Past Year Questions: The Negotiable Instruments Act, 1881 | Business Laws for CA Foundation PDF Download

Q 1. (i) "Delivery of an instrument is essential whether instrument is payable to bearer or order for effecting the negotiation." Discuss this statement with reference to provisions of The Negotiable Instrument Act, 1881.
(3 Marks, May 2025)

Answer: (i)  As per Section 46 of the Negotiable Instruments Act, 1881, delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the property in the instrument to the person to whom it is delivered. The delivery can be, actual or constructive. Actual delivery takes place when the instrument changes hand physically. Constructive delivery takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on his behalf or when the indorser, after indorsement, holds the instrument as an agent of the indorsee.
Section 46 also lays down that when an instrument is conditionally or for a special purpose only, the property in it does not pass to the transferee, even though it is indorsed to him, unless the instrument is negotiated to a holder in due course.

​(ii) Differentiate between a promissory note and bill of exchange.
(4 Marks, May 2025)

Answer: (ii)  Difference between promissory note and bill of exchange 

Q 2.  Ram purchased a second-hand car from his friend Rohan for ₹ 5 lakhs on 10th November, 2022. He paid ₹ 4 lakh immediately and promised to pay ₹ 1 lakh within a year. But, he could not pay the remaining amount till December-2023. On 5th January, 2024 Ram received an invitation for Rohan’s wedding which he could not attend but sent a cheque of ₹ 51,000 as gift by post. When Rohan deposited the cheque, it was returned unpaid due to insufficient balance in the account of Ram. Rohan considered it as an offence under Section 138 of The Negotiable Instruments Act, 1881. Advise:
(i) Whether Ram would be held liable for dishonour of cheque?
(ii) Whether Rohan was justified in considering this as an offence under Section 138 of The Negotiable Instruments Act, 1881.
(7 Marks, May 2025)

Answer: According to section 138 of the Negotiable Instruments Act, 1881, where any cheque drawn by a person on an account maintained by him with a banker— 
• for payment of any amount of money 
• to another person from that account 
• for the discharge, in whole or in part, of any debt or other liability, [A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section] 
• is returned by the bank unpaid, 
• either because of the— 

• amount of money standing to the credit of that account is insufficient to honor the cheque, or 
• that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, 

such person shall be deemed to have committed an offence and shall, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both. 

Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability. 
(i) In the given question, Rohan received a cheque from Ram, for   ` 51,000 as a gift for his marriage. In terms of section 138, cheque given as a gift does not fall within this section. Hence, Ram would not be held liable for dishonour of cheque. 
(ii) The explanation to the section provides that for the purpose of section 138 only a legally enforceable debt or other liability is to be taken into consideration. The cheque of ` 51,000 was issued in the nature of a gift and not as a part of the payment for the balance amount of car. Hence, Rohan was not justified in considering the dishonour of cheque, an offence under section 138 of the Negotiable Instruments Act, 1881. 

Q 3. What are the rules governing the compensation payable in the event of dishonour of a negotiable instrument under the provisions of The Negotiable Instruments Act, 1881?
(7 Marks, Jan 2025)

Answer: Rules as to compensation (Section 117 of the Negotiable Instruments Act, 1881): The compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any party liable to the holder or any endorsee, shall be determined by the following rules:

(a) the holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it; 
(b) when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places; 
(c) an endorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at 18% per annum from the date of payment until tender or realisation thereof, together with all expenses caused by the dishonour and payment; 
(d) when the person charged and such endorser reside at different places, the endorser is entitled to receive such sum at the current rate of exchange between the two places; 
(e) the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). 

If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill. 

Q4. Anjali purchased various cosmetic products worth ₹ 15,000 during the last week from Sushil, a shopkeeper, on credit of one month. After a fortnight, she makes out a blank promissory note, signed it and delivered to Sushil who further endorsed it to Manish for the payment of his dues. Manish, who is holder in due course, filled up the due amount of ₹ 17,000 from Sushil and on maturity presented it to Anjali for payment but she refused to pay because the amount filled up is more than the agreed amount of ₹ 15,000. It is to be noted that the amount of ₹ 17,000 is covered by the stamp affixed on it. Referring to the provisions of The Negotiable Instruments Act, 1881 decide, whether Anjali is liable to honour the promissory note to Manish for ₹ 17,000?
(4 Marks, Jan 2025)

Answer: (i) Section 20 of the Negotiable Instruments Act, 1881 reads as “Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp.   The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount. Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder”.   

