"#,: 's can be seen$ the definition of capital asset is very sweeping nature and covers
the property of any kind barring the e*ceptions mentioned above. <roperty of any kind used in #ection 6,3=-
is of widest amplitude and include not only tangible assets but also intangible rights. &t may be eitherO
corporeal or incorporeal.
0orporeal means of a material nature$ i.e.$ physical things like land$ building$ "ewellery$ shares$ cars$
scooter$ etc. (ot only these assets but noncorporeal assets like route permits for buses$ tenancy rights$ lease
hold rights$ copyrights$ etc. will also be covered under the definition of capital assets.
2) P'%/'$6 H4, $% 0 C*/"$*4 A++$+: 'll assets like goodwill$ leasehold rights$ manufacturing license$
route permits$ shares of companies$ residential or commercial houses$ patents and trademarks$ "ewellery$
land are called capital assets. 1owever$ assets meant purely for personal use and which are movable like
household utensils$ appliances$ furniture$ carpets$ T> set$ refrigerators$ musical instruments for personal use$
vehicles like cycle$ scooter$ car: only for personal use are not to be treated as capital assets as these will be
covered under personal effects.
:) P'%/'$6 T'*#+!'', (.+$ 0 C*/"$*4 A++$ %# $& D*$ %! T'*#+!': To attract charge of capital gain$
the property transferred must be a capital asset on the date of transfer and it is not necessary that it should
have been a capital asset also on the date of the acCuisition by the assessee. &f the concerned asset does not
fall within the definition of capital asset on the date of transfer$ no capital gain can be levied.
;) C4.00"#5 %! I#)%( !'%( C*/"$*4 G*"#+: !here a property has been transferred to the spouse under
#ection ;=,3-$ any capital gain arising to the spouse from such asset would be includible in the total income
of the transferor.
C*/"$*4 G*"# +&%.4, *'"+ "# $& P'7"%.+ 1*' "# -&")& T'*#+!' T%%C P4*)
(ormally$ capital gain arises in the previous year in which the transfer of the asset takes place even if the
consideration for the transfer is received or realized in a later year. There are$ however$ three e*ceptiona3
cases here capital gain is ta*able not in the year of transfer of the asset$ but in some other year. These
e*ceptions are:
2amage or destruction of any capital asset by fire or other calamities.
0onversion of capital asset into stockintrade.
0ompulsory acCuisition of an asset.
T'*#+!' %! C*/"$*4 A++$
Transfer in relation to a capital asset includes:
3- The sale$ e*change$ or relinCuishment of the assetH or
6- The e*tinguishment of any rights thereinH or
9- &ts compulsory acCuisition under any lawH or
=- !here the asset is converted by the owner into stockintrade of a business carriedon by himH or
The maturity or redemption of a zero coupon bondH or
:- 0onversion of a business into a limited companyH or
;- 'ny transaction involving the allowing of the possession of any immovable property to be taken or
retained in part performance of a contract of the nature referred to in the Transfer of <roperty 'ct$
3846H or
5- 'ny transaction ,whether by way of becoming a member of$ or acCuiring shares in a cooperative
society$ a company$ etc.- which has the effect of transferring the en"oyment of any immovable
property.
C'$*"# T'*#+*)$"%#+ #%$ '5*',, *+ T'*#+!' (S)$"%# ;7)
The following transactions are not regarded as transfer for the purpose of capital gains ta*:
'ny distribution of capital assets on the total or partial partition of a 1indu undivided family.
'ny transfer of a capital asset under a gift or will or an irrevocable trust.
E8)/$"%#
&f shares or debentures or warrants$ allotted by a company directly or indirectly to its employees under the
.mployeesO #tock Dption <lan or #cheme of the 0ompany$ are transferred under a gift or irrevocable trust$ it
will be deemed to be a transfer.
'ny transfer of a capital asset by a company to its subsidiary company$ if:
o The parent company holds the whole of the share capital of the subsidiary companyH and
o The subsidiary$ company is an &ndian company$
'ny transfer of a capital asset by a subsidiary company to the holding company$ if:
o The whole of the share capital of the subsidiary company is held by the holding companyH
and
o The holding company is an &ndian company.
:- 'ny transfer of a capital asset as per 0lause ,9- or ,=- above shall be treated as transfer if the transfer is
made after 68th February$ 3844 as stockintrade.

;- 'ny transfer$ in a scheme of an amalgamation$ of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an &ndian company.
T6/+ %! C*/"$*4 A++$+ *#, G*"#+:
0apital assets are of two types:
3- #hortTerm 0apital 'sset L#ection 6,=6'-M: ' capital asset held by an assessee for not more than9;
months immediately preceding the date of it transfer is known as a short term capital asset. 1owever$ the
following assets shall be treated as shortterm capital assets if they are held for not more than twelve months
,instead of 9; months mentioned above- immediately preceding the date of its transfer:
i- .Cuity or <reference shares held in a company.
ii- 'ny other security listed in a recognized stock e*change in &ndia.
iii- @nits of the @nit Trust of &ndia or units of a /utual Fund specified uTs 3A,692-.
iv- Rero coupon bond.
7ains arising on the transfer of shortterm capital asset are known as shortterm capital gain L#ection
6,=6%-.
6- LongTerm 0apital 'sset L#ection 6,68'-: &t means a capital. asset which is not a shortterm capital asset.
&n other words$ if the asset is held by the assessee for more than 9; months or 36 months$ as the case may
be$ such an asset will be treated as a longterm capital asset. 7ains arising on the transfer of longterm
capital asset are known as longterm capital gain L#ection 6,68%-.
INCOME FROM OTHER SOURCES HSEC. <= TO <>I
I#$'%,.)$"%#
's per #ection :;,3-$ income of every kind$ which is not to be e*cluded from the total income under this 'ct
shall be chargeable to incometa* under the head N&ncome from other sourcesN if it is not chargeable to
income ta* under any of the first four heads specified in #ection 3=.
B*+"+ %! C&*'5
The following conditions must be satisfied before an income can be ta*ed under the head N&ncome from
other #ourcesN:
3- There must be an incomeH
6- #uch income is not e*empt under the provisions of this 'ctH
9- #uch income is not chargeable to ta* under any first four head$ i.e.$ N&ncome from salaryN$ N&ncome from
house propertyN$ N<rofits and gains of business or professionN and N&ncome from capital gainN.
&ncome from other sources is$ therefore$ a residuary head of income.
C&*'5*04 I#)%(+:
&ncome chargeable under the head O&ncome from Dther #ourcesO can be divided into two categories:
3- #pecific &ncomes
6- Dther &ncomes
11.8.;. S/)"!") I#)%(+V I#)4.,, .#,' VI#)%( !'%( O$&' S%.')+V S)$"%# <=(2)
2ividend 2ividend is defined by #ection 6,66-. 2ividend from an &ndian company is not
ta*able in the hands of shareholders. 1owever$ deemed dividend under #ection
6,66-,e- from an &ndian company or any dividend from a foreign company is
ta*able in the hands of shareholders under the head N&ncome from other sourcesN.
!innings from
Lotteries$ etc
&t includes any winnings from lotteries$ crossword puzzles$ races including horse
races$ card games and other games of any sort or from gambling or betting of any
form or nature whatsoever. These receipts are chargeable to ta* under the head
N&ncome from other sourcesN.
.mployeesO 0ontribution
towards #taff !elfare
#cheme
'ny sum received by the assessee from his employees as contributions to any
staff welfare scheme is ta*able in the hands of the employer under the head
N&ncome from other sourcesN ,if it is not ta*able as business income under
#ection 64-
&nterest on #ecurities
&nterest on debentures$ 7overnment securitieslbonds is ta*able under the head
N&ncome from other sourcesN ,if the same is not ta*ed as business income under
#ection 64-
Bental &ncome of
/achinery$ <lant or
Furniture
Bental income from machinery$ plant or furniture let on hire is ta*able as income
from other sources ,if the same is not ta*ed as business income under #ection
64-.
Bental &ncome of
Lettingout of <lant$
/achinery or Furniture
along with Lettingout of
%uilding and the Two
Lettings are not
#eparable
#uch rental income is ta*able under the head N&ncome from other sourcesN ,if the
same is not ta*ed as business income under #ection 64-
#um Beceived under
Ieyman &nsurance
<olicy
'ny sum received under a Ieyman insurance policy ,including bonus- is ta*able
as income from other sources ,if the same is not ta*able as salary income or
business
income-.
O$&'W I#)%(+ -&")& *' N%'(*446 I#)4.,, .#,' $& H*, 4#)%( !'%( O$&' S%.')+V
Following are some of the incomes which are normally chargeable to ta* under this head because these are
not covered under any of the four specified heads:
1. &ncome form subletting of a house property by a tenant$
2. 0asual income$
:. &nsurance commission$
;. Family pension ,payment received by the legal heirs of a deceased employees-$
<. 2irector fees
=. &nterest on bank depositsTdeposits with companies$
7. &nterest on loans$
8. &ncome form undisclosed sources$
>. Bemuneration received by /embers of.<arliament$
1?. &nterest on securities of foreign government$
11. .*aminership fees received by a teacher from an institution other than his employer$
12. Bent from a vacant piece of plot of land$
1:. 'griculture income from agricultural land situated outside &ndia$
1;. &nterest received on delayed refund$
1<. &ncome from royalty if it is not income business or profession$
1=. 2irectorOs commission for standing as a guarantor to bankers$
17. 2irectorOs commission for underwriting shares of a new company$
18. &ncome from racing establishment$
1>. &ncome from granting of mining rights$
2?. &ncome from markets$ fisheries$ rights of ferry or moorings$
21. &ncome from grant of grazing rights$ .
22. &nterest paid by the government on e*cess payment of advance ta*$ etc.$ and
2:. &ncome received after discontinuance of business.
D,.)$"%#+ *44%-*04 .#,' 7*'"%.+ +)$"%#+ %! C&*/$' 2IA %! I#)%( T*8 A)$ :
@nder section 4A0 ,>arious investments-
@nder section 4A000 ,<remium for 'nnuity plans-
@nder section 4A002 ,0ontribution to <ension 'ccount-
@nder section 4A2 ,/edicalT 1ealth &nsurance-
@nder section 4A22 ,Behabilitation of 1andicapped 2ependent Belative-
@nder section 4A22% ,/edical .*penditure on #elf or 2ependent Belative-
@nder section 4A. ,&nterest on Loan for 1igher #tudies-
@nder section 4A7 ,>arious 2onations-
@nder section 4A77 ,1ouse Bent <aid-
@nder section 4A@ ,.mployee suffering from <hysical 2isability-
@nder section 4ABB% ,Boyalty of a <atent-
S)$"%# 8?C:
This section has been introduced by the Finance 'ct 6AA:. %roadly speaking$ this section provides deduction
from total income in respect of various investmentsT e*pendituresTpayments in respect of which ta* rebate
uTs 44 was earlier available. The total deduction under this section ,alongwith section 4A000 and 4A002- is
limited to Bs. 3 lakh only. 'n additional deduction upto a ma*imum of Bs. 6A$AAAT will be available from
'ssessment Gear 6A3336 ,FG 6A3A33- for investment in &nfrastructure %onds. The following
investmentTpayments are eligible for deduction uTs 4A0.
Life &nsurance <remium For individual$ policy must be in self or spouse+s or any child+s name. For
1@F$ it may be on life of any member of 1@F.
#um paid under contract for deferred annuity For individual$ on life of self$ spouse or any child .
#um deducted from salary payable to 7ovt. #ervant for securing deferred annuity for selfspouse or
child <ayment limited to 6AV of salary.
0ontribution made under .mployee+s <rovident Fund #cheme.
0ontribution to <<F For individual$ can be in the name of selfTspouse$ any child Q for 1@F$ it can be
in the name of any member of the family.
0ontribution by employee to a Becognised <rovident Fund.
#um deposited in 3A yearT3: year account of <ost Dffice #aving %ank
#ubscription to any notified securitiesTnotified deposits scheme. e.g. (##
#ubscription to any notified savings certificate$ @nit Linked #avings certificates. e.g. (#0 >&&&
issue.
0ontribution to @nit Linked &nsurance <lan of L&0 /utual Fund e.g. 2hanrakhsa 3848
0ontribution to notified deposit schemeT<ension fund set up by the (ational 1ousing #cheme.
0ertain payment made by way of instalment or part payment of loan taken for purchaseTconstruction
of residential house property.
0ondition has been laid that in case the property is transferred before the e*piry of : years from the
end of the financial year in which possession of such property is obtained by him$ the aggregate
amount of deduction of income so allowed for various years shall be liable to ta* in that year.
0ontribution to notified annuity <lan of L&0,e.g. Ueevan 2hara- or @nits of @T&Tnotified /utual
Fund. &f in respect of such contribution$ deduction uTs 4A000 has been availed of rebate uTs 44
would not be allowable.
#ubscription to units of a /utual Fund notified uTs 3A,692-.
#ubscription to deposit scheme of a public sector$ company engaged in providing housing finance.
#ubscription to eCuity sharesT debentures forming part of any approved eligible issue of capital made
by a public company or public financial institutions.
Tuition fees paid at the time of admission or otherwise to any school$ college$ university or other
educational institution situated within &ndia for the purpose of full time education of any two
children. 'vailable in respect of any two children
S)$"%# 8?CCC: D,.)$"%# "# '+/)$ %! P'(".( P*", !%' A##."$6 P4*# %! LIC %' O$&' I#+.''
<ayment of premium for annuity plan of L&0 or any other insurer 2eduction is available upto a ma*imum of
Bs. 3AA$AAAT. ,This limit has been increased from Bs. 3A$AAAT w.e.f. A3.A=.6AA5-.
The premium must be deposited to keep in force a contract for an annuity plan of the L&0 or any other
insurer for receiving pension from the fund.
S)$"%# 8?CCD: D,.)$"%# "# '+/)$ %! C%#$'"0.$"%# $% P#+"%# A))%.#$
2eposit made by a 0entral government servant in his pension account to the e*tent of 3AV of his salary.
!here the 0entral 7overnment makes any contribution to the pension account$ deduction of such
contribution to the e*tent of 3AV of salary shall be allowed. Further$ in any year where any amount is
received from the pension account such amount shall be charged to ta* as income of that previous year.
(ote: The limit for ma*imum deduction available under #ections 4A0$ 4A000 and 4A002 ,combined
together- is Bs. 3$AA$AAAT ,Bs. one lac only-. 'n additional deduction upto a ma*imum of Bs. 6A$AAAT will
be available from 'ssessment Gear 6A3336 ,FG 6A3A33- for investment in &nfrastructure %onds.
S)$"%# 8?D: D,.)$"%# "# '+/)$ %! M,")*4 I#+.'*#)
2eduction is available upto Bs. 3:$AAAT for senior citizens and upto Bs. 3A$AAAT for others.,This limit has
been increased to Bs. 6A$AAAT for senior citizens and to Bs. 3:$AAAT for others w.e.f. '. G. 6AA4A8-. The
premium is to be paid by cheCue and the insurance scheme should be framed by the 7eneral &nsurance
0orporation of &ndia Q approved by the 0entral 7ovt. or any other insurer and approved by the insurance
Begulatory Q 2evelopment authority. The premium should be paid in respect of health insurance of the
assessee or his family members.
S)$"%# 8?DD: D,.)$"%# "# '+/)$ %! R&*0"4"$*$"%# %! H*#,")*//, D/#,#$ R4*$"7
2eduction of Bs. :A$AAAT w.e.f. A3.A=.6AA= in respect of
3. .*penditure incurred on medical treatment$ ,including nursing-$ training and rehabilitation of
handicapped dependent relative.
6. <ayment or deposit to specified scheme for maintenance of dependant handicapped relative.
Further$ if the dependant is a person with severe disability a deduction of Bs. 5:$AAAT ,enhanced to Bs.
3$AA$AAAT from Financial Gear 6AA83A- shall be available under this section. The handicapped dependent
should be a dependent relative suffering from a permanent disability ,including blindness- or mentally
retarded$ as certified by a specified physician or psychiatrist. (ote: ' person with severe disability means a
person with 4AV or more of one or more disabilities as outlined in section :;,=- of the <ersons with
disabilities ,.Cual opportunities$ protection of rights and full participation- 'ct.
S)$"%# 8?DDB: D,.)$"%# "# '+/)$ %! M,")*4 E8/#,"$.' %# S4! %' D/#,#$ R4*$"7
' deduction to the e*tent of Bs. =A$AAAT or the amount actually paid$ whichever is less is available for
e*penditure actually incurred by resident assessee on himself or dependent relative for medical treatment of
specified disease or ailment. The diseases have been specified in Bule 3322. ' certificate in form 3A & is to
be furnished by the assessee from any Begistered 2octor.
S)$"%# 8?E: D,.)$"%# "# '+/)$ %! I#$'+$ %# L%*# !%' H"5&' S$.,"+
This section has been amended by the Finance 'ct$6AA: and w.e.f. A3.A=.6AA;$ deduction shall be allowed
only in respect of interest on loan taken for pursuing higher education and the ceiling of Bs. =A$AAAT has
been removed. ,The deduction will also be available for the purpose of higher education of a relative w.e.f.
'.G. 6AA4A8.-
S)$"%# 8?G: D,.)$"%# "# '+/)$ %! 2*'"%.+ D%#*$"%#+
The various donations specified in #ec. 4A7 are eligible for deduction upto either 3AAV or :AV with or
without restriction as provided in #ec. 4A7
S)$"%# 8?GG:D,.)$"%# "# '+/)$ %! H%.+ R#$ P*",
2eduction available is the least of
3. Bent paid less 3AV of total income
6. Bs. 6AAAT per month
9. 6:V of total income$ provided
o 'ssessee or his spouse or minor child should not own residential accommodation at the place
of employment.
o 1e should not be in receipt of house rent allowance.
o 1e should not have self occupied residential premises in any other place.
S)$"%# 8?U: D,.)$"%# "# '+/)$ %! E(/4%6 +.!!'"#5 !'%( P&6+")*4 D"+*0"4"$6
2eduction of Bs. :A$AAAT to an individual who suffers from a physical disability,including blindness- or
mental retardation. Further$ if the individual is a person with severe disability$ deduction of Bs. 5:$AAAT
shall be available uTs 4A@. 0ertificate should be obtained from a 7ovt. 2octor. The relevant rule is Bule
332.
S)$"%# 8?RRB: D,.)$"%# "# '+/)$ %! *#6 I#)%( 06 -*6 %! R%6*4$6 %! * P*$#$
2eduction in respect of any income by way of royalty is respect of a patent registered on or after A3.A=.6AA9
under the <atents 'ct 385A shall be available upto Bs. 9 lacs or the income received$ whichever is less. The
assessee must be an individual resident is &ndia who is a patentee. The assessee must furnish a certificate is
the prescribed form duly signed by the prescribed authority.
REBATE AND RELIEF FROM TAJ:
!hen in the total income of an assessee such income is included on which ta* had already been paid
then from amount of ta* on total income some deduction is allowed to him. &t is rebate of ta*.
&ncome ta* is payable on total income of an assessee .Ta* so calculated is sub"ect to rebate and relief
of income ta* on certain income.
'ssessee is entitled to get the rebate of incometa* at average rate of income ta* in respect of his
share income from an assosiation pf persons or a body of individual if the 'D< or %D& has paid ta*
on its total income.
'ssessee is entitled to a rebate of income ta* in respect of his agricultural income included in his
total income. #uch rebate is deducted from assessee gross ta* liability.
They may be granted a relief of income ta* in respect of advances or arrears of salary received from
him during the previous year.
CORPORATE GO2ERNANCE
C%'/%'*$ 5%7'#*#) is a number of /'%)+++, ).+$%(+, /%4")"+, 4*-+, *#, +$"$.$"%#+ which
have impact on the way a )%(/*#6 is )%#$'%44,. 'n important theme of corporate governance is the nature
and e*tent of accountability of people in the 0.+"#++$ and mechanisms that try to decrease the principalK
agent problem.
0orporate governance also includes the relationships among the many stakeholders involved and the
goals for which the corporation is governed. &n contemporary business corporations$ the main e*ternal
stakeholder groups are shareholders$ debt holders$ trade creditors$ suppliers$ customers and communities
affected by the corporationOs activities. &nternal stakeholders are the board of directors$ e*ecutives$ and other
employees. &t guarantees that an enterprise is directed and controlled in a responsible$ professional$ and
transparent manner with the purpose of safeguarding its longterm success. &t is intended to increase the
confidence of shareholders and capitalmarket investors.
' related but separate thread of discussions focuses on the impact of a corporate governance system
on economic efficiency$ with a strong emphasis on shareholdersO welfareH this aspect is particularly present
in contemporary public debates and developments in regulatory policy
There has been renewed interest in the corporate governance practices of modern corporations since
6AA3$ particularly due to the highprofile collapses of a number of large corporations$ most of which
involved accounting fraud. 0orporate scandals of various forms have maintained public and political interest
in the regulation of corporate governance. &n the @.#.$ these include .nron 0orporation and /0&
&nc. ,formerly !orld0om-. Their demise is associated with the @.#. federal government passing
the #arbanesD*ley 'ct in 6AA6$ intending to restore public confidence in corporate governance.
0omparable failures in 'ustralia ,1&1$ Dne.Tel- are associated with the eventual passage of the 0L.B<
8 reforms. #imilar corporate failures in other countries stimulated increased regulatory interest
,e.g.$ <armalat in &taly-.
PRINCIPLES OF CORPORATE GO2ERNANCE
0ontemporary discussions of corporate governance tend to refer to principles raised in three documents
released since 388A: The 0adbury Beport ,@I$ 3886-$ the <rincipals of 0orporate 7overnance ,D.02$ 3884
and 6AA=-$ the #arbanesD*ley 'ct of 6AA6 ,@#$ 6AA6-. The 0adbury and D.02 reports present general
principals around which businesses are e*pected to operate to assure proper governance. The #arbanes
D*ley 'ct$ informally referred to as #arbo* or #o*$ is an attempt by the federal government in the @nited
#tates to legislate several of the principles recommended in the 0adbury and D.02 reports.
R"5&$+ *#, @."$*04 $'*$(#$ %! +&*'&%4,'+: Drganizations should respect the rights of
shareholders and help shareholders to e*ercise those rights. They can help shareholders e*ercise their
rights by openly and effectively communicating information and by encouraging shareholders to
participate in general meetings.
I#$'+$+ %! %$&' +$*C&%4,'+: Drganizations should recognize that they have legal$ contractual$
social$ and market driven obligations to nonshareholder stakeholders$ including employees$ investors$
creditors$ suppliers$ local communities$ customers$ and policy makers.
R%4 *#, '+/%#+"0"4"$"+ %! $& 0%*',: The board needs sufficient relevant skills and understanding
to review and challenge management performance. &t also needs adeCuate size and appropriate levels of
independence and commitment
I#$5'"$6 *#, $&")*4 0&*7"%': &ntegrity should be a fundamental reCuirement in choosing
corporate officers and board members. Drganizations should develop a code of conduct for their
directors and e*ecutives that promotes ethical and responsible decision making.
