Sample Paper Series- II, Solution - Business Laws for CA Foundation

 Page 1


1 
Test Series: April, 2019 
MOCK TEST PAPER 2 
FOUNDATION COURSE 
PAPER 2: SECTION A: BUSINESS LAWS  
ANSWERS 
1. (a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
Each of two or more joint promisors may compel every other joint promisor to contribute equally 
with himself to the performance of the promise, unless a contrary intention appears from the 
contract. 
If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
In the instant case, Krish, Kamya and Ketan jointly promised to pay Rs. 6,00,000 to Dia. Kamya 
become insolvent and her private assets are sufficient to pay 1/5 of her share of debts. Krish is 
compelled to pay the whole amount. Krish is entitled to receive Rs. 40,000 from Kamya’s estate, 
and Rs. 2,80,000 from Ketan.  
(b)  The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore, the whole idea of  
Mr. Akbar was simply to split his income into three parts with a view to evade tax. No other 
business was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried no other business, but was created 
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over 
to the assessee as pretended loans.  
(c)  The differences between the sale and agreement to sell is as follows: 
Basis of difference Sale Agreement to sell 
Transfer of property The property in the goods 
passes to the buyer 
immediately. 
Property in the goods passes to the 
buyer on future date or on 
fulfilment of some condition. 
Nature of contract It is an executed contract. i.e. 
contract for which 
consideration has been paid. 
It is an executory contract. i.e. 
contract for which consideration is 
to be paid at a future date. 
Remedies for breach The seller can sue the buyer for 
the price of the goods because 
The aggrieved party can sue for 
damages only and not for the price, 
© The Institute of Chartered Accountants of India
Page 2


1 
Test Series: April, 2019 
MOCK TEST PAPER 2 
FOUNDATION COURSE 
PAPER 2: SECTION A: BUSINESS LAWS  
ANSWERS 
1. (a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
Each of two or more joint promisors may compel every other joint promisor to contribute equally 
with himself to the performance of the promise, unless a contrary intention appears from the 
contract. 
If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
In the instant case, Krish, Kamya and Ketan jointly promised to pay Rs. 6,00,000 to Dia. Kamya 
become insolvent and her private assets are sufficient to pay 1/5 of her share of debts. Krish is 
compelled to pay the whole amount. Krish is entitled to receive Rs. 40,000 from Kamya’s estate, 
and Rs. 2,80,000 from Ketan.  
(b)  The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore, the whole idea of  
Mr. Akbar was simply to split his income into three parts with a view to evade tax. No other 
business was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried no other business, but was created 
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over 
to the assessee as pretended loans.  
(c)  The differences between the sale and agreement to sell is as follows: 
Basis of difference Sale Agreement to sell 
Transfer of property The property in the goods 
passes to the buyer 
immediately. 
Property in the goods passes to the 
buyer on future date or on 
fulfilment of some condition. 
Nature of contract It is an executed contract. i.e. 
contract for which 
consideration has been paid. 
It is an executory contract. i.e. 
contract for which consideration is 
to be paid at a future date. 
Remedies for breach The seller can sue the buyer for 
the price of the goods because 
The aggrieved party can sue for 
damages only and not for the price, 
© The Institute of Chartered Accountants of India
2 
of the passing of the property 
therein to the buyer. 
unless the price was payable at a 
stated date. 
Liability of parties A subsequent loss or 
destruction of the goods is the 
liability of the buyer. 
Such loss or destruction is the 
liability of the seller. 
Burden of risk Risk of loss is that of buyer 
since risk follows ownership. 
Risk of loss is that of seller. 
Nature of rights Creates Jus in rem Creates Jus in personam 
Right of resale The seller cannot resell the 
goods. 
The seller may sell the goods since 
ownership is with the seller. 
2. (a) Discharge of a Contract: 
A Contract may be discharged either by an act of parties or by an operation of law which may be 
enumerated as follows: 
(1) Discharge by performance which may be actual performance or attempted performance. 
Actual performance is said to have taken place, when each of the parties has done what he 
had agreed to do under the agreement. When the promisor offers to perform his obligation, 
but the promisee refuses to accept the performance, it amounts to attempted performance or 
tender. 