In the instant case, Anjali is not liable to honour the promissory note to Manish for Rs. 17000. She is liable only for Rs. 15000.
(ii) Priya, a small business owner, receives a bill of exchange from her customer, Sanjay, which is due for payment on October 15th. On October 12th, Priya presents the bill of exchange for payment at Sanjay’s office during regular business hours, but Sanjay is not present. Priya leaves the bill with Sanjay’s assistant, requesting to be presented to Sanjay for payment when he returns. However, Sanjay’s assistant forgot to give the bill, and Sanjay does not make the payment by the due date, and the bill is dishonoured. Based on the provisions of The Negotiable Instruments Act, 1881, examine whether Priya’s presentation of the bill of exchange to Sanjay’s assistant is valid under law.
(3 Marks, Jan 2025)

Answer: (ii) Presentment for payment [Section 64 of the Negotiable Instruments Act, 1881] 
As per section 64 of the Negotiable Instruments Act, 1881, promissory notes, bill of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided.
In default of such presentment, the other parties thereto are not liable thereon to such holder. 
So, presentment for payment must be made to the person primarily liable on the instrument, or in their absence, at the proper place during the usual business hours. 
In this case, Priya presented the bill at Sanjay’s office during regular business hours, but since Sanjay was not present, she left the bill with his assistant. 
While leaving the bill with the assistant might be considered a practical step, it does not fulfil the strict legal requirement of presenting the bill directly to the drawee (Sanjay) or his authorised representative for payment.
Therefore, the presentation of the bill by Priya to Sanjay’s assistant is not valid under law. 

Q 5.  (i) With reference to provisions of The Negotiable Instruments Act, 1881, tell the instances where a person shall be deemed to have committed an offence for dishonour of cheque and what are the conditions to be complied with for not constituting such an offence?
(4 Marks, Sep 2024)

Answer: (i) Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as if he were a bailee. 
Thus, a finder of lost goods has:   
(i) to take proper care of the property as man of ordinary prudence would take 
(ii) no right to appropriate the goods and   
(iii) to restore the goods if the owner is found. 

The right of finder of lost goods- may sue for specific reward offered [Section 168]: The finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him in finding the owner and preserving the goods found. But he has a right to retain the goods against the owner until he receives such compensation.

When finder of thing commonly on sale may sell it [Section 169]: When a thing which is commonly the subject of sale if lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it— 
(1) when the thing is in danger of perishing or of losing the greater part of its value, or   
(2) when the lawful charges of the finder in respect of the thing found amount to two-thirds of its value.   
Hence, the answers are: 
(A) Gifting the wristwatch to his son Mahesh, is unlawful. Raghav had no ownership rights over the watch and could not legally transfer it to someone else. 
(B) Warning Madhav to Sue for Recovery of Lawful Expenses: Raghav has no right to sue Madhav for the expenses voluntarily incurred by Raghav in finding the owner. 
(C)  Retaining Possession of the Wristwatch Until Recovery of Lawful Expenses: Raghav’s action of retaining the wristwatch until Madhav reimburses him for lawful expenses is valid.   
(D) Selling of Wristwatch for Recovery of Expenses: The watch is not perishable, and the expenses claimed (₹ 20,000) are far below two-thirds of the value of the watch (₹ 1,00,000). Therefore, Raghav does not have the right to sell the watch under these circumstances, and selling the watch would be unlawful.
(ii) (a) All cheques are bills while all bills are not cheques. Explain the additional features of a cheque which differentiate a cheque from bill as per the Negotiable Instruments Act, 1881.
(b) Ambiguous instrument
(3 Marks, Sep 2024)

Answer: (ii) According to section 55 of the Indian Contract Act, 1872, when a party to a contract promises to do certain thing at or before the specified time, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract.

Effect of acceptance of performance at time other than agreed upon - If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.

In the instant case,  
(a) Woollen Garments Limited is legally entitled to reject the goods due to the failure to meet the delivery deadline, as time was a crucial term of the contract. 
(b) The company cannot accept the total supply on the request of woman group but only when the company i.e. buyer elects to do so. In that case, the company cannot claim compensation for any loss occasioned by the non-performance of the promise (i.e. delay in supply) at the time agreed.

Q 6. Referring to the provisions of the Negotiable Instruments Act, 1881, answer the following in the given scenario:
(i) Aman drew the bill of exchange (the bill) on Baban, who accepted it, payable to Magan or order. Magan indorsed the bill to Gagan. Gagan indorsed the bill to Akash to be delivered to him on the next day. However, on the death of Gagan on the same day, his only son Ankit delivered the bill to Akash on the next day as intended by his deceased father. On presenting the bill on the due date, Baban refused to pay. Explaining the importance of delivery in negotiation, decide, whether Akash can enforce the payment of the bill against Baban or the previous parties.
(4 Marks, Sep 2024)

Answer: (i)  Importance of Delivery in Negotiation [Section 46 of the Negotiable Instruments Act, 1881]

Delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the property in the instrument to the person to whom it is delivered. The delivery can be, actual or constructive. Actual delivery takes place when the instrument changes hand physically. Constructive delivery takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on his behalf or when the indorser, after indorsement, holds the instrument as an agent of the indorsee.

