LAW ASSIGNMENT ON

BILL OF EXCHANGE
SUBMITTED TO: Prof I.R.Panjwani

NAME: PRATIK M PALRECHA ROLL NO 2013216 DIV - D

INDEX
INTRODUCTION TO NEGOTIABLE INSTRUMENTS ACT, 1881 MEANING OF BILLS OF EXCHANGE ILLUSTRATION TO BILL OF EXCHANGE SECTIONS CASE STUDY BIBLIOGRAPHY

INTRODUCTION TO NEGOTIABLE INSTRUMENTS ACT, 1881

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. This Section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or demand or after a certain time. Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may extend to the amount of the instrument.

The effect or the consequences of these provisions are: 1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time.

3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a persons account with a banker.

Meaning of Bills of Exchange

According to the Negotiable Instruments Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. The following features of a bill of exchange emerge out on the basis of this definition. A bill of exchange must be in writing and not oral. It is an order to make payment. The order to make payment is unconditional. The maker of the bill of exchange must sign it. The payment to be made must be certain. The date on which payment is made must also be certain. The bill of exchange must be payable to a certain person. The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time. It must be stamped as per the requirement of law. According to the Negotiable Instruments Act, a bill of exchange is generally drawn by the creditor on his debtor. It has to be accepted by the debtor or someone else on his behalf. It is called a draft before its acceptance. Therefore, one of the underlying features of a bill of exchange is that it has to be accepted either by the person upon whom it is drawn or by someone else on his/her behalf. For example, Amit sold goods to Rohit on credit for Rs.10000 for three months. If agreed so, Amit can draw a bill of exchange upon Rohit for Rs. 10000 payable after three months. Before it is accepted by Rohit it will be called a draft. It will become a bill of exchange only when Rohit writes the word accepted on it and puts his signature to communicate the acceptance.

Parties to a Bill of Exchange

There are three parties to a bill of exchange: Drawer is the maker of the bill of exchange. A seller/creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/ debtor. The drawer after writing the bill of exchange has to sign it as maker of the bill. Drawee is the person upon whom the bill of exchange is drawn. Drawee is purchaser of the goods upon whom the bill of exchange is drawn. The drawee has to write the word accepted if he accepts to make the payment given in the bill on the due date and has to put his signatures on it. After the drawee of a bill has signed his

assent on the face of the bill, he is called the acceptor and this process is called acceptance. A bill of exchange becomes a legal document after acceptance and binds the drawee to honour the bill on the due date. Acceptance however may be general or qualified. The general acceptance requires signatures of the acceptor only without stating any conditions, thereto. However, mention of a bank or a specified place of payment or part payment thereof, makes the acceptance qualified. A qualified acceptance varies the express terms of the bill as originally drawn and thereby the drawer can refuse to consider the bill as accepted. Sometimes the bill of exchange may be accepted by another person on behalf of the drawee. For example a bill of exchange drawn by Ram upon Shyam may be accepted by Ghanshyam. Payee is the person to whom the payment is made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations. In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee In case the bill is transferred in favour of a creditor of the drawer then the creditor will become the payee. Normally, the drawer and the payee is the same person. Similarly, the drawee and the acceptor is normally the same person. For example, Mamta sold goods worth Rs.10, 000 to Jyoti and drew a bill of exchange upon her for the same amount payable after three months. Here Mamta is the drawer of the bill and Jyoti is the drawee. If the bill is retained by Mamta for three months and the amount of Rs.10000 is received by her on the due date than Mamta will be the payee. If Mamta gives away this bill to her creditor, Ruchi then Ruchi will be the Conditions of Bills of exchange Section 5 of the Act defines, A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee. Essential conditions of a bill of exchange (1) It must be in writing. (2) It must be signed by the drawer. (3) The drawer, drawee and payee must be certain. (4) The sum payable must also be certain. (5) It should be properly stamped.