D"+)4%+.' *#, $'*#+/*'#)6: Drganizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a level of accountability. They
should also implement procedures to independently verify and safeguard the integrity of the companyOs
financial reporting. 2isclosure of material matters concerning the organization should be timely and
balanced to ensure that all investors have access to clear$ factual information.
REGULATIONS
L5*4 #7"'%#(#$ F G#'*4
0orporations are created as legal persons by the laws and regulations of a particular "urisdiction.
These may vary in many respects between countries$ but a corporationOs legal person status is fundamental to
all "urisdictions and is conferred by statute. This allows the entity to hold property in its own right without
reference to any particular real person. &t also results in the perpetual e*istence that characterizes the modern
corporation. The statutory granting of corporate e*istence may arise from general purpose legislation ,which
is the general case- or from a statute to create a specific corporation$ which was the only method prior to the
38th century.
&n addition to the statutory laws of the relevant "urisdiction$ corporations are sub"ect to common
law in some countries$ and various laws and regulations affecting business practices. &n most "urisdictions$
corporations also have a constitution that provides individual rules that govern the corporation and authorize
or constrain its decisionmakers. This constitution is identified by a variety of termsH in .nglishspeaking
"urisdictions$ it is usually known as the 0orporate 0harter or the L/emorandum andM 'rticles of 'ssociation.
The capacity of shareholders to modify the constitution of their corporation can vary substantially.
C%,+ *#, 5.",4"#+
0orporate governance principles and codes have been developed in different countries and issued
from stock e*changes$ corporations$ institutional investors$ or associations ,institutes- of directors and
managers with the support of governments and international organizations. 's a rule$ compliance with these
governance recommendations is not mandated by law$ although the codes linked to stock e*change listing
reCuirements may have a coercive effect. For e*ample$ companies Cuoted on the London$ Toronto and
'ustralian #tock .*changes formally need not follow the recommendations of their respective codes.
1owever$ they must disclose whether they follow the recommendations in those documents and$ where not$
they should provide e*planations concerning divergent practices. #uch disclosure reCuirements e*ert a
significant pressure on listed companies for compliance.
Dne of the most influential guidelines has been the 3888 D.02 <rinciples of 0orporate 7overnance.
This was revised in 6AA=. The D.02 guidelines are often referenced by countries developing local codes or
guidelines. %uilding on the work of the D.02$ other international organizations$ private sector associations
and more than 6A national corporate governance codes$ the @nited (ations &ntergovernmental !orking
7roup of .*perts on &nternational #tandards of 'ccounting and Beporting ,&#'B- has produced
their 7uidance on 7ood <ractices in 0orporate 7overnance 2isclosure. This internationally agreed
benchmark consists of more than fifty distinct disclosure items across five broad categories:
'uditing
%oard and management structure and process
0orporate responsibility and compliance
Financial transparency and information disclosure
Dwnership structure and e*ercise of control rights
The investorled organisation &nternational 0orporate 7overnance (etwork ,&07(- was set up by
individuals centered around the ten largest pension funds in the world 388:. The aim is to promote global
corporate governance standards. The network is led by investors that manage 34 trillion dollars and
members are located in fifty different countries. &07( has developed a suite of global guidelines ranging
from shareholder rights to business ethics. The !orld %usiness 0ouncil for #ustainable
2evelopment ,!%0#2- has done work on corporate governance$ particularly on accountability and
reporting$ and in 6AA= released &ssue /anagement Tool: #trategic challenges for business in the use of
corporate responsibility codes$ standards$ and frameworks. This document offers general information and a
perspective from a business associationTthinktank on a few key codes$ standards and frameworks relevant to
the sustainability agenda.
&n 6AA8$ the &nternational Finance 0orporation and the @( 7lobal 0ompact released a report$ 0orporate
7overnance the Foundation for 0orporate 0itizenship and #ustainable %usiness$ linking the environmental$
social and governance responsibilities of a company to its financial performance and longterm
sustainability.
/ost codes are largely voluntary. 'n issue raised in the @.#. since the 6AA: 2isney decision
L65M
is the
degree to which companies manage their governance responsibilitiesH in other words$ do they merely try to
supersede the legal threshold$ or should they create governance guidelines that ascend to the level of best
practice. For e*ample$ the guidelines issued by associations of directors$ corporate managers and individual
companies tend to be wholly voluntary but such documents may have a wider effect by prompting other
companies to adopt similar practices.
0orporate governance mechanisms and controls are designed to reduce the inefficiencies that arise
from moral hazard and adverse selection. For e*ample$ to monitor managersO behavior$ an independent third
party ,the e*ternal auditor- attests the accuracy of information provided by management to investors. 'n
ideal control system should regulate both motivation and ability.
I#$'#*4 )%'/%'*$ 5%7'#*#) )%#$'%4+
&nternal corporate governance controls monitor activities and then take corrective action to accomplish
organisational goals. .*amples include:
M%#"$%'"#5 06 $& 0%*', %! ,"')$%'+: The board of directors$ with its legal authority to hire$ fire
and compensate top management$ safeguards invested capital. Begular board meetings allow potential
problems to be identified$ discussed and avoided. !hilst none*ecutive directors are thought to be more
independent$ they may not always result in more effective corporate governance and may not increase
performance. 2ifferent board structures are optimal for different firms. /oreover$ the ability of the board
to monitor the firmOs e*ecutives is a function of its access to information. .*ecutive directors possess
superior knowledge of the decisionmaking process and therefore evaluate top management on the basis
of the Cuality of its decisions that lead to financial performance outcomes$ ex ante. &t could be argued$
therefore$ that e*ecutive directors look beyond the financial criteria.
I#$'#*4 )%#$'%4 /'%),.'+ *#, "#$'#*4 *.,"$%'+: &nternal control procedures are policies
implemented by an entityOs board of directors$ audit committee$ management$ and other personnel to
provide reasonable assurance of the entity achieving its ob"ectives related to reliable financial reporting$
operating efficiency$ and compliance with laws and regulations. &nternal auditors are personnel within an
organization who test the design and implementation of the entityOs internal control procedures and the
reliability of its financial reporting
B*4*#) %! /%-': The simplest balance of power is very commonH reCuire that the <resident be a
different person from the Treasurer. This application of separation of power is further developed in
companies where separate divisions check and balance each otherOs actions. Dne group may propose
companywide administrative changes$ another group review and can veto the changes$ and a third group
check that the interests of people ,customers$ shareholders$ employees- outside the three groups are
being met.
R(.#'*$"%#: <erformancebased remuneration is designed to relate some proportion of salary to
individual performance. &t may be in the form of cash or noncash payments such as shares and share
options$ superannuation or other benefits. #uch incentive schemes$ however$ are reactive in the sense
that they provide no mechanism for preventing mistakes or opportunistic behavior$ and can elicit myopic
behavior.
&n publiclytraded @.#. corporations$ boards of directors are largely chosen by the <residentT0.D and the
<residentT0.D often takes the 0hair of the %oard position for hisTherself ,which makes it much more
difficult for the institutional owners to NfireN himTher-. The practice of the 0.D also being the 0hair of the
%oard is known as NdualityN. !hile this practice is common in the @.#.$ it is relatively rare elsewhere. &t is
illegal in the @.I.
E8$'#*4 )%'/%'*$ 5%7'#*#) )%#$'%4+
.*ternal corporate governance controls encompass the controls e*ternal stakeholders e*ercise over the
organization. .*amples include:
competition
debt covenants
demand for and assessment of performance information ,especially financial statements-
government regulations
managerial labour market
media pressure
takeovers
F"#*#)"*4 '/%'$"#5 *#, $& "#,/#,#$ *.,"$%'
The board of directors has primary responsibility for the corporationOs e*ternal financial
reporting functions. The 0hief .*ecutive Dfficer and 0hief Financial Dfficer are crucial participants and
boards usually have a high degree of reliance on them for the integrity and supply of accounting
information. They oversee the internal accounting systems$ and are dependent on the
corporationOsaccountantsand internal auditors.
0urrent accounting rules under &nternational 'ccounting #tandards and @.#. 7''< allow managers some
choice in determining the methods of measurement and criteria for recognition of various financial reporting
elements. The potential e*ercise of this choice to improve apparent performance ,see creative
accounting and earnings management- increases the information risk for users. Financial reporting fraud$
including nondisclosure and deliberate falsification of values also contributes to usersO information risk. To
reduce these risk and to enhance the perceived integrity of financial reports$ corporation financial reports
must be audited by an independent e*ternal auditor who issues a report that accompanies the financial
statements ,see financial audit-. &t is
Dne area of concern is whether the auditing firm acts as both the independent auditor and
management consultant to the firm they are auditing. This may result in a conflict of interest which places
the integrity of financial reports in doubt due to client pressure to appease management. The power of the
corporate client to initiate and terminate management consulting services and$ more fundamentally$ to select
and dismiss accounting firms contradicts the concept of an independent auditor. 0hanges enacted in the
@nited #tates in the form of the #arbanesD*ley 'ct ,following numerous corporate scandals$ culminating
with the .nron scandal- prohibit accounting firms from providing both auditing and management consulting
services. #imilar provisions are in place under clause =8 of #tandard Listing 'greement in &ndia.
CORPORATE TAJ PLANNING
' company has been defined as a "uristic person having an independent and separate legal entity from its
shareholders. &ncome of the company is computed and assessed separately in the hands of the company.
1owever the income of the company which is distributed to its shareholders as dividend is assessed in their
individual hands. #uch distribution of income is not treated as e*penditure in the hands of company$ the
income so distributed is an appropriation of the profits of the company.
T*8*04 C%'/%'*$ I#)%(
The ta* levied on a company+s income is based on its legal residence. 0ompanies of &ndian origin are levied
ta* in &ndia$ while &nternational companies are levied ta* on earnings from their &ndian operations. For
&nternational companies+ royalty$ interest$ gains from sale of capital assets within &ndia$ dividends from
&ndian companies and fees for technical services are all treated as income arising in &ndia.
T*8 O# D"+$'"0.$, P'%!"$+
Till 3885$ a company was not reCuired to pay any income ta* on the amount of dividends declared$
distributed or paid by such company. %ut such dividend was included in the income of the shareholders
under the head Nincome from other sourcesN. The finance act 3885 brought about changes to the rule.
A) T*8 O# D"+$'"0.$, P'%!"$+ O! T& D%(+$") C%(/*#6
The domestic company would be reCuired to pay additional income ta* on any amount declared$ distributed
or paid by such company by way of dividend ,be it interim or otherwise- on or after 3A;3885$be it from
current or accumulated profits. #uch additional income ta* shall be payable Z 3A per cent of the amount so
distributed. .ven if no income ta* is payable by the company on it total income$ the additional ta* would
have to be paid.
B) E8(/$"%# O! D"7",#, I# T& H*#,+ O! S&*'&%4,'+
&n view of the income ta* now payable by the domestic company$ any dividends declared$ distributed or paid
by such company$ on or after A3A;3885 shall be e*empt in the hands of the shareholders.
Time limit for deposit of additional income ta*:
#uch additional ta* will have to be paid by the principal officer of the domestic company within 3= days
from the date of:
a- 2eclaration of any dividend.
b- 2istribution of any dividend.
c- <ayment of any dividend$ whichever is earlier.
A,,"$"%#*4 "#)%(F$*8 "+ #%$ *44%-, *+ ,,.)$"%#:
The company shall not be allowed any deduction on account of such additional income ta* under any
provisions of the income ta* act.
0orporate ta* planning provides strategies that are significant in minimizing ta*es. #ome valuable
ways to save include sponsoring a retirement plan$ writing off company assets$ claiming depreciation
e*pense$ taking deductions on business automobiles$ office e*penses$ self employment health insurance$
employer sponsored child care resources$ and using a home office for the company
0orporate ta* planning provides some ways that a business owner can save on income ta*es both
shortterm and longterm. &ncome received must be reported but deductions can reduce the amount that is
actually owed. The deductions can vary depending upon the type of industry and what are considered
legitimate deductions.
#ome company owners shift income to a family member as a ta* advantage. &n order to do this a
family member must be providing some benefit to the business and the amount should be in line with the
type of compensation. #hifting income legitimately can lower a company into a lower ta* bracket. Df course
the shifting of income to a family member could raise their income bracket and this should be considered.
0orporate ta* planning involves looking out for employees by offering retirement$ cafeteria and
medical benefit plans. 0afeteria plans allow employees to use a portion of preta* income for medical or
child care e*penses. 0orporations do not have to pay payroll ta*es or workers comp premiums on the dollars
that are paid into a cafeteria plan or medical benefits plan.
There are many deductions that a company can take advantage of including startup costs$ business
trip e*penses$ home office use$ the use of automobiles$ and other assets. The costs of health care e*penses
are often deductible especially for the owner and dependents. &n addition$ any contributions made to a health
savings account are also deductible e*penses. %usiness ta* planning includes knowing what plans provide
the greatest benefits and implementing those plans to not only provide benefits to the company but benefits
to employees as well.
!hen starting up a company many of the initial e*penses can be written off up to a certain dollar
amount. #ome of these may include personal property like furniture or office eCuipment. Dther things that
can be written off the first year of purchase include machinery$ fi*tures$ storage facilities$ and other personal
property. Dther considerations when starting up a business include travel$ vehicle usage$ home office$ and
uniforms. 0orporate ta* planning sources suggests making sure that writeoffs are legitimate business
e*penses. !hen using a home office for company use only a percentage of e*penses can be written off.
Travel e*pense can only apply when the travel is for the company. 0ombining company business with
personal business must be taken into consideration for any type of writeoff to be legitimate.
There is a degree of burden that is felt from ta* legislation by any and every owner. 1owever$ there
are positive ways that a corporation can comply with obligations and find ways to develop a strong company
otherwise. %usiness ta* planning includes taking advantage of opportunities to provide relief when possible.
' corporate planning attorney can provide some good advice on how to structure a company to be optimally
successful while remaining compliant with considerations such as paying ta*es. &nformation can be found on
the &nternet that can help prepare a new business owner with how to be compliant in every area when it
comes to reporting income and deducting e*penses.
0haritable contributions are a great way for a company to save on ta*es and help those in the
community. /any non profit organizations are set up to help those who are less fortunate within the
community that they reside and some offer services to anyone who they can help no matter where they are
located. There are limits on how much of a contribution that can be counted and the organization has to fit
the guidelines used by the &B# to be considered a legitimate charitable organization. #ome of the ones who
usually do Cualify are churches$ educational companies$ scientific or medical research institutions$ those that
provide true charitable services and organizations who help animals. There is more information on the
&nternet about organizations that truly Cualify as charitable.
(UNIT I2 COMPLETED)
UNIT 2
CONSUMER PROTECTION ACT AND INTRODUCTION OF C1BER
LAWS
CONSUMER PROTECTION ACT
MEANING OF CONSUMER
Gou have learnt that a consumer is a person who consumes or uses any goods or services. 7oods may
be consumables like wheat flour$ salt$ sugar$ fruit etc. or durable items like television$ refrigerator$ toaster$
mi*er$ bicycle etc. #ervices refer to items like electricity$ cooking gas$ telephone$ transportation$ film show
etc. (ormally$ it is the consumption or use of goods and services that makes the person to be called as
)consumer+. %ut in the eyes of law$ both the person who buys any goods or hires any service for
consideration ,price- and the one who uses such goods and services with the approval of the buyer are
termed as consumers. For e*ample$ when your father buys apple for you and you consume them$ your father
as well as yourself are treated as consumers. The same thing applies to hiring a ta*i to go to your school. &n
other words$ even the buyer of goods and services whether he uses them himself or purchases them for
consumption or use by some other person,s- is treated as consumer in the eyes of law. 1owever$ a person
who buys goods for resale ,like wholesaler$ retailer$ etc.- or for any commercial purpose is not treated as
consumer.
@nder the 0onsumer <rotection 'ct 384;$ the word C%#+.(' has been defined separately for the
purpose of goods and services.
,a- For the purpose of goods$ a consumer means ,i- one who buys any goods for considerationH and ,ii- any
user of such goods other than the person who actually buys it$ provided such use is made with the approval
of the buyer.
,The e*pression )consumer+ does not include a person who obtains such goods for resale or for any
commercial purpose.-
,b- For the purpose of services$ a consumer means
,i- Dne who hires any service or services for considerationH and
,ii- 'ny beneficiary of such service,s- provided the service is availed with the approval of such person.
CONCEPT OF CONSUMER PROTECTION: 0onsumer protection means safeguarding the interest and
rights of consumers. &n other words$ it refers to the measures adopted for the protection of consumers from
unscrupulous and unethical malpractices by the business and to provide them speedy redressal of their
grievances. The most common business malpractices leading to consumer e*ploitation are given below.
,a- #ale of adulterated goods i.e.$ adding something inferior to the product being sold.
,b- #ale of spurious goods i.e.$ selling something of little value instead of the real product.
,c- #ale of substandard goods i.e.$ sale of goods which do not confirm to prescribed Cuality standards.
,d- #ale of duplicate goods.
,e- @se of false weights and measures leading to underweight.
,f- 1oarding and blackmarketing leading to scarcity and rise in price.
,g- 0harging more than the /a*imum Betail <rice ,/B<- fi*ed for the product.
,h- #upply of defective goods.
,i- /isleading advertisements i.e.$ advertisements falsely claiming a product or service to be of superior
Cuality$ grade or standard.
,"- #upply of inferior services i.e.$ Cuality of service lower than the Cuality agreed upon.
The above instances show the e*ploitation of consumers in the conte*t of goods and services. &n a
democratic nation like &ndia$ should we allow this to happenE #o the measures adopted by the government or
nongovernment organisations ,(7Ds- for safeguarding the interests of the consumers constitute consumer
protection.
E8*(/4+ %! C%#+.(' E8/4%"$*$"%# "# I#,"*
P The after sales service provider of the television set charged Bs 6AA as service charge though he repaired
the set within the warranty period.
P The tickets issued to different passengers on the same day for the same "ourney showed the same seat
number.
P <enalty of Bs. :A was charged by #%& after issuing the cheCue book to the customer showing that the
balance available in the account was less than the minimum reCuired balance for issue of cheCue book.
P The supply of cooking gas cylinder to the consumers is found to be underweight.
NEED FOR CONSUMER PROTECTION
The necessity of adopting measures to protect the interest of consumers arises mainly due to the helpless
position of the consumers. There is no denying fact that the consumers have the basic right to be protected
from the loss or in"ury caused on account of defective goods and deficiency of services. %ut they hardly use
their rights due to lack of awareness$ ignorance or lethargic attitude. 1owever in view of the prevailing
malpractices and their vulnerability there to$ it is necessary to provide them physical safety$ protection of
economic interests$ access to information$ satisfactory product standard$ and statutory measures for redressal
of their grievances. The other main arguments in favour of consumer protection are as follows:
(*) S%)"*4 R+/%#+"0"4"$6
The business must be guided by certain social and ethical norms. &t is the moral responsibility of the
business to serve the interest of consumers. Ieeping in line with this principle$ it is the duty of producers
and traders to provide right Cuality and Cuantity of goods at fair prices to the consumers.
(0) I#)'*+"#5 A-*'#++
The consumers are becoming more mature and conscious of their rights against the malpractices by the
business. There are many consumer organisations and associations who are making efforts to build
consumer awareness$ taking up their cases at various levels and helping them to enforce their rights.
()) C%#+.(' S*$"+!*)$"%#
Father of the (ation /ahatma 7andhi had once given a call to manufactures and traders to treat your
consumers as god. 0onsumers+ satisfaction is the key to success of business. 1ence$ the businessmen
should take every step to serve the interests of consumers by providing them Cuality goods and services at
reasonable price.
(,) P'"#)"/4 %! S%)"*4 J.+$")
.*ploitation of consumers is against the directive principles of state policy as laid down in the 0onstitution
of &ndia. Ieeping in line with this principle$ it is e*pected from the manufacturers$ traders and service
providers to refrain from malpractices and take care of consumers+ interest.
() P'"#)"/4 %! T'.+$+&"/
'ccording to 7andhian philosophy$ manufactures and producers are not the real owners of the business.
Besources are supplied by the society. They are merely the trustees of the resources and$ therefore$ they
should use such resources effectively for the benefit of the society$ which includes the consumers.
(!) S.'7"7*4 *#, G'%-$& %! B.+"#++
The business has to serve consumer interests for their own survival and growth. Dn account of globalisation
and increased competition$ any business organisation which indulges in malpractices or fails to provide
improved services to their ultimate consumer shall find it difficult to continue. 1ence$ they must in their own
long run interest$ become consumer oriented.
CONSUMER RIGHTS
Uohn F$ Iennedy$ the former @#' <resident$ in his message to consumer had given si* rights to consumers.
These rights are ,i- right to safety$ ,ii- right to be informed$ ,iii- right to choose$ ,iv- right to be heard$ ,v-
right to redress and ,vi- right to represent. These rights had paved the way for organised consumer
movement in the @#' and later it spread all over the world. &n &ndia$ the 0onsumer <rotection 'ct$ 384; has
also provided for the same rights to consumers. Let us have a brief idea about these rights of consumers.
(*) R"5&$ $% S*!$6
&t is the right of the consumers to be protected against goods and services which are hazardous to health or
life. For e*ample$ defective vehicles could lead to serious accidents. The same is true of electrical appliances
with substandard material. Dnly recently$ there were mass protests and boycott of soft drinks due to
presence of hazardous pesticides beyond permissible limits. Thus$ right to safety is an important right
available to the consumer which ensures that the manufacturers shall not produce and sell substandard and
dangerous products.
(0) R"5&$ $% 0 I#!%'(,
The right to be informed is an important component of consumer protection. The consumer must be
provided with adeCuate and accurate information about Cuality$ Cuantity$ purity$ standard and the price of the
goods and services. (owadays the manufacturers provide detailed information about the contents of the
product$ its Cuantity$ date of manufacturing$ date of e*piry$ ma*imum retail price$ precautions to be taken$
etc. on the label and package of the product. #uch information helps the consumers in their buying decision
and use of the product.
()) R"5&$ $% C&%%+
The right to choose provides that the consumer must be assured$ whenever possible$ access to a variety of
goods and services at competitive prices. &f the market has enough varieties of products at highly
competitive prices$ the buyers have an opportunity of wide selection. 1owever$ incase of monopolies like
railways$ postal service and electricity supply etc. it implies a right to be assured of satisfactory Cuality of
service at a fair price.
(,) R"5&$ $% 0 H*',
The rights to safety$ information and choice will be frivolous without the right to be heard. This right has
three interpretations. %roadly speaking$ this right means that consumers have a right to be consulted by
7overnment and public bodies when decisions and policies are made affecting consumer interests. 'lso$
consumers have a right to be heard by manufactures$ dealers and advertisers about their opinion on
production$ marketing decisions and any grievances of the consumers. (owadays$ most of the top
manufacturers and firms have set up consumer service cells to attend to consumers+ complaints and take
appropriate steps for their redressal. Thirdly$ consumers have the right to be heard in legal proceedings in
law courts dealing with consumer complaints.