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that 
if the parties to a contract agree to substitute a new contract for it or to refund or remit or alter 
it, the original contract need not to be performed. Novation, Rescission, Alteration and 
Remission are also the same ground of this nature. 
(3) Discharge by impossibility of performance: The impossibility may exist from its initiation. 
Alternatively, it may be supervening impossibility which may take place owing to (a) 
unforeseen change in law (b) The destruction of subject matter (c) The non-existence or non-
occurrence of particular state of things (d) the declaration of war (Section 56). 
(4) Discharge by lapse of time: A contract should be performed within a specific period as 
prescribed in the Law of Limitation Act., 1963. If it is not performed the party is deprived of 
remedy at law. 
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc. 
(6) Discharge by breach of contract: Breach of contract may be actual breach of contract or 
anticipatory breach of contract. If one party defaults in performing his part of the contract on 
the due date, he is said to have committed breach thereof. When on the other hand, a person 
repudiates a contract before the stipulated time for its performance has arrived, he is deemed 
to have committed anticipatory breach. If one of the parties to a contract breaks the promise 
the party injured thereby, has not only a right of action for damages but he is also discharged 
from performing his part of the contract (Section 64). 
(7) A promise may dispense with or remit, wholly or in part, the performance of the promise made 
to him, or may extend the time for such performance or may accept instead of it any 
satisfaction he thinks fit. In other words, a contract may be discharged by remission.  
(Section 63). 
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the 
performance of the promise, the promisor is excused by such neglect or refusal (Section 67). 
(b) Meaning: A LLP is a new form of legal business entity with limited liability. It is an alternative 
corporate business vehicle that not only gives the benefits of limited liability at low compliance cost 
but allows its partners the flexibility of organising their internal structure as a traditional partnership. 
© The Institute of Chartered Accountants of India
Page 3


1 
Test Series: April, 2019 
MOCK TEST PAPER 2 
FOUNDATION COURSE 
PAPER 2: SECTION A: BUSINESS LAWS  
ANSWERS 
1. (a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
Each of two or more joint promisors may compel every other joint promisor to contribute equally 
with himself to the performance of the promise, unless a contrary intention appears from the 
contract. 
If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
In the instant case, Krish, Kamya and Ketan jointly promised to pay Rs. 6,00,000 to Dia. Kamya 
become insolvent and her private assets are sufficient to pay 1/5 of her share of debts. Krish is 
compelled to pay the whole amount. Krish is entitled to receive Rs. 40,000 from Kamya’s estate, 
and Rs. 2,80,000 from Ketan.  
(b)  The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore, the whole idea of  
Mr. Akbar was simply to split his income into three parts with a view to evade tax. No other 
business was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried no other business, but was created 
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over 
to the assessee as pretended loans.  
(c)  The differences between the sale and agreement to sell is as follows: 
Basis of difference Sale Agreement to sell 
Transfer of property The property in the goods 
passes to the buyer 
immediately. 
Property in the goods passes to the 
buyer on future date or on 
fulfilment of some condition. 
Nature of contract It is an executed contract. i.e. 
contract for which 
consideration has been paid. 
It is an executory contract. i.e. 
contract for which consideration is 
to be paid at a future date. 
Remedies for breach The seller can sue the buyer for 
the price of the goods because 
The aggrieved party can sue for 
damages only and not for the price, 
© The Institute of Chartered Accountants of India
2 
of the passing of the property 
therein to the buyer. 
unless the price was payable at a 
stated date. 
Liability of parties A subsequent loss or 
destruction of the goods is the 
liability of the buyer. 
Such loss or destruction is the 
liability of the seller. 
Burden of risk Risk of loss is that of buyer 
since risk follows ownership. 
Risk of loss is that of seller. 
Nature of rights Creates Jus in rem Creates Jus in personam 
Right of resale The seller cannot resell the 
goods. 
The seller may sell the goods since 
ownership is with the seller. 
2. (a) Discharge of a Contract: 
A Contract may be discharged either by an act of parties or by an operation of law which may be 
enumerated as follows: 
(1) Discharge by performance which may be actual performance or attempted performance. 