 Section 46 also lays down that when an instrument is conditionally or for a special purpose only, the property in it does not pass to the transferee, even though it is indorsed to him, unless the instrument is negotiated to a holder in due course. 

The contract on a negotiable instrument until delivery remains incomplete and revocable. Delivery is essential not only at the time of negotiation but also at the time of making or drawing of negotiable instrument. The rights in the instrument are not transferred to the indorsee unless after the indorsement the same has been delivered. If a person makes the indorsement of instrument but before the same could be delivered to the indorsee, the indorser dies, the legal representatives of the deceased person cannot negotiate the same by mere delivery thereof. (Section 57).

In the instant case, Ankit the only son of Gagan delivered the bill to Akash on the next day as intended by his deceased father (Gagan) which is not valid.   

Hence, Akash cannot enforce the payment of the bill against Baban or the previous parties.  

(ii) Reliable Limited, an Indian company, is a global leader in Petrochemical products. For payment of the sale price of machinery imported from Alex Manufacturing Limited, a USA-based company (the exporter), the Indian company drew a bill of exchange on Manish, a resident of Mumbai (India) who accepted the bill at Mumbai payable to the exporter in Los Angeles, USA. Decide, whether the bill of exchange is an inland instrument or a foreign instrument. Assume that the bill of exchange was signed by the authorised person for the drawer company.
(3 Marks, Sep 2024)

Answer: (ii) As per section 11 of the Negotiable Instruments Act, 1881, a promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person resident in India, shall be deemed to be an inland instrument. In the instant case, the bill of exchange was: 

• Drawn in India (since Reliable Limited, an Indian company, drew it). 
• Accepted in India (Manish, a resident of Mumbai, accepted the bill in Mumbai). 
• Payable outside India, in Los Angeles, USA. 

The bill of exchange in this case is an inland instrument because it was drawn in India and accepted by a person resident in India, even though it is payable outside India (Los Angeles, USA).

Q 7. (b) A promissory note, payable at a certain period after sight, must be presented to the maker thereof for payment. Under which scenarios presentment for payment is not necessary and the instrument is dishonoured at the due date for presentment according to the provisions of The Negotiable Instrument Act, 1881?
(7 Marks, Jun 2024)

Answer: As per Section 76 of the Negotiable Instruments Act, 1881: No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment, in any of the following cases: 

(a) (i)  If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or   
(ii)   if the instrument being payable at his place of business, he closes such place on a business day during the usual business hours, or   
(iii)  if the instrument being payable at some other specified place, neither he nor any person authorised to pay it attends at such place during the usual business hours, or 
(iv)  if the instrument not being payable at any specified place, he cannot after due search, be found; 

(b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment; 
(c) as against any party if, after maturity, with knowledge that the instrument has not been presented— 

• he makes a part payment on account of the amount due on the instrument, 
• or promises to pay the amount due thereon in whole or in part, 
• or otherwise waives his right to take advantage of any default in presentment for payment; 

(d) as against the drawer, if the drawer could not suffer damage from the want of such presentment.

Q 8. Mr. Y issued a cheque for ₹ 10,000 to Mr. Z which was dishonoured by the Bank because Y did not have enough funds in his account and has no authority to overdraw. Examine as per the provisions of the Negotiable Instruments Act, 1881 whether-
(i) Mr. Y is liable for dishonour of cheque, if yes, what are the consequences for such an offence?
(ii) What would be your answer if Y issued a cheque as a donation to Mr. Z?
(7 Marks, Jun 2024)

Answer: (a) Dishonour of Cheque for Insufficiency, Etc., of funds in the accounts [Section 138 of the Negotiable Instruments Act, 1881] 

Where any cheque drawn by a person on an account maintained by him with a banker— 
• for payment of any amount of money 
• to another person from that account 
• for the discharge, in whole or in part, of any debt or other liability, [A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section]   
• is returned by the bank unpaid,   
• either because of the—

• amount of money standing to the credit of that account is insufficient to honour the cheque, or  
• that it exceeds the amount arranged to be paid from that account by an agreement made with that bank,   

such person shall be deemed to have committed an offence and shall, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both. 

In the instant case,   
(i) Since Y’s cheque was dishonoured by the Bank due to insufficiency of funds in his account, he shall be deemed to have committed an offence and shall, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. 20,000, or with both. 
(ii) A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section. Hence, if Y issued a cheque as a donation to Mr. Z, he shall not be liable under section 138 of the Act.