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Business Meetings – BCR Notes CA Foundation

A business meeting is a formal gathering of business people for discussing and deciding some business matters. In business organisations many important decisions are taken in meetings. Business meetings take place at all levels of management. At the top level, Board of Directors hold meetings from time to time for taking crucial decisions regarding the company’s business.

At the middle level meetings of heads of departments deliberate upon inter-departmental issues. At the supervisory level, meetings of works committee are held to discuss and decide day to day problems of the factory and so on.

The main steps involved in conducting business meetings are as follows :

• Sending notice of the meeting
• Attaching agenda with the notice
• Ascertaining the quorum for the meeting
• Moving motions in the meetings
• Voting, poll and proxy
• Passing resolutions
• Recording minutes of the meeting.

Types of Meetings:
In a public limited company the following types of meetings are held:
1. Meeting of Board of Directors : Board of Directors is the highest organ of management. Meetings of the Board are held from time to time to take important decisions about the company’s affairs. New issues of shares and debentures, acquisition of some other firms, approval and adoption of half yearly accounts, declaration of dividend are some examples of issues which are decided in such meetings.

2. Statutory Meeting: This is the first meeting of’the members after the in-cooperation of the company. Its purpose is to acquaint the members with the company’s affairs. A statutory report is sent along with the notice of the statutory meeting. At this meeting, the members can discuss matters relating to the formation of the company.

3. Annual General Meeting : Every company is required to hold every year a general meeting of its members. This provides them an opportunity to discuss the working and affairs of the company.

4. Extraordinary General Meeting : It is a meeting held between two annual general meetings. An extraordinary general meeting is called to consider an urgent and important matter, the consideration of which cannot be postponed to the next annual general meeting. For example, the management of the company may convene an extraordinary general meeting for obtaining the approval of members for sub-division of the company’s share of ₹ 10 each into 5 shares of ₹ 2 each.

5. Class Meetings: Meetings of preference shareholders or of debenture-holders may be held to transact some business concerning them.

Command Meeting	Committee Meeting
Meeting between Managers and subordinates.	Is a group appointed by parent organisation comprising of experts for decisions making.
Manager alone is responsible for decision making- Autocratic.	Systematic and logical steps which involves all members in the decision making process – participative.
Main objective of the manager is to share information, state, policies or give directions.	Objectives could vary advisory/problem solving/ decision making etc.

Notice:
A proper notice of the forthcoming meeting must be sent to every person entitled to attend and vote at the meeting. It is a statutory requirement to issue a notice. A meeting is not properly convened unless notice of the meeting is sent. The notice must be in writing and it must be given sufficiently in advance. In case of company meetings, the notice must be sent 21 days before the date of the meeting.

The notice of a meeting must specify :

• The date, time and place of the meeting
• The name of the company
• The nature, purpose and type of meeting
• The authority by which notice is issued
• The name and signature of the person issuing the notice
• The matters to be discussed at the meeting, in serial order (unless separate agenda is sent)
• In the case of special business an explanatory statement
• The exact wording of any proposed resolutions
• The date of issue of the notice
• Any enclosures required to be sent with the notice.

A notice is a piece of formal communication. It should be simple, brief and clear.
1. Notice of Board Meeting: A notice of every meeting of the Board of Directors must be given in writing to every director at his/her usual address. The notice is prepared by the company secretary in consultation with the chairman.
Example 1 : Notice of a Board Meeting

ABC LIMITED
21, Bhikaji Cama Place,
New Delhi – 110 056
Notice

A meeting of the Board of Directors of the company will be held on May 10,2007 at 4 p.m. at the Registered office of the company at 21, Bhikaji Cain a Place, New Delhi to consider, approve and to take on record the unaudited quarterly financial results for the period ended June 30,2007. Kindly make it convenient to attend.
For and on behalf of the Board of Directors.
B.P. Sharma
Company Secretary
New Delhi
19th April, 2007

2. Notice of annual general meeting: A notice of at least 21 days must be given for the annual general meeting. The notice must state the date, time and place of the meeting. It must specify that a member entitled to attend and vote at the meeting can appoint a proxy. Copies of Annual Accounts, Directors’ Report and Auditors’ Report are sent along with the notice.

Example 2 : A Notice of Annual General Meeting

ABC Limited
21, Bhikaji Cama Place
New Delhi – 110 056
Notice

Notice is hereby given that the Twenty first Annual General Meeting of the company will be held on September 11,2007 at 11 a.m. at Air Force Auditorium, Subroto Park, New Delhi. Copy of the agenda and proxy form is attached herewith.
By order of the Board.
B.P. Sharma
Company Secretary
August 10, 2007
Notes:
→ A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote in his place. A proxy need not be a member of the company. The instrument appointing a proxy should however be deposited at the registered office of the company not less than forty eight hours before the commencement of the meeting.

→ The transfer Books and Register of Members will be closed from August 12, 2007 to September 11, 2007.

→ The dividend when declared and sanctioned for payment will be payable on and from lo those share-holders whose names are on the Register of Members on 11th August, 2007.
Notice is hereby given that the 10th Annual General Meeting of the Members of XYZ Ltd. will be held on _______, at the Registered Office of the Company at Plot Nos. 16-18, Bandra Kurla Complex, Mumbai at ___________ a.m. to transact the following business.

Ordinary Business:
→ To receive, consider and adopt the Audited Balance Sheet of the company as on _______ and the Profit & Loss Account for the year ended on that date and Auditor’s and Director’s Reports thereon.

→ To declare dividend for the year ending _______.

→ To appoint a director in place of Mr _______ who retires by rotation and being eligible, offers himself for re-appointment.

→ To appoint Statutory Auditors of the company; and fix their remuneration. ”
Regd. Office:                                                                                    For and on behalf of Board of Directors
Plot No. 16-18,
Bandra Kurla Complex
Mumbai                                                                                           Chairman of the Meeting

Notes:

• A member entitled to attend and vote is entitled to appoint a proxy to attend and vote instead of himself and the proxy need not be a member of the company.
• Explanatory statement relating to special business is annexed to this Notice as required under section 173 of the Companies Act, 1956.
• The Register of members and the Share Transfer Books of the Company will remain closed from ___________ both days inclusive.
• Members are requested to notify immediately change of address, if any, to company’s Registered Office. While communicating to the company, please quote the folio number.

Shareholders desirous of obtaining any information concerning the accounts and operations of the company are requested to address their questions to the company’s Head office, so as to reach at least 5 days before the date of the meeting so that the information may be made available at the meeting to the best extent possible.

3. Notice of extraordinary general meeting: Notice for an extraordinary general meeting must be given 21 days before the date of the meeting. The notice must specify the date, time and place of the meeting. The purpose of the meeting is also stated in the notice.

Example 3 : A Notice of Extraordinary General Meeting

ABC Limited
21, Bhikaji Cama Place
New Delhi – 110 056
Notice

Notice is hereby given that extraordinary general meeting of the company will be held on 10th July 2007 at 10 a.m. at FICCI Auditorium, Tansen Marg. New Delhi to consider and if thought fit to pass the following resolution which will he proposed as a special resolution.
“Resolved that every equity share of ₹ 10 each fully paid-up be sub-divided into five shares of ₹ 2 each.”
By order of the Board
B.R. Sharma
Company Secretary
18th June, 2007

Agenda:
Agenda means a document that outlines the various matters to be discussed at a forthcoming meeting. It consists of a list of ‘things to be done’ at a meeting. It is in the form of a statement specifying the order in which the various matters are to be dealt with. Generally, the routine business is placed prior to the special business. Agenda is prepared and sent for all types of meetings. The Secretary is in change of the agenda. He prepares the agenda in consultation with the Chairman of the company. The agenda is sent along with the notice of the meeting.

The main features of agenda are as follows :

• It outlines all matters to be discussed in the meeting in a serial order
• It is fixed before hand
• It is usually sent along with the notice of the meeting
• It is customary to mention “any other matter with the permission of the chair” as the last item in the agenda
• Its main purpose is to set the tone and direction of the meeting.

Five Tips for Efficient Meetings:

• Don’t meet if the same information could be covered in an e-mail or a brief report.
• Begin the meeting on time even if a few participants are missing.
• Be absolutely clear on what the agenda is and follow it.
• Make it interactive. Don’t dominate the discussion.
• Bring the meeting to a clear, constructive close.

What goes into an agenda?

• The purpose and the desired outcome of the meeting.
• Who the participants are.
• The date, time and place.
• The length of the meeting.
• A list of the topics to be covered.
• A list starting who will address each topic and for how long.
• Any background information participants will need to know.

Preparation and despatch of agenda before the meeting is useful in the following ways:

• It helps the members to come prepared for the meeting
• It helps the chair person to conduct the meeting in a smooth and efficient manner
• It ensures that only matters relevant to the meeting are discussed
• It ensures that every point is properly taken up for discussion
• It facilitates the preparation of the minutes.

Distinction Between Agenda And Circular:

Basis of Distinction	Agenda	Circular
1. Purpose	To inform about what is to be done in a forth-coming meeting	To inform all departments and branches of the organisation
2. Contents	A list of items to be taken up in a meeting	Information which is of interest and use to all parts of the organisation
3. Target audience	The members entitled to attend the meeting	Heads of various departments and branches attend the meeting.
4. Time period	To be sent usually 21 days before the meeting	No specified time period
5. Attachment	Usually sent along with notice of the meeting	No such attachment

While preparing the agenda, the secretary should keep in mind the following points:

• The agenda should be precise and clear
• It should be brief
• Each item on the agenda should be numbered serially
• The routine business should be listed before the special business
• All items of similar nature should be placed in continuous order.