Actual performance is said to have taken place, when each of the parties has done what he 
had agreed to do under the agreement. When the promisor offers to perform his obligation, 
but the promisee refuses to accept the performance, it amounts to attempted performance or 
tender. 
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that 
if the parties to a contract agree to substitute a new contract for it or to refund or remit or alter 
it, the original contract need not to be performed. Novation, Rescission, Alteration and 
Remission are also the same ground of this nature. 
(3) Discharge by impossibility of performance: The impossibility may exist from its initiation. 
Alternatively, it may be supervening impossibility which may take place owing to (a) 
unforeseen change in law (b) The destruction of subject matter (c) The non-existence or non-
occurrence of particular state of things (d) the declaration of war (Section 56). 
(4) Discharge by lapse of time: A contract should be performed within a specific period as 
prescribed in the Law of Limitation Act., 1963. If it is not performed the party is deprived of 
remedy at law. 
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc. 
(6) Discharge by breach of contract: Breach of contract may be actual breach of contract or 
anticipatory breach of contract. If one party defaults in performing his part of the contract on 
the due date, he is said to have committed breach thereof. When on the other hand, a person 
repudiates a contract before the stipulated time for its performance has arrived, he is deemed 
to have committed anticipatory breach. If one of the parties to a contract breaks the promise 
the party injured thereby, has not only a right of action for damages but he is also discharged 
from performing his part of the contract (Section 64). 
(7) A promise may dispense with or remit, wholly or in part, the performance of the promise made 
to him, or may extend the time for such performance or may accept instead of it any 
satisfaction he thinks fit. In other words, a contract may be discharged by remission.  
(Section 63). 
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the 
performance of the promise, the promisor is excused by such neglect or refusal (Section 67). 
(b) Meaning: A LLP is a new form of legal business entity with limited liability. It is an alternative 
corporate business vehicle that not only gives the benefits of limited liability at low compliance cost 
but allows its partners the flexibility of organising their internal structure as a traditional partnership. 
© The Institute of Chartered Accountants of India
3 
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its 
assets, the liability of the partners will be limited. 
Steps to incorporate LLP:  
(a) Name reservation 
• The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of 
LLP. 
• Applicant has to file e- Form 1, for ascertaining availability and reservation of the name of a 
LLP business. 
(b) Incorporate LLP 
• After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability 
Partnership (LLP). 
• e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated 
partners’ details and consent of the partners/ designated partners to act as partners/ 
designated partners. 
(c) LLP Agreement 
• Execution of LLP Agreement is mandatory as per Section 23 of the Act. 
• LLP Agreement is required to be filed with the registrar in e- Form 3 within 30 days of 
incorporation of LLP. 
3. (a) Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable 
like any other property, but as the partnership relationship is based on mutual confidence, the assignee 
of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as 
the original partner.  
The rights of such a transferee are as follows: 
(1) During the continuance of partnership, such transferee is not entitled  
(a) to interfere with the conduct of the business,  
(b)  to require accounts, or  
(c)  to inspect books of the firm.  
 He is only entitled to receive the share of the profits of the transferring partner and he is bound 
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will 
be entitled, against the remaining partners:  
(a)  to receive the share of the assets of the firm to which the transferring partner was 
entitled, and  
(b)  for the purpose of ascertaining the share,  
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of all 
the partners. A partner cannot by transferring his own interest, make anybody else a partner in his 
place, unless the other partners agree to accept that person as a partner. At the same time, a partner 
is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded 
as an existing interest and tangible property which can be assigned. 
(b) BREACH OF CONTRACT- DAMAGES: Section 73 of the Indian Contract Act, 1872 lays down that 
when a contract has been broken, the party who suffers by such breach is entitled to receive from 
the party who has broken the contract compensation for any loss or damage caused to him thereby 
© The Institute of Chartered Accountants of India
Page 4


1 
Test Series: April, 2019 
MOCK TEST PAPER 2 
FOUNDATION COURSE 
PAPER 2: SECTION A: BUSINESS LAWS  
ANSWERS 
1. (a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
Each of two or more joint promisors may compel every other joint promisor to contribute equally 
with himself to the performance of the promise, unless a contrary intention appears from the 
contract. 
If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
In the instant case, Krish, Kamya and Ketan jointly promised to pay Rs. 6,00,000 to Dia. Kamya 
become insolvent and her private assets are sufficient to pay 1/5 of her share of debts. Krish is 
compelled to pay the whole amount. Krish is entitled to receive Rs. 40,000 from Kamya’s estate, 
and Rs. 2,80,000 from Ketan.  
(b)  The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore, the whole idea of  
Mr. Akbar was simply to split his income into three parts with a view to evade tax. No other 
business was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried no other business, but was created 
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over 
to the assessee as pretended loans.  
(c)  The differences between the sale and agreement to sell is as follows: 
Basis of difference Sale Agreement to sell 
Transfer of property The property in the goods 
passes to the buyer 
immediately. 
Property in the goods passes to the 
buyer on future date or on 
fulfilment of some condition. 
Nature of contract It is an executed contract. i.e. 
contract for which 
consideration has been paid. 
It is an executory contract. i.e. 
contract for which consideration is 
to be paid at a future date. 
Remedies for breach The seller can sue the buyer for 
the price of the goods because 
The aggrieved party can sue for 
damages only and not for the price, 
© The Institute of Chartered Accountants of India
2 
of the passing of the property 
therein to the buyer. 
unless the price was payable at a 
stated date. 
Liability of parties A subsequent loss or 
destruction of the goods is the 
liability of the buyer. 
Such loss or destruction is the 
liability of the seller. 
Burden of risk Risk of loss is that of buyer 
since risk follows ownership. 
Risk of loss is that of seller. 
Nature of rights Creates Jus in rem Creates Jus in personam 
Right of resale The seller cannot resell the 
goods. 
The seller may sell the goods since 
ownership is with the seller. 
2. (a) Discharge of a Contract: 
A Contract may be discharged either by an act of parties or by an operation of law which may be 
enumerated as follows: 
(1) Discharge by performance which may be actual performance or attempted performance. 
Actual performance is said to have taken place, when each of the parties has done what he 
had agreed to do under the agreement. When the promisor offers to perform his obligation, 
but the promisee refuses to accept the performance, it amounts to attempted performance or 
tender. 
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that 
if the parties to a contract agree to substitute a new contract for it or to refund or remit or alter 
it, the original contract need not to be performed. Novation, Rescission, Alteration and 
Remission are also the same ground of this nature. 
(3) Discharge by impossibility of performance: The impossibility may exist from its initiation. 
Alternatively, it may be supervening impossibility which may take place owing to (a) 
unforeseen change in law (b) The destruction of subject matter (c) The non-existence or non-
occurrence of particular state of things (d) the declaration of war (Section 56). 
(4) Discharge by lapse of time: A contract should be performed within a specific period as 
prescribed in the Law of Limitation Act., 1963. If it is not performed the party is deprived of 
remedy at law. 
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc. 
(6) Discharge by breach of contract: Breach of contract may be actual breach of contract or 
anticipatory breach of contract. If one party defaults in performing his part of the contract on 
the due date, he is said to have committed breach thereof. When on the other hand, a person 
repudiates a contract before the stipulated time for its performance has arrived, he is deemed 
to have committed anticipatory breach. If one of the parties to a contract breaks the promise 
the party injured thereby, has not only a right of action for damages but he is also discharged 
from performing his part of the contract (Section 64). 
(7) A promise may dispense with or remit, wholly or in part, the performance of the promise made 
to him, or may extend the time for such performance or may accept instead of it any 
satisfaction he thinks fit. In other words, a contract may be discharged by remission.  
(Section 63). 
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the 
performance of the promise, the promisor is excused by such neglect or refusal (Section 67). 
(b) Meaning: A LLP is a new form of legal business entity with limited liability. It is an alternative 
corporate business vehicle that not only gives the benefits of limited liability at low compliance cost 
but allows its partners the flexibility of organising their internal structure as a traditional partnership. 
© The Institute of Chartered Accountants of India
3 
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its 
assets, the liability of the partners will be limited. 
Steps to incorporate LLP:  
(a) Name reservation 
• The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of 
LLP. 
• Applicant has to file e- Form 1, for ascertaining availability and reservation of the name of a 
LLP business. 
(b) Incorporate LLP 
• After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability 
Partnership (LLP). 
• e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated 
partners’ details and consent of the partners/ designated partners to act as partners/ 
designated partners. 
(c) LLP Agreement 
• Execution of LLP Agreement is mandatory as per Section 23 of the Act. 
• LLP Agreement is required to be filed with the registrar in e- Form 3 within 30 days of 
incorporation of LLP. 
3. (a) Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable 
like any other property, but as the partnership relationship is based on mutual confidence, the assignee 
of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as 
the original partner.  
The rights of such a transferee are as follows: 
(1) During the continuance of partnership, such transferee is not entitled  
(a) to interfere with the conduct of the business,  
(b)  to require accounts, or  
(c)  to inspect books of the firm.  
 He is only entitled to receive the share of the profits of the transferring partner and he is bound 
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will 
be entitled, against the remaining partners:  
(a)  to receive the share of the assets of the firm to which the transferring partner was 
entitled, and  
(b)  for the purpose of ascertaining the share,  
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of all 
the partners. A partner cannot by transferring his own interest, make anybody else a partner in his 
place, unless the other partners agree to accept that person as a partner. At the same time, a partner 
is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded 
as an existing interest and tangible property which can be assigned. 
(b) BREACH OF CONTRACT- DAMAGES: Section 73 of the Indian Contract Act, 1872 lays down that 
when a contract has been broken, the party who suffers by such breach is entitled to receive from 
the party who has broken the contract compensation for any loss or damage caused to him thereby 
© The Institute of Chartered Accountants of India
4 
which naturally arose in the usual course of things from such breach or which the parties knew 
when they made the contract to be likely to result from the breach of it. 
The leading case on this point is “Hadley v. Baxendale” in which it was decided by the Court that 
the special circumstances under which the contract was actually made were communicated by the 
plaintiff to the defendant, and thus known to both the parties to the contract, the damages resulting 
from the breach of such contract which they would reasonably contemplate, would be the amount 
of injury which would ordinarily follow from the breach of contract under these special 
circumstances so known and communicated. 
The problem asked in this question is based on the provisions of Section 73 of the Indian Contract 
Act, 1872. In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from 
him for the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the special 
circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ ` 500/- at the rate of 0.50 paise i.e. 1000 
water bottles x 0.50 paise (difference between the procuring price of water bottles and contracted 
selling price to ‘Y’) being the amount of profit ‘X’ would have made by the performance of his 
contract with ‘Y’. 
If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been the 
difference between the contract price and the market price on the day of default. In other words, 
the amount of damages would be ` 750/- (i.e. 1000 water bottles x 0.75 paise). 
4. (a)  The following are implied conditions in a contract of sale by sample in accordance with Section 17 
of the Sale of Goods Act, 1930; 
  (a) that the bulk shall correspond with the sample in quality; 
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample. 
(c) that the goods shall be free from any defect, rendering them unmerchantable, which would 
not be apparent on a reasonable examination of the sample. 
Implied Warrants: 
1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that the buyer 
shall have and enjoy quiet possession of the goods. That is to say, if the buyer having got 
possession of the goods, is later on disturbed in his possession, he is entitled to sue the seller 
for the breach of the warranty. 
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied warranty that the 
goods shall be free from any charge or encumbrance in favour of any third party not declared 
or known to the buyer before or at the time the contract is entered into.  
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied warranty as to 
quality or fitness for a particular purpose may be annexed by the usage of trade. 
4. Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that 
the goods are inherently dangerous or they are likely to be dangerous to the buyer and that 
the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise 
he will be liable in damages. 
(b) A partner may not be expelled from a firm by a majority of partners except in exercise, in good 
faith, of powers conferred by contract between the partners. It is, thus, essential that:  
(i)  the power of expulsion must have existed in a contract between the partners;  
(ii)  the power has been exercised by a majority of the partners; and  
(iii) it has been exercised in good faith. 
© The Institute of Chartered Accountants of India
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Test Series: April, 2019 
MOCK TEST PAPER 2 
FOUNDATION COURSE 
PAPER 2: SECTION A: BUSINESS LAWS  
ANSWERS 
1. (a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise, 
the promisee may, in the absence of express agreement to the contrary, compel any one or more 
of such joint promisors to perform the whole of the promise. 