() R"5&$ $% SC R,'++*4
The consumers have been given the right of redressal of their grievances relating to the performance$ grade$
Cuality etc. of the goods and services. &f reCuired$ the product must be repaired T replaced by the sellerT
manufacturer. The 0onsumer <rotection 'ct has duly provides for a fair settlement of genuine grievances of
the consumers. &t has also set up a proper mechanism for their redressal at district$ state and national levels.
(!) R"5&$ $% C%#+.(' E,.)*$"%#
&t means the right to receive knowledge and skill to become informed consumer. &n this direction the
consumer associations$ educational institutions and the policy makers can play an important part. They are
e*pected to impart information and knowledge about
,i- the relevant laws which are aimed at preventing unfair trade practices$
,ii- the ways and means which dishonest traders and producers may adopt to deceive the consumers$
,iii- insistence on a bill or receipt at the time of purchase$ and
,iv- the procedure to be followed by consumers while making complaints. .ffective consumer education
leads to an increased level of consumer awareness and help them to enforce their rights more effectively$ and
protect themselves against fraudulent$ deceitful and grossly misleading advertisement$ labeling$ etc.
RESPONSIBILITIES OF CONSUMERS
Gou have learnt about the various rights of the consumers. Let us now have an idea about their duties and
responsibilities. These include the following:
(*) B @.*4"$6 )%#+)"%.+
To put a stop to adulteration and corrupt practices of the manufacturers and traders$ it is the duty of every
consumer to be conscious of the Cuality of product they buy. They should look for the standard Cuality
certification marks like &#&$ 'gmark$ F<D$ !oolmark$ .comark$ 1allmark etc. while making the purchases.
(0) B-*' %! ("+4*,"#5 *,7'$"+(#$+
The advertisement often e*aggerates the Cuality of products. 1ence$ the consumers should not rely on the
advertisement and carefully check the product or ask the users before making a purchase. &ncase there are
discrepancies$ the same should be brought to the notice of the sponsors and the appropriate authority$ if need
be.
()) R+/%#+"0"4"$6 $% "#+/)$ * 7*'"$6 %! 5%%,+ 0!%' (*C"#5 +4)$"%#
The consumer should inspect a variety of goods before buying the goods and service. For this purpose
heTshe should compare their Cuality$ price$ durability$ after sales service etc. This would enable the
consumers to make the best choice within the limit of their own resources.
(,) C%44)$ /'%%! %! $'*#+*)$"%#
The consumer should insist on a valid documentary evidence ,cash memoTinvoice- relating to purchase of
goods or availing of any services and preserve it carefully. #uch proof of purchase is reCuired for filing a
complaint. &n case of durable goods the manufactures generally provide the warranteeTguarantee card along
with the product. &t is the duty of consumers to obtain these documents and ensure that these are duly signed$
stamped and dated. The consumer must preserve them till the warranteeT guarantee period is over.
() C%#+.('+ (.+$ 0 *-*' %! $&"' '"5&$+
The consumers must be aware of their rights as stated above and e*ercise them while buying goods and
services. For e*ample$ it is the responsibility of a consumer to insist on getting all information about the
Cuality of the product and ensure himT her that it is free from any kind of defects.
(!) C%(/4*"#$ !%' 5#."# 5'"7*#)+
's a consumer if you are dissatisfied with the productTservices$ you can ask for redressal of your grievances.
&n this regard$ you must file a proper claim with the company first. &f the manufacturerTcompany does not
respond$ then you can approach the forums. %ut your claim must state actual loss and the compensation
claim must be reasonable. 't no cost fictitious complaints should be filed otherwise the forum may penalise
you.
(5) P'%/' .+ %! /'%,.)$K+'7")+
&t is e*pected from the consumers that they use and handle the productTservices properly. &t has been noticed
that during guarantee period$ people tend to reckless use of the product$ thinking that it will be replaced
during the guarantee period. This practice should be avoided.
'part from the responsibility enumerated above$ the consumers should be conscious of their duty towards
other consumers$ society and ecology and make responsible choice. &n other words$ their purchases and
consumption should not lead to waste of natural resources and energy and environmental pollution.
T1PES OF CONSUMER REDRESSAL MACHINARIES AND FORUMS
!e have enumerated several instances of e*ploitations and malpractices on the part of
manufacturers$ traders$ dealers and services providers. (ow the Cuestion arises as to how can these be
eliminated. 'ctually it is very difficult to stop such e*ploitation by any consumer single handedly. The
consumers have to collectively act against such malpractices and take the help of consumer organisations
and the government agencies. &nfact$ consumer protection essentially needs consumer awareness$ education
and guidance$ and it cannot be assured by voluntary business conduct or selfregulation. The following are
the various ways and means of consumer protection followed in &ndia.
(*) L%C A,*4*$
Lok 'dalats are the effective and economical system for Cuick redressal of the public grievances. The
aggrieved party can directly approach the adalats with his grievance$ and his issues are discussed on the spot
and decisions are taken immediately. The consumers may take the advantage of this system to solve their
problems. 0ases of electricity billing$ telephone billings$ road accidents etc. can be taken up in Lok 'dalat
for spot settlement. &nfact$ &ndian Bailways$ /ahanagar Telephone (igam Limited and 2elhi >idyut %oard
hold Lok 'dalat regularly to settle user+s grievances on the spot.
(0) P.04") I#$'+$ L"$"5*$"%#
<ublic &nterest Litigation ,<&L- is a scheme under which any person can move to the court of law in the
interest of the society. &t involves efforts to provide legal remedy to unrepresented groups and interests.
#uch groups may consist of consumers$ minorities$ poor persons$ environmentalists and others. 'ny person
or organisation$ though not a party to the grievances$ can approach the court for remedial action in case of
any social atrocities.
()) R,'++*4 F%'.(+ *#, C%#+.(' P'%$)$"%# C%.#)"4+
@nder the 0onsumer <rotection 'ct 384;$ a "udicial system has been set up to deal with the consumer
grievances and disputes at district level$ state level and national level. These are known as 2istrict Forum$
#tate 0onsumer 2isputes Bedressal 0ommission ,#tate 0ommission- and (ational 0onsumer 2isputes
Bedressal 0ommission ,(ational 0ommission-. 'ny individual consumer or association of consumers can
lodge a complaint with the 2istrict$ #tate or (ational level forum$ depending on the value goods and claim
for compensation. The main ob"ective of these forums is to provide for a simple$ speedy and ine*pensive
redressal of consumers+ grievances.
The 'ct as amended in 6AA6 also provides for setting up of C%#+.(' P'%$)$"%# C%.#)"4 at
district$ state and national level for promotion and protection of the rights of the consumers as laid down in
#ection ; of the 'ct. The councils are reCuired to give wide publicity to the rights of consumers$ the
procedures for filling complaints by them and provide inputs to consumer movement in the country.
(,) A-*'#++ P'%5'*((
To increase the level of awareness among the consumers the 7overnment of &ndia has initiated various
publicity measures. &t regularly brings out "ournals$ brochures$ booklets and various posters depicting the
rights and responsibilities of consumers$ redressal machineries etc. &t observes !orld 0onsumer Bights 2ay
on 3: /arch and (ational 0onsumer 2ay on 6= 2ecember. #everal video programmes on consumer
awareness are broadcasted through different television channels. #imilarly$ audio programmes are also
broadcasted through 'll &ndia Badio and F/ channels. The poster and slogan competition on consumer
protection are also organised at various level. To encourage the participation of public in the field of
consumer protection the 7overnment has also instituted (ational 'wards to the persons who have done
outstanding work in this field.
() C%#+.(' O'5*#"+*$"%#+
0onsumer organisations have been active all over the world to promote and protect consumer interests. '
number of such organisations have also been set up in recent years in different parts of &ndia. &t is felt that
neither it is possible to discipline all members of the business community through moral sanctions and a
code of fair business practices nor can administrate orders and legislative provisions to ensure consumer
protection without the active involvement of consumer associations. (ow with an increasing number of
consumer organisations involved in consumer protection$ the consumer movement is getting a foothold in
&ndia and helping individuals to seek Cuick and adeCuate redressal of their grievances. Look at the bo* for
some of such consumer organisations.
CONSUMER ORGANISATIONS
#ome of the important 0onsumer Drganisations that have been playing an active role in taking up consumer
cause are:
0.B0 ,0onsumer .ducation and Besearch 0entre-$ 'hmedabad
>D&0. ,>oluntary Drganisation in the &nterest of 0onsumer .ducation-$ (ew 2elhi
07#& ,0onsumer 7uidance #ociety of &ndia-$ /umbai
0'7 ,0onsumer 'ction 7roup-$ 0hennai
0@T# ,0onsumer @nity and Trust #ociety-$ Uaipur
0ommon 0ause$ (ew 2elhi
0onsumer .ducation 0entre$ 1yderabad
Iarnataka 0onsumer #ervice #ociety$ %angalore
Ierela #tate 0onsumers 0oordination 0ommittee$ 0ochin
These organisations are collecting data on different products and testing them$ investigating into the
problems of consumers$ publishing and distributing brochures and "ournals$ organising consumer awareness
programmes$ filing complaints$ suits and writ petitions on behalf of the consumers$ etc.
(!) C%#+.(' W4!*' F.#,
The government has created a consumer welfare fund for providing financial assistance to strengthen the
voluntary consumer movement in the country particularly in rural areas. This fund is mainly used for setting
up facilities for training and research in consumer education$ complaint handling$ counseling and guidance
mechanisms$ product testing labs$ and so on.
(5) L5"+4*$"7 M*+.'+
' number of laws have been enacted in &ndia to safeguard the interest of consumers and protect them from
unscrupulous and unethical practices of the businessmen. #ome of these 'cts are as follows:
,i- 2rug 0ontrol 'ct$ 38:A
,ii- 'gricultural <roducts ,7rading and /arketing- 'ct$ 3895
,iii- &ndustries ,2evelopment and Begulation- 'ct$ 38:3
,iv- <revention of Food 'dulteration 'ct$ 38:=
,v- .ssential 0ommodities 'ct$ 38::
,vi- The #tandards of !eights and /easures 'ct$ 38:;
,vii- /onopolies and Bestrictive Trade <ractices 'ct$ 38;8
,viii- <revention of %lackmarketing and /aintenance of .ssential #upplies 'ct$ 384A
,i*- %ureau of &ndian #tandards 'ct$ 384;
The ob"ect and interest of almost all these enactments are mainly punitive$ though some of these are
also preventive in nature. 1owever$ none of these laws provide any direct relief to the consumers. 1ence$
amendments have been made in some of these laws by which individual consumers and consumer
organisations have been conferred the right to take initiative and launch legal proceedings in civil and
criminal courts against the violators.
'nother legal enactment that made a dent in this situation was the /onopolies and Bestrictive Trade
<ractices 'ct$ 38;8. &t gained the status of a specific consumer protection law with amendments made in
384=. &nspite of the changes made in 384=$ a need was felt to have a more elaborate legislation. #o the
0onsumer <rotection 'ct was passed in 384; to offer the necessary protection to consumers and provide an
elaborate mechanism to deal with consumer grievances and disputes. ' broad idea about its main provisions
is being given in the ne*t section.
CONSUMER PROTECTION ACT 1>8=
The 0onsumer <rotection 'ct was passed in 384; and it came into force from 3 Uuly 3845. The main
ob"ectives of the 'ct are to provide better and allround protection to consumers and effective safeguards
against different types of e*ploitation such as defective goods$ deficient services and unfair trade practices.
&t also makes provisions for a simple$ speedy and ine*pensive machinery for redressal of consumers+
grievances.
S*4"#$ F*$.'+ %! C%#+.(' P'%$)$"%# A)$ 1>8=
The salient features of 0onsumer <rotection 'ct ,0<'- 384; are as follows:
,a- &t applies to all goods$ services and unfair trade practices unless specifically e*empted by the 0entral
7overnment.
,b- &t covers all sectors whether private$ public or cooperative.
,c- &t provides for establishment of consumer protection councils at the central$ state and district levels to
promote and protect the rights of consumers and three tier Cuasi"udicial machinery to deal with consumer
grievances and disputes.
,d- &t provides a statutory recognition to the si* rights of consumers.
GOODS AND SER2ICES CO2ERED UNDER CPA 1>8=
The term )goods+ under this 'ct has the same meaning as under the sale of goods 'ct.
'ccordingly it covers all types of movable property other than money and includes stocks and shares$
growing crops$ etc. The term )service+ means service of any description made available to potential users
and includes banking$ financing$ housing construction$ insurance$ entertainment$ transport$ supply of
electrical and other energy$ boarding and lodging$ amusement$ etc. The services of doctors$ engineers$
architects$ lawyers etc. are included under the provisions of 0onsumer <rotection 'ct.
PROCEDURES FOR CONSUMER GRIE2ANCES REDRESSAL
For redressal of consumer grievances a complaint must be filed with the appropriate forum. &n this section
let us know$ who can file a complaint$ what complaints can be filed$ where to file the complaint$ how to file
the complaints etc.
W&% )*# !"4 * )%(/4*"#$?
The following persons can file a complaint under 0onsumer <rotection 'ct 384;:
,a- a consumerH
,b- any recognised voluntary consumer association whether the consumer is a member of that association or
notH
,c- the 0entral or any #tate 7overnmentH and
,d- one or more consumers where these are numerous consumers having same interest.
,e- Legal heir or representative in case of death of a consumer.
W&*$ )%(/4*"#$+ )*# 0 !"4,?
' consumer can file a complaint relating to any one or more of the following:
,a- an unfair trade practice or a restrictive trade practice adopted by any trader or service providerH
,b- goods bought by him or agreed to be bought by him suffer from one or more defectH
,c- services hired or availed of$ or agreed to be hired or availed of$ suffer from deficiency in any respectH
,d- price charged in e*cess of the price ,i- fi*ed by or under the law for the time being in force$ ,ii- displayed
on the goods or the package$ ,iii- displayed in the price list$ or
,iv- agreed between the partiesH and
,e- goods or services which are hazardous or likely to be hazardous to life and safety when used.
W&' $% !"4 * )%(/4*"#$?
&f the value of goods and services and the compensation claimed does not e*ceed Bs. 6A lakh$ the complaint
can be filed in the 2istrict ForumH if it e*ceeds Bs. 6A lakh but does not e*ceed Bs. Dne crore$ the complaint
can be filed before the #tate 0ommissionH and if it e*ceeds Bs. Dne crore$ the complaint can be filed before
the (ational 0ommission.
H%- $% !"4 * )%(/4*"#$?
' complaint can be made in person or by any authorised agent or by post. The complaint can be written on a
plain paper duly supported by documentary evidence in support of the allegation contained in the complaint.
The complaint should clearly specify the relief sought. &t should also contain the nature$ description and
address of the complainant as well as the opposite party$ and so also the facts relating to the complaint and
when and where it arose.
W&*$ *' $& '4"!+ *7*"4*04 $% )%#+.('+?
2epending on the nature of complaint the and relief sought by the consumer$ and the facts of the case$ the
Bedressal ForumT0ommission may order one or more of the following reliefs:
,a- Bemoval of defects from the goods or deficiencies in services in Cuestion.
,b- Beplacement of the defective goods.
,c- Befund of the price paid.
,d- 'ward of compensation for loss or in"ury suffered.
,e- 2iscontinuance of unfair trade practices or restrictive trade practice or not to repeat them.
,f- !ithdrawal of hazardous or dangerous goods from being offered for sale.
,g- <rovision of adeCuate costs to aggrieved parties.
T"( 4"("$ !%' !"4"#5 $& )*+
The consumer can file the complaint within two years from the date on which the cause of action had arisen.
1owever$ it may be admitted even after the lapse of two years if sufficient cause is shown for the delay.
T"( 4"("$ !%' ,)","#5 $& )*+
.very complaint must be disposed off as speedily as possible within a period of three
CONCEPT OF CONSUMER PROTECTION
0onsumer protection means safeguarding the interest and rights of consumers. &n other words$ it refers to the
measures adopted for the protection of consumers from unscrupulous and unethical malpractices by the
business and to provide them speedy redressal of their grievances. The most common business malpractices
leading to consumer e*ploitation are given below.
,a- #ale of adulterated goods i.e.$ adding something inferior to the product being sold.
,b- #ale of spurious goods i.e.$ selling something of little value instead of the real product.
,c- #ale of substandard goods i.e.$ sale of goods which do not confirm to prescribed Cuality standards.
,d- #ale of duplicate goods.
,e- @se of false weights and measures leading to underweight.
,f- 1oarding and blackmarketing leading to scarcity and rise in price.
,g- 0harging more than the /a*imum Betail <rice ,/B<- fi*ed for the product.
,h- #upply of defective goods.
,i- /isleading advertisements i.e.$ advertisements falsely claiming a product or service to be of superior
Cuality$ grade or standard.
THE CONSUMER PROTECTION ACT, 1>8=
The industrial revolution and the development in the international trade and commerce has led to the
vast e*pansion of business and trade$ as a result of which a variety of consumer goods have appeared in the
market to cater to the needs of the consumers and a host of services have been made available to the
consumers like insurance$ transport$ electricity$ housing$ entertainment$ finance and banking. ' well
organised sector of manufacturers and traders with better knowledge of markets has come into e*istence$
thereby affecting the relationship between the traders and the consumers making the principle of consumer
sovereignty almost inapplicable.
The advertisements of goods and services in television$ newspapers and magazines influence the
demand for the same by the consumers though there may be manufacturing defects or imperfections or short
comings in the Cuality$ Cuantity and the purity of the goods or there may be deficiency in the services
rendered. &n addition$ the production of the same item by many firms has led the consumers$ who have little
time to make a selection$ to think before they can purchase the best. For the welfare of the public$ the glut of
adulterated and substandard articles in the market has to be checked.
&nspite of various provisions providing protection to the consumer and providing for stringent action
against adulterated and substandard articles in the different enactments like 0ode of 0ivil <rocedure$ 38A4$
the &ndian 0ontract 'ct$ 3456$ the #ale of 7oods 'ct$ 389A$ the &ndian <enal 0ode$ 34;A$ the #tandards of
!eights and /easures 'ct$ 385; and the /otor >ehicles 'ct$ 3844$ very little could be achieved in the field
of 0onsumer <rotection. Though the /onopolies and Bestrictive Trade <ractices 'ct$ 38;8 arid the
<revention of Food 'dulteration 'ct$ 38:= have provided relief to the consumers yet it became necessary to
protect the consumers from the e*ploitation and to save them from adulterated and substandard goods and
services and to safe guard the interests of the consumers. &n order to provide for better protection of the
interests of the consumer the 0onsumer <rotection %ill$ .384; was introduced in the Lok #abha on :th
2ecember$ 384;.
WHAT IS AN UNFAIR TRADE PRACTICE The 'ct says that$ unfair trade practice means a trade
practice which$ for the purpose of promoting the sale$ use or supply of any goods or for the provison of any
service$ adopts any unfair method or unfair or deceptive practice including any of the following practices$
namelyS
,3- The practice of making any statement$ whether orally or in writing or by visible representation whichS
,i- falsely represents that the goods are of particular standard$ Cuality$ Cuantity$ grade$ composition$ style
or modelH
,ii- falsely represents that the services are of a particular standard$ Cuality or gradeH
,iii- falsely represents any rebuilt$ secondhand$ renovated$ reconditioned or old goods as new goodsH
,iv- represents that the goods or services have sponsorship$ approval performance$ characteristics$
accessories$ uses or benefits which such goods or services do not haveH
,v- represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller
or supplier does not haveH
,vi- makes false or misleading statement concerning the need for$ or the usefulness of$ any goods or
servicesH
REDRESSAL AGENCIES OR COUNCILS OR CONSTITUTION OF THE FORUMS.
The composition of the 2istrict Forum and the #tate 0ommission has been detailed out by the 0onsumer
<rotection 'ct$ 384;. 's for the (ational 0ommission$ the 0onsumer <rotection Bules$ 3845$ elaborates
upon its composition.
ISTRICT FOR/0 4SECTION '*8
COMPOSITION F 2istrict Forum consist of one president and two other members ,one of whom is to be a
woman-.
The president of the Forum is a person who is$ or has been Cualified to be a 2istrict Uudge$ and other
members are persons of ability$ integrity and standing$ and have adeCuate knowledge or e*perience of$ or
have shown capacity in dealing with$ problems relating to economics$ law$ commerce$ accountancy$ industry$
public affairs or administration.
The ob"ect underlying the inclusion of non"udicial members appears to be to impart a balance to the
functioning of the 2istrict Forum by ensuring that the members are able to understand the economic and
social impact of the matters. Further inclusion of one female members ensures that the matters are viewed
from a woman+s angle also.
APPOINTING AUTHORIT1 .very appointment of the president and members of the 2istrict Forum is
made by the #tate 7overnment on the recommendation of a selection committee consisting of the following$
namelyS
,i- the <resident of the #tate 0ommission S 0hairman.
,ii- #ecretary$ Law 2epartment of the #tate S /ember.
,iii- #ecretary incharge of the 2epartment dealing with consumer affairs in the #tate S /ember.
TERM OF OFFICE HSECTION 1?(2)I .very member of the 2istrict Forum is to hold office for a term
of five years or up to the age of ;: years$ whichever is earlier. 1owever$ heTshe shall not be eligible for re
appointment.
2ACANC1 ' vacancy in the office of president or a member may occur after the e*piry of his term$ or by
his death$ resignation$ or removal.
&n terms of proviso to section 3A,6-$ a member may resign his office in writing under his hand addressed to
the #tate 7overnment and on such resignation being accepted$ his office shall become vacant and may be
filled by the appointment of a person possessing the reCuisite Cualifications in relation to the category of the
member who has resigned.
The 0onsumer <rotection 'ct does not have any specific provision for removal of the president and
members of the 2istrict Forum. %ut the consumer protection rules made by various #tates provide for such
removal. 'ccordingly$ a president or member of a 2istrict Forum may be removed by the #tate 7overnment$
whoS
,a- has been ad"udged an insolvent$ or
,!- has been convicted of an offence involving moral turpitude$ or
,c- has become physically or mentally incapable of performing his duties$ or
,d- has acCuired such financial interest in the matter as would pre"udicially affect his functions as president
or member$ or
,e- has abused his position so as to render his continuance to office pre"udicial to public interest.
T.B/# '(2 0D(2&T&D(# DF #.B>&0. L#.0T&D( 3A,9-M The salary or honorarium and other
allowances payable to$ and the other terms and conditions of service of the members of the 2istrict Forum
shall be such as may be prescribed by the #tate 7overnment. 2ifferent #tates have made different rules in
this regard.
STATE CO00ISSION 4SECTION '58 'fter the 2istrict Forum$ #tate 0ommission is ne*t in the
hierarchy of 0onsumer Bederessal Forums under the 'ct.
COMPOSITION #tate 0ommission consists of a president and two members one of whom is to be a
woman.