Example 4 : Agenda of Board Meeting

ABC Limited
21, Bhikaji Caina Place
New Delhi – 110 056

Agenda of the meeting to be- held on May 10, 2007.

• To approve and sign the minutes of the last Board Meeting held on….
• To consider audited Annual Accounts and Directors’.Report to shareholders for the year ended 31st i March, 2007.
• To recommend dividend.
• To fix up the dale for concerning the Annual General Meeting and business to be transacted therein.
• To fix up the period during which Register of Members and the Share Transfer Book will be closed.
• To consider any other matter with the permission of the chair.
• To fix date of the next Board Meeting.

By the order of the Board
B.P. Sharma
Company Secretary

Example 5 : Agenda of Statutory Meeting

ABC Limited
21, Bhikaji Cama Place
New Delhi – 110 056

Agenda of the statutory meeting to be held on …………………….

• To call upon the secretary to read the notice convening the statutory meeting.
• To draw the attention of the members to the fact that the ‘List of Members’ is open for inspection.
• To propose that the Statutory Report as circulated be taken as read.
• To explain to the members that meeting is convened to as per section 165 of the Companies Act, 1956 I so as to afford an opportunity to the members to discuss any matters relating to the formation of the company and arising out of the Statutory Report.
• The Chairman to refer to matters, if any, relating to formation, progress and financial results and comment upon the financial position as shown in the Statutory Report.
• Invite discussion and answer the questions.
• To consider and approve the Statutory Report. By the order of the Board

B.R. Sharma
Company Secretary

Example 6:
Agenda of Annual General Meeting

ABC Limited
21, Bhikaji Cama Place
New Delhi- 110 056

Agenda of the Annual General Meeting to be held at ……………..
On …………… at …………………
1. To read the Annual General Meeting to be held at ………………..

2. The Secretary to read the Auditor’ Report on the Accounts.

3. The Chairman to move that the Directors’ Report and Accounts, as printed and circulated, be taken as read.

4. The Chairman’s speech.

5. The Chairman to propose that the Balance Sheet as at 31 st March, 2007 and the Profit & Loss Account for the year ended on that dale, and the Reports of Directors and Auditors thereon be approved and adopted.

6. The dividend of ₹ 10 per equity share as recommended by the directors be approved and sanctioned for payment.

7. To elect directors in place of those who arc retiring by rotation :

• To elect a director in place of Shri ………………. who is retiring by rotation and being eligible for re-election offers himself for re-election.
• To elect a director in place of Shri ………………. who is retiring by rotation and being eligible for re-election offers himself for re-election.

8. To appoint auditors for the next year and fix their remuneration.

9. To lake up any other matter with the permission of the chair. By order of the Board
B.P. Sharma
Company Secretary

Example 7 : Agenda of Extraordinary General Meeting

ABC Limited
21, Bhikaji Carna Place
New Delhi -110 056

Agenda of the Extraordinary General Meeting to be held on …………………
1. The Secretary to read the notice convening the meeting.

2. Splitting up of shares :

• The Chairman to explain the reason for the proposed splitting up of Equity shares and to move the following resolution as a special resolution – “That the one crore fully paid Equity Shares of ₹ 10 each be, and are hereby split into 5 crore fully paid Equity Shares of ₹ 2 each.”
• Mr ………………. to second the motion.
• The Chairman to invite discussion, put the motion to the meeting, take votes if necessary and declare the results.

3. Vote of thanks to the chair. By the order of the Board
B.P. Sharma
Company Secretary

Minutes:
Meetings have become an important means of exchanging ideas, discussing problems and issues and arriving at decisions. The decisions and resolutions made at meetings need to be recorded for future reference and actions. A written record of whatever was discussed and decided in a meeting is known as minutes.

Meaning of Minutes:
A minute is defined as ‘a note to preserve the memory’. The term ‘Minutes’ means a permanent written record or brief summary of the proceedings of a committee meeting or assembly. They are an official record of the deliberations of any formal meeting of persons, e.g., Parliament, a Legislative body, a Municipal Council, a Board of Directors or any Committee.

There are several types of meetings where discussions take place and certain decisions are taken. It is often necessary to keep an official record of these meetings. In the case of Parliament or Legislative body, the proceedings are recorded verbatim or in full. But in case of committee meetings only a summary is recorded. The term ‘minutes’ is generally used to refer to a summarised record of committee meetings. Thus, minutes are the official and systematic record of the proceedings of a meeting. They indicate when and where a meeting was held, who chaired the meeting, who were present, what decisions were taken, and so on.

Objectives and Importance of Minutes:
All organisations, whether business or social, consider it necessary to maintain a proper record of the business transacted at their various meetings. Once minutes are approved and signed, they are accepted as an evidence even in the court of law. In case of joint stock companies, it is compulsory to maintain minutes of the proceedings of every meeting of Board of Directors and members.

The main uses of minutes are as follows :

• Minutes contain a record of the business transacted and decisions taken at a meeting. They serve as a permanent record for future reference.
• Minutes serve as a reminder of the actions to be taken to implement the decisions arrived at a meeting.
• In case of joint stock companies, law requires maintenance of minutes. The interested parties are allowed to inspect the minutes.
• Minutes can be produced as evidence of the proceedings in a Court of Law.
• Minutes help in the efficient conduct of business. If proper minutes are not kept, the decisions arrived at meetings may be questioned by any member or Auditor and these cannot be proved in a Court of Law.

Distinction Between Minutes and Reports:
Sometimes verbatim (word by word) or summarised reports of the proceedings of meetings are prepared for circulation among members or for sending to the newspapers for publication. It is necessary to distinguish between such reports and minutes, although both record the proceedings of a meeting.

Distinction Between Minutes and Reports:

Basis of Distinction	Minutes	Reports
1. Starting word	A minute begins with the word ‘Resolved’.	The word ‘Resolved’ is not written while writing a report.
2. Form	Minutes are generally not written in a narrative form. They record date, time and place of the meeting and resolutions passed.	Reports are always written in a narrative form giving a historical account of all that was discussed.
3. Details	Minutes are summarised record of the proceedings of a meeting.	Reports may be verbatim or summarised.
4. Evidence	Approved and signed minutes are accepted by the courts as evidence.	Reports are not accepted by the courts as evidence.
5. Time of preparation	Minutes can be prepared within a reasonable time after the meeting.	Reports are prepared just after the meeting.
6. Number	Separate minutes have to be prepared for each meeting.	A report may include summaries of more than one meeting.
7. Manner of re-cording	The exact wording of resolutions adopted at the meeting must be recorded in minutes.	A report need not contain exact wording of the decisions arrived at the meeting.

Types of Minutes:
Minutes are of two types –

• minutes of resolutions
• minutes of narration.

1. Minutes of Resolutions: In this type of minutes, only the resolutions passed at the meeting are recorded. It always begins with the words “Resolved that” followed by the exact resolution. The discussion which preceded the resolutions is not recorded. Even the movers and seconders of the resolutions are not mentioned. This is the usual form of writing minutes.

2. Minutes of Narration : In this type of minutes, the resolutions passed at the meeting are recorded. In addition, a brief account of the business discussed and transacted and the voting pattern are also recorded. Minutes of narration are somewhat similar to a report.

Minutes of narration generally cover the following :

• Names of those present at the meeting.
• Signing of minutes of the previous meeting.
• Recording of leave of absence.
• Taking note of reports, plans and financial statements.
• Tabling of correspondence.
• Tabling note of notice of interest of directors in contracts.

A minute of narration may also form part of the resolution.

Specimen of A Minute of Resolution:
Resolved that a call of ₹ 5 per share be made upon the Equity Shares (Nos. 1 to 10,00,000) of the company and such call to be payable on 31st July, 2004, to the company’s bankers, State Bank of India, Parliament Street, New Delhi, and that the call letter be issued to the shareholders on 31st May, 2004.

Specimen of A Minute of Narration:

• The Secretary read the notice convening the meeting.
• The solicitor to the company, Mr. Maheshwar Dayal, produced the certificate of incorporation No. 12345 dated 7th June, 2004.
• The consent to act as directors was signed by each of the directors and the secretary was instructed to file the same with the Registrar of Companies.

Specimen of A Minute of Narration Forming Part of Minutes of Resolution:
A letter from Mr. K. Madhavan, the Marketing Manager of the company, dated 11th April, 2004 tendering his resignation was read and it was resolved that the same be accepted as and from 11th April, 2004. Further resolved that the post be advertised in the Times of India and Economic Times. The draft of the advertisement was approved.

Contents of minutes:
Minutes can be written in two ways –

• tabular form
• narrative form.

1. Tabular Form: In this type of minutes, only the resolutions passed at the meeting are record¬ed. It always begins with the words “Resolved that” followed by the exact resolution. The discussion which preceded the resolutions is not recorded. Even the movers and seconders of the resolutions are not mentioned. This is the usual form of writing minutes.