Each of two or more joint promisors may compel every other joint promisor to contribute equally 
with himself to the performance of the promise, unless a contrary intention appears from the 
contract. 
If any one of two or more joint promisors makes default in such contribution, the remaining joint 
promisors must bear the loss arising from such default in equal shares. 
In the instant case, Krish, Kamya and Ketan jointly promised to pay Rs. 6,00,000 to Dia. Kamya 
become insolvent and her private assets are sufficient to pay 1/5 of her share of debts. Krish is 
compelled to pay the whole amount. Krish is entitled to receive Rs. 40,000 from Kamya’s estate, 
and Rs. 2,80,000 from Ketan.  
(b)  The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person 
distinct and separate from its members, and therefore, has an independent separate legal 
existence from its members who have constituted the company. But under certain circumstances 
the separate entity of the company may be ignored by the courts. When that happens, the courts 
ignore the corporate entity of the company and look behind the corporate façade and hold the 
persons in control of the management of its affairs liable for the acts of the company. Where a 
company is incorporated and formed by certain persons only for the purpose of evading taxes, the 
courts have discretion to disregard the corporate entity and tax the income in the hands of the 
appropriate assessee. 
(1) The problem asked in the question is based upon the aforesaid facts. The three companies 
were formed by the assessee purely and simply as a means of avoiding tax and the companies 
were nothing more than the façade of the assessee himself. Therefore, the whole idea of  
Mr. Akbar was simply to split his income into three parts with a view to evade tax. No other 
business was done by the company. 
(2) The legal personality of the three private companies may be disregarded because the 
companies were formed only to avoid tax liability. It carried no other business, but was created 
simply as a legal entity to ostensibly receive the dividend and interest and to hand them over 
to the assessee as pretended loans.  
(c)  The differences between the sale and agreement to sell is as follows: 
Basis of difference Sale Agreement to sell 
Transfer of property The property in the goods 
passes to the buyer 
immediately. 
Property in the goods passes to the 
buyer on future date or on 
fulfilment of some condition. 
Nature of contract It is an executed contract. i.e. 
contract for which 
consideration has been paid. 
It is an executory contract. i.e. 
contract for which consideration is 
to be paid at a future date. 
Remedies for breach The seller can sue the buyer for 
the price of the goods because 
The aggrieved party can sue for 
damages only and not for the price, 
© The Institute of Chartered Accountants of India
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of the passing of the property 
therein to the buyer. 
unless the price was payable at a 
stated date. 
Liability of parties A subsequent loss or 
destruction of the goods is the 
liability of the buyer. 
Such loss or destruction is the 
liability of the seller. 
Burden of risk Risk of loss is that of buyer 
since risk follows ownership. 
Risk of loss is that of seller. 
Nature of rights Creates Jus in rem Creates Jus in personam 
Right of resale The seller cannot resell the 
goods. 
The seller may sell the goods since 
ownership is with the seller. 
2. (a) Discharge of a Contract: 
A Contract may be discharged either by an act of parties or by an operation of law which may be 
enumerated as follows: 
(1) Discharge by performance which may be actual performance or attempted performance. 
Actual performance is said to have taken place, when each of the parties has done what he 
had agreed to do under the agreement. When the promisor offers to perform his obligation, 
but the promisee refuses to accept the performance, it amounts to attempted performance or 
tender. 
(2) Discharge by mutual agreement: Section 62 of the Indian Contract Act, 1872 provides that 
if the parties to a contract agree to substitute a new contract for it or to refund or remit or alter 
it, the original contract need not to be performed. Novation, Rescission, Alteration and 
Remission are also the same ground of this nature. 
(3) Discharge by impossibility of performance: The impossibility may exist from its initiation. 
Alternatively, it may be supervening impossibility which may take place owing to (a) 
unforeseen change in law (b) The destruction of subject matter (c) The non-existence or non-
occurrence of particular state of things (d) the declaration of war (Section 56). 
(4) Discharge by lapse of time: A contract should be performed within a specific period as 
prescribed in the Law of Limitation Act., 1963. If it is not performed the party is deprived of 
remedy at law. 
(5) Discharge by operation of law: It may occur by death of the promisor, by insolvency etc. 
(6) Discharge by breach of contract: Breach of contract may be actual breach of contract or 
anticipatory breach of contract. If one party defaults in performing his part of the contract on 
the due date, he is said to have committed breach thereof. When on the other hand, a person 
repudiates a contract before the stipulated time for its performance has arrived, he is deemed 
to have committed anticipatory breach. If one of the parties to a contract breaks the promise 
the party injured thereby, has not only a right of action for damages but he is also discharged 
from performing his part of the contract (Section 64). 
(7) A promise may dispense with or remit, wholly or in part, the performance of the promise made 
to him, or may extend the time for such performance or may accept instead of it any 
satisfaction he thinks fit. In other words, a contract may be discharged by remission.  
(Section 63). 
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the 
performance of the promise, the promisor is excused by such neglect or refusal (Section 67). 
(b) Meaning: A LLP is a new form of legal business entity with limited liability. It is an alternative 
corporate business vehicle that not only gives the benefits of limited liability at low compliance cost 
but allows its partners the flexibility of organising their internal structure as a traditional partnership. 
© The Institute of Chartered Accountants of India
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The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its 
assets, the liability of the partners will be limited. 
Steps to incorporate LLP:  
(a) Name reservation 
• The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of 
LLP. 
• Applicant has to file e- Form 1, for ascertaining availability and reservation of the name of a 
LLP business. 
(b) Incorporate LLP 
• After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability 
Partnership (LLP). 
• e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated 
partners’ details and consent of the partners/ designated partners to act as partners/ 
designated partners. 
(c) LLP Agreement 
• Execution of LLP Agreement is mandatory as per Section 23 of the Act. 
• LLP Agreement is required to be filed with the registrar in e- Form 3 within 30 days of 
incorporation of LLP. 
3. (a) Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is transferable 
like any other property, but as the partnership relationship is based on mutual confidence, the assignee 
of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as 
the original partner.  
The rights of such a transferee are as follows: 
(1) During the continuance of partnership, such transferee is not entitled  
(a) to interfere with the conduct of the business,  
(b)  to require accounts, or  
(c)  to inspect books of the firm.  
 He is only entitled to receive the share of the profits of the transferring partner and he is bound 
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts. 
(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will 
be entitled, against the remaining partners:  
(a)  to receive the share of the assets of the firm to which the transferring partner was 
entitled, and  
(b)  for the purpose of ascertaining the share,  
he is entitled to an account as from the date of the dissolution. 
By virtue of Section 31, no person can be introduced as a partner in a firm without the consent of all 
the partners. A partner cannot by transferring his own interest, make anybody else a partner in his 
place, unless the other partners agree to accept that person as a partner. At the same time, a partner 
is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded 
as an existing interest and tangible property which can be assigned. 
(b) BREACH OF CONTRACT- DAMAGES: Section 73 of the Indian Contract Act, 1872 lays down that 
when a contract has been broken, the party who suffers by such breach is entitled to receive from 
the party who has broken the contract compensation for any loss or damage caused to him thereby 
© The Institute of Chartered Accountants of India
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which naturally arose in the usual course of things from such breach or which the parties knew 
when they made the contract to be likely to result from the breach of it. 
The leading case on this point is “Hadley v. Baxendale” in which it was decided by the Court that 
the special circumstances under which the contract was actually made were communicated by the 
plaintiff to the defendant, and thus known to both the parties to the contract, the damages resulting 
from the breach of such contract which they would reasonably contemplate, would be the amount 
of injury which would ordinarily follow from the breach of contract under these special 
circumstances so known and communicated. 
The problem asked in this question is based on the provisions of Section 73 of the Indian Contract 
Act, 1872. In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from 
him for the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the special 
circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ ` 500/- at the rate of 0.50 paise i.e. 1000 
water bottles x 0.50 paise (difference between the procuring price of water bottles and contracted 
selling price to ‘Y’) being the amount of profit ‘X’ would have made by the performance of his 
contract with ‘Y’. 
If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been the 
difference between the contract price and the market price on the day of default. In other words, 
the amount of damages would be ` 750/- (i.e. 1000 water bottles x 0.75 paise). 
4. (a)  The following are implied conditions in a contract of sale by sample in accordance with Section 17 
of the Sale of Goods Act, 1930; 
  (a) that the bulk shall correspond with the sample in quality; 
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample. 
(c) that the goods shall be free from any defect, rendering them unmerchantable, which would 
not be apparent on a reasonable examination of the sample. 
Implied Warrants: 
1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that the buyer 
shall have and enjoy quiet possession of the goods. That is to say, if the buyer having got 
possession of the goods, is later on disturbed in his possession, he is entitled to sue the seller 
for the breach of the warranty. 
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied warranty that the 
goods shall be free from any charge or encumbrance in favour of any third party not declared 
or known to the buyer before or at the time the contract is entered into.  
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]. An implied warranty as to 
quality or fitness for a particular purpose may be annexed by the usage of trade. 
4. Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that 
the goods are inherently dangerous or they are likely to be dangerous to the buyer and that 
the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise 
he will be liable in damages. 
(b) A partner may not be expelled from a firm by a majority of partners except in exercise, in good 
faith, of powers conferred by contract between the partners. It is, thus, essential that:  
(i)  the power of expulsion must have existed in a contract between the partners;  
(ii)  the power has been exercised by a majority of the partners; and  
(iii) it has been exercised in good faith. 
© The Institute of Chartered Accountants of India
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If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the 
business of the firm. 
The test of good faith as required under Section 33(1) includes three things:  
•  The expulsion must be in the interest of the partnership.  
•  The partner to be expelled is served with a notice.  
•  He is given an opportunity of being heard.  
If a partner is otherwise expelled, the expulsion is null and void. 
Thus, according to the test of good faith as required under Section 33(1), expulsion of Partner Y is 
not valid. 
5. (a) Position of Mr. D: Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D delivered 
the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid seller as according to 
section 45(1) of the Sale of Goods Act,1930 the seller of goods is deemed to be an ‘Unpaid Seller’ 
when the whole of the price has not been paid or tendered and the seller had an immediate right 
of action for the price.  
 Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot exercise the 
right against the goods, he can only exercise his rights against the buyer i.e. Mr. E which are as 
under:  
(i)  Suit for price (Section 55): In the mentioned contract of sale, the price is payable after 15 
days and Mr. E refuses to pay such price, Mr. D may sue Mr. E for the price.  
(ii)  Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for damages for 
non-acceptance if Mr. E wrongfully neglects or refuses to accept and pay for the goods. As 
regards measure of damages, Section 73 of the Indian Contract Act, 1872 applies.  
(iii) Suit for interest (Section 61): If there is no specific agreement between the Mr. D and Mr. 
E as to interest on the price of the goods from the date on which payment becomes due, Mr. 
D may charge interest on the price when it becomes due from such day as he may notify to 
Mr. E.  
(b)  Meaning of Guarantee Company: Section 2(21) of the Companies Act, 2013 defines a Company 
Limited by Guarantee as a company having the liability of its members limited by the memorandum 
to such amount as the members may respectively undertake to contribute to the assets of the 
company in the event of its being wound up.  Thus, the liability of the members of a guarantee 
company is limited to a stipulated amount in terms of individual guarantees given by members and 
mentioned in the memorandum. The members cannot be called upon to contribute more than such 
stipulated amount for which each member has given a guarantee in the memorandum of 
association.  
Similarities and dis-similarities between the Guarantee Company and the Company limited 
by shares: The common features between a “guarantee company” and the “company limited 
share” are legal entity and limited liability. In case of a company limited by shares, the liability of 
its members is limited to the amount remaining unpaid on the shares held by them. Both these type 
of companies have to state this fact in their memorandum that the members’ liability is limited. 
However, the dissimilarities between a ‘guarantee company’ and ‘company limited by shares’ is 
that in the former case the members will be called upon to discharge their liability only after 
commencement of the winding up of the company and only to the extent of amounts guaranteed 
by them respectively; whereas in the case of a company limited by shares, the members may be 
called upon to discharge their liability at any time, either during the life of the company or during 
the course of its winding up. 
© The Institute of Chartered Accountants of India