<resident is a person who is or has been a Uudge of a 1igh 0ourt$ and the members$ are persons of ability$
integrity and standing and have adeCuate knowledge or e*perience of$ or have shown capacity in dealing
with$ problems relating to economics$ law$ commerce$ accountancy$ industry$ public affairs or administra
tion.
APPOINTING AUTHORIT1 <resident of a #tate 0ommission is appointed by the #tate 7overnment
after consultation with the 0hief Uustice of the 1igh 0ourt.
Dther members of the 0ommission are made by the #tate 7overnment on the recommendation of a selection
committee consisting of the following$ namelyS
,i- <resident of the #tate 0ommission S 0hairman.
,ii- #ecretary of the Law 2epartment of the #tate S /ember.
,iii- #ecretary$ incharge of 2epartment dealing with consumer affairs in the #tate S /ember.
TERM OF OFFICE HSECTION 1=(:)I .very member of the #tate 0ommission shall hold office for five
years or upto the age of ;5 years whichever is earlier and he shall not be eligible for reappointment.
:.2F2, 2ACANC1 Bules as to the vacancy related in the office of the president or any member are similar
to those discussed in conte*t of the members of the 2istrict Forum. Befer /*'* ::.2F1, for the details.
TERMS AND CONDITIONS OF SER2ICE HSECTION 1=(2)I The salary or honorarium and other
allowances payable to$ and the other terms and conditions of service of$ the members of the #tate
0ommission shall be such as may be prescribed by the #tate 7overnment.
NATIONAL CO00ISSION 4SECTION :*8 The (ational 0ommission is the top most layer in the three
level hierarchy of the 0onsumer Forums.
COMPOSITION The (ational 0ommission consists of a president$ and four other members ,one of
whom is to be a woman-.
The president should be the one who is or has been a Uudge of the #upreme 0ourt$ and the members should
be the persons of ability$ integrity and standing and have adeCuate knowledge or e*perience of$ or have
shown capacity in dealing with$ problems relating to economics$ law$ commerce$ accountancy$ industry$
public affairs or administration.
APPOINTING AUTHORIT1 The <resident is appointed by the 0entral 7overnment after consultation
with the 0hief Uustice of &ndiaH
The appointment of other members of the 0ommission is made by the 0entral 7overnment on the
recommendation of a selection committee.
This selection committee consists of$ namely:S
,a- a person who is a Uudge of the #upreme 0ourt$ to be nominated by the 0hief Uustice of &ndiaS
0hairman.
,!- the #ecretary in the 2epartment of Legal 'ffairs in the 7overnment of &ndiaS/ember.
,c- #ecretary of the 2epartment dealing with consumer affairs in the 7overnment of &ndia S /ember.
(ote that before appointment$ the president and member,s- of the (ational 0ommission have to take an
undertaking that he does not and will not have any such financial or other interest as is likely to affect
pre"udicially his functions as such member.
TERM OF OFFICE HSECTION 2?(:)I .very member of the (ational 0ommission is to hold office for a
term of five years or upto the age of seventy years$ whichever is earlier and is not eligible for re
appointment.
2ACANC1 ' vacancy in the office of president or a member may occur after the e*piry of his term$ or by
his death$ resignation$ or removal.
&n terms of proviso to rule 36,9-$ the president or a member may resign his office in writing under his hand
addressed to the 0entral 7overnment$ or he can be removed from his office in accordance with the
provisions of rule 39.
PROCEDURES TO APPL1 IN CONSUMER PROTECTION COUNCIL
:.; !e understand that the 0onsumer Forums are the bodies who function like courts in order to settle the
consumer disputes. Their composition is so made as to best represent the interests of the consumers$ and
they have specified "urisdictions. The ne*t Cuestion is what procedure these Forums adopt in order to deal
with the consumer disputes.
#ection 39 of the 'ct has detailed the procedure in conte*t of 2istrict Forum only. For #tate 0ommission$
section 34 says that it will follow the same procedure as followed by 2istrict Forum with such modifications
as necessary$ and for the (ational 0ommission$ section 66 gives power to the 0entral 7overnment to make
rules in this regard. These rules in turn have included therein the procedure given by section 39. &n addition$
these rules have prescribed some procedures to be followed by the parties to the complaint.
' complaint may be made with respect to the goods or services. !hen complaint relates to goods$ the
criteria for the decision is whether the goods are defective or not. (ow the Cuestion is how to hold that
the goods are defective. The most logical way is to get the goods tested to determine the defect. 1owever$ in
certain cases defect can be determined without technical support or it may happen that the test is not
feasible. These areS
The opposite party admits the defect.
The defect is obvious and is visible to naked eyes$ like in a complaint about contamination of water$
the sample of water given was so dirty that the Forum did not consider it necessary to send it for test.
!hen the complainant is not in possession of the sub"ect matter of the complaint$ e.g., in a matter the
complainant had given to the dealer the tyre and tube which had burst$ the dealer sent the same to the
manufacturer. Thus the complainant was not in possession of the same.
!hen sub"ect matter of the complaint gets destroyed$ like in case a pressure cooker burst$ its remains
can+t be send to the laboratory for testing.
&n case of complaint regarding deficiency in service there is no Cuestion of testing or analysis.
Thus the procedure to be followed by the Forums can be discussed under the two headsS
3. where laboratory test is reCuired to determine the defect in goods.
6. where no laboratory test is reCuired to determine the defect in goods or the complaint relates to
services.
PROCEDURE TO BE FOLLOWED B1 THE FORUMS AND REDRESSAL AGENCIES
$ROCE/RE TO ,E FOLLO1E ,2 T-E ISTRICT FOR/0 4SECTION ')8 The following
procedure is eCually applicable to the 2istrict Forum$ #tate 0ommission with reCuired modifications$ and
(ational 0ommission with additional procedures reCuired by the rules.
WHERE LABORATOR1 TEST IS RE9UIRED TO DETERMINE THE DEFECT IN GOODS '
consumer is supposed to file as many copies of the complaint as there are number of "udges$ with all
essential information$ supporting papers like correspondence$ and specifying the compensation demanded.
Dn receipt of such complaintS
,a- The 2istrict Forum should refer a copy of the complaint to the opposite party directing him to give his
version of the case within a period of thirty days which can be e*tended to forty five days.
!here the opposite party on receipt of a complaint referred to him denies or disputes the allegations
contained in the complaint$ or omits or fails to take any action to represent his case within the time given by
the 2istrict Forum$ the 2istrict Forum would take the following steps to settle the dispute :
,!- The 2istrict Forum may reCuire the complainant to deposit specified fees for payment to the
appropriate laboratory for carrying out the necessary analysis or test in relation to the goods in
Cuestion.
,c- The 2istrict Forum will obtain a sample of the goods$ seal it$ authenticate it and refer the sample so
sealed to the Pappropriate la!orator% for an analysis or test$ whichever may be necessary$ with a view
to finding out whether such goods suffer from any defect.
The 2istrict Forum will remit the fees to the appropriate laboratory to enable it to carry out reCuired
analysis or test.
The laboratories supposed to report its findings to the 2istrict Forum within a period of fiftyfive
days. This period is e*tendible by the 2istrict Forum.
,d- @pon receiving laboratory+s report$ its copy will be forwarded by the 2istrict Forum to the opposite
party alongwith its own remarks.
,e- &n the event of any party disputing the correctness of the findings$ or the methods of analysis or test
adopted by the appropriate laboratory$ the 2istrict Forum shall reCuire the ob"ecting party to submit his
ob"ections in writing.
,f- The 2istrict Forum will give an opportunity of hearing to the ob"ecting party.
,g- The 2istrict Forum shall issue appropriate order after hearing the parties.
WHERE NO LABORATOR1 TEST IS RE9UIRED TO DETERMINE THE DEFECT IN GOODS
OR THE COMPLAINT RELATES TO SER2ICES
,a- Dn receiving the complaint$ the 2istrict Forum should refer a copy of the complaint to the opposite
party directing him to give his version of the case within a period of thirty days which can be e*tended
to forty five days.
,!- The opposite party on receipt of a complaint referred to him mayS
,i- admit the complaint
,ii- deny or dispute the allegations contained in the complaint$ or
,iii- omits or fails to respond within the time given by the 2istrict Forum.
,c- !here the opposite party admits the allegation$ the 2istrict Forum should decide the matter on the
basis of the merits of the case and the documents before it.
!here the opposite party denies or disputes the allegations made in the complaint$ the 2istrict Forum
will proceed to settle the dispute on the basis of evidence brought to its notice by both the parties.
!here the opposite party omits or fails to respond within the time given by the Forum$ the 2istrict
Forum will proceed to settle the dispute on the basis of evidence brought to its notice by the
complainant.
,d- The 2istrict Forum shall issue an appropriate order after hearing the parties and taking into account
available evidence.
Ghat is an appropriate la!orator% $nder the Act
#ection 6,3-,a- of the 'ct defines an appropriate laboratory as a laboratory or organisationS
,i- recognised by the 0entral 7overnmentH
,ii- recognised by a #tate 7overnment$ sub"ect to such guidelines as may be prescribed by the 0entral
7overnment in this behalfH or
,iii- any such laboratory or organisation established by or under any law for the time being in force$ which
is maintained$ financed or aided by the 0entral 7overnment or a #tate 7overnment for carrying out
analysis or test of any goods with a view to determining whether such goods suffer from any defect.
(ote : Bule 6' of the 0onsumer <rotection Bules$ 3845 provides the procedure to be followed by the
laboratories in order to get recognition from the #tates. !e have not discussed this procedure here since it is
beyond purview of our study.
$ROCE/RE TO ,E FOLLO1E ,2 T-E NATIONAL CO00ISSION 4SECTION ::8 #ection 66 of
the 'ct provides that the (ational 0ommission shall follow such procedure as prescribed by the 0entral
7overnment. The 0onsumer <rotection Bules$ 3845 framed by the 0entral 7overnment lay down the
procedure which is as follows :
,3- ' complaint containing the following particulars shall be presented by the complainant in person or by
his agent to the (ational 0ommission or be sent by registered post$ addressed to the (ational 0ommission :
,a- the name$ description and the address of the complainantH
,!- the name$ description and address of the opposite party or parties$ as the case may be$ so far as they
can be ascertainedH
,c- the facts relating to the complaint and when and where it aroseH
,d- documents in support of the allegations contained in the complaintH
,e- the relief which the complainant claims.
,6- The (ational 0ommission shall$ in disposal of any complaint before it$ as far as possible$ follow the
procedures laid down section 39 of the 'ct. ,discussed in para 99.=3-
,9- Dn the date of hearing$ it shall be obligatory on the parties or their agents to appear before the (ational
0ommission. !here the complainant or his agent fails to appear$ the (ational 0ommission may either
dismiss the complaint for default or decide it on merits. !here the opposite party or its agent fails to appear
on the date of hearing the (ational 0ommission may decide the complaint ex parte.
,=- The complaint shall be decided as far as possible within a period of three months from the date of notice
received by opposite party where complaint does not reCuire analysis or testing of commodities and within
five months if it reCuires analysis or testing of commodities.
,:- 'fter the proceedings$ the (ational 0ommission shall issue the orders accordingly
POWERS OF THE CONSUMER FORUMS HSECTIONS 1:(;), 1;(1) AND RULE 1?I
For the purpose of ad"udicating a consumer dispute$ section 39,=- has vested the 0onsumer Forums with
certain powers of a civil court. 'part from these powers$ the 0entral 7overnment has provided some
additional powers to them under Bule 3A of the 0onsumer <rotection Bules$ 3845. Finally section 3= of the
'ct has provided them with the power to issues orders.
$o!er# a3in to t>o#e of ci+il co"rt 4Section ')6;78 The Forums are vested with the 0ivil 0ourt powers
with respect to the following :
,a- summoning and enforcing the attendance of any defendant or witness and e*amining the witness on
oathH
,!- discovery and production of any document or other material ob"ect producible as evidenceH
,c- receiving of evidence on affidavitsH
,d- reCuisitioning of the report of the concerned analysis or test from the appropriate laboratory or from
any other relevant sourceH
,e- issuing of any commission for the e*amination of any witnessH and
,f- any other matter which may be prescribed.
Additional po!er# of t>e con#"mer for"m# 4R"le '*8 The (ational 0ommission$ the #tate 0ommission
and the 2istrict Forum have following additional powers :
,a- BeCuiring production of any books$ accounts$ documents$ or commodities from any person$
e*amining and retaining them.
,!- Dbtaining information reCuired for the purpose of the proceedings from any person.
,c- enter and search any premises and seize from such premises books$ papers$ documents$ commodities
reCuired for the purpose of proceedings under the 'ct.
$o!er to i##"e order 4Section ';6'78 &f$ after the proceedings$ the Forum is satisfied that the complainant
suffer from any defect in goods or deficiency in service$ it may issue an order to the opposite party directing
him to do one or more of the following things$ namely :S
,a- to remove the defect pointed out by the appropriate laboratory from the goods in CuestionH
,!- to replace the goods with new goods of similar description which shall be free from any defectH
,c- to return to the complainant the price$ or$ as the case may be$ the charges paid by the complainantH
,d- to pay such amount as may be awarded by it as compensation to the consumer for any loss or in"ury
suffered by the consumer due to the negligence of the opposite partyH
,e- to remove the defects or deficiencies in the services in CuestionH
,f- to discontinue the unfair trade practice or the restrictive trade practice or not to repeat itH
,g- not to offer the hazardous goods for saleH
,h- to withdraw the hazardous goods from being offered for saleH
,i- to provide for adeCuate costs to complainant.
Appeal# again#t order# )'ppeal+ is a legal instrumentality whereby a person not satisfied with the findings
of a court has an option to go to a higher court to present his case and seek "ustice. &n the conte*t of
0onsumer Forums
3. 'n appeal can be made with the #tate 0ommission against the order of the 2istrict Forum within 9A
days of the order which is e*tendable for further 3: days. L#ection 3:M
6. 'n appeal can be made with the (ational 0ommission against the order of the #tate 0ommission
within 9A days of the order or within such time as the (ational 0ommission allows. L#ection 38M
9. 'n appeal can be made with the #upreme 0ourt against the order of the (ational 0ommission within
9A days of the order or within such time as the #upreme 0ourt allows. L#ection 69M
Finality of order# !here no appeal has been preferred against the order made by the 2istrict Forum$ or
#tate 0ommission$ or the (ational 0ommission$ such order shall be final. L#ection 6=M
$enaltie# for non.compliance .very order made by the 2istrict Forum or #tate 0ommission$ or the
(ational 0ommission may be enforced in the same manner as if it were a decree of the court. L#ection 6:M
'll the persons the trader$ or complainant$ or the opposite party$ are supposed to comply with the orders.
!hen any such person fails or omits to comply with the order$ the 2istrict Forum$ or #tate 0ommission$ or
the (ational 0ommission$ as the case may be$ may punish him withS
imprisonment for a term ranging between one month and three years$ or
with fine ranging between Bs. 6$AAA and Bs. 3A$AAA$ or
with both.
INTELLECTUAL PROPERT1 RIGHTS
W&*$ "+ (*#$ 06 I#$44)$.*4 P'%/'$6 R"5&$+?
&ntellectual <roperty Bights ,&<Bs- are legal rights governing the use of creations of the human mind.
The recognition and protection of these rights is of recent origin. <atents$ designs and trade marks are
considered as industrial property.
C*$5%'"+ %! I#$44)$.*4 P'%/'$6 R"5&$+:
'ccording to Trade Belated aspects of &ntellectual <roperty Bights ,TB&<#-$ 'greement of !orld
Trade Drganization ,!TD-$ the intellectual property rights are K
1. C%/6'"5&$:
The sub"ectmatter of copyright is the literary$ dramatic and musical or artistic work$ a
cinematograph film and a sound recording. Literary work includes computer preogrammes$ tables and
complications including computer databases.
2. T'*, M*'C
There are two types of trade mark rights K one conferred by registration under the statute and the
other acCuired in relation to a trade mark$ trade name or get K up by actual use in relation to some product or
service. The rights conferred by registrations are confined in the use of the mark in relation to the actual
goods for which it is registered.
:. G%5'*/&")*4 I#,")*$"%#+:
7eographical indication in relation to goods means an indication which identifies such goods as
agricultural goods$ natural goods or manufactured goods as originating$ or manufactured in the territory of a
country$ or a region or locality in that territory$ where a given Cuality$ reputation or other characteristic of
such goods is essentially attributable to its geographical origin.
;. I#,.+$'"*4 D+"5#+:
&ndustrial design means only the features of shape$ configuration$ pattern$ ornament or composition
of lines or colours applied to any article whether in two dimensional or three dimensional or in both forms$
by any industrial process or means whether manual or mechanical.
<. P*$#$+:
The sub"ect matter of a patent right is an invention. 1e whose skill or labour produces the idea of a
new process$ instrument$ or manufacture has that idea as his own in law. 1e alone is entitled to use it and to
draw it the profit inherent in it.
DISTINGUISH BETWEEN PATENT, COP1RIGHT AND TRADEMAR3.
S.NO BASIS PATENT COP1RIGHT TRADEMAR3
1. Bight protected ' new invention to
manufacture the
product patented or
Driginal$ literary$ dramatic$
musical and artistic works$
cinematograph film and
To use a particular mark$
which may be a symbol$
word$ device applied to
use the process
patented.
records. articles of commerce to
indicate the
distinctiveness of goods.
2. Time period 6A years and in case of
food and drugs : or 5
years.
Life time plus :Ayears for
literary$ dramatic$ musical
and artistic works.
5 years and may be
renewed from time to
time.
:. !ho can
register
'ctual inventor or an
assignee of the right to
make an application or
legal representative of
either.
The author or publisher of$
or owner of or other person
interested in the copyright
in any work.
<roprietor of the
trademark and application
may be made in the name
of an individual$ partners
of a Firm$ 0orporation.
;. 0ommercial use 'ssigning rights or
licensing them to
industrialists for a
lump sum payment or
royalty basis.
%y assigning or licensing
the right to others on a
royalty or lump sum basis.
Licensing the right by
registration of the license
as a registered user.
<. Bemedy for
&nfringement
&n"unction$ 2amages$
'ccounts of profits.
0ivil$ 0riminal$
'dministrative.
&n"unction$ 2amages$
'ccounts of profits.
S)%/ %! I#$44)$.*4 P'%/'$6 R"5&$+:
The international character of different intellectual property rights is recognized in various
international conventions for the protection of such property rights.
'ccording to Trade Belated aspects of &ntellectual <roperty Bights ,TB&<#-$ 'greement of !orld
Trade Drganization ,!TD-$ the protection of &ntellectual <roperty provided by the following:
C%/6'"5&$ *#, R4*$, R"5&$+:
3. The @niversal 0opyright 0onvention.
6. The 7eneva 0onvention for the <rotection of procedures of <honograms against @nauthorized
2uplication of their <honograms$ 3853.
9. The 7eneva Treaty on &nternational Begistration of 'udio>isual !orks$ 3886.
=. !&<D copyright Treaty$ 388;.
:. !&<D performances and <honograms Treaty$ 388;.
T'*, M*'C+:
3. /adrid 'greement 0oncerning the &nternational Begistration of /arks$ 3858.
6. <rotocol Belating to the /adrid 'greement 0oncerning the &nternational Begistration of /arks$
3848.
9. 0ommon regulations under the /adrid 'greement 0oncerning the &nternational Begistration of
/arks and <rotocol Belating that 'greement.
=. The (ice 'greement 0oncerning the &nternational 0lassification of 7oods and #ervices for the
<urposes of Begistration of /arks$ 38:5.
:. The >ienna 'greement .stablished on &nternational 0lassification of the Figurative .lements of
/arks$ 3859.
G%5'*/&")*4 I#,")*$"%#+:
3. 'greement of /adrid for the Bepression of False or 2eceptive &ndications of #ource on 7oods$
38;5.
6. Lisbon 'greement for the <rotection of 'ppellations of Drigin and their &nternational Begistration$
3858.
I#,.+$'"*4 D+"5#+:
3. 1ague 'greement of &nternational 2eposit of &ndustrial 2esigns$ 38;A.
6. Locarno 'greement of .stablishing an &nternational 0lassification of &ndustrial 2esign$ 38;4.
P*$#$+:
3. <atent 0ooperation Treaty$ 385A.
6. %udapest Treaty on the &nternational Becognition of the 2eposit of /icroorganism$ 384A.
9. .urasian <atent 0onvention
=. #trasbourg 'greement of &nternational <atent 0lassification.
:. .uropean <atent 0onvention$ 3859.
;. 0onvention on %iological 2iversity.
I#$44)$.*4 P'%/'$6 R"5&$+:
3. The copyright 'ct$ 38:5 as amended in 3888.
6. The Trade /arks 'ct$ 3888.
9. The 7eographical &ndications of 7oods 'ct$ 3888.
=. The 2esigns 'ct$ 6AAA.
:. The <atents 'ct$ 385A as 'mended in 3888$ 6AA6 and 6AA:.
;. The <rotection of <lant >arieties and Farmer+s Bights 'ct$ 6AA3.
5. The %iological 2iversity 'ct$ 6AA6.
4. The #emiconductor &ntegrated 0ircuits Layout 2esign 'ct$ 6AAA.
WHAT IS INTELLECTUAL PROPERT1
&ntellectual property refers to creations of the mind: inventionsH literary and artistic worksH and symbols$
names and images used in commerce. &ntellectual property is divided into two categories:
I#,.+$'"*4 P'%/'$6 includes patents for inventions$ trademarks$ industrial designs and geographical
indications.
C%/6'"5&$ covers literary works ,such as novels$ poems and plays-$ films$ music$ artistic works ,e.g.$
drawings$ paintings$ photographs and sculptures- and architectural design. Bights related to copyright
include those of performing artists in their performances$ producers of phonograms in their recordings$ and
broadcasters in their radio and television programs.
WHAT ARE INTELLECTUAL PROPERT1 RIGHTS?
&ntellectual property rights are like any other property right. They allow creators$ or owners$ of patents$
trademarks or copyrighted works to benefit from their own work or investment in a creation. These rights
are outlined in 'rticle 65 of the @niversal 2eclaration of 1uman Bights$ which provides for the right to
benefit from the protection of moral and material interests resulting from authorship of scientific$ literary or
artistic productions. The importance of intellectual property was first recognized in the <aris 0onvention for
the <rotection of &ndustrial <roperty ,3449- and the %erne 0onvention for the <rotection of Literary and
'rtistic !orks ,344;-. %oth treaties are administered by the !orld &ntellectual <roperty Drganization
,!&<D-.
WH1 PROMOTE AND PROTECT INTELLECTUAL PROPERT1?
There are several compelling reasons. First$ the progress and wellbeing of humanity rest on its capacity to
create and invent new works in the areas of technology and culture. #econd$ the legal protection of new
creations encourages the commitment of additional resources for further innovation. Third$ the promotion
and protection of intellectual property spurs economic growth$ creates new "obs and industries$ and enhances
the Cuality and en"oyment of life.
'n efficient and eCuitable intellectual property system can help all countries to realize intellectual property+s
potential as a catalyst for economic development and social and cultural wellbeing. The intellectual
property system helps strike a balance between the interests of innovators and the public interest$ providing
an environment in which creativity and invention can flourish$ for the benefit of all.
WHAT IS A PATENT?
' patent is an e*clusive right granted for an invention K a product or process that provides a new way of
doing something$ or that offers a new technical solution to a problem. ' patent provides patent owners with
protection for their inventions.
<rotection is granted for a limited period$ generally 6A years.
WHAT 3IND OF PROTECTION DO PATENTS OFFER?
<atent protection means an invention cannot be commercially made$ used$ distributed or sold without the
patent owner+s consent. <atent rights are usually enforced in courts that$ in most systems$ hold the authority
to stop patent infringement. 0onversely$ a court can also declare a patent invalid upon a successful challenge
by a third party.
H%- "+ * /*$#$ 5'*#$,?
The first step in securing a patent is to file a patent application. The application generally contains the title of
the invention$ as well as an indication of its technical field. &t must include the background and a description
of the invention$ in clear language and enough detail that an individual with an average understanding of the
field could use or reproduce the invention. #uch descriptions are usually accompanied by visual materials K
drawings$ plans or diagrams K that describe the invention in greater detail. The application also contains
various claims$ that is$ information to help determine the e*tent of protection to be granted by the patent.
W&*$ C"#,+ %! "#7#$"%#+ )*# 0 /'%$)$,?
'n invention must$ in general$ fulfill the following conditions to be protected by a patent. &t must be of
practical useH it must show an element of novelty$ meaning some new characteristic that is not part of the
body of e*isting knowledge in its particular technical field. That body of e*isting knowledge is called prior
art. The invention must show an inventive step that could not be deduced by a person with average
knowledge of the technical field. &ts sub"ect matter must be accepted as patentable under law. &n many
countries$ scientific theories$ mathematical methods$ plant or animal varieties$ discoveries of natural
substances$ commercial methods or methods of medical treatment ,as opposed to medical products- are not
generally patentable.
WHO GRANTS PATENTS?
<atents are granted by national patent offices or by regional offices that carry out e*amination work for a
group of countries K for e*ample$ the .uropean <atent Dffice ,.<D- and the 'frican &ntellectual <roperty
Drganization ,D'<&-. @nder such regional systems$ an applicant reCuests protection for an invention in one
or more countries$ and each country decides whether to offer patent protection within its borders. The
!&<Dadministered. <atent 0ooperation Treaty ,<0T- provides for the filing of a single international patent
application that has the same effect as national applications filed in the designated countries. 'n applicant
seeking protection may file one application and reCuest protection in as many signatory states as needed.
WHAT IS A TRADEMAR3?
' trademark is a distinctive sign that identifies certain goods or services produced or provided by an
individual or a company. &ts origin dates back to ancient times when craftsmen reproduced their signatures$
or marks$ on their artistic works or products of a functional or practical nature. Dver the years$ these
marks have
evolved into today+s system of trademark registration and protection. The system helps consumers to
identify and purchase a product or service based on whether its specific characteristics and Cuality K as
indicated by its uniCue trademark K meet their needs.
!hat is a trademarkE
WHAT DO TRADEMAR3S DO?
Trademark protection ensures thatthe owners of marks have the e*clusive right to use them to identify goods
or services$ or to authorize others to use them in return for payment. The period of protection varies$ but a
trademark can be renewed indefinitely upon payment of the corresponding fees. Trademark protection is
legally enforced by courts that$ in most systems$ have the authority to stop trademark infringement. &n a
larger sense$ trademarks promote initiative and enterprise worldwide by rewarding their owners with
recognition and financial profit. Trademark protection also hinders the efforts of unfair competitors$ such as
counterfeiters$ to use similar
distinctive signs to market inferior or different products or services. The system enables people with skill
and enterprise to produce and market goods and services in the fairest possible conditions$ thereby
facilitating international trade.
WHAT 3INDS OF TRADEMAR3S CAN BE REGISTERED?
Trademarks may be one or a combination of words$ letters and numerals. They may consist of drawings$
symbols or threedimensional signs$ such as the shape and packaging of goods. &n some countries$ non
traditional marks may be registered for distinguishing features such as holograms$ motion$ color and non
visible signs ,sound$ smell or taste-. &n addition to identifying the commercial source of goods or services$
several other trademark categories also e*ist. 0ollective marks are owned by an association whose members
use them to indicate products with a certain level of Cuality and who agree to adhere to specific
reCuirements
set by the association. #uch associations might represent$ for e*ample$ accountants$ engineers or architects.
0ertification marks are given for compliance with defined standards but are not confined to any
membership.
They may be granted to anyone who can certify that their products meet certain established standards. #ome
e*amples of recognized certification are the internationally accepted &#D 8AAA Cuality standards and
.colabels for products with reduced environmental impact.
HOW IS A TRADEMAR3 REGISTERED?
First$ an application for registration of a trademark must be filed with the appropriate national or regional
trademark office. The application must contain a clear reproduction of the sign filed for registration$
including any colors$ forms or threedimensional features. &t must also contain a list of the goods or services
to which
the sign would apply. The sign must fulfill certain conditions in order to be protected as a trademark or other
type of mark.
&t must be distinctive$ so that consumers can distinguish it from trademarks identifying other products$ as
well as identify a particular product with it. &t must neither mislead nor deceive customers nor violate public
order
or morality. Finally$ the rights applied for cannot be the same as$ or similar to$ rights already granted to
another trademark owner. This may be determined through search and e*amination by national offices$ or by
the opposition of third parties who claim to have similar or identical rights.
WHAT IS AN INDUSTRIAL DESIGN?
'n industrial design refers to the ornamental or aesthetic aspects of an article. ' design may consist of three
dimensional features$ such as the shape or surface of an article$ or twodimensional features$ such as
patterns$ lines or color. &ndustrial designs are applied to a wide variety of industrial products and handicrafts:
from technical and medical instruments to watches$ "ewelry and other lu*ury itemsH from house wares and
electrical appliances to vehicles and architectural structuresH from te*tile designs to leisure goods. To be
protected under most national laws$ an industrial design must be new or original and nonfunctional. This
means that an industrial design is primarily of an aesthetic nature$ and any technical features of the article to
which it is applied are not protected by the design registration. 1owever$ those features could be protected
by a patent.
!hat is an &ndustrial 2esignE
WH1 PROTECT INDUSTRIAL DESIGNS?
&ndustrial designs are what make an article attractive and appealingH hence$ they add to the commercial value
of a product and increase its marketability. !hen an industrial design is protected$ the owner K the person or
entity that has registered the design K is assured an e*clusive right and protection against unauthorized
copying or imitation of the design by third parties. This helps to ensure a fair return on investment. 'n
effective system of protection also benefits consumers and the public at large$by promoting fair competition
and honest trade practices$ encouraging creativity and promoting more aesthetically pleasing products.
<rotecting industrial designs helps to promote economic development by encouraging creativity in the
industrial and manufacturing sectors$ as well as in traditional arts and crafts. 2esigns contribute to the
e*pansion of commercial activity and the e*port of national products. &ndustrial designs can be relatively
simple and ine*pensive to develop and protect. They are reasonably accessible to small and mediumsized
enterprises as well as to individual artists and crafts makers$ in both developed and developing countries.
WHAT IS A GEOGRAPHICAL INDICATION?
' geographical indication is a sign used on goods that have a specific geographical origin and possess
Cualities or a reputation due to that place of origin. /ost commonly$ a geographical indication consists of
the name of the place of origin of the goods. 'gricultural products typically have Cualities that derive from
their place of production and are influenced by specific local geographical factors$ such as climate and soil.
!hether a sign functions as a geographical indication is a matter of national law and consumer perception.
7eographical indications may e used for a wide variety of agricultural products$ such as$ for e*ample$
Tuscany for olive oil produced in a specific area of &taly$ or BoCuefort for cheese produced in that
region of France. The use of geographical indications is not limited to agricultural products. They may also
highlight specific Cualities of a product that are due to human factors found in the product+s place of origin$
such as specific manufacturing skills and traditions. The place of origin may be a village or town$ a region or
a country. 'n e*ample of the latter is #witzerland or #wiss$ perceived as a geographical indication in
many countries for products made in #witzerland and$ in particular$ for watches.
WH1 DO GEOGRAPHICAL INDICATIONS NEED PROTECTION?
7eographical indications are understood by consumers to denote the origin and Cuality of products. /any of
them have acCuired valuable reputations which$ if not adeCuately protected$ may be misrepresented by
commercial operators. False use of geographical indications by unauthorized parties$ for e*ample
2ar"eeling for tea that was not grown in the tea gardens of 2ar"eeling$ is detrimental to consumers and
legitimate
producers. The former are deceived into believing they are buying a genuine product with specific Cualities
and characteristics$ and the latter are deprived of valuable business and suffer damage to the established
reputation of their products.
WHAT IS THE DIFFERENCE BETWEEN A GEOGRAPHICAL INDICATION AND A
TRADEMAR3?
' trademark is a sign used by a company to distinguish its goods and services from those produced by
others. &t gives its owner the right to prevent others from using the trademark. ' geographical indication
guarantees to consumers that a product was produced in a certain place and has certain characteristics that
are due to that
place of production. &t may be used by all producers who make products that share certain Cualities in the
place designated by a geographical indication.
HOW ARE GEOGRAPHICAL INDICATIONS PROTECTED?
7eographical indications are protected in accordance with national laws and under a wide range of concepts$
such as laws against unfair competition$ consumer protection laws$ laws for the protection of certification
marks or special laws for the protection of geographical indications or appellations of origin. &n essence$
unauthorized parties may not use geographical indications if such use is likely to mislead the public as to the
true origin of the product. 'pplicable sanctions range from court in"unctions preventing unauthorized use to
the payment of damages and fines or$ in serious cases$ imprisonment.
WHAT ARE COP1RIGHT AND RELATED RIGHTS?
0opyright laws grant authors$ artists and other creators protection for their literary and artistic creations$
generally referred to asworks. ' closely associated field is related rights or rights related to copyright
that encompass rights similar or identical to those of copyright$ although sometimes more limited and of
shorter duration. The beneficiaries of related rights are: performers ,such as actors and musicians- in their
performancesH producers of phonograms ,for e*ample$ compact discs- in their sound recordingsH and
broadcasting organizations in their radio and television programs. !orks covered by copyright include$ but
are not limited to: novels$ poems$ plays$ reference works$ newspapers$ advertisements$ computerprograms$
databases$ films$ musical compositions$ choreography$ paintings$ drawings$ photographs$ sculpture$
architecture$ maps and technical drawings.
WHAT RIGHTS DO COP1RIGHT AND RELATED RIGHTS PRO2IDE?
The creators of works protected by copyright$ and their heirs and successors ,generally referred to as right
holders-$ have certain basic rights under copyright law. They hold the e*clusive right to use or authorize
others to use the work on agreed terms. The right holder,s- of a work can authorize or prohibit: its
reproduction in all forms$ including print form and sound recordingH its public performance and
communication to the publicH its broadcastingH its translation into other languagesH and its adaptation$ such as
from a novel to a screenplay for a film. #imilar rights of$ among others$ fi*ation ,recording- and
reproduction are granted under related rights. /any types of works protected under the laws of copyright
and related rights reCuire mass distribution$ communication and financial investment for their successful
dissemination ,for e*ample$ publications$ sound recordings and films-. 1ence$ creators often transfer these
rights to companies better able to develop and market the works$ in return for compensation in the form of
payments andTor royalties ,compensation based on a percentage of revenues generated by the work-. The
economic rights relating to copyright are of limited duration K as provided for in the relevant !&<D treaties
K beginning with the creation and fi*ation of the work$ and lasting for not less than :A years after the
creator+s death. (ational laws may establish longer terms of protection. This term of protection enables both
creators and their heirs and successors to benefit financially for a reasonable period of time. Belated rights
en"oy shorter terms$ normally :A years after the performance$ recording or broadcast has taken place.
0opyright and the protection of performers also include moral rights$ meaning the right to claim authorship
of a work$ and the right to oppose changes to the work that could harm the creator+s reputation. Bights
provided for under copyright and related rights laws can be enforced by right holders through a variety of
methods and for a$ including civil action suits$ administrative remedies and criminal prosecution.
&n"unctions$ orders reCuiring destruction of infringing items$ inspection orders$ among others$ are used to
enforce these rights.
WHAT ARE THE BENEFITS OF PROTECTING COP1RIGHT AND RELATED RIGHTS?
0opyright and related rights protection is an essential component in fostering human creativity and
innovation. 7iving authors$ artists and creators incentives in the form of recognition and fair economic
reward increases their activity and output and can also enhance the results. %y ensuring the e*istence and
enforceability of rights$ individuals and companies can more easily invest in the creation$ development and
global dissemination of their works. This$ in turn$ helps to increase access to and enhance the en"oyment of
culture$ knowledge and entertainment the world over$ and also stimulates economic and social development.
PATENT ACT OF 1>7?
D!"# P*$#$.
' patent is a form of industrial or intellectual property. ' patent is a right granted to a person who
has invented a new and useful article or an improvement of an e*isting article or a new process of making an
article. &t consists of an e*clusive right to manufacture the new article invented or manufacture an article
according to the invented process for a limited period. 'fter the e*piry of the duration of patent$ anybody
can make use of the invention.

S$*$ $& %0G)$"7+ %! P*$#$ 4*-?
The ob"ect of granting a patent is to encourage and develops new technology and industry. 'n
inventor may disclose the new invention only if he is rewarded otherwise he may work it secretly. &n
consideration of the grant of monopoly for a limited period$ the inventor disclosed the details of the new
invention and the method of working it so that after the e*piry of monopoly period others can use the
invention or improve upon it.
Thus$ the theory upon which the patent system is based is that the opportunity of acCuiring e*clusive
rights in an invention stimulates technical progress in four ways:
&t encourages research and invention.
&t includes an inventor to disclose his discoveries instead of keeping them as a trade secret.
&t offers a reward for the e*penses of developing inventions to the stage at which they are
commercially practicable.
&t provides an inducement to invest capital in new lines of production$ which may not appear
profitable if many competing producers embarked on them simultaneously.
T1PES OF PATENT APPLICATIONS
a- Drdinary 'pplication
b- 'pplication for <atent of 'ddition ,granted for &mprovement or /odification of the already
patented invention$ for an une*pired term of the main patent-.
c- 2ivisional 'pplication ,in case of plurality of inventions disclosed in the main application-.
d- 0onvention application $ claiming priority date on the basis of filing in 0onvention 0ountries.
e- (ational <hase 'pplication under <0T.
E8/4*"# *0%.$ P*$#$*04 I#7#$"%#?
'n )invention+ means a new product or process involving an inventive step and capable of industrial
application Lsec. 6,3- ,"-M.
)'n inventive step means a feature of an invention that involves technical advance as compared to
the e*isting knowledge or having economic significance or both and that makes the invention not obvious to
a person skilled in the art Lsec. 6,3- ,"a-M.
(ew invention means any invention or technology which has not been participated by publication
in any document or used in the country or elsewhere in the world before the date of filing of patent
application with complete specification i.e. the sub"ect matter has not fallen in public domain or that it does
not form part of the state of the art Lsec. 6,3- ,3-M.
The three essential reCuirements of a patentable invention are novelty$ inventiveness and utility.
I#7#$"%#+ N%$ P*$#$*04
The following inventions are not patentable.
'n invention which is frivolous ,playfully- or which claims anything obvious or contrary to well
established natural laws.
'n invention the primary or intended use or commercial e*ploitation of which could be contrary
public order or morality or which causes serious pre"udice ,in"ustice- to human$ animal or plant life
or health or to the environment.
The mere discovery of a scientific principle or the formulation of an abstract theory or discovery of
any living thing or nonliving thing substances occurring in nature.
The mere arrangement or rearrangement or duplication of known devices each functioning
independently of one another in a known way.
' method of agriculture or horticulture.
any process for the medicinal$ surgical$ curative$ prophylactic$diagnostic$ therapeutic or other
treatment of human beings or any process for a similar treatment of animals to render them free of
disease or to increase their economic value or that of their products.
plants and animals in whole or any part thereof other than microorganisms but including seeds$
varieties and species and essentially biological processes for production or propagation of plants and
animalsH
a mathematical or business method or a computer programme per se or algorithmsH
a literary$ dramatic$ musical or artistic work or any other aesthetic creation whatsoever including
cinematographic works and television productionsH
a mere scheme or rule or method of performing mental act or method of playing
gameH
a presentation of information
topography of integrated circuitsH
'n invention which in effect$ is traditional knowledge or which is an aggregation or duplication of
known properties of traditionally known component or components.
&nventions relating to atomic energy and the inventions pre"udicial to the interest of security of
&ndia.
W&*$ *' $& /'%),.'+ !%' G'*#$ %! P'%,.)$ *#, P'%)++ P*$#$?
The <atent 'ct$ 385A$ has made a distinction between a product patent and a process patent. The
definition of an invention is )' new product or process involving an inventive step and capable of industrial
application+. Thus$ an invention be either a process or of a product.
P'%),.'+:F
W&% M*6 A//46:
'n application for a patent for an invention may be made by any person claiming to be the true and
first inventor of the invention or being the assignee of the person claiming to be true and first inventor$ or by
the legal representative of any deceased person who immediately before his death was entitled to make such
an application either alone or "ointly with any other person Lsec. ;M.
F%'( %! A//4")*$"%#:
.very application for a patent shall be for one invention only and shall be made in the prescribed
form and filed in the patent office. The filing date of such an application and its complete specification
processed by the patent office as designated or elected office shall be the international filing date accorded
under the <atent 0ooperative Treaty.
I#!%'(*$"%# R5*',"#5 F%'"5# A//4")*$"%#+:
!here an applicant for a patent is prosecuting either alone or "ointly with any other person an
application for a patent in any country outside &ndia in respect of the same or substantially the same
invention$ or where to his knowledge such an application is being prosecuted by some person through whom
he claims or by some person deriving title from him$ he shall file along with his application or subseCuently
within the prescribed period as the controller.
C%#$#$+ %! S/)"!")*$"%#:
.very specification$ whether provisional or complete$ shall describe the invention and shall begin
with a title sufficiently indicating the sub"ect matter to which the invention relates.
P'"%'"$6 D*$+ %! C4*"(+ %! * C%(/4$ S/)"!")*$"%#:
There shall be a priority date of each claim of a complete specification. !here a complete
specification is filed in pursuance of a single application accompanied by a provisional specification.
P.04")*$"%# %! A//4")*$"%#+:
The applicant may$ in the prescribed manner$ reCuest the 0ontroller to publish his application at any
time before the e*piry of the period prescribed and the controller shall publish such application as
soon as possible.
.very application for a patent shall$ on the e*piry of the period specified as above$ be published$
e*cept in cases where the application
&n which secrecy direction is imposed under section 9:H or
1as been withdrawn three months prior to the period specified as above.
&n case a secrecy direction has been given in respect of an application under section 9:$ then it shall
be published after the e*piry of the period prescribed under subsection ,3-.
The patent office$ may$ on payment of such fee as may be prescribed$ make the specification and
drawings$ if any$ of such application available to the public.
R@.+$ !%' 8*("#*$"%#:
(o application for a patent shall be e*amined unless the applicant or any other interested person
makes a reCuest in the prescribed manner for such e*amination within the prescribed period.
EJPLAIN THE RIGHTS OF PATENTEE?
#ub"ect to the other provisions contained in this act and the conditions specified in section =5$ a
patent granted under this act shall confer upon the <atentee K
The person in whose favour a patent is granted is called a patentee.
1e can deal with the patent right like any other property. 1e can sell it to another person.
1e can grant a license to use the patented property to others.
1e can also assign such property to another person.
The patent holder has the e*clusive right to make$ use$ e*ercise$ sell or distribute the invention in
&ndia.
'ny use without license or other authorization from the patent holder$ is an infringement. The patent
holder can move the court to restrain the violator and claim damages.
EJPLAIN THE INFRINGEMENT OF PATENTS AND ITS REMEDIES?
I#!'"#5(#$ P*$#$+:
The infringement of patents means the violation of the monopoly rights conferred by the grant.
Bights of the patent holder are the e*clusive rights to make$ use$ e*ercise$ sell or distribute the articles
manufactured in accord with the patent or manufactured in accordance with the patented process ,section
3A9-.
J.'"+,")$"%#:
(o suit for a declaration as to noninfringement or for any relief or for infringement of a patent shall
be instituted in any court inferior to a district court having "urisdiction to try the suit. !here a counterclaim
for revocation of the patent is made by the defendant$ the suit$ along with the counterclaim$ shall be
transferred to the 1igh court for decision ,section 3A=-.
B.',# %! /'%%! "# )*+ %! +."$ )%#)'#"#5 "#!'"#5(#$:
&n any suit for infringement of a patent$ where the sub"ect matter of patent is a process for obtaining a
product$ the 0ourt may direct the defendant to prove that the process used by him to obtain the product$
identical to the product of the patented process.
R4"! "# +."$ !%' "#!'"#5(#$:
The relief$ which a court may grant in any suit for infringement includes an in"unction and$ at the
option of the plaintiff$ either damages or an account of profits ,section 3A4-.
S)"#$"!") *,7"+%'+:
&n any suit for infringement$ the court may$ at anytime$ appoint an independent scientific advisor to
assist the court or to inCuire and report upon any such Cuestion of fact$ or of opinion as it may formulate for
the purpose. The remuneration of the scientific advisor shall be fi*ed by the court and shall include the costs
of making a report ,section 33:-.
R(,"+:
&n order to create an effective deterrent to infringement$ the "udicial authorities shall have authority
to order that goods that they have found to be infringing be$ without compensation of any sort$ disposed of
outside the channels of commerce in such a manner as to avoid any harm caused to the right holder or$
unless this would be contrary to e*isting constitutional reCuirements$ destroyed.
The "udicial authorities shall also have the authority to order that materials and implements the
predominant use of which has been in the creation of the infringing goods be$ without compensation of any
sort$ disposed of outside the channels of commerce in such a manner as to minimize the risks of further
infringements. &n considering such reCuests$ the need for proportionality between the seriousness of the
infringement and the remedies ordered as well as the interests of thirdparties shall be taken into account.
IT ACT 2???,2??2 AND 2??8
&n the present decade if &ndia made news internationally$ in technology sectors$ it has been mainly for
the contracts that it grabbed for performing data processing activities from offshore. &nitially this started
with simple transcription centers where voice recorded details were converted into digital data. %ut lately$
this has transformed into knowledge processing centers where complete research is done on various domains
which include medicine$ law$ technology and even media.
.ven within the country there has been increasing use of computers. %e it 'irline or train reservation
system or the initiative towards online collection of direct and indirect ta*es$ there is great amount of data
about individuals and businesses which is available in digital format. Dne of the main concerns regarding
the e*istence and use of data on computers has been lack of adeCuate security legislation in the country. &n
year 6AAA &ndia did enact &T 'ct and made first attempt at trying to define use and misuse of digital medium
in the country.
'nalyzing the provisions of &T 'ct$ 6AAA and its recent amendments towards combating cyber crime
is the basic theme of this paper. !hile attempting to do this it first analyses the current trends in cyber crime
and its ramifications. #econd it analyses the needs of legislation and current provisions in the &T 'ct. Third$
this paper discusses similar provisions elsewhere in the world and attempts to draw parallels in e*isting laws
within the country. Finally it sums up the current provisions with suggested recommendations for a possible
safe and secure cyber world.
@nited nations 0ommission on &nternational Trade Law in 388; framed /odel Law on .lectronic
0ommerce.The @nited (ations 7eneral 'ssembly by resolution 'TB.#T:3T3;6$ dated the 9A Uanuary 3885
adopted this /odel law. This resolution recommended that all #tates give favorable consideration to the said
/odel Law when they enact or revise their laws$ in view of the need for uniformity of the law applicable to
alternatives to paperbased methods of communication and storage of information.
The /inistry of 0ommerce 7overnment of &ndia created the first draft of the legislation following
these guidelines termed as N. 0ommerce 'ct 3884N. #ince later a separate ministry for &nformation
technology came into being$ the draft was taken over by the new ministry which redrafted the legislation as
N&nformation Technology %ill 3888N. This draft was placed in the <arliament in 2ecember 3888 and passed
in /ay 6AAA. 'fter the assent of the <resident on Uune 8$ 6AAA$ the act was finally notified with effect from
Dctober 35$ 6AAA vide notification number 7.#.B 544,.-. <ronouncement passing the legislation also clearly
indicated the emphasis behind passing the act
) 'n 'ct to provide legal recognition for transactions carried out by means of electronic data
interchange and other means of electronic communication$ commonly referred to as Nelectronic commerceN$
which involve the use of alternatives to paperbased methods of communication and storage of information$
to facilitate electronic filing of documents with the 7overnment agencies and further to amend the &ndian
<enal 0ode$ the &ndian .vidence 'ct$ 3456$ the %ankersO %ooks .vidence 'ct$ 3483 and the Beserve %ank
of &ndia 'ct$ 389= and for matters connected therewith or incidental thereto.+ 0learly$ most sections
addressed the need of issuance of digital certificates and management of these certificates. 0yber crime as a
sub"ect was not looked into at depth. There were only passing references to acts of cyber crime without
mentioning the crime specifically. Therefore since the 'ct was passed there had been increasing demand to
address increasing events of cyber crime.
C>ronology of E+ent#
.ver since the 'ct came into being there were series of demands for bringing about changes that will
make sure that the 'ct provided for curbing the menace of cyber crime. &ssues of data leakage and personal
privacy also started making news. These demands for change were further strengthened by the %<D industry
in &ndia which had to produce credentials of data safety and privacy in &ndia to bid for international pro"ects
which were being outsourced out of western countries.
' ma"or amendment was made to the 'ct with effect from ; February 6AA9 conseCuent to the
passage of a related legislation called (egotiable &nstruments 'mendment 'ct 6AA6. The amendment to
(egotiable &nstruments 'ct$ 6AA6 for the first time recognized a cheCue in electronic form. These changes
notwithstanding$ &ndian government realizing the changing terrain of online interactions$ formed an e*pert
committee under /inistry of &T to suggest amendments to act to keep it relevant. /ain reasons for looking
into changes in the 'ct were
,a- sub"ect matter being information technology which has a accelerated pace of development
,b- intensive approach employed in it as opposed to a general framework to regulate information technology
The committee pointing out several lacuna+s in the enactment proposed amendments to it in the
report it tendered to the ministry of information technology. The result was the &nformation Technology
'mendment %ill$ 6AA; based on the report submitted by the e*pert committee.
2uring the same time in order to provide for protection of data leakage and personal privacy a
<ersonal 2ata <rotection %ill was introduced in Ba"ya #abha in 6AA;. This bill$ however$ remains to be
passed. The &nformation technology 'ct 6AAA amendment %ill 6AA; has since been passed by the &ndian
<arliament on 2ecember 69$ 6AA4.
IT A)$ /'%7"+"%#+ *#, A(#,(#$+
IT Act :***
's has been discussed earlier the &T 'ct 6AAA was mainly to ensure legal recognition of e commerce within
&ndia. 2ue to this most provisions are mainly concerned with establishing digital certification processes
within the country. 0yber crime as a term was not defined in the act. &t only delved with few instances of
computer related crime. These acts as defined in 0hapter F& of the 'ct are
a. &llegal access$ introduction of virus$ denial of services$ causing damage and manipulating computer
accounts ,#ection =9-
b. Tampering$ destroying and concealing computer code ,#ection ;:-
c. 'cts of hacking leading to wrongful loss or damage ,#ection ;;-
d. 'cts related to publishing$ transmission or causing <ublication of obsceneT lascivious in nature ,section
;5- 'ct of causing denial of service$ introduction of virus etc as defined in section =9 only amounts to
payment of damages which could be upto one crore. <unishment in section ;: and ;; is three years or fine
up to two lakh rupees or both. For section ;5 the first time offenders can be punished up to : years with fine
up to one lakhs of rupees. #ubseCuent offence can lead to ten years of punishment and fine up to two lakhs
of rupees.
IT Act Amendment :**A
&T 'ct 'mendment which came into force after <residential assent in Feb 6AA8 has following salient
features
L"*0"4"$6 %! 0%,6 )%'/%'*$ $%-*',+ S#+"$"7 P'+%#*4 D*$*
(ew amendment was brought in changes in section =9 of &T 'ct 6AAA in which for the first time any body
corporate which deals with sensitive personal information does not have adeCuate controls resulting in
wrongful loss or wrongful gain to any person is liable to pay damages to that person to the tune of five
crores.
I#$'%,.)$"%# %! 7"'.+, (*#"/.4*$"#5 *))%.#$+, ,#"*4 %! +'7")+ $) (*, /.#"+&*04
#ection ;; has been amended to include offences punishable as per section =9 which has also been amended
to include offences as listed aboveH punishment may lead to imprisonment which may e*tend to three years
or with fine which may e*tend to five lakh rupees or with both. This is a change from earlier position where
introduction of virus$ manipulating some ones account has been made punishable with imprisonment for the
first time.
P&"+&"#5 *#, S/*(
!hile this has not been mentioned specifically but this can be interpreted in the provisions mentioned here
in section ;; '. Through this section sending of menacing$ annoying messages and also misleading
information about the origin of the message has become punishable with imprisonment up to three years and
fine
S$%4# C%(/.$' '+%.') %' )%((.#")*$"%# ,7")
(ewly added #ection ;;% has been introduced to tackle with acts of dishonestly receiving and retaining any
stolen computer resource. This has also been made punishable with three years or fine of one lakh rupees or
both.
M"+.+ %! D"5"$*4 S"5#*$.'
#ection ;;0. 2ishonest use of somebody else+s digital signature has been made punishable with
imprisonment which may e*tend to three years and shall also be liable to fine with may e*tend to rupees one
lakh.
C&*$"#5
0heating using computer resource has been made punished with imprisonment of either description for a
term which may e*tend to three years and shall also be liable to fine which may e*tend to one lakh rupee
,section ;;2-
C60' $''%'"+(
The newly introduced section ;;F talks about acts of cyber terror which threatens the unity$ integrity or
sovereignty of &ndia or strike terror in the people or any section of the people include
a. 2enial of service of resources in use by nation
b. 'ttempting to penetrate or access a computer resource without authorization or e*ceeding authorized
access
c. &ntroducing or causing to introduce any computer contaminant likely to cause death or in"uries to person
or damage to or destruction of property or disrupts or knowing that it is likely to cause damage or disruption
of supplies or services essential to the life of the community or
d. knowingly or intentionally penetrates or accesses a computer resource without authorisation or e*ceeding
authorised access$ and by means of such conduct obtains access to information$ data or computer database
that is restriced for reasons for the security of the #tate or foreign relations$ or any restrictued information$
data or computer database$ with reasons to believe that such information$ data or computer database so
obtained may be used to cause or likely to cause in"ury to the interests of the sovereignty and integrity of
&ndia$ the security of the #tate$ friendly relations with foreign #tates$ public order$ decency or morality$ or in
relation to contempt of court$ defamation or incitement to an offence$ or to the advantage of any foreign
nation$ group of individuals or otherwise$ commits the offence of cyber terrorism. These acts have been
made punishable with &mprisonment which may e*tend to imprisonment for life
C&"4, P%'#%5'*/&6
(ewly introduced section ;5 % attempts to address the issue of child pornography. Through this section it
has made the publication or transmission of material in any electronic form which depicts children engaged
in se*ually e*plicit act or conduct$ any one who creates$ facilitates or records these acts and images
punishable with imprisonment of five years and fine which may e*tend up to ten lakhs in first offence and
seven years and fine of ten lakhs on subseCuent offence.
I#$'(,"*'6B+ 4"*0"4"$6
&ntermediaries have been made liable to retain any information in the format that 0entral government
prescribes. ,#ections ;50- and are punishable for violation with a punishment of imprisonment of 9 years
and fine. &n case of any act which affects national sovereignty intermediaries are liable to seven years
,#ection ;8,=--
S.'7"44*#), I#$')/$"%# *#, M%#"$%'"#5
&n order to compact cyber terrorism the government has further armed itself with drastic powers #ections ;8
of &T 'ct 6AAA amended enhances the scope from the 6AAA version to include interception and monitoring.
This has been a ma"or change in the section which also empowers government not only to monitor any
traffic but also block any site through any intermediary. 'ny failure on part of the intermediary is punishable
by seven years and also fine ,#ection ;8,=--. .arlier the provision did not mention any fine.
C%5#"P*#) %! )*++
'll cases which entail punishment of three years or more have been made cognizable. Dffences with three
years punishment have also been made bailable ,#ection 55%-. This change though welcome will make sure
most cases falling under &T 'ct will e bailable with sole e*ception of 0yber terrorism cases$ cases related to
child pornography and violations by intermediaries in some cases.
I#7+$"5*$"%# %! O!!#)+
Dne ma"or change has been inclusion of &nspectors as investigating officers for offences defined in this act
,section 54-. .arlier these investigations were being done only by an officer of the rank of 2eputy
#uperintendent of <olice which was a serious limitation mainly because number of officers in this rank is
limited. !ith this change one can look forward to more cases being filed and investigated by police.
M*G%' D"4.$"%#+
Se="ally e=plicit content
(ewly introduced section ;; . talks about acts of intentionally or knowingly captures$ publishes or
transmits the image of a private area of any person without his or her consent$ under circumstances violating
the privacy of that person$ shall be punished with imprisonment which may e*tend to three years or with
fine not e*ceeding two lakh rupees$ or with both. &n fact the earlier section ;5 of &T 'ct did mention )any
material which is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave..+
and was punishable for first offence with five years of imprisonment and fine of one lakh rupees. This
change has made the provision lenient and open to misinterpretation.
Compliance !it> order# of Controller
#ection ;4,6- which earlier made failure to comply with the direction of controller punishable with three
years of imprisonment or fine of two lacks or both now has been reduced to two years punishment or fine of
one lakh of rupees or both.
W&# ,", $& A)$ )%( "#$% !!)$?
&t came into effect on 35.3A.6AAA.
W&*$ "+ $& #)++"$6 !%' +.)& * 4*-?
#ociety is becoming increasingly technologyoriented. (othing moves without the aid of computers and
telecommunications$ these days. 's part of the (ational &nformation Technology <olicy ,(&T<-$ the
7overnment wants to deal with the citizens electronically. Lot of developments are taking place in regard to
.0ommerce and . %usiness in &ndia. To avoid any legal complications or litigations in such financial
transactions$ the 7overnment had felt the need for 0yber Laws. %anking is going to change a lot with the
advent of this 'ct. &t has ushered in a lot of transformation in %anking.
W&*$ *' $& *'*+ $% -&")& $&"+ A)$ ,%+ #%$ *//46?
This 'ct does not apply to a negotiable instrument
<owerofattorney
' trust
' will
' mortgage deed
'ny documentTtransaction as may be notified by the 0entral 7overnment
W&*$ *' $& (*"# !*$.'+ %! $&"+ A)$?
%ecause of this 'ct$ electronic records like$ floppies$ compact discs$ microfilms$ magnetic films$
hard disk or any such electronic devices$ can be produced in a court of law ase v i de n ce. From now
onwards$ any evidence need not be in a typewritten$ handwritten or printed paper it can be in an electronic
form. !ith the advent of this 'ct$ any document or record or information can be retained in the electronic
form. (ow this 'ct has come into effect$ an electronic record can be affi*ed with a 2igital #ignature. 1eavy
penalty can be imposed for those indulging in computer crimes and hacking.
&f any person transmits obscene material in an electronic form$ heTshe can be punishable with
imprisonment andTor heavy penalty.
W&*$ *' $& A)$+ *(#,, *+ /*'$ %! $&"+ IT A)$?
&ndian <enal 0ode
&ndian .vidence 'ct
%ankers+ %ook .vidence 'ct and
Beserve %ank of &ndia 'ct
DIGITAL SIGNATURE
W&*$ "+ D"5"$*4 S"5#*$.'? H%- "+ "$ )'*$, *#, .+,?
'ccording to #ection L6 ,3- ,p-M 2igital #ignature means authentication of any electronic record by a
subscriber by means of an electronic method or procedure in accordance with the provisions of sce.9.
C'*$"%# %! D"5"$*4 S"5#*$.':
The 2igital #ignature is created in two distinct stages:
S$*5 N I
The .lectronic Becord is converted into a /essage 2igest$ using a mathematical function known as
1ash Function.
This function digitally freezes the .lectronic Becord$ to ensure integrity of the contents of intended
communication contained in the electronic record.
'ny tampering with the contents of electronic record will immediately invalidate the 2igital
#ignature.
S$*5 N II
The identity of the person affi*ing the 2igital #ignature is authenticated through the use of a private
key.
The private key attached itself to the /essage 2igest$ and can be verified by any outsider who has
the public key corresponding to such private key.
This will enable the outsider to verify whether the electronic record is retained intact$ or has been
tampered with since it was so fi*ed with the digital signature.
&t will also enable a person who has a public key$ to identify the originate of the message.
L"+$ %.$ $& 45*4 ')%5#"$"%# 5'*#$, $% 4)$'%#") ')%',+ *#, D"5"$*4 S"5#*$.'?
E4)$'%#") R)%',+ H+). ;I:
!here any law reCuires that any information or matter shall be in writing or typewritten or printed
from$ then such reCuirement shall be deemed to be satisfied$ if such information or matter is
Bendered or made available in an electronic form$ and
'ccessible so as to be usable for a subseCuent reference.
D"5"$*4 S"5#*$.' H+). <I:
!here any law reCuires that any
&nformation or matter should be authenticated by affi*ing the signature$ or
2ocument shall be signed or bear the signature of any person$ then such reCuirement shall be
satisfied if it is authenticated by means of 2igital #ignature affi*ed in the prescribed manner.
The term DS"5#,E, with its grammatical variations and cognate e*pressions$ shall$ with reference or a
person$ mean affi*ing of his hand written signature or any mark on any document and the e*pression
signature shall be constructed accordingly.
ELECTRONIC GO2ERNANCE AND ELECTRONIC RECORDS
W'"$ +&%'$ #%$+ %# EF 5%7'#*#) %' E4)$'%#") R)%',+ *#, D"5"$*4 S"5#*$.'+ )*# 0 .+, "#
G%7'#(#$ *#, "$+ *5#)"+?
EFG%7'#*#):
#ection ; forms the foundation .lectronic governance$ it provides that
The filing of any form$ application or other documents with
The issue or grant of any license$ permit$ sanction or approval by whatever name called$ by$
The receipt or payment of money to$ any body$ office$ authority or agency owned or controlled by the
appropriate government$ may be affected in the prescribed electronic form.
M*##' *#, F%'( H+). =(2)I:
The manner and format of the electronic records to be filed$ created or issued and the method of
payment of fees or charges shall be prescribed by the appropriate government.
A//'%/'"*$ G%7'#(#$ H+). 2 (1) ()I:
'ppropriate 7overnment as respects any matter enumerated in list && of the sevebth #chedule to the
constitution ,i.e. #tate government list-.
F*)"4"$6 %#46, #%$ * '"5&$ H+). >I:
(o person can insist that
'ny /inistry or 2epartment of the 0entral or #tate 7overnment.
'ny #tatutory authority or %ody or any authority.
%ody controlled or funded by the government should accept$ issue$ create$ retain and preserve any
document in the form of electronic records or effect any monetary transaction in the electronic form.
W&*$ "+ *# E4)$'%#") G*P$$? C*# /.04")*$"%# 0 (*, "# $& E4)$'%#") G*P$$?
E NG*P$$ (+).2 (1) (+)I: .lectronic 7azette is the official 7azette published in electronic form.
P.04")*$"%# "# %!!")"*4 %' E4)$'%#") G*P$$ H+).8I: !here any law reCuires the publication of any rule$
regulation$ order$ byelaw$ notification or any other matter in the Dfficial 7azette or the .lectronic 7azette.
E!!)$"7 D*$: !here the Bule$ Begulation etc. is published both in the Dfficial 7azette and the .lectronic
7azette$ the date of publication shall be the date the 7azette$ which was first published in any form.
F*)"4"$6 %#46, #%$ * '"5&$ H+). >I: (o person can insist that any /inistry or 2epartment of the 0entral and
#tate 7overnment.
S$*$ $& /'%7"+"%# '4*$"#5 $% *$$'"0.$"%# *#, *)C#%-4,5(#$ %! F')%',+?
O'"5"#*$%' H+).2(1) (P*)I: Driginator means a person who
#ends$ generates$ stores or transmits any electronic message$ or
0ause any electronic message to be sent$ generated$ stored or transmitted to any other person.
I#$'(,"*'6 H+). 2(1) (-)I: &ntermediary is a person who
Beceive$ store or transmits electronic message or
<rovides any service with respect to such emessage on behalf of any other person.
A,,'++ H+). 2(1) (0)I: 'ddressee means a person who is intended by the Driginator to receive the
electronic record$ but does not include &ntermediary.
A$$'"0.$"%# %! F')%',+ H+).11I: 'ttribution in relation to records means$ To consider it to be written or
made by someone. 'n electronic record shall be attributed to the originator if it was sent
%y the Driginator himself
%y a person who had the authority to act on behalf of the Driginator in respect of that electronic
record$ or
%y an information system programmed by or on behalf of the originator to operate automatically.
A)C#%-4,5(#$ %! R)"/$ H+).12I: 'cknowledgement of Beceipt shall be made by the addressee.
F%'( %! A)C#%-4,5(#$ HS). 12(1)I: !here the originator and addressee have not agreed upon a
particular form or method of acknowledgement$ the addresses can acknowledge the receipt of electronic
record by any of the methods mentioned below K
'ny communication by the addressee$ automated or otherwise$ or
'ny conduct or the 'ddressee$ sufficient to indicate to the originator that the electronic record has
been received.
C%#,"$"%# *+ $% *)C#%-4,5(#$ H+). 12I: The provisions relating to the effects of acknowledgement for
receipt of electronic record. The Driginator may stipulate that the electronic records shall be binding only on
receipt of an acknowledgement.

D"+).++ $& /'%7"+"%# '4*$"#5 $% +).'"$6 %! EF')%',+ *#, D"5"$*4 S"5#*$.'?
S).' E4)$'%#") R)%', H+)$"%#. 1;I:
!here any security procedure has been applied to an electronic record at a specific point of time$
then such record shall be deemed to be a secure electronic record forms such point of time to the
verification.
S).' D"5"$*4 S"5#*$.' H+)$"%#. 1<I:
&f$ by application of a security procedure agreed to by the parties concerned$ it can be verified that a
2igital #ignature$ at the time it was affi*ed$ was
@niCue to the subscriber affi*ing it$
0apable of identifying such subscriber$ and
0reated in a manner or using a means under the e*clusive control of the subscriber and is linked to
the electronic record to which it relates in such a manner that if the electronic record was altered the
digital signature would be invalidated. Then such 2igital #ignature shall be deemed to be a #ecure
2igital #ignature.
S).'"$6 P'%),.' HS). 1=I:
The 0entral 7overnment shall prescribe the security procedure having regard to commercial
circumstances prevailing at the time when the procedure was used$ including
The nature of the transaction
The level of sophistication of technological capacity of the parties
The availability of alternatives offered to but re"ect by any party
The cost of alternative procedures$ and
The procedures in general use for similar types of transactions or communications.
D"+).++ $& /%-'+ %! C%#$'%44' $% (*C '5.4*$"%#+ )%#+"+$#$ -"$& I#!%'(*$"%# T)&#%4%56 A)$,
2????
P%-'+:
The 0ontroller may$ after consultation with the 0yber Begulation 'dvisory 0ommittee and with
previous approval of the 0entral 7overnment$ by notification in the Dfficial 7azette$ make regulations
consistent with this 'ct and the rules to carry out the purpose of this 'ct.
M*$$'+ )%7',:
&n particular$ and without pre"udice to the generality of the following power$ such regulations may
provide for all or any of the following matters$ namely K
<articulars relating to maintenance of database.
0onditions and restrictions sub"ect to which the 0ontroller may recognize.
Terms sub"ect to which a license may be granted.
Dther standards to be observed by a certifying 'uthority.
<articulars of statement which shall accompany an application for 2#0.
E8/4*"# $& /'%),.' $% *//46 !'% 4")#+ $% "++. D"5"$*4 S"5#*$.' C'$"!")*$+?
A//4")*$"%# !%' L")#+ $% "++. DSCB+ H+). 21I:
'ny person$ fulfilling the prescribed reCuirements as to Cualification$ e*pertise$ manpower$ financial
resources$ other facilities$ may make an application$ to the controller$ for a license to issue 2#0+s.
F%'(+ *#, /*'$").4*'+ H+). 22I:
.very application for issue of a license shall be in the prescribed form and accompanied by K
' 0ertification <ractice statement.
' statement including the procedures with respect to identification of the applicant.
<ayment of the prescribed fees$ not e*ceeding Bs. 6:AAA and
#uch other documents as may be prescribed by the 0entral 7overnment.
#ec. 6,3- ,h- 0ertification <ractice #tatement means a statement issued by a 0ertifying 'uthority
to specify the practices that the 0ertifying 'uthority employs in issuing 2#0s.
G'*#$ %! L")#+ H+). 2;I:
The 0ontroller$ after considering the application may either grant the license or re"ect the application.
1owever re"ection shall be made only after giving the applicant a reasonable opportunity of being heard.
N*$.' %! L")#+:
' license granted shall K
%e valid for such period as may be prescribed by the 0entral 7overnment.
(ot be transferable or heritable.
%e sub"ect to such terms and conditions as may be specified by the regulations.
R#-*4 %! L")#+ H+). 2:I:
/ade not less than =: days before the date of e*piry of the period of validity of the license$
&n the prescribed form$ and
'ccompanied by the prescribed fees$ not e*ceeding Bs.:AAA.
W&# * 4")#+ !%' "++. %! D"5"$*4 S"5#*$.'+ 0 '7%C, %' )*#)44,?
R7%)*$"%# %! L")#+ HS). 2<(1)I:
The controller may revoke the license$ if he is satisfied after making such inCuiry as deemed fit$ that a
0ertifying 'uthority has K
/ade a statement in$ or in relation to$ the application for the issue or renewal of the license$ which is
incorrect or false in material particulars.
Failed to comply with the terms and conditions sub"ect to which the license was granted.
Failed to maintain the procedures and standards specified.
S.+/#+"%# %! L")#+ HS). 2<(2)I:
The 0ontroller may$ if he has reasonable cause to believe that there is any ground for revoking a
license$ by order suspends such license pending the completion of any inCuiry ordered by him.
1owever$ no license shall be suspended for a period e*ceeding 3A days unless the 0ertifying
'uthority has been given a reasonable opportunity of showing cause against the proposed
suspension.
N%$") %! S.+/#+"%# %' R7%)*$"%# %! L")#+ HS). 2=I:
!here the license of the 0ertifying 'uthority is suspended or revoked$ the 0ontroller shall publish
notice of such suspension or revocation$ as the case may be$ in the database maintained by him.
S.''#,' %! L")#+ HS). ::I:
.very 0ertifying 'uthority whose license is suspended or revoked shall immediately after such
suspension or revocation$ surrender the license to the controller.
!hether nay 0ertifying 'uthority fails to surrender a license$ the person in whose favour a license is
issue is$ shall be guilty of an offence and shall be punished with imprisonment up to ; months and T
or fine up to Bs. 3AAA.
W&*$ *' $& ,.$"+ %! C'$"!6"#5 A.$&%'"$"+ "# '5*', $% $& .+*5 %! D"5"$*4 S"5#*$.'?
T% !%44%- /'%),.'+ H+).:?I:
/ake use of hardware$ software and procedures that are secure from misuse.
<rovide a reasonable level of reliability in its services.
'dhere to security procedure to ensure secrecy and privacy or digital signature
Dbserve such other standards as may be specified by regulation.
T% #+.' )%(/4"*#) -"$& $& A)$ H+). :1I:
.very 0ertifying 'uthority shall ensure that every person employed or otherwise engaged by it
complies$ in the course of his employment or engagement$ with the provisions of this 'ct$ rules$ regulations
and orders.
T% ,"+/4*6 L")#+ H+). :2I:
.very 0ertifying 'uthority shall display its license at a conspicuous place of the premises in which it
carries on its business.
D"+)4%+.' H+). :;(1)I:
.very 0ertifying 'uthority shall disclose the following in the manner specified by regulations K
&ts 2#0 which contains the public key corresponding to the private key used by that 0ertifying
'uthority to digitally sign another 2#0.
'ny 0ertification practice statement relevant thereto.
(otice of the revocation or suspension of its 0ertifying 'uthority 0ertificate if any$ and
'ny other fact that materially and adversely affects either the reliability of 2#0$ which that
'uthority has issued$ or the 'uthority+s ability to perform its services.
D"+)4%+.' "# )*+ %! ('5#)"+ H+). :;(2)I:
!here in the opinion of the 0ertifying 'uthority$ any event has occurred or any situation has arisen
which may materially and adversely affect the integrity of its computer system or the conditions sub"ect to
which a 2#0 was granted$ then the 0ertifying 'uthority shall K
@se reasonable efforts to notify any person who is likely to be affected by that occurrences$ or
'ct in according with the procedure specified in its certification practice statement to deal with such event
or situation.
M#$"%# $& /'%7"+"%# '4*$"#5 $% "++. %! D"5"$*4 S"5#*$.' C'$"!")*$?
D DIGITAL IGITAL S SIGNATURE IGNATURE C CERTIFICATE ERTIFICATE HS HSEC EC. (1) ( . (1) (9 9)I )I
A//4")*$"%#:
'ny person may make an application in the prescribed form to the 0ertifying 'uthority for the issue
of a 2#0. The application shall be accompanied by K
<rescribed fee not e*ceeding Bs. 6:$AAA to the 0ertifying 'uthority. 2ifferent amounts may be
prescribed for different classes of participants.
' 0ertification practice statement or where there is no such statement$ a statement containing the
prescribed particulars.
C%#,"$"%#+ !%' 5'*#$ DSC:
2#0 shall be granted only when the 0ertifying 'uthority is satisfied that K
The applicant holds the <rivate Iey corresponding to the <ublic Iey to be listed in the 2#0.
The applicant holds a <rivate Iey$ which is capable of creating a digital signature.
The public key to be listed in the certificate can be used to verifying a digital signature affi*ed by the <rivate
Iey held by the applicant.
G'*#$ C'$"!")*$:
Dn receipt of an application$ the 0ertifying 'uthority may$ after consideration of eth 0ertification
<ractice #tatement or the other statement and after making such enCuiries as it may dream fit$ grant the 2#0
or re"ect the application. For any re"ections$ reasons shall be recorded in writing and a reasonable
opportunity of being heard shall be given to the applicant.
E8/4*"# $& /'%7"+"%#+ '4*$"#5 $% '7%)*$"%# %' +.+/#+"%# %! DSC?
S.+/#+"%# %! DSC HS). :7I:
The suspension shall not be for period e*ceeding 3: days unless the subscriber has been given an
opportunity of being heard in the matter. The 0ertifying 'uthority shall communicate the fact of suspension
to the subscriber.
R7%)*$"%# %! DSC HS). :8I:
' 0ertifying 'uthority may revoke a 2#0 issued by it
!here the subscriber or any other parson authorized by him makes a reCuest to that effect$ or
@pon the death of the subscriber$ or
@pon dissolution of the Firm or winding up of the 0ompany where subscriber is a Firm or a
0ompany.
N%$") %! S.+/#+"%# %' R7%)*$"%#:
!here a 2#0 is suspended or revoked$ The 0ertifying 'uthority shall publish a notice of such
suspension or revocation$ as the case may be$ in the Bepository specified in the 2#0 for publication
of such notice.
!here one or more repositories are specified$ the 0ertifying 'uthority shall publish notice$ in all
such repositories.
C1BER CRIMES
INTRODUCTION:
The term )cyber crime+ is a misnomer. This term has nowhere been defined in any statute T'ct passed or
enacted by the &ndian <arliament. The concept of cyber crime is not radically different from the concept of
conventional crime. %oth include conduct whether act or omission$ which cause breach of rules of law and
counterbalanced by the sanction of the state.
%efore evaluating the concept of cyber crime it is obvious that the concept of conventional crime be
discussed and the points of similarity and deviance between both these forms may be discussed.
C%#7#$"%#*4 C'"(F 0rime is a social and economic phenomenon and is as old as the human society.
0rime is a legal concept and has the sanction of the law. 0rime or an offence is a legal wrong that can be
followed by criminal proceedings which may result into punishment. The hallmark of criminality is that$ it
is breach of the criminal law. <er Lord 'tkin the criminal Cuality of an act cannot be discovered by
reference to any standard but one: is the act prohibited with penal conseCuences.
' crime may be said to be any conduct accompanied by act or omission prohibited by law and
conseCuential breach of which is visited by penal conseCuences.
C60' C'"(F 0yber crime is the latest and perhaps the most complicated problem in the cyber world.
0yber crime may be said to be those species$ of which$ genus is the conventional crime$ and where either
the computer is an ob"ect or sub"ect of the conduct constituting crime. 'ny criminal activity that uses a
computer either as an instrumentality$ target or a means for perpetuating further crimes comes within the
ambit of cyber crime
' generalized definition of cyber crime may be unlawful acts wherein the computer is either a tool or
target or both. The computer may be used as a tool in the following kinds of activity financial crimes$ sale
of illegal articles$ pornography$ online gambling$ intellectual property crime$ email spoofing$ forgery$ cyber
defamation$ cyber stalking. The computer may however be target for unlawful acts in the following cases
unauthorized access to computerT computer systemT computer networks$ theft of information contained in
the electronic form$ email bombing$ data didling$ salami attacks$ logic bombs$ Tro"an attacks$ internet time
thefts$ web "acking$ theft of computer system$ physically damaging the computer system.
DISTINCTION BETWEEN CON2ENTIONAL AND C1BER CRIME
There is apparently no distinction between cyber and conventional crime. 1owever on a deep introspection
we may say that there e*ists a fine line of demarcation between the conventional and cyber crime$ which is
appreciable. The demarcation lies in the involvement of the medium in cases of cyber crime. The sine Cua
non for cyber crime is that there should be an involvement$ at any stage$ of the virtual cyber medium.
C1BER CRIMINALS
The cyber criminals constitute of various groupsT category. This division may be "ustified on the
basis of the ob"ect that they have in their mind. The following are the category of cyber criminals
1. C&"4,'# *#, *,%4+)#$+ 0$-# $& *5 5'%./ %! = N 18 6*'+ N
The simple reason for this type of delinCuent behaviour pattern in children is seen mostly due to the
inCuisitiveness to know and e*plore the things. Dther cognate reason may be to prove themselves to be
outstanding amongst other children in their group. Further the reasons may be psychological even. ..g.
the %al %harati ,2elhi- case was the outcome of harassment of the delinCuent by his friends.
2. O'5*#"+, &*)C'+F
These kinds of hackers are mostly organised together to fulfil certain ob"ective. The reason may be to fulfil
their political bias$ fundamentalism$ etc. The <akistanis are said to be one of the best Cuality hackers in the
world. They mainly target the &ndian government sites with the purpose to fulfil their political ob"ectives.
Further the ('#' as well as the /icrosoft sites is always under attack by the hackers.
:. P'%!++"%#*4 &*)C'+ K )'*)C'+ N
Their work is motivated by the colour of money. These kinds of hackers are mostly employed to hack the
site of the rivals and get credible$ reliable and valuable information. Further they are ven employed to crack
the system of the employer basically as a measure to make it safer by detecting the loopholes.
;. D"+)%#$#$, (/4%6+F
This group include those people who have been either sacked by their employer or are dissatisfied with their
employer. To avenge they normally hack the system of their employee.
REASONS FOR C1BER CRIME:
Capacity to #tore data in comparati+ely #mall #paceF The computer has uniCue characteristic of storing data
in a very small space. This affords to remove or derive information either through physical or virtual
medium makes it much more easier.
Ea#y to acce##F The problem encountered in guarding a computer system from unauthorised access is that
there is every possibility of breach not due to human error but due to the comple* technology. %y secretly
implanted logic bomb$ key loggers that can steal access codes$ advanced voice recordersH retina imagers etc.
that can fool biometric systems and bypass firewalls can be utilized to get past many a security system.
Comple=: The computers work on operating systems and these operating systems in turn are composed of
millions of codes. 1uman mind is fallible and it is not possible that there might not be a lapse at any stage.
The cyber criminals take advantage of these lacunas and penetrate into the computer system.
Negligence. (egligence is very closely connected with human conduct. &t is therefore very probable that
while protecting the computer system there might be any negligence$ which in turn provides a cyber
criminal to gain access and control over the computer system.
Lo## of e+idence. Loss of evidence is a very common Q obvious problem as all the data are routinely
destroyed. Further collection of data outside the territorial e*tent also paralyses this system of crime
investigation.
MODE AND MANNER OF COMMITING C1BER CRIME:
@nauthorized access to computer systems or networks T 1acking
This kind of offence is normally referred as hacking in the generic sense. 1owever the framers of the
information technology act 6AAA have no where used this term so to avoid any confusion we would not
interchangeably use the word hacking for )unauthorized access+ as the latter has wide connotation.
T&!$ %! "#!%'(*$"%# )%#$*"#, "# 4)$'%#") !%'(F
This includes information stored in computer hard disks$ removable storage media etc. Theft may be either
by appropriating the data physically or by tampering them through the virtual medium.
E(*"4 0%(0"#5F
This kind of activity refers to sending large numbers of mail to the victim$ which may be an individual or a
company or even mail servers there by ultimately resulting into crashing.
D*$* ,",,4"#5F
This kind of an attack involves altering raw data "ust before a computer processes it and then changing it
back after the processing is completed. The electricity board faced similar problem of data diddling while
the department was being computerised.
S*4*(" *$$*)C+F
This kind of crime is normally prevalent in the financial institutions or for the purpose of committing
financial crimes. 'n important feature of this type of offence is that the alteration is so small that it would
normally go unnoticed. ..g. the Riegler case wherein a logic bomb was introduced in the bank+s system$
which deducted 3A cents from every account and deposited it in a particular account.
D#"*4 %! S'7") *$$*)CF
The computer of the victim is flooded with more reCuests than it can handle which cause it to crash.
2istributed 2enial of #ervice ,22o#- attack is also a type of denial of service attack$ in which the offenders
are wide in number and widespread. ..g. 'mazon$ Gahoo.
2"'.+ K -%'( *$$*)C+F
>iruses are programs that attach themselves to a computer or a file and then circulate themselves to other
files and to other computers on a network. They usually affect the data on a computer$ either by altering or
deleting it. !orms$ unlike viruses do not need the host to attach themselves to. They merely make functional
copies of themselves and do this repeatedly till they eat up all the available space on a computerOs memory.
..g. love bug virus$ which affected at least : V of the computers of the globe. The losses were accounted to
be \ 3A million. The worldOs most famous worm was the &nternet worm let loose on the &nternet by Bobert
/orris sometime in 3844. 'lmost brought development of &nternet to a complete halt.
L%5") 0%(0+F
These are event dependent programs. This implies that these programs are created to do something only
when a certain event ,known as a trigger event- occurs. ..g. even some viruses may be termed logic bombs
because they lie dormant all through the year and become active only on a particular date ,like
the 0hernobyl virus-.
T'%G*# *$$*)C+F
This term has its origin in the word )Tro"an horse+. &n software field this means an unauthorized programme$
which passively gains control over another+s system by representing itself as an authorised programme. The
most common form of installing a Tro"an is through email. ..g. a Tro"an was installed in the computer of
a lady film director in the @.#. while chatting. The cyber criminal through the web cam installed in the
computer obtained her nude photographs. 1e further harassed this lady.
I#$'#$ $"( $&!$+F
(ormally in these kinds of thefts the &nternet surfing hours of the victim are used up by another person. This
is done by gaining access to the login &2 and the password. ..g. 0olonel %a"wa+s case the &nternet hours
were used up by any other person. This was perhaps one of the first reported cases related to cyber crime in
&ndia. 1owever this case made the police infamous as to their lack of understanding of the nature of cyber
crime.
W0 G*)C"#5F
This term is derived from the term hi "acking. &n these kinds of offences the hacker gains access and control
over the web site of another. 1e may even mutilate or change the information on the site. This may be done
for fulfilling political ob"ectives or for money. ..g. recently the site of /&T ,/inistry of &nformation
Technology- was hacked by the <akistani hackers and some obscene matter was placed therein. Further the
site of %ombay crime branch was also web "acked. 'nother case of web "acking is that of the )gold
fish+ case. &n this case the site was hacked and the information pertaining to gold fish was changed. Further a
ransom of @# \ 3 million was demanded as ransom. Thus web "acking is a process where by control over
the site of another is made backed by some consideration for it.
STATUTOR1 PRO2ISONS:
The &ndian parliament considered it necessary to give effect to the resolution by which the 7eneral
'ssembly adopted /odel Law on .lectronic 0ommerce adopted by the @nited (ations 0ommission on
Trade Law. 's a conseCuence of which the &nformation Technology 'ct 6AAA was passed and enforced on
35th /ay 6AAA.the preamble of this 'ct states its ob"ective to legalise ecommerce and further amend the
&ndian <enal 0ode 34;A$ the &ndian .vidence 'ct 3456$ the %anker+s %ook .vidence 'ct3483 and the
Beserve %ank of &ndia 'ct 389=. The basic purpose to incorporate the changes in these 'cts is to make
them compatible with the 'ct of 6AAA. #o that they may regulate and control the affairs of the cyber world in
an effective manner.
The &nformation Technology 'ct deals with the various cyber crimes in chapters &F Q F&. The
important sections are #s. =9$;:$;;$;5. #ection =9 in particular deals with the unauthorised access$
unauthorised downloading$ virus attacks or any contaminant$ causes damage$ disruption$ denial of access$
interference with the service availed by a person. This section provide for a fine up to Bs. 3 0rore by way of
remedy. #ection ;: deals with )tampering with computer source documents+ and provides for imprisonment
up to 9 years or fine$ which may e*tend up to 6 years or both. #ection ;; deals with )hacking with computer
system+ and provides for imprisonment up to 9 years or fine$ which may e*tend up to 6 years or both.
Further section ;5 deals with publication of obscene material and provides for imprisonment up to a term of
3A years and also with fine up to Bs. 6 lakhs.
ANAL1SIS OF THE STATUTOR1 PRO2ISONS:
The &nformation Technology 'ct 6AAA was undoubtedly a welcome step at a time when there was no
legislation on this specialised field. The 'ct has however during its application has proved to be inadeCuate
to a certain e*tent. The various loopholes in the 'ct are
3. The hurry in which the legislation was passed$ without sufficient public debate$ did not really serve the
desired purpose.
.*perts are of the opinion that one of the reasons for the inadeCuacy of the legislation has been the hurry in
which it was passed by the parliament and it is also a fact that sufficient time was not given for public
debate.
2. DC60'4*-+, in their very preamble and aim$ state that they are targeted at aiding ecommerce$ and are
not meant to regulate cybercrime,;- K
/r. <avan 2uggal holds the opinion that the main intention of the legislators has been to provide for a law to
regulate the ecommerce and with that aim the &.T.'ct 6AAA was passed$ which also is one of the reasons for
its inadeCuacy to deal with cases of cyber crime.
't this point & would like to e*press my respectful dissent with /r. 2uggal. & feel that the above statement
by /r. 2uggal is not fundamentally correct. The reason being that the preamble does state that the 'ct aims
at legalising ecommerce. 1owever it does not stop here. &t further amends the &.<.0.$ .vidence 'ct$
%anker+s %ook .vidence and B%& 'ct also. The 'ct also aims to deal with all matters connected therewith or
incidental thereto. &t is a cardinal rule of interpretation that te*t should be read as a whole to gather the
meaning. &t seems that the above statement has been made in total disregard of this rule of
interpretation. The preamble$ if read as a whole$ makes it very clear that the 'ct eCually aims at legalising
ecommerce and to curb any offences arising there from.
:.C60' $%'$+F
The recent cases including 0yber stalking cyber harassment$ cyber nuisance$ and cyber defamation
have shown that the &.T.'ct 6AAA has not dealt with those offences. Further it is also contended that in future
new forms of cyber crime will emerge which even need to be taken care of. Therefore &ndia should sign the
cyber crime convention. 1owever the &.T.'ct 6AAA read with the <enal 0ode is capable of dealing with these
felonies.
;.C60' )'"( "# $& A)$ "+ #"$&' )%(/'&#+"7 #%' 8&*.+$"7F
&ndia need dedicated legislation on cyber crime that can supplement the &ndian <enal 0ode. NThe &T 'ct$
6AAA is not comprehensive enough and doesnOt even define the term Ocyber crimeN. &ndia$ as a nation$ has to
cope with an urgent need to regulate and punish those committing cyber crimes$ but with no specific
provisions to do so. #upporters of the &ndian <enal 0ode #chool vehemently argue that &<0 has stood the
test of time and that it is not necessary to incorporate any special laws on cyber crime. This is because it is
debated by them that the &<0 alone is sufficient for all kinds of crime. 1owever$ in practical terms$ the
argument does not have appropriate backing. &t has to be distinctly understood that cyber crime and
cyberspace are completely new whelms$ where numerous new possibilities and opportunities emerge by the
day in the form of new kinds of crimes.
<.A(0"5."$6 "# $& ,!"#"$"%#+F
The definition of hacking provided in section ;; of the 'ct is very wide and capable of misapplication.
There is every possibility of this section being misapplied and in fact the 2elhi court has misapplied it.
The infamous 5%2#8$G%0 has made it very clear that what may be the fate of a person who is booked under
section ;; or the constant threat under which the netizens are till s. ;; e*ists in its present form.
Further section ;5 is also vague to certain e*tent. &t is difficult to define the term lascivious information or
obscene pornographic information. Further our inability to deal with the cases of cyber pornography has
been proved by the %al %harati case.
=. U#"!%'( 4*-F
/r. >inod Iumar holds the opinion that the need of the hour is a worldwide uniform cyber law to combat
cyber crime. 0yber crime is a global phenomenon and therefore the initiative to fight it should come from
the same level. ..g. the author of the love bug virus was appreciated by his countrymen.
7.L*)C %! *-*'#++F
Dne important reason that the 'ct of 6AAA is not achieving complete success is the lack of awareness among
the s about their rights. Further most of the cases are going unreported. &f the people are vigilant about their
rights the law definitely protects their right. ..g. the 2elhi high court in Dctober 6AA6 prevented a person
from selling /icrosoft pirated software over an auction site. 'chievement was also made in the case before
the court of metropolitan magistrate 2elhi wherein a person was convicted for online cheating by buying
#ony products using astolen credit card.
8. J.'"+,")$"%# "++.+F
Uurisdiction is also one of the debatable issues in the cases of cyber crime due to the very universal nature of
cyber space. !ith the evergrowing arms of cyber space the territorial concept seems to vanish. (ew
methods of dispute resolution should give way to the conventional methods. The 'ct of 6AAA is very silent
on these issues.
>. E8$'* $''"$%'"*4 *//4")*$"%#F
Though #.5: provides for e*traterritorial operations of this law$ but they could be meaningful only when
backed with provisions recognizing orders and warrants for &nformation issued by competent authorities
outside their "urisdiction and measure for cooperation for e*change of material and evidence of computer
crimes between law enforcement agencies.
1?. R*"+"#5 * )60' *'(6F
%y using the word )cyber army+ by no means & want to convey the idea of virtual army$ rather & am laying
emphasis on the need for a well eCuipped task force to deal with the new trends of hi tech crime. The
government has taken a leap in this direction by constituting cyber crime cells in all metropolitan and other
important cities. Further the establishment of the C60' C'"( I#7+$"5*$"%# C44 (CCIC) %! $& C#$'*4
B.'*. %! I#7+$"5*$"%# (CBI) 11) is definitely a welcome step in this direction. There are man cases in
which the 0.%.& has achieved success. The present position of cases of cyber crime (17) is K
11. C60' +*776 0#)&F
0yber savvy "udges are the need of the day. Uudiciary plays a vital role in shaping the enactment according
to the order of the day. Dne such stage$ which needs appreciation$ is the<.&.L.$ which the Ierela
1igh 0ourt has accepted through an email. The role of the "udges in today+s word may be gathered by the
statement "udges carve )law is+ to )law ought to be+. /r T.I.>ishwanathan$ member secretary$ Law
0ommission $ has highlighted the reCuirements for introducing ecourts in &ndia. &n his article published in
The 1indu he has stated if there is one area of 7overnance where &T can make a huge difference to &ndian
public is in the Uudicial #ystem.
12. D6#*(") !%'( %! )60' )'"(F
#peaking on the dynamic nature of cyber crime F%& 2irector Louis Freeh has said$ N&n short$ even though
we have markedly improved our capabilities to fight cyber intrusions the problem is growing even faster
and we are falling further behind.E The ,de-creativity of human mind cannot be checked by any law. Thus
the only way out is the liberal construction while applying the statutory provisions to cyber crime cases.
1:. H+"$*$"%# $% '/%'$ %!!#)+F
's stated above one of the fatal drawbacks of the 'ct has been the cases going unreported. Dne obvious
reason is the noncooperative police force. This was proved by the 2elhi time theft case. NThe police are a
powerful force today which can play an instrumental role in preventing cybercrime. 't the same time$ it
can also end up wielding the rod and harassing innocent s$ preventing them from going about their normal
cyber business.N(1?) This attitude of the administration is also revelled by incident that took place
at /errut and %elgam. ,for the facts of these incidents refer to naavi.com-. For complete realisation of the
provisions of this 'ct a cooperative police force is reCuire.
PRE2ENTION OF C1BER CRIME:
<revention is always better than cure. &t is always better to take certain precaution while operating the net.
' should make them his part of cyber life. #aileshkumar Rarkar$ technical advisor and network security
consultant to the /umbai <olice 0yber crime 0ell$ advocates the :< mantra for online security: <recaution$
<revention$ <rotection$ <reservation and <erseverance. ' netizen should keep in mind the following
things
To prevent cyber stalking avoid disclosing any information pertaining to oneself. This is as good as
disclosing your identity to strangers in public place.
'lways avoid sending any photograph online particularly to strangers and chat friends as there have
been incidents of misuse of the photographs.
'lways use latest and up date anti virus software to guard against virus attacks.
'lways keep back up volumes so that one may not suffer data loss in case of virus contamination
(ever send your credit card number to any site that is not secured$ to guard against frauds.
'lways keep a watch on the sites that your children are accessing to prevent any kind of harassment
or depravation in children.
&t is better to use a security programme that gives control over the cookies and send information
back to the site as leaving the cookies unguarded might prove fatal.
!eb site owners should watch traffic and check any irregularity on the site. <utting hostbased
intrusion detection devices on servers may do this.
@se of firewalls may be beneficial.
!eb servers running public sites must be physically separate protected from internal corporate
network.
'd"udication of a 0yber 0rime Dn the directions of the %ombay 1igh 0ourt the 0entral 7overnment has
by a notification dated 6:.A9.A9 has decided that the #ecretary to the &nformation Technology 2epartment
in each state by designation would be appointed as the 'D for each state.
0apacity of human mind is unfathomable. &t is not possible to eliminate cyber crime from the cyber space.
&t is Cuite possible to check them. 1istory is the witness that no legislation has succeeded in totally
eliminating crime from the globe. The only possible step is to make people aware of their rights and duties
,to report crime as a collective duty towards the society- and further making the application of the laws
more stringent to check crime. @ndoubtedly the 'ct is a historical step in the cyber world. Further & all
together do not deny that there is a need to bring changes in the &nformation Technology 'ct to make it
more effective to combat cyber crime. & would conclude with a word of caution for the prolegislation
school that it should be kept in mind that the provisions of the cyber law are not made so stringent that it
may retard the growth of the industry and prove to be counterproductive.
C1BER LAW
&nformation and communication technologies ,&0Ts- today have impacts on virtually every aspect of
society and every corner of the world in information or digital age fostering commerce$ improving education
and health care$ and facilitating communications among all stakeholders. The more cases of cybercrimes
over the &0Ts especially through the fastest growing medium like &nternet$ the more voices for regulating
them in whatever forms. #ome countries$ thus$ began to accommodate such voices or demands through
revising the e*isting laws and T or issuing new legislation,s- K or )cyberlaws+ to deal with new issues on
&0Ts.
The term or scope of )cyberlaws+ is yet unclear in many countries although it can be interpreted at
large in two: Dne is for the relevant legislations dealing with or regulating converged computer$
telecommunications and multimedia or broadcasting in such cases as the /ultimedia and 0ommunications
'ct$ /alaysiaH the other is for those tackling the emerging cybercrimes in such cases as the &nformation
Technology 'ct in &ndia and the 0onvention of 0ybercrimes adopted by the 0ouncil of .urope. The term of
cyberlaws or legislations referred to in this paper will be limited to the latter.
&n the global information society K beyond national "urisdictions$ an escalating national de "ure
regulation meets a similarly pervasive de facto futility of enforcement. (ational legislatures might continue
to enact regulations especially over criminal matters$ but their regulatory endeavors are unlikely to be
effectively enforceable$ as they desire due to the global nature of &0Ts. 7lobal phenomena like cybercrimes
should in principle propel nations to achieve legislative cooperation and partnership at international levels$
since cyberspace is no respecter of national boundaries. The nature and e*tent of the problem in enforcing
the laws over the cyberspace is enormous. #ome law enforcement agencies are responding aggressively$
others are not fully aware of the problem on the cyberspace and lack the e*pertise and resources to pursue
the kind of cases appearing everyday. #ome &#<s have taken affirmative actions to crackdown on cyber
offenders$ whilst others have not. There is a great deal more that government andTor industry can and should
do to empower individuals to protect themselves against cyber offenders and other online threats.
T& (*"# +)%/ *#, ,74%/(#$ %! )60'F4*-+
The e*isting legislations and statutes need to be reviewed to determine whether they can address the issues
arising out of the new &0T era. &f the current laws are inadeCuate to deal with the problems$ national
governments and T or appropriate regional and international bodies need to either revise the e*isting laws or
enact new laws to provide individual$ corporate and government users with ma*imum trust and security$ as
Table 3 articulates a few e*amples.
E#!%')(#$ ()&*#"+(+
To optimize benefits of &0Ts and secure confidence of users$ information society should be safe and secured
through not only cyberlaws per se but also appropriate enforcement mechanisms. 1owever$ first of all$
many countries do not have specific #!%')(#$ *5#)"+ to combat various cybercrimes.
W&*$ "+ C60' L*-?
0yber Law is the law governing cyber space. 0yber space is a very wide term and includes computers$
networks$ software$ data storage devices ,such as hard disks$ @#% disks etc-$ the &nternet$ websites$ emails
and even electronic devices such as cell phones$ 'T/ machines etc. Law encompasses the rules of conduct:
3. that have been *//'%7, by the government$ and
6. which are in !%') over a certain territory$ and
9. which must be %06, by all persons on that territory.
>iolation of these rules could lead to government action such as imprisonment or fine or an order to pay
compensation.
C60' 4*- #)%(/*+++ 4*-+ '4*$"#5 $%:
3. 0yber 0rimes
6. .lectronic and 2igital #ignatures
9. &ntellectual <roperty
=. 2ata <rotection and <rivacy
C60' )'"(+ are unlawful acts where the computer is used either as a tool or a target or both. The
enormous growth in electronic commerce ,ecommerce- and online share trading has led to a phenomenal
spurt in incidents of cyber crime. These crimes are discussed in detail further in this chapter. '
comprehensive discussion on the &ndian law relating to cyber crimes and digital evidence is provided in the
ASCL /.04")*$"%# titled C60' C'"(+ L D"5"$*4 E7",#) N I#,"*# P'+/)$"7.
E4)$'%#") +"5#*$.'+ are used to authenticate electronic records. 2igital signatures are one type of
electronic signature. 2igital signatures satisfy three ma"or legal reCuirements K signer authentication$
message authentication and message integrity. The technology and efficiency of digital signatures makes
them more trustworthy than hand written signatures. These issues are discussed in detail in the ASCL
/.04")*$"%# titled E)%((') N L5*4 I++.+.
&ntellectual property is refers to creations of the human mind e.g. a story$ a song$ a painting$ a design etc.
The facets of "#$44)$.*4 /'%/'$6 that relate to cyber space are covered by cyber law.
These include:
P )%/6'"5&$ 4*- in relation to computer software$ computer source code$ websites$ cell phone content etc$
P software and source code 4")#)+
P $'*,(*'C 4*- with relation to domain names$ meta tags$ mirroring$ framing$ linking etc
P +(")%#,.)$%' 4*- which relates to the protection of semiconductor integrated circuits design and layouts$
P /*$#$ 4*- in relation to computer hardware and software.
These issues are discussed in detail in the ASCL /.04")*$"%# titled IPR L C60'+/*) F $& I#,"*#
P'+/)$"7.
D*$* /'%$)$"%# *#, /'"7*)6 laws aim to achieve a fair balance between the privacy rights of the individual
and the interests of data controllers such as banks$ hospitals$ email service providers etc. These laws seek to
address the challenges to privacy caused by collecting$ storing and transmitting data using new technologies.
N, !%' C60' L*-
There are various reasons why it is e*tremely difficult for conventional law to cope with cyberspace. #ome
of these are discussed below.
3. 0yberspace is an "#$*#5"04 dimension that is impossible to govern and regulate using conventional law.
6. 0yberspace has complete ,"+'+/)$ !%' G.'"+,")$"%#*4 0%.#,*'"+. ' person in &ndia could break into a
bank+s electronic vault hosted on a computer in @#' and transfer millions of Bupees to another bank in
#witzerland$ all within minutes. 'll he would need is a laptop computer and a cell phone.
9. 0yberspace handles 5"5*#$") $'*!!") 7%4.(+ 7'6 +)%#,. %illions of emails are crisscrossing the globe
even as we read this$ millions of websites are being accessed every minute an billions of dollars are
electronically transferred around the world by banks every day.
=. 0yberspace is absolutely %/# $% /*'$")"/*$"%# 06 *44. ' tenyear old in %hutan can have a live chat
session with an eightyear old in %ali without any regard for the distance or the anonymity between them.
:. 0yberspace offers #%'(%.+ /%$#$"*4 !%' *#%#6("$6 to its members. Beadily available encryption
software and steganographic tools that seamlessly hide information within image and sound files ensure the
confidentiality of information e*changed between cybercitizens.
;. 0yberspace offers neverseenbefore )%#%(") !!")"#)6. %illions of dollars worth of software can be
traded over the &nternet without the need for any government licenses$ shipping and handling charges and
without paying any customs duty.
5. .lectronic information has become the main ob"ect of cyber crime. &t is characterized by 8$'(
(%0"4"$6$ which e*ceeds by far the mobility of persons$ goods or other services. &nternational computer
networks can transfer huge amounts of data around the globe in a matter of seconds.
4. ' software source code worth crores of rupees or a movie can be /"'*$, *)'%++ $& 54%0 within hours
of their release.
8. T&!$ %! corporeal "#!%'(*$"%# ,e.g. books$ papers$ 02 BD/s$ floppy disks- is easily covered by
traditional penal provisions. 1owever$ the problem begins when electronic records are copied Cuickly$
inconspicuously and often via telecommunication facilities. 1ere the original information$ so to say$
remains in the possession of the owner and yet information gets stolen.
J.'"+/'.,#)%! I#,"*# C60' L*-
The primary source of cyber law in &ndia is the I#!%'(*$"%# T)&#%4%56 A)$$ 6AAA ,&T 'ct- which
came into force on 35 Dctober 6AAA. The primary purpose of the 'ct is to provide 45*4 ')%5#"$"%# $%
4)$'%#") )%((') and to facilitate filing of 4)$'%#") ')%',+ -"$& $& G%7'#(#$.
The &T 'ct also penalizes various )60' )'"(+ and provides strict punishments ,imprisonment
terms upto 3A years and compensation up to Bs 3 crore-.
'n E8).$"7 O',' dated 36 #eptember 6AA6 contained instructions relating provisions of the 'ct with
regard to protected systems and application for the issue of a 2igital #ignature 0ertificate.
/inor errors in the 'ct were rectified by the I#!%'(*$"%# T)&#%4%56 (R(%7*4 %! D"!!").4$"+)
O','$ 6AA6 which was passed on 38 #eptember 6AA6. The &T 'ct was amended by the N5%$"*04
I#+$'.(#$+ (A(#,(#$+ *#, M"+)44*#%.+ P'%7"+"%#+) A)$$ 6AA6. This introduced the concept of
electronic cheCues and truncated cheCues.
I#!%'(*$"%# T)&#%4%56 (U+ %! E4)$'%#") R)%',+ *#, D"5"$*4 S"5#*$.'+) R.4+$ 6AA= has provided
the necessary legal framework for filing of documents with the 7overnment as well as issue of licenses by
the 7overnment. &t also provides for payment and receipt of fees in relation to the 7overnment bodies. Dn
the same day$ the I#!%'(*$"%# T)&#%4%56 (C'$"!6"#5 A.$&%'"$"+) R.4+$ 6AAA also came into force.
These rules prescribe the eligibility$ appointment and working of 0ertifying 'uthorities ,0'-. These rules
also lay down the technical standards$ procedures and security methods to be used by a 0'. These rules
were amended in 6AA9$ 6AA= and 6AA;.
T)&#%4%56 (C'$"!6"#5 A.$&%'"$6) R5.4*$"%#+$ 6AA3 came into force on 8 Uuly 6AA3. They provide
further technical standards and procedures to be used by a 0'. Two important guidelines relating to 0's
were issued. The first are the G.",4"#+ for submission of application for license to operate as a 0ertifying
'uthority under the &T 'ct. These guidelines were issued on 8th Uuly 6AA3.
(e*t were the G.",4"#+ for submission of certificates and certification revocation lists to the
0ontroller of 0ertifying 'uthorities for publishing in (ational Bepository of 2igital 0ertificates. These were
issued on 3;
th
2ecember 6AA6.
The C60' R5.4*$"%#+ A//44*$ T'"0.#*4 (P'%),.') R.4+$ 6AAA also came into force on 35th
Dctober 6AAA. These rules prescribe the appointment and working of the 0yber Begulations 'ppellate
Tribunal ,0B'T- whose primary role is to hear appeals against orders of the 'd"udicating Dfficers.
The C60' R5.4*$"%#+ A//44*$ T'"0.#*4 (S*4*'6, A44%-*#)+ *#, %$&' $'(+ *#, )%#,"$"%#+ %!
+'7") %! P'+","#5 O!!")') R.4+$ 6AA9 prescribe the salary$ allowances and other terms for the <residing
Dfficer of the 0B'T.
I#!%'(*$"%# T)&#%4%56 (O$&' /%-'+ %! C"7"4 C%.'$ 7+$, "# C60' A//44*$ T'"0.#*4)
R.4+ 6AA9 provided some additional powers to the 0B'T. Dn 35th /arch 6AA9$ the I#!%'(*$"%#
T)&#%4%56 (9.*4"!")*$"%# *#, E8/'"#) %! A,G.,")*$"#5 O!!")'+ *#, M*##' %! H%4,"#5 E#@."'6)
R.4+$ 6AA9 were passed.
These rules prescribe the Cualifications reCuired for 'd"udicating Dfficers. Their chief responsibility
under the &T 'ct is to ad"udicate on cases such as unauthorized access$ unauthorized copying of data$ spread
of viruses$ denial of service attacks$ disruption of computers$ computer manipulation etc. These rules also
prescribe the manner and mode of inCuiry and ad"udication by these officers. The appointment of
ad"udicating officers to decide the fate of multicrore cyber crime cases in &ndia was the result of the /.04")
"#$'+$ 4"$"5*$"%# !"4, 06 +$.,#$+ %! A+"*# S)&%%4 %! C60' L*-+ ,'#0L-.
The 7overnment had not appointed the 'd"udicating Dfficers or the 0yber Begulations 'ppellate
Tribunal for almost 6 years after the passage of the &T 'ct. This prompted '#0L students to file a <ublic
&nterest Litigation ,<&L- in the %ombay 1igh 0ourt asking for a speedy appointment of 'd"udicating
officers. The %ombay 1igh 0ourt$ in its order dated 8th Dctober 6AA6$ directed the 0entral 7overnment to
announce the appointment of ad"udicating officers in the public media to make people aware of the
appointments. The division bench of the /umbai 1igh 0ourt consisting of 1on+ble Uustice '.<. #hah and
1on+ble Uustice Ban"ana 2esai also ordered that the 0yber Begulations 'ppellate Tribunal be constituted
within a reasonable time frame.
Following this the 0entral 7overnment passed an order dated 69rd /arch 6AA9 appointing the
#ecretary of 2epartment of &nformation Technology of each of the #tates or of @nion Territories of &ndia
as the ad"udicating officers.
The I#!%'(*$"%# T)&#%4%56 (S).'"$6 P'%),.') R.4+$ 6AA= came into force on 68th Dctober
6AA=. They prescribe provisions relating to secure digital signatures and secure electronic records. 'lso
relevant are the I#!%'(*$"%# T)&#%4%56 (O$&' S$*#,*',+) R.4+$ 6AA9.
'n important %',' '4*$"#5 $% 04%)C"#5 %! -0+"$+ was passed on 65th February$ 6AA9. 0omputer
.mergency Besponse Team ,0.BT&(2- can instruct 2epartment of Telecommunications ,2DT- to block a
website.
The I#,"*# P#*4 C%, ,as amended by the &T 'ct- penalizes several cyber crimes. These include
forgery of electronic records$ cyber frauds$ destroying electronic evidence etc. 2igital .vidence is to be
collected and proven in court as per the provisions of the I#,"*# E7",#) A)$ ,as amended by the &T 'ct-.
&n case of bank records$ the provisions of the B*#C'+B B%%C E7",#) A)$ ,as amended by the &T 'ct- are
relevant. &nvestigation and ad"udication of cyber crimes is done in accordance with the provisions of the
C%, %! C'"("#*4 P'%),.' and the &T 'ct. T& R+'7 B*#C %! I#,"* A)$ was also amended by the &T
'ct.
REMEDIES OR C1BER CRIME:
1. R4"*#) %# $''+$'"*4 4*-+ "+ *# .#$+$, *//'%*)&. 2espite the progress being made in many
countries$ most countries still rely on standard terrestrial law to prosecute cyber crimes. The ma"ority of
countries are relying on archaic statutes that predate the birth of cyberspace and have not yet been tested in
court.
2. W*C /#*4$"+ 4"("$ ,$''#). The weak penalties in most updated criminal statutes provide limited
deterrence for crimes that can have largescale economic and social effects.
:. S4!F/'%$)$"%# '(*"#+ $& !"'+$ 4"# %! ,!#+. The general weakness of statutes increases the
importance of private sector efforts to develop and adopt strong and efficient technical solutions and
management practices for information security.
;. A 54%0*4 /*$)&-%'C %! 4*-+ )'*$+ 4"$$4 )'$*"#$6. Little consensus e*ists among countries regarding
e*actly which crimes need to be legislated against. &n the networked world$ no island is an island. @nless
crimes are defined in a similar manner across "urisdictions$ coordinated efforts by law enforcement officials
to combat cyber crime will be complicated.
<. A (%,4 *//'%*)& "+ #,,. /ost countries$ particularly those in the developing world$ are seeking a
model to follow. These countries recognize the importance of outlawing malicious computerrelated acts in a
timely manner in order to promote a secure environment for ecommerce. %ut few have the legal and
technical resources necessary to address the comple*ities of adapting terrestrial criminal statutes to
cyberspace. ' coordinated$ publicprivate partnership to produce a model approach can help eliminate the
potential danger from the inadvertent creation of cyber crime havens.
The weak state of global legal protections against cyber crime suggests three kinds of action.
1. F"'(+ +&%.4, +).' $&"' #$-%'C, "#!%'(*$"%#.
Laws to enforce property rights work only when property owners take reasonable steps to protect their
property in the first place. 's one observer has noted$ if homeowners failed to buy locks for their front
doors$ should towns solve the problem by passing more laws or hiring more policeE .ven where laws are
adeCuate$ firms dependent on the network must make their own information and systems secure. 'nd where
enforceable laws are months or years away$ as in most countries$ this responsibility is even more significant.
2. G%7'#(#$+ +&%.4, *++.' $&*$ $&"' 4*-+ *//46 $% )60' )'"(+.
(ational governments remain the dominant authority for regulating criminal behavior in most places in the
world. Dne nation already has struggled from$ and ultimately improved$ its legal authority after a
confrontation with the uniCue challenges presented by cyber crime. &t is crucial that other nations profit from
this lesson$ and e*amine their current laws to discern whether they are composed in a technologically neutral
manner that would not e*clude the prosecution of cyber criminals. &n many cases$ nations will find that
current laws ought to be updated. .nactment of enforceable computer crime laws that also respect the rights
of individuals are an essential ne*t step in the battle against this emerging threat.
:. F"'(+, 5%7'#(#$+, *#, )"7"4 +%)"$6 +&%.4, -%'C )%%/'*$"746 $% +$'#5$&# 45*4 !'*(-%'C+ !%'
)60' +).'"$6.
To be prosecuted across a border$ an act must be a crime in each "urisdiction. Thus$ while local legal
traditions must be respected$ nations must define cyber crimes in a similar manner. 'n important effort to
craft a model approach is underway in the 0ouncil of .urope comprising =3 countries. The 0ouncil is
crafting an international 0onvention on 0yber 0rime. The 0onvention addresses illegal access$ illegal
interception$ data interference$ system interference$ computerrelated forgery$ computerrelated fraud$ and
the aiding and abetting of these crimes. &t also addresses investigational matters related to "urisdiction$
e*tradition$ the interception of communications$ and the production and preservation of data.
Finally$ it promotes cooperation among law enforcement officials across national borders. Late in its
process$ the 0ouncil began to consider the views of affected industry and civil society. This process is
making the 0ouncil+s product more realistic$ practical$ efficient$ balanced$ and respectful of due process that
protects individual rights. 't this point$ most observers support provisions to improve law enforcement
cooperation across borders. 1owever$ industry$ through the !orld &nformation Technology and #ervices
'lliance $ argues that the reCuirements on service providers to monitor communications and to provide
assistance to investigators$ as outlined in the 2raft 0onvention$ would be unduly burdensome and e*pensive.
'nother provision considered ob"ectionable could criminalize the creation and use of intrusive software$ or
hacking programs$ which are designedfor legitimate security testing purposes.
This action could stifle the advances in technology vital to keep up with evolving cyber threats.
<rivacy and human rights advocates ob"ect to the 2raft 0onvention+s lack of procedural safeguards and due
process to protect the rights of individuals$ and to the possibility that the ensuing national laws would
effectively place restrictions on privacy$ anonymity$ and encryption. The 0ouncil plans to release a final
draft of the 0onvention in 2ecember 6AAA. &n 6AA3$ a political process involving national governments will
determine the scope and coverage of the final 0onvention. %ecause of cyber crime+s international potential$
all countries$ and all companies$ are affected. &nterested parties$ including national governments from
outside .urope$ and businesses and nongovernmental organizations from around the world$ should
participate vigorously in a consensus process to develop measures that support effective international law
enforcement and foster continued growth and innovation.

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UNIT I

DEFINE THE TERM LAW.

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