2. Narrative Form: In this type of minutes, the resolutions passed at the meeting are recorded. In addition, a brief account of the business discussed and transacted and the voting pattern are also recorded. Minutes of narration are somewhat similar to a report.

Minutes of meetings generally contain the following particulars :

• The kind of meeting.
• Date, time and place of the meeting.
• The name of the person in the chair.
• Names of directors, secretary and persons in attendance.
• Reading and confirmation of the minutes of the last meeting and their signing by the Chairman, together with any matters arising from the minutes.
• Brief subject heading of each minute with the resolutions adopted.
• Financial statements and reports presented and approved in the meeting. These may be put in the form of Appendix.
• Appointments made, if any.
• In the case of special resolution, the number of votes for and against.
• Names of persons dissenting with any resolution passed at the meeting.
• Instructions given by the meeting to the Secretary or other officers.
• Chairman’s signature and date of verification of minutes as correct.

Guidelines for Writing Minutes:
Drafting of minutes is largely a matter of skill, judgement and practice. The writer of minutes needs to understand the situation, listen attentively and take notes during the, discussion. Minute is largely standardised and the standard form should be followed as far as possible.

Some hints for writing minutes are given below :
1. Minutes of each meeting should have a heading containing the type of meeting.

2. The date, time and place at which the meeting was held should be mentioned.

3. In the case of the general meetings and board meetings, it is usual to state the number of the meeting.

4. The minutes should contain the names of all those who were present and the capacity in which they were present. But where the attendance is large, the names of persons attending are not stated in the minutes. Only the number of persons who attended the meeting is mentioned. A separate register is kept for signing by each person attending the meeting.

5. Each item in the minutes is numbered and given a brief heading.

6. Each item should be written in the minutes in the same order in which the business was transacted.

7. Minutes should be brief but no important detail should be omitted.

8. Defamatory language, irrelevant points should not be recorded.

9. While writing minutes, no reference should be made to the feelings of the persons present. The tone of the minutes should be impersonal, Le., written in third person.

10. Dates and figures should be clearly and precisely stated in the minutes. If a reference is made to certain letters or reports, their numbers and dates should also be mentioned. This is necessary to. avoid the possibility of ambiguity and misunderstanding.

11. In case of a special resolution passed at the meeting, the number of those in favour and against should be recorded.

12. The secretary should go on taking notes during the meeting. If a clarification is required, it should be immediately sought. The minutes should be written as quickly as possible after the meeting so that no important facts are forgotten.

13. It is advisable for the secretary to show the rough draft of the minutes to the Chairman and get his approval. This will avoid incorrect recording and alternations later on.

14. The language of the minutes should be simple and precise. Simple past tense and passive voice are preferable. Be objective in your recording and use Reported Speech. Be careful while converting Direct Speech to Indirect Speech.

15. Ensure that each item discussed in the meeting has been recorded.

16. Use a separate paragraph for each item.

17. Record full text of motions, if a vote was taken and give exact text of resolutions adopted at the meeting.

Minutes of Statutory Meeting:
A specimen of minutes of statutory meeting is given below:

XYZ Company Limited
Registered Office : 11, Parliament Street, New Delhi

Minutes of the proceedings of the Statutory Meeting of XYZ Company Limited held on …………….. 2004 ………….. at ……………. p.m. at die Registered Office of the Company.
Mr …………….. in the chair
Mr ……………..
Mr ……………..
Mr …………….. directors
Mr …………….. secretary
and …………….. shareholders present as per attendance book.
1. Notice of the meeting: The secretary read the notice convening the meeting.

2. Statutory report: The statutory report dated was taken as read with the consent of the meeting.

3. List of members : The Chairman informed the members that according to the provisions of section 165 of the Companies Act, 1956, the list of members was placed on the table for the inspection of members.

4. Chairman’s address: The chairman then reviewed the activities of the company since formation and referred to the financial position and business prospects. He also invited the members to discuss and ask questions on any matter relating to the formation, financial position and prospects of the company and any other matter arising out the statutory report.

5. Approval of modification of contract: After the questions put by members were satisfactorily answered, a shareholder moved that the modifications in certain contract referred to in the report be approved. Accordingly, it was “Resolved that the modifications in the contracts as stated in the statutory report be, and are hereby, approved”.

6. Adoption of report It was then moved that the statutory report as presented be approved. Accordingly, it was unanimously.
“Resolved that the statutory report be, and is hereby, approved.”

7. Vote of thanks: A vote of thanks to the Chair was proposed and acclaimed by all, the chairman declared the meeting closed.
Place ……………..
Dated ……………..                                    Sd. ……………..                                Sd. ……………..
Secretary                                    Chairman

Minutes of Board Meeting:
A specimen of the minutes of the first meeting of Board of Directors is given below:

XYZ Company Limited
Registered Office : 11, Parliament Street, New Delhi

Minutes of the Board Meeting held at the Company’s Registered Office …………….. on …………….. day of …………….. 2004 …………….. at …………….. A.M./P.M.
Present:
Mr …………….. Chairman
Mr …………….. Managing Director
Mr …………….. Director
Mr …………….. Secretary
In attendance, Mr. …………….., solicitor.
1. Chairman : Upon the directors taking their seats, Mr. …………….. Was requested to take the Chair.

2. Certificate of Incorporation : Mr. …………….. produced the certificate of incorporation of the Company No. …………….. dated …………….. 20 ……………..

3. Chairman : It was unanimously resolved that Mr. …………….. be, and is hereby, elected and appointed Chairman of the Company and of the Board of Directors.

4. Quorum at Board meetings: It was decided that, in accordance with clauses Nos …………….. of the Company’s Articles, the quorum of directors at Board meetings should be three directors.

5. Appointment of Managing Director: It was resolved that Mr. …………….. be, and is, hereby, appointed Managing Director of the Company for a period of five years at a salary of ₹ per month.

6. Appointment of Secretary: It was resolved that Mr …………….. be, and is hereby, appointed secretary of the company at a salary of ₹ per month, the appointment to be determinable upon three months’ notice given by either the Company or the Secretary.

The minutes then record the decisions of the Board and resolutions passed in respect of the following matters:

• Appointment of bankers, and conferring authority on the person who would sign the cheques.
• Endorsement of cheques.
• Signature of bills of exchange.
• Appointment of auditors.
• Approval of common seal of the Company and the persons who would hold keys of the locks.
• Consideration of agreement with vendors.
• Issue of shares to vendors.
• Issue of prospectus.
• Fixation of date of next meeting.

Minutes of Annual General Meeting:
A specimen of the minutes of the annual general meeting of a company is given below:

XYZ Company Limited
Registered Office : 11, Parliament Street, New Delhi

Minutes of …………….. Annual General Meeting of the Company held at …………….. on the …………….. day …………….. 20 …………….. at …………….. A.M./P.M.
Present:
Mr. …………….. Chairman
Mr. …………….. Mr. …………….. Secretary
Mr. …………….. Mr. …………….. Auditor
Mr. …………….. Director Mr. …………….. By invitation
and …………….. Shareholders as per attendance book

Subject	Proposer and Seconder	Details
1. Notice of meeting		The secretary read the notice concerning the meeting.
2. Auditor’s report		The secretary read the report of the auditors on accounts and balance sheet.
3. Directors’ report and accounts	Proposer: Chairman Seconder: Mr. ……………..(Shareholder)	Directors’ report and accounts previously printed and circulated were taken to be read. Then the chairman addressed the meeting, invited questions and answered them satisfactorily. Resolved: That the directors’ report and accounts for the year be, and are hereby, approved and adopted.
4. Declaration of dividend	Proposer: Chairman Seconder: Mr. …………….. (Shareholder)	Resolved that a dividend of ………………. % on Preference Shares and ………………. % on Equity Shares, less income-tax, as recommended by directors be, and is hereby, declared payable to shareholders appearing in Register of Members as on ……………….. 20 ………………
5. Re-election of directors	Proposer: Chairman Seconder: Mr. ……………..(Shareholder)	Resolved that Mr …….., a director, retiring by rotation but eligible for re-election be, and is hereby, re-elected as a director of the company.
6. Appointment of auditors	Proposer: Chairman Seconder: Mr. …………….. (Shareholder)	Resolved that M/s ………., the retiring auditors be, and are hereby, appointed auditors at a remuneration of ₹ ………………. to hold office until the next annual general meeting.
7. Vote of thanks	Proposer: Chairman Seconder: Mr. …………….. (Shareholder)	A vote of thanks was unanimously accorded to the Chairman and other directors.
	Chairman ………….	Dated …………

1. Notice: The secretary read the notice convening the meeting.

2. Chairman’s speech : The Chairman explained to the meeting the need for amending regulation 29(1) of the Company’s Articles of Association. He pointed out the difficulties that are likely to arise to the Company as well as the members if this amendment is not carried out. He moved the following resolution as a special resolution :
“Resolved that clause (1) of regulation 29 of the Company’s Articles of Association be deleted and the following substituted therefor :
(i) …………………………………… .”
After discussion, the motion was put to vote. The requisite number of members having demanded a poll, the Chairman decided to take the poll forthwith. After the report of the scrutineers was received, the Chairman declared the motion passed by the requisite majority.