(6) It must contain an express order to pay money and money alone. For example, In the following cases, there is no order to pay, but only a request to pay. Therefore, none can be considered as a bill of exchange: (a) I shall be highly obliged if you make it convenient to pay Rs. 1000 to Suresh. (b) Mr. Ramesh, please let the bearer have one thousand rupees, and place it to my account and oblige However, there is an order to pay, though it is politely made, in the following examples: (a) Please pay Rs. 500 to the order of A. (b) Mr. A will oblige Mr. C, by paying to the order of P. (7) The order must be unconditional. Distinction Between Bill of Exchange and Promissory Note 1. Number of parties: In a promissory note there are only two parties the maker (debtor) and the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out of the three may be filled by one and the same person, 2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of exchange to the drawer and payee or drawee and payee may be same person. 3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the direction of the drawer. 4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it can be presented for payment. 5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional. 6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee. 7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note. 8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be

given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.

Classification of Bills
Bills can be classified as: (1) Inland and foreign bills. (2) Time and demand bills. (3) Trade and accommodation bills. (1) Inland and Foreign Bills Inland bill: A bill is, named as an inland bill if: (a) it is drawn in India on a person residing in India, whether payable in or outside India, or (b) it is drawn in India on a person residing outside India but payable in India. The following are the Inland bills (i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is an inland bill. (ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an inland bill. (iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill. Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign bills: 1. A bill drawn outside India and made payable in India. 2. A bill drawn outside India on any person residing outside India. 3. A bill drawn in India on a person residing outside India and made payable outside India. 4. A bill drawn outside India on a person residing in India. 5. A bill drawn outside India and made payable outside India. Bills in sets (Secs. 132 and 133): The foreign bills are generally drawn in sets of three, and each sets is termed as a via. As soon as anyone of the set is paid, the others becomes inoperative. These bills are drawn in different parts. They are drawn in order to avoid their loss or miscarriage during transit. Each part is despatched separately. To avoid delay, all the parts are sent on the same day; by different mode of conveyance.

Rules: Sections 132 and 133 provide for the following rules: (i) A bill of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All parts make one bill and the entire bill is extinguished, i.e. when payment is made on one part- the other parts will become inoperative (Section 132). (ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed only on one of the parts. In case a person accepts or endorses different parts of the bill in favour of different persons, he and the subsequent endorsers of each part are liable on such part as if it were a separate bill (Sec. 132). (iii) As between holders in due course of the different parts of the same bill, he who first acquired title to anyone part is entitled to the other parts and is also entitled to claim the money represented by bill (Sec. 133).

(2) Time and Demand Bill Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable after date is a time bill. Demand bill: A bill payable at sight or on demand is termed as a demand bill. (3) Trade and Accommodation Bill Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an accommodation bill. Example: A, is need of money for three months. He induces his friend B to accept a bill of exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The bill is an accommodation bill. A may get the bill discounted from his bankers immediately, paying a small sum as discount. Thus, he can use the funds for three months and then just before maturity he may remit the money to B, who will meet the bill on maturity. In the above example A is the accommodated party while B is the accommodating party. It is to be noted that an recommendation bill may be for accommodation of both the drawer arid acceptor. In such a case, they share the proceeds of the discounted bill.

Rules regarding accommodation bills are: (i) In case the patty accommodated continues to hold the bill till maturity, the accommodating party shall not be liable to him for payment of, the bill since the contract between them is not based on any consideration (Section 43). (ii) But the accommodating party shall be liable to any subsequent holder for value who may be knowing the exact position that the bill is an accommodation bill and that the full consideration has not been received by the acceptor. The accommodating party can, in turn, claim compensation from the accommodated party for the amount it has been asked to pay the holder for value. (iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity is in the same position as a holder before maturity, provided he takes it in good faith and for value (Sec. 59) In form and all other respects an accommodation bill is quite similar to an ordinary bill of exchange. There is nothing on the face of the accommodation bill to distinguish it from an ordinary trade bill.

SECTIONS
BOE : U/s 5 Parties to BOE : U/s 7 Payment on Demand : U/s 19 Inland Bills : U/s 11 Foreign Bills : U/s 12

CASE STUDY
Ranbir Rajkapoor Vs. S.S. Bhonsale, Tax Recovery Officer and others LegalCrystal Citation Court : Mumbai Reported in : [1986]162ITR153(Bom) Judge : M.L. Pendse, J. Subject : Direct Taxation Decided On : Jan-08-1986 Acts : Income Tax Act, 1961 - Sections 60 and 61 Case Number : Writ Petition No. 1135 of 1984 Appellant : Ranbir Rajkapoor Respondent : S.S. Bhonsale, Tax Recovery Officer and others Excerpt: Direct Taxation - auction sale - Sections 60 and 61 of Income Tax Act, 1961 petition against order of respondent who refused to set aside auction sale petitioner paid all amount of penalty within 30 days - respondent refused to set aside auction sale - according to Section 61 petitioner en ..... 16,82,225. Shri Dhanuka is, therefore, right in submitting that the petitioner was not entitled to the relief under rule 60 of the Second Schedule to the Income-tax Act, 1961. 6. But, in my judgment, the petitioner has already filed an application under rule 61 on March 16, 1984. The petitioner by addressing a letter to the Tax Recovery Officer had complained that the property was knocked down for Rs. Indeed, as this application under rule 61 was filed by the petitioner, it was not open to the Tax Recovery Officer to dispose of the application under rule 60, because sub-rule(2) of rule 60 specifically prescribes that when a defaulter makes an application under rule 61, then unless he withdraws that application, he is not entitled to prosecute the application under rule 60. In my judgment, as the petitioner had already instituted an application under rule 61 on March 16, 1984, the Tax Recovery Officer was in error in disposing of the application under rule 60 and rejecting it on the ground that the petitioner had failed to comply with the requirements of the rules. Judgment: Pendse, J. 1. The petitioner is the owner of an immovable property known as Daboo House, Plot No. 16, Jay Bharat Co-operative Housing Society Limited, Khar. Respondent No. 1 is the Tax Recovery Officer. On January 16, 1984, he issued a proclamation of sale for public auction of the petitioner's property for recovery of arrears of tax amounting to Rs. 37,98,451. The reserve pride was

fixed at Rs. 15,00,000. The property was put to auction and was sold on March 8, 1984, for a price of Rs. 8.70 lakhs in favour of respondents Nos. 3 and 4. The property was sold for a price far less than the reserve price. In the meanwhile, the petitioner had informed the Tax Recovery Officer that he had filed an appeal and taken other proceedings for challenging the amount of arrears of taxes mentioned in the recovery certificate. The petitioner had succeeded in getting the amount of arrears reduced by the income-tax authorities. The Tax Recovery Officer thereupon on March 9, 1984, that is, a day next to the date of auction sale, forwarded the recovery certificate to the income-tax authorities for rectification. 2. On March 16, 1984, the petitioner addressed a letter to respondent No. 1 complaining about the holding of the auction sale and disposing of the property at a price less than the reserve price. On March 20, 1984, the petitioner approached the Tax Recovery Officer and the Tax Recovery Officer informed the petitioner that if the petitioner deposits the amount specified in the sale proclamation together with interest and 5 per cent. of the purchase money by way of penalty to be paid to the purchaser, then it may be possible to set aside the auction sale. The petitioner pointed out that the amount mentioned in the sale proclamation has been substantially reduced by the Income-tax Officer in the proceedings adopted by the petitioner and sought advice from the Tax Recovery Officer as to what amount should be deposited. The petitioner was told to deposit an amount of Rs. 2,23,955 and the petitioner did deposit that amount on April 6, 1984. On the same day, the petitioner addressed a letter to the Tax Recovery Officer for cancellation of the sale under rule 60(1) of the Second Schedule to the Income-tax Act, 1961. The petitioner was informed by respondent No. 1 that a further amount of Rs. 43,500 is required to be deposited for payment to the auction-purchaser and the petitioner deposited even that amount. Therefore, on April 20, 1984, the petitioner was informed by the Tax Recovery Officer that the auction sale cannot be set aside and has become final. That has given rise to the filing of the present petition in this court. 3. The petition came up for admission before Mrs. Justice Manohar on June 22, 1984, and the learned judge, while admitting the petition, directed the petitioner to deposit with respondent No. 1 a sum of Rs. 16,82,225 which according to respondents Nos. 1 and 2 was due from the petitioner towards the arrears of taxes. This amount was ascertained by the income-tax authorities as the amount due after the relief secured by the petitioner from the higher authorities, the result of which was that the amount of arrears of Rs. 37,98,451 stood reduced to Rs. 16,82,225. The petitioner accordingly deposited the amount with respondent No. 1 on June 28, 1984. 4. It is now contended on behalf of the petitioner that the auction sale held in favour of respondents Nos. 3 and 4 is required to be set aside under rules 60 and 61 of the Second Schedule to the Income-tax Act, 1961. Rule 60 provides that where an immovable property has been sold in execution, the defaulter may at any time within 30 days from the date of sale, apply to the Tax

Recovery Officer to set aside the sale, on deposit for payment to the Incometax Officer, the amount specified in the proclamation of sale with interest at the rate of 12% per annum and for payment to the purchaser as penalty a sum equal to 5% of the purchase money. The rule further prescribes that in case the defaulter makes an application under rule 61, then unless that application is withdrawn, it is not permissible to make or prosecute the application under rule 60. Rule 61 prescribes that a sale can be set aside by the Tax Recovery Officer on the ground that notice was not served on the defaulter or on the ground of material irregularity in publishing or conducting the sale. The rule further prescribes that the sale should be set aside provided it is further established that substantial injury was suffered by the defaulter by the irregularity and the defaulter deposits the amount recoverable in execution of the certificate. 5. Shri Dhanuka, learned counsel appearing on behalf of the Department, submitted that the petitioner made the application under rule 60 on April 6, 1984, but relief could not be granted to the petitioner as the petitioner had filed to deposit the entire arrears of taxes. The contention of the petitioner that the amount of Rs. 2,23,955 was deposited as per directions of the Tax Recovery Officer cannot be accepted because it was not fir the Tax Recovery Officer to determine what was the amount due. Indeed, it has been subsequently found that the amount due was Rs. 16,82,225. Shri Dhanuka is, therefore, right in submitting that the petitioner was not entitled to the relief under rule 60 of the Second Schedule to the Income-tax Act, 1961. 6. But, in my judgment, the petitioner has already filed an application under rule 61 on March 16, 1984. The petitioner by addressing a letter to the Tax Recovery Officer had complained that the property was knocked down for Rs. 8,70,000 in spite of the reserved price fixed at Rs. 15 lakhs. That being a serious irregularity, the petitioner was entitled to claim that the auction sale should be set aside under rule 61. As this application was filed within one month of the date of holding of the auction sale and the petitioner having shown a serious irregularity in conducting the sale, it was necessary for the Tax Recovery Officer to dispose of this application under rule 61 on merits. Indeed, as this application under rule 61 was filed by the petitioner, it was not open to the Tax Recovery Officer to dispose of the application under rule 60, because sub-rule(2) of rule 60 specifically prescribes that when a defaulter makes an application under rule 61, then unless he withdraws that application, he is not entitled to prosecute the application under rule 60. In my judgment, as the petitioner had already instituted an application under rule 61 on March 16, 1984, the Tax Recovery Officer was in error in disposing of the application under rule 60 and rejecting it on the ground that the petitioner had failed to comply with the requirements of the rules. In my judgment, it is necessary for the Tax recovery Officer to ascertain whether the relief could be granted to the petitioner under rule 61. The Tax Recovery Officer would consider whether the holding of auction sale for a price which is far below the reserved price, amounts to a serious irregularity in conducting the sale. The Tax Recovery

Officer may also consider whether the publication of the proclamation of sale was proper or otherwise and whether there was any irregularity in publishing the sale. The Tax Recovery Officer should dispose of the application of the petitioner under rule 61 within four weeks from the date of receipt of the writ. The amount of Rs. 16,82,225 deposited by the petitioner with respondent No. 1 shall be considered as a deposit made by the petitioner under rule 61(b). 7. Accordingly, rule is made a absolute and the decision communicated by respondent No. 1 to the petitioner on April 20, 1984, that the auction sale has become final is set aside and respondent No. 1 is directed to dispose of the application filed by the petitioner under rule 61 of the Second Schedule to the Income-tax Act, 1961, on merits and in the light of the observations made in this judgment. 8. In the circumstances of the case, there will be no order as to cost ______________________________________________________________

BIBLIOGRAPHY

http://indiankanoon.org/ lawcommissionofindia.nic.in www.advocatekhoj.com rbidocs.rbi.org.in www.investopedia.com