3. Vote of thanks: There being no other matter, the meeting ended with a hearty vote of thanks to the Chair.
Place …………….. Sd. …………….. Sd ……………..
Date …………….. Secretary …………….. Chairman

Alteration of Minutes:
Ordinarily, the minutes cannot be altered once they are written. However, any minor mistake or clerical error which is detected when the minutes are being read at the next meeting, can be rectified and signed by the chairman. If the mistake is of a serious nature, such as a material misdescription or incomplete description of the proceedings, then that part of the minutes may be sourced out and the correct minutes written up afresh.

The chairman must sign both the cancellation as well as the fresh entry. However, if a serious or material mistake in the terms of any resolution is detected, this should not be rectified by scoring out. Rather a fresh resolution should be adopted at the next meeting to undo the effect of the earlier resolution. The secretary should make some notes against the earlier resolution by giving the reference of the new resolution.

Confirmation of Minutes:
Usually the minutes of a meeting are read at the next meeting before it is signed by the chairman. This is done to provide an opportunity to point out any mis-statement or error which may have crept into the minutes. The reading of minutes of a previous meeting at the next meeting is a mere acknowledgement that the proceedings have been correctly recorded. If during the reading of the minutes some members point out any discrepancy or mis-statement, the same are rectified before the minutes are signed by the chairman. This procedure is known as confirmation or verification of minutes.

Handling Business Meetings (Role of Chairman):
1. Clearly Define the Purpose of the Meeting : It may not at all be necessary to call a meeting. It is quite possible that the purpose may be achieved by circulating a note. If it is necessary to call a meeting, decide its purpose clearly.

2. Select the Participants : The persons who are to attend the meeting, should be selected carefully. They must have knowledge and interest in the issue and be able to spare adequate time for the meeting. The number of participants should be restricted.

3. Give Adequate Notice: The members should be informed well in advance of the meeting. The notice of the meeting should mention clearly the day, date, time and venue of the meeting.

4. Distribute the Agenda : The agenda (list of items to be discussed) of the meeting should be circulated will in advance. This will enable the members to come prepared and participate effectively in the meeting.

5. Provide All the Facts: When the agenda requires the members to know some important facts, provide the necessary facts. For example, if a meeting has been called to discuss decline in sales, the figures concerning sales for the current year/quarter and past year/quarter should be communicated to the members.

6. Observe Punctuality : Start the meeting on time. Do not think of those who are absent, think of those who are present. You can end the meeting on time only when you begin on time.

7. Ensure the required quorum: Quorum means the minimum number of persons who must be present before the meeting can begin.

8. Begin with a Positive Note: Chairman’s opening remarks set the tone and direction of the meeting. Give the members the feeling that they have come for a useful purpose and they are going to make their distinct contribution towards the accomplishment of that purpose.

9. Encourage Participation : There is often general reluctance to speak on the part of members. They may be anxious to know what stand others take. One may expect others to give one the lead. The chairman should break the initial silence and encourage participation in the deliberations.

10. Be Brief: The chairman’s initial remarks should be brief. Short opening suggests urgency of the issue and keeps members alert.

11. Remain Impartial: The chairman should take no sides and should be neutral. He should give everyone the opportunity to speak and participate in the meeting. Emotional build up, personality flare ups and tension should be controlled through humour.

12. Control the Deliberation: Ensure that one person speaks at a time and members maintain silence. Private discussions need to be avoided as these distract attention Handle the meeting firmly to keep it orderly and on the right track. Do not suppress unfitting views. Clarify contributions of members by frequently summarising the deliberations.

13. Sum Up : Before end of the meeting, point out the decisions meeting arrived at. Along with the decisions, disagreements, if any should also be stated clearly. Indicate how the decisions made are to be implemented, close the meeting in time and do not allow it to drag on unnecessarily. However, abrupt close is not good.

Skills Required By Chairman of Meetings:
In order to perform his role effectively in meeting, the chairman requires the following skills:

• Know the quorum for the meeting and ensure the quorum before starting the meeting.
• Call the meeting to order and ask the secretary to read the agenda of the meeting.
• Clarity the purpose of the meeting in short and vivid manner.
• Show a positive attitude.
• Give every member the opportunity to speak and allocate time in equitable and fair way.
• Ability to check personality clashes and emotional flare-ups.
• Remain cool and impartial even under provocation.
• Summarise the discussion at appropriate intervals and at the end of the discussion.
• Deal with questions directed at him tactfully.
• Keep liaison with the secretary so that proceedings of the meeting are duly recorded.
• Encourage and support the discussion through appropriate gestures. Discourage those who interfere with the order in the meeting.

Appendix:
How effectively do you manage your meetings?
For each factor, circle a number that most represent your view of your own management of the meeting that you chair.

1. I spend the minimum amount of time in meetings and they are effective and well planned.	12345	I spend far too much time in meetings and mainly they could be more effective.
2. I always plan ahead and clearly define the purpose of my meeting.	12345	I rarely plan my meetings in advance and the purpose is probably unclear.
3. I always establish in my own mind that the meeting is cost-effective.	12345	I very rarely attempt to establish whether my meeting are cost-effective.
4. I always try to keep my meetings to the minimum number of relevant people.	12345	Probably my meetings have too many people and not all those people are necessarily relevant.
5. I spend time thinking carefully about my agenda and I always publish it in advance.	12345	I rarely publish an agenda and, when I do, it is probably weak and sketchy.
6. Normally people are well prepared for my meetings.	12345	I always have the common complaint that people are not well prepared for my meetings.
7. I always publish the finish time and allocate time properly to each agenda item.	12345	I rarely publish a finish time and my time management could probably be improved fairly substantially.
8. I am very conscious of the need for good chairmanship and I actively try to improve my skills.	12345	I am afraid that my chairmanship is haphazard.
9. At the end of each meeting I allocate time to summarising, and ensure that all actions are accountable.	12345	I often end a meeting without ensuring that actions are clearly accountable.
10. I always try to ensure that meetings where I am not chair are properly managed.	12345	Other people’s meetings are their responsibility.

If you selected lower numbers, you have very firmly grasped that meetings need to be effectively managed and you are always conscious of the need to ensure good performance. Higher numbers need attention – your meetings will be low in effectiveness and not particularly productive for you or the participants. A consistent choice of number five means that you are wasting your time and everybody else’s time in your meetings. Almost certainly the output of your meetings is very erratic.

Successful business meetings, they say, are the life blood of any executive’s career. Hence arranging a conference is as important as the meeting itself. Here, we present some of the important things to keep in mind while preparing for such events.

Subject:
Conferences can be of several kinds. The secret behind organising a successful conference is to first understand what it is meant to achieve and then to chart out a proper agenda for it. This may require several internal meetings, followed by meetings with outsiders like tour organisers, hotels and travel agents.

Exhibitions and Trade Shows:
Some conferences may involve exhibitions or trade shows. In such cases, you must ensure that the venue is large enough to hold the exhibition and that there is sufficient space for closed-door or open-forum meetings.

Technology:
Conferences often need extensive tech support for success. Video conferencing plays a vital role in several conferences, while some meetings can make do with audio conferencing facilities only. Whatever the case, proper arrangements must be made in advance. Wi-fi-enabled boardrooms, touch screens, centrally-monitored projectors and screens, lights, laptops, the works, they are all required, and so, should be planned for in advance.

Incentives:
Perhaps one of the easiest ways of incentivizing employees while making them work is to organize a business conference for them in exotic locales; in other words, allowing them to mix pleasure with business. For most of these meetings, one needs to decide whether or not to include executives’ spouses and families. Also, the number of people or the strength of the group needs to be ascertained and a budget worked out. This will determine the possible destinations where the meeting can be held.

Location:
Depending on how much you are willing to invest in your conference, you could look at either having it in your office auditorium (if it has one), at a local conference centre, five-star hotel or take that extra step to arrange for an outstation trip in India or abroad. If you do decide to travel out of station, you must research the destination thoroughly and plan out any conducted tours that may want to offer the delegates; also draw up a list of good eating joints and shopping venues at these places. These are several travel agencies that take charge of all your requirements.

Transportation:
In case you need to add that zing to the usually dull round table conference, you must also ensure that your business partners/executives find it easy to not just get to the venue, but get there on time. The best idea would be to arrange for transport for everyone so that the entire group assembles at one common point, and you can take them to the venue. This way, you could also throw in a surprise element of an undisclosed conference venue!

Once you know the venue, it is of prime importance that your business delegates have a comfortable stay and take home memories of not just hectic business meetings but also of a time well spent. Zeroing in on the right accommodation facilities and venues helps you make the trip memorable. A word of caution: in case you are planning to hold your meeting in some place faraway, pay special attention to the menu, particularly if you have people who want only a particular kind of diet! Not everyone on your team might be game having roasted crocodile for dinner.

Conducting And Participating In Meetings:
Meetings involve oral communication. In a meeting you may be either a leader or a participant. As a leader you are required to conduct the meeting. There are certain rules of conducting meetings (called parliamentary procedure). You should know and follow these rules while conducting a meeting. In addition, you should take the following steps:
1. Plan the meeting: A meeting requires thorough preparation. First, develop an agenda (a list of topics to be discussed) to achieve the goals of the meeting. The items in the agenda should be arranged in the most logical order. After preparing the agenda, make it available to all those who are to attend the meeting.

2. Follow the Agenda: Follow the agenda item by item. In most meetings, the discussion tends to stray and new items come up. Keep the discussion on track In case new items arise during the meeting, take them up at the end or postpone them for a future meeting.

3. Move the Discussion Along: Once an item is covered, bring up the next one. Do what is necessary to proceed through the agenda. However, you should not cut off discussion before all important points have been made. The goal should be to permit complete discussion on the one hand and to avoid repetition and useless comments on the other.

4. Control those who talk too much: In most meetings, a few persons tend to dominate the discussion. The leader’s task is to control them. You should step in when they begin to astray or bring in useless matter. You can do so tactfully by asking for other viewpoints or moving on to the next topic.

5. Encourage Everyone to take part: Bring those who talk too little into the discussion. You can do this by asking for their viewpoints and showing respect for their comments.

6. Control Time: When your meeting time is limited, decide in advance how much time will be given to each item. Then at the right time, you should end discussion of each item. You may announce time, goals in the beginning of the meeting and remind the participants time status throughout the meeting.

7. Summarize at Appropriate Times: As a leader, you should summarise comments and conclusions made on each item at appropriate times.

Participating in Meetings:
As a participant in a meeting, you should do the following:
1. Follow the agenda: You should not bring up items not on the agenda. Also avoid commenting on such items brought up by other participants.

2. Participate: Everybody present should meaningfully participate in the discussion. You should talk whenever you have something to contribute.

3. Do not Talk too much: Avoid talking too much and getting carried away. Always respect the rights of others.

4. Cooperate: By its very nature, a meeting requires cooperation from all the participants. Therefore, you should work with others in every possible way.

5. Be Courteous: As a participant you should be courteous to others. You should respect their opinions and permit them to speak

Etiquette In Meetings:
While attending a meeting good manners such as the following need to be followed:

• Be punctual for the meeting.
• Seek permission from the chairman before speaking.
• Stand up before you start speaking.
• Address your comments to the chairperson.
• Stick to the issue and do not bring up issues not listed in the agenda.
• Be brief and to the point.
• Don’t interrupt others when they are speaking.
• Be polite or courteous in your language and body movements.
• In case you want to discuss anything outside the agenda, take up in any other matter at the last with the chairman’s permission.

This Companies Act, 2013 – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Companies Act, 2013 – CA Foundation Business Law Study Material

Question 1.
What is meant by the lifting of the corporate veil? What are the instances in which the corporate veil may be lifted?
OR
There are cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct from its shareholders or members. Elucidate.
Answer:
‘Lifting the veil’ means looking behind the company as a legal person ie., disregarding the corporate entity and paying regard instead to the realities behind the legal form. Where the courts ignore the corporate personality and concern themselves directly with the members or directors, the corporate veil may be said to have been lifted.

The following are the cases where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct and separate from its shareholders or members:

1. To determine the character of the company i.e. to find out whether the company is an enemy or a friend:
The Court may rend the veil for ascertaining whether a company is an enemy company. Unlike a natural person, a company does not have a mind or conscience; therefore, it cannot be a friend or foe. It may, however, be characterized as an enemy company, if its affairs are under the control of the people of an enemy country. For this purpose, the Court may examine the character of the persons who are really at the helm of affairs of the company, which was done in the leading case of Daimler Co. Ltd. vs. Continental Tyre & Rubber Co. Ltd.

2. Company is formed to evade taxes:
Where a corporate entity is used to evade or circumvent tax, the Court can disregard the corporate entity [Juggilal v. Commissioner of Income Tax AIR (SC)].
19.3
Thus where the company is used as a means of evasion of taxes, then for protection of revenue of the Government, the corporate veil may be lifted. [Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371].

3. Company is formed to avoid a legal obligation/welfare legislation:
Where the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another).

4. Formation of subsidiaries to act as agents:
A company may sometimes be regarded as an agent or trustee of its members, or of another company, and may therefore be deemed to have lost its individuality in favor of its principal & the disqualifications of the principal shall be treated as that of the agent. Here the principal will be held liable for the acts of that company, as was held in the case of Merchandise Transport Limited v. British Transport Commission (1982).

5. Company formed for fraud/improper conduct or to defeat law:
The corporate veil may be lifted if the company is formed to – (a) defeat the law; (b) defraud creditors; (c) avoid legal obligations (arising by way of a contract). Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or circumvent the law, to defraud creditors, or to avoid legal obligations. [Gilford Motor Co. v. Horne & Jones v. Lipman]

6. To determine the technical competence of the company:
A company is an artificial entity and therefore it cannot be judged for competence and experience. In some cases where the technical compe¬tence of the company is to be ascertained, such as to determine the eligibility of the company for a certain contract, then the experience, qualification, and competence of the members shall be treated as that of the company. Thus corporate veil shall be lifted as was done in the case of New Hori¬zons Ltd. v. UOI (1997).

Question 2.
Define OPC and state the rules regarding its membership. Can it be converted into a non-profit company under section 8 or a private company?
Answer:
One person company
Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company that has only one person as a member. The following are the rules regarding membership of OPC:

1. There can be only one person as a member of OPC.
2. The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the subscriber’s death or his incapacity to contract, become a member of the company.
3. The other person whose name is given in the memorandum shall give his prior written consent in the prescribed form and the same shall be hied with the Registrar of companies at the time of incorporation.
4. Such other person may be given the right to withdraw his consent.
5. The member of OPC may at any time change the name of such other person by giving notice to the company and the company shall intimate the same to the Registrar.
6. Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
7. Only a natural person who is an Indian citizen and resident in India (person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year)—

• shall be eligible to incorporate an OPC;
• shall be a nominee for the sole member of an OPC.

8. No person shall be eligible to incorporate more than one OPC or become a nominee in more than one such company.
9. No minor shall become a member or nominee of the OPC or can hold share with beneficial interest.

OPC cannot be incorporated or converted into a company under section 8 of the Act. However, it may be converted into a private or public company. OPC cannot voluntarily convert itself into any kind of company unless two years have expired from the date of incorporation, except where the paid-up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceed two crore rupees.

Question 3.
State the limitations of the Doctrine of Indoor Management under the Companies Act, 2013.
Answer:
The Doctrine of Indoor Management or Turquand Rule has limitations of its own. That is to say, it is inapplicable to the following cases, namely:

a. Actual or constructive knowledge of irregularity
The rule does not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity. [Howard vs. Patent Ivory Manufacturing Co.]

b. Suspicion of Irregularity/Negligence
The doctrine is not applicable in the case of negligent persons. If an officer of the company acts in a manner, which would not ordinarily be within his powers, the person dealing with him must make proper inquiries and satisfy himself as to the officer’s authority. If he fails to make an inquiry, he cannot rely on the rule. Where the transaction is unusual or not in the ordinary course of business, it is the duty of the outsider to make the necessary inquiry. The protection of the ‘‘Turquand Rule” is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. [Anand Bihari Lai vs. Dinshaw & Co.]

c. Forgery
The doctrine of indoor management applies only to irregularities that might otherwise affect a transaction but it cannot apply to forgery which must be regarded as a nullity. Forgery may in circumstances exclude the ‘Turquand Rule’. [Ruben vs. Great Fingall Consolidated]

Question 4.
Explain the meaning of Guarantee Company? State the similarities & dissimilarities, between a Guarantee Company & Company Limited by Share.
Answer:
“Company limited by guarantee” means 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.

These companies may or may not have a share capital In the case of a guarantee company with a share capital, the members are required to purchase shares of a fixed amount and also give a guarantee for a further sum in the event of winding up. Generally, guarantee companies are formed for non-trading purposes. Such as promotion of commerce, art, science, sports, etc., and do not aim for profit. The Chambers of Commerce, charitable institutions, sports clubs, are generally organized as guarantee companies.

The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

POINTS OF DISTINCTION	COMPANY LIMITED BY SHARES	COMPANY LIMITED BY GUARANTEE
Purpose:	Profit/non-profit both.	Generally not for profit.
Usefulness:	When initial funds are required to be raised to commence business.	Only where no working funds are needed or where these funds can be held from other sources like endowment, fees, charges, donations, etc.
Transfer of interest	May not be restricted.	Restricted & different than that of those limited by shares
Liability of members	Limited to amount unpaid on shares.	Limited to amount guaranteed.
Amount Called	Unpaid amount on shares may be called even before winding up.	Amount guaranteed can be called only on winding up. If company has a share capital, unpaid amount on shares can be called before winding up.
Share capital	Must have share capital	May or may not have share capital
To start	Raises initial funds from, members	Does not raise initial funds from members, unless it has a share capital.

Question 5.
When a company is registered, it is clothed with a legal personality. Explain.
OR
What is the meaning of “Certificate of Incorporation” under the provisions of the Companies Act, 2013? What are the effects of the registration of a company?
Answer:
A company can be incorporated by complying with the formalities prescribed u/s 7 of the Companies Act, 2013. Application in the prescribed form must be made, along with the documents prescribed for this purpose and fees, to the Registrar within whose jurisdiction, the registered office of the company is proposed to be situated. The Registrar on being duly satisfied as to the compliance of all the requirements, relating to the incorporation of a company, as prescribed under the Companies Act, 2013 and the rules made thereunder, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act. The certificate of incorporation shall also indicate the unique identity number allotted to the company le. the Corporate Identity Number, which shall be a distinct identity for the company.

When a company is registered and a certificate of incorporation is issued by the Registrar, the following important consequences follow:

1. The company becomes a distinct legal entity. Its life commences from the date mentioned in the certificate of incorporation.
2. It becomes a body corporate and it acquires a perpetual succession.
3. It is capable of suing and being sued in its corporate name.
4. Its property is not the property of the shareholders. The shareholders have a right to share in the profits of the company when realized and divided. Likewise, any liability of the company is not the liability of individual shareholders.

From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from the incorporators; and there comes into existence a binding contract between the company and its members as evidenced by the Memorandum and Articles of Association. It has perpetual existence until it is dissolved by liquidation or struck out of the register.

A legal personality emerges from the moment of registration of a company and from that moment the persons subscribing to the Memorandum of Association and other persons joining as members are regarded as a body corporate or a corporation in aggregate and the legal person begins to function as an entity. A company on registration acquires a separate existence and the law recognizes it as a legal person separate and distinct from its members.

Question 6.
Define a Small Company as defined under the Companies Act, 2013.
Answer:
Small Company: Small company given under section 2(85) of the Companies Act, 2013 which means a company, other than a public company—
1. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and

2. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Exceptions: This section shall not apply to:

• a holding company or a subsidiary company;
• a company registered under section 8; or
• a company or body corporate governed by any special Act.

Question 7.
Explain the concept of Dormant company as envisaged in the Companies Act, 2013.
Answer:
Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
“Inactive company” means a company that has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
“Significant accounting transaction” means any transaction other than

• payment of fees by a company to the Registrar;
• payments made by it to full the requirements of this Act or any other law;
• allotment of shares to full the requirements of this Act; and
• payments for maintenance of its office and records.

Question 8.
Differentiate between the Memorandum of Association & Articles of Association.
Answer:

	MOA	AOA
Power	is the charter and constitution of the company.	The articles are subordinate to the memorandum. If there is a conflict between the two, the memorandum shall prevail.
Ultra vires	Acts done by a company beyond the scope of the memorandum are absolutely void (ineffective). They cannot be ratified even by the unanimous vote of all the shareholders.	Articles of association govern the internal relationship between the company and its members, Ac Is done the company beyond its Articles can be ratified by the shareholders.
Registration	Every company must have its own memorandum. It must be compulsorily filed for registration. It must be in the following forms: Model: A, B, C, D, E of Schedule I	Every company must have its own Articles. ¡t must be compulsorily filed for registration. It must be in the following forms: Model: F, G, H, 1, J of Schedule I
Alteration	MOA cannot be altered easily.	AOA can be altered if it is desired by the 3/4th majority.
Nature	Memorandum of association contains the basic conditions on which the company is incorporated. It provides for the name, situation objects, capital, and liability of the company.	Articles of association are the rules governing the internal management of the company. It provides for rules and procedures for the conduct of its business.
Scope	It determines the objects, scope, and extent of the activities of the company.	It governs the way in which the objects of the company are to be carried out.

Question 9.
State whether a non-profit organization can be registered as a company under the Companies Act, 2013. If so, what procedure does it have to adopt?
Answer:
Formation of companies with charitable objects etc. (Section 8 company)
Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to

• Promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, etc.
• Such company intends to apply its profit in promoting its objects and
• Prohibiting the payment of any dividend to its members.

Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CD, etc.

Power of Central Government to issue the license—

• Section 8 allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private Limited’ to its name, by issuing license on such conditions as it deems fit.
• The Registrar shall on application register such person or association of persons as a company under this section.
• On registration, the company shall enjoy the same privileges and obligations as of a limited company.

Note: Central Government has delegated the power to grant licenses to the ROC.

Question 10.
Examine with reasons whether the following statements are correct or incorrect with reasons:

1. A private company must have a minimum of two members while a public company must have a minimum of seven members
2. Affixing of Common Seal on the company’s documents is compulsory.
3. A company being an artificial person cannot own property & cannot sue or be sued

Answer:
(1) Correct. According to the provisions of section 3 of the Companies Act, 2013, which deals with the basic provisions for incorporation of a company, in the case of the public company a minimum of 7 persons is required to form a company to carry on the purpose as illustrated in the MOA of the company, by subscribing their name to the MOA. Similarly, a minimum of 2 persons is required to form a private company.

(2) Incorrect. As per the Companies (Amendment) Act, 2015, the common seal has been made optional by omitting the words “and a common seal” from Section 9 of the Act, with a view to providing an alternative authorization for the purpose of creation of contract by a company. This amendment provides that in case a company does not have a common seal, the authentication shall be made by any key managerial personnel or an officer or employee of the company, duly authorized by the Board on this behalf.

(3) Incorrect: A company is an artificial person and has a separate legal entity independent of its members. As a consequence, a company can enter into contracts in its own name, acquire and transfer/sell property in its own name and can also sue and be sued in its own name.

Question 11.
What is meant by Doctrine of Constructive Notice?
Answer:
Section 399 provides that the memorandum and articles when registered with the Registrar of Companies ‘become public documents’ and then they can be inspected by anyone on payment of a nominal fee. Therefore, any person who contemplates entering into a contract with the company has the means of ascertaining the powers of the company and is thus, presumed to have read these documents and understood them in their true perspective. This is known as the “doctrine of constructive notice”.

Even if the party dealing with the company does not have actual notice of the contents of these documents it is presumed that he has an implied (constructive) notice of them. Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limit set on the authority of the directors as per the memorandum or articles, he cannot, as a general rule, acquire any rights under the contract against the company.

By constructive notice is meant

• Whether a person reads the documents or not, he is presumed to have knowledge of the contents of the documents. He is not only presumed to have read the documents but also understood them in their true perspective, and
• Every person dealing with the company not only has the constructive notice of the memorandum and articles but also of all the other related documents, such as Special Resolutions, etc., which are required to be registered with the Registrar.

Thus, if a person enters into a contract that is beyond the powers of the company as defined in the memorandum, or outside the authority of directors as per memorandum or articles, he cannot acquire any rights under the contract against the company.

Question 12.
Briefly explain the doctrine of ‘ultra vires’ under the Companies Act, 2013. What are the consequences of ultra vires acts of the company?
Answer:
The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the legal powers of the doers. This presupposes that the powers in their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated in its memorandum can be departed from only to the extent permitted by the Act, thus far and no further. In consequence, any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company.

The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this if a person enters into a transaction that is ultra vires the company, he cannot enforce it against the company.

Further, an act that is ultra vires the company being void, cannot be ratified by the shareholders of the company. The leading case through which this doctrine was enunciated is that of Ashbury Railway Carriage and Iron Company Limited v. Riche (1875).
The following are the consequences of an ultra vires act of the company:

• An act ultra vires the company is null and void and thus wholly inopera¬tive. Neither the company can sue nor be sued against on such a contract made for an ultra vires act.
• An act that is ultra vires the company cannot be ratified even by the unanimous consent of all the shareholders.
• An act that is ultra vires the company cannot become ultra vires’ by reason of estoppel, acquiescence, the lapse of time, delay, or ratification.
• The directors shall be held personally liable to the third parties who contracted for an ultra vires transaction on behalf of the company.

Question 13.
What is meant by the entrenchment of provisions in the Articles of Association?
Answer:
The articles may contain provisions for entrenchment (to protect something) to the effect that specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

The provisions for entrenchment shall only be made either on the formation of a company or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

Where the articles contain provisions for entrenchment, whether made on the formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed.

Question 14.
What do you mean by ‘Companies with charitable purpose’ (Section 8) under the Companies Act, 2013? Mention the conditions of the issue & revocation of the license of such company by the Government.
Answer:
“Companies with Charitable Objects” (Section 8) refers to the companies incorporated for a purpose other than earning profits. Such companies which carry on activities other than those of a commercial nature can be incorporated after obtaining a license u/s 8.
The Central Government issues a license for incorporation of a company under section 8 if it is duly satisfied that

• the proposed company is being incorporated to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, etc.
• such a company intends to apply its profits in promoting its objects only &
• company prohibits the payment of any dividend to its members.

The Central Government may by order revoke the license of the company:

• where the company contravenes any of the requirements of the conditions of section 8, subject to which the license is issued or
• where the affairs of the company are conducted fraudulently, or
• where the affairs of the company are conducted in a manner that is violative of the objects, or
• in a manner prejudicial to the public interest.

Before such revocation, the Central Government must give notice of its intention to revoke the license to the company and must also award the company, a reasonable opportunity of being heard.

Question 15.
The Articles of Association of XYZ Ltd. provides that the Board of Directors has the authority to issue bonds provided such issue is authorized by the shareholders by a necessary resolution in the general meeting of the company. The company was in dire need of funds & therefore it issued the bonds to Mr. X without passing any such resolution in the general meeting. Can Mr. X recover the money from the company? Decide, referring to the relevant provisions of the Companies Act, 2013. (C.A. Foundation RTP May 2018)
Answer:
As per the provisions of The Doctrine of Indoor Management, if an act is authorized by the AOA/MOA, then the outsider dealing with the company, is entitled to assume that all the formalities concerned with the act in question, have been complied with by the company in a regular manner, provided he has knowledge of the formalities mentioned in the MOA/AO A. Thus if the outsider has knowledge of the contents of these public documents and has understood them in their true perspective, then doctrine offers protection to the outsider and allows him to enforce the said contract against the company.

The facts of the case are similar to the leading case, of The Royal British Bank v. Turquand, where the directors of RRB Ltd. issued a bond to Turquand. The AOA empowered the directors to issue such bonds under the authority of a proper resolution. In fact, no such resolution was passed. Notwithstanding that, it was held that T could sue on the presumption of Doctrine of Indoor Management. Thus it can be concluded applying the above provisions and the ruling of the leading case, that Mr. X can recover the money from the company, assuming that all the required formalities for passing the resolution have duly complied.

Question 16.
Krishna, an assessee, was a wealthy man earning huge income by way of dividends and interest. He formed three private companies and agreed with each to hold a block of investment as an agent for them. The dividend and interest income received by the companies was handed back to Krishna as a pretended loan. This way Krishna divided his income into three parts in a bid to reduce his tax liability. Decide for what purpose the three companies were established? Whether the legal personality of the three companies may be disregarded?
Answer:
A company on being incorporated acquires a separate legal existence. Its existence is distinct and separate from its members. This principle of a separate legal entity may be referred to as the veil of incorporation. Generally, the law does not disregard this ‘corporate veil’ and does not concern itself directly with the members of the directors of the company. However, in certain exceptional cases, the law shall disregard the corporate entity and pay regard to the realities behind the legal facade, in order to render justice. One of the circumstances where the corporate veil is lifted is for the protection of revenue of the Government. Thus where the corporate entity is being used as a means of evasion of taxes there the corporate veil shall be lifted.

In the given case, Krishna an assessee earning huge dividend and interest income, formed three private companies and agreed to hold the investments as an agent, and received back the dividend & interest income as a pretended loan, with the intention to reduce his taxation liability.
Thus it is evident that the three private companies have been incorporated to merely serve as a means for evading taxes by Krishna & the corporate veil shall be lifted and the separate entity shall be disregarded. The dividend and interest income shall be deemed to be that of Krishna and he shall be liable to pay tax on the same, as was held in the leading case of Sir Dinshaw Maneckjee Petit.

Question 17.
Ravi Private Limited has borrowed t 5 crores from Mudra Finance Ltd. This debt is ultra vires to the company. Examine whether the company is liable to pay this debt? State the remedy if any available to Mudra Finance Ltd.
Answer:
A company cannot depart from the provisions contained in its M.O.A., however imperative may be the departure. It cannot enter into a contract that is beyond the power confessed on it by the M.O.A. If it does so, the contract shall be regarded as ultra vires and therefore void ab initio. The impact of an ultra vires transaction is that neither the company nor the third party has a right to sue on it. Since the memorandum is a public document by virtue of its being filed with the R.O.C., the parties who come to contract with the company, are deemed to have a knowledge of the contents of the M.O.A. If in spite of this the person enters into an ultra vires transaction, he cannot enforce the same against the company. Further money has been advanced to a company, in an ultra vires transaction, generally, it cannot be recovered by the lender. However, if the company has not yet expended the money then the company can be stopped from parting with the same by means of a suit for injunction and the lender shall be entitled to take back the same in species.

In the given case Ravi Private Limited has borrowed ₹ 5 crores from Mudra Finance Ltd. which is ultra vires, which implies that Ravi Pvt. Ltd. has borrowed the amount beyond the limit prescribed in the M.O.A. of the company. Applying the above-stated effect of the doctrine of ultra vires, it can be concluded that since the act of Ravi Pvt. Ltd. is ultra vires the company, the transaction shall be treated as void ab initio. However the lender i.e., Mudra Finance Ltd. shall be entitled to stop Ravi Pvt. Ltd. from parting with the money lent and take back the property in species.

Question 18.
ABC Pvt. Ltd., is a Private Company having five members only. All the members of the company were going by car to Mumbai in relation to some business. An accident took place and all of them died. Answer with reasons, under the Companies Act, 2013 whether the existence of the company has also come to the end?
Answer:
The company on its incorporation enjoys perpetual succession on account of its separate legal entity. The members may come and go but the company shall continue to be in existence forever until the company is legally wound up. Further, since the shares are transferable, in the event of the death of the members, the shares shall be transmitted to their legal representatives. Thus the company, ABC Pvt. Ltd. shall continue to be in existence, in spite of the death of its members in the given case.

Question 19.
The paid-up Share Capital of AVS Private Limited is ₹ 1 crore, consisting of 8 lacs Equity Shares of ₹ 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of ₹ 10 each, fully paid-up. XYZ Private Limited and BCL Private Limited are holding 3 lacs Equity Shares and 1,50,000 Equity Shares respectively in AVS Private Limited. XYZ Private Limited and BCL Private Limited are the subsidiaries of TSR Private Limited. With reference to the provisions of the Companies Act, 2013, examine whether AVS Private Limited is a subsidiary of TSR Private Limited? Would your answer be different if TSR Private Limited has 8 out of a total of 10 directors on the Board of Directors of AVS Private Limited?
Answer:
Section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company:

• controls the composition of the Board of Directors; or
• exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

For the purposes of this section:

• a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (z) or sub-clause
• is of another subsidiary company of the holding company;
• the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

Further the term “Total Share Capital”, means the aggregate of the:

• Paid-up equity share capital; and
• Convertible preference share capital. Thus applying the above-stated provisions, in both the above cases, AVS Pvt. Ltd. will be the subsidiary of TSR Pvt. Ltd. Total share capital of AVS Pvt. Ltd. is 8,00,000 shares out of which TSR Pvt. Ltd. is holding 4,50,000 shares through its subsidiaries.

Question 20.
The Articles of a company required that all deeds etc. should be signed by the M.D., the Secretary, and an Executive Director on behalf of the company. A deed of mortgage was signed by the Managing Director on behalf of the company in favor of Z. Can it be a valid deed?
Answer:
Hint: Doctrine of constructive Notice; The Articles require the deed to be signed by 3 persons. Z should have consulted the Articles of Association of the company to ascertain the authority of signing the deed. Even if, the M.D. has signed it in good faith, the deed is still not valid. Z can’t claim on the basis of the deed. The concept is that since the Articles is a public document, on being filed with the ROC, Z is presumed to have known its provisions. This principle was laid in Kotla Venkateswami v. Ramamurthy AIR 1934 Mad 579.

Question 21.
The Object Clause of Memorandum of Association of ABC Pvt. Ltd. Authorized the company to carry on the business of trading in Fruits and Vegetables. The Directors of the company in recently concluded Board Meeting decided and accordingly, the company ordered for fish for the purpose of trading. FSH Limited supplied fish to ABC Pvt. Ltd. Worth ₹ 36 lakhs. The members of the company convened an extraordinary general meeting and negated the proposal of the Board of Directors on the ground of ultra vires acts. FSH Limited being aggrieved of the said decision of ABC Pvt. Ltd. seeks your advice. Advise them.
Answer:
Hint:- Doctrine of ultra vires’, Company being an artificial person can enter into those contracts as are warranted by terms of the object clause of its MOA. A company can depart from the objects stated in MOA only to the extent permitted by the Act, thus far and no further. Thus any act done or any contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void inoperative and is therefore not binding on the company.

In the given case the object clause of MOA of ABC Pvt. Ltd. authorizes to carry on the business of trading in fruits & vegetables only, whereas the company enters into a contract with FSH Ltd. for the purchase of fish worth ₹ 36 lakhs. Thus the contract is ultra vires the company and shall not be binding on the company. Further ratification of ultra vires transactions cannot be done even by the whole body of shareholders. Thus FSH Ltd. has no remedy against the company. It can hold the directors of ABC Pvt. Ltd. personally liable.

Question 22.
FAREB Limited was incorporated by the acquisition of Fareb & Co., a partnership firm, which was earlier involved in many illegal activities. The promoters furnished some false information and also suppressed some material facts at the time of incorporation of the company. Some members of the public (not being directors or promoters of the company) approached the National Company Law Tribunal (NCLT) against the incorporation status of FAREB Limited. NCLT is about to pass the order by directing that the liability of the members of the company shall be unlimited.
Given the above, advise on whether the above order will be legal and mention the precaution to be taken by NCLT before passing the order in respect of the above as per the provisions of the Companies Act, 2013.
Answer:
Hint According to the provisions of Section 7(7) of the Companies Act, 2013, where a company has been got incorporated by furnishing false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants,

• pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or
• direct that liability of the members shall be unlimited; or
• direct removal of the name of the company from the register of companies; or
• pass an order for the winding-up of the company; or
• pass such other orders as it may deem fit.

Provided that before making any order:

• the company shall be given a reasonable opportunity of being heard in the matter; and
• the Tribunal shall take into consideration the transactions entered into by the company, including the obligations, if any, contracted or payment of any liability.

Further where it is proved that a company has been incorporated as aforesaid, then the promoters, the persons named as the first directors, and the persons making a declaration at the time of incorporation of the company shall each be .liable for action for fraud under section 447.
In the given case, the decision of NCLT to direct that the liability of the members of FAREB Ltd. shall be unlimited is legally valid as per the above-stated provisions. However, before passing any such direction, NCLT shall grant FAREB Ltd., the opportunity of being heard and shall take into consideration the transactions entered into by company, including the obligations if any contracted or payment of any liability.

Question 23.
A company registered under Section 8 of the Companies Act, 2013, earned huge profits during the financial year ended on 31st March 2018 due to some favorable policies declared by the Government of India and implemented by the company. Considering the development, some members of the company wanted the company to distribute dividends to the members of the company. They approached you to advise them about the maximum amount of dividend that can be declared by the company as per the provisions of the Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013, and advise the members accordingly.
Answer:
According to provisions of section 8 of the Companies Act, 2013, a company can be incorporated for not-for-profit purposes under a license from Central Government provided the following conditions have complied

• The company is formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity protection of the environment, etc.
• Such a company intends to apply its profits/surplus in the promotion of its objects and
• The payment of dividends to its members is prohibited.

In the given case the member of a Section 8 company is desirous that the company should distribute dividends out of the huge profits earned by the company, among its members.

Thus applying the above-stated provisions it is evident that distribution of dividends is prohibited and therefore the claim of the members is not tenable.

Question 24.
Mr. X had purchased some goods from M/s. ABC Limited on credit. A credit period of one month was allowed to Mr. X. Before the due date Mr. X went to the company and wanted to repay the amount due from him. He found only Mr. Z there, who was the factory supervisor of the company, Mr. Z told Mr. X that the accountant and the cashier were on leave, he is in¬charge of receiving money and he may pay the amount to him. Mr. Z issued a money receipt under his signature.

After two months M/s. ABC Limited issued a notice to Mr. X for non-payment of the dues within the stipulated period. Mr. X informed the company that he had already cleared the dues and he is no more responsible for the same. He also contended that Mr. Z is an employee of the company to whom he had made the payment and being an outsider, he trusted the words of Mr. Z as duty distribution is a job of the internal management of the company. Analyze the situation and decide whether Mr. X is free from his liability.
Answer:
The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. An outsider who has read the public documents (MOA & AOA) containing the powers of the company and the extent to which they have been delegated to its officers and understood them in their true perspective, can assume that the internal operations and management of the company have been performed regularly, in respect of the contract that he is desirous of entering into with the company. However, there are certain limitations to this doctrine.

One of the exceptions to the Doctrine of Indoor management is knowledge/ suspicion of irregularity. The protection under the doctrine does not extend to those persons who have behaved negligently. Thus when the circumstances are such which invite inquiry & for example when an officer of the company is purporting to act in a matter, which is apparently outside the usual scope of his authority, then the outsides are under a duty to make the necessary inquiry. If the outsider fails to make an inquiry as such then he cannot seek protection under the Doctrine of Indoor Management and the company shall not be bound by the transaction. This was also held in the case of Anand Behari Lai v. Dinshaw & Co.

In the given case Mr. X makes the payment to Mr. Z the factory supervisor. The act of receiving money on behalf of the company falls beyond the apparent authority of a factory supervisor. The nature of the transaction was such which required Mr. X to enquire as to Mr. Z’s authority.

Thus applying the above-stated provisions it can be concluded that Mr. X is not free from his liability towards the company as he failed to enquire about Mr. Z’s authority despite the suspicious circumstances. members in the company as noted below:

• Directors and their relatives                                                                     190
• Employees                                                                                                15
• Ex-Employees (Shares were allotted when they were employees)           10
• 5 couples holding shares jointly in the name of husband and wife (5*2) 10
• Others                                                                                                        5

The board of Directors of the company proposes to convert it into a private company. Also, advise whether the reduction in the number of members is necessary.
Answer:
Hint: Provisions of section 2(68) of Companies Act, 2013. Definition of a private company. In Computing the number of members joint shareholders are treated as a single member. Further, the number of present employees & past employees who continue to be members even after termination of employment shall not be included in the number of members.

In the given case Flora Fauna Limited can be converted into a private company provided the restrictions of a private company are incorporated in the area of the company and due procedure for conversion, under the Act is duly complied with. Further Flora Fauna Ltd. would be required to have its number of members Limited to 200.

Presently the total number of members are:

• Directors & their relatives                                       =190
• 5coup]es[joint shareholders counted as a  single] =5
• Other                                                                       = 5
  Total                                                                              200 [excluding present & ex-employees]

Therefore since the number of members does not exceed 200, no reduction in the number of members is required for conversion.

Question 26.
Sound Syndicate Ltd. a public company, its articles of association empower the managing agents to borrow both short and long-term loans on behalf of the company. Mr. Liddle the director of the company, approached Easy finance Ltd., a non-banking finance company for a loan of Rs. 25,00,000 in name of the company. The lender agreed and provided the said loan. Later on, Sound Syndicate Ltd. refused to repay the money borrowed on the pretext that no resolution authorizing such loan have been actually passed by the company and the lender should have enquired about the same prior to providing such loan. Hence the company is not liable to pay such a loan. Analyze the above situation in terms of the provisions of Doctrine of Indoor Management under the Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is correct or not?
Answer:
According to the provisions of Doctrine of Indoor Management, an outsider while entering into contracts with a company is entitled to assume, due & regular compliance of all the formalities & internal proceedings required on the part of the company for the purpose of the contract, provided the outside has the knowledge, of the scope of authority of the company as contained in the MoA and also of the extent to which the authority has been delegated to the officials of the company. Thus an outsider can plead protection against the internal irregularities in the operations of the company & hold the company liable under the contract, only if he has the knowledge of MoA as well as the AoA and has understood their terms in their true perspective. In case the third party (outsider) has no knowledge of MoA & AoA then it cannot seek remedy under Doctrine of Indoor Management.

In the given case sound Syndicate Ltd. contracts with Easy Finance Ltd. to borrow a loan of Rs. 25,00,000. The AoA of sound Syndicate Ltd. empowers its managing agents (i.e. directors) to borrow loans on its behalf. Thus applying the above-stated provisions to the given case it can be concluded that if Easy Finance Ltd. had the knowledge of the AoA of Sound Syndicate Ltd. & was aware of the power of its directors to borrow loans on behalf of the company, then the fact, that no resolution authorizing the directors was actually passed, shall be of no consequence & Easy Finance Ltd. can hold the company liable for the loan. The passing of resolution authorizing the loan is a matter of internal management of the company which will be presumed to have been regularly performed, provided Easy Finance Ltd. has the knowledge of the AoA of Sound Syndicate Ltd. Thus the contention of Sound Syndicate Ltd. is not correct.

Question 27.
The Memorandum and Articles of Association of a company were delivered to the Registrar of Companies for registration on January 6, 2018. On January 8th, 2018, the Registrar issued the certificate of incorporation but dated it January 6th, 2018. On that very day (January 6th, 2018) the company made an allotment of its shares. The allotment was challenged that it was made before the actual issue of the certificate of incorporation. How would you decide and why?
Answer:
Hint: According to the provisions of The Companies Act, 2013, a company comes into existence the moment it is incorporated and a certificate of incorporation is issued. The company acquires a separate legal entity, from the date mentioned in the certificate and becomes competent to enter into a contract in its own name, purchase assets, incur liabilities in its own name and sue and be sued in its own name. Thus in the given case, the company has acquired a separate legal entity from the date of its incorporation as appearing in the certificate, i.e. 6th January 2018. Therefore the contract for allotment of shares made by the company is valid.

Question 28.
Popular Products Ltd. is a company incorporated in India, having a total Share Capital of Rs. 20 Crores. The Share capital comprises 12 Lakhs equity shares of Rs. 100 each and 8 Lakhs Preference Shares of Rs. 100 each. Delight Products Ltd. and Happy products Ltd. hold 2,50,000 and 3,50,000 shares respectively in Popular Products Ltd. Another company Cheerful products Ltd. holds 2,50,000 shares in Popular Products Ltd. Jovial Ltd., is the holding company for all the above three companies namely Delight Products Ltd.; Happy products Ltd; Cheerful products Ltd. Can Jovial Ltd., be termed as a subsidiary company of Popular Products Ltd., if it Controls the composition of directors of Popular Products Ltd. State the related provision in the favour of your answer.
Answer:
According to the provisions of section 2(46) of the Companies Act, 2013, a company is a holding company in relation to one or more other companies, which means a company of which such companies are subsidiary companies. Further section 2(87) defines the subsidiary company in relation to any other company (holding company), which means a company in which the holding company –

• controls the composition of the Board of Directors; or
• exercises or controls more than one-half of the total share capital either on its own or together with one or more of its subsidiary companies.

A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clauses (z) & (it) is of another subsidiary company of the holding company.

In the given case subsidiaries of Jovial Ltd. – Delight Products Ltd.; Happy Products Ltd. & Cheerful Products Ltd. hold 2,50,000; 3,50,000 & 2,50,000 shares respectively in Popular Ltd. The total shareholding of these subsidiaries amounts to 8,50,000 shares which is more than half of the total share capital of Popular Ltd. of 12,00,000 No. of shares. Thus Jovial Ltd. is controlling more than half of the share capital of Popular Ltd. through its subsidiaries.

Further, if Jovial Ltd. is in a position to exercise control over the composition of the Board of Directors of Popular Ltd. then also Jovial Ltd. shall be regarded as the holding company of Popular Ltd. Thus it can be concluded that Jovial Ltd. is not the subsidiary, but is rather the holding company of Popular Ltd.

Accounting Concepts, Principles and Conventions – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounting Concepts, Principles and Conventions – CA Foundation Accounts Study Material

Question 1.
What are Accounting Concepts, Principles & Conventions?
Answer:
Usually, accounting theories are expressed (referred) as Postulates, Concepts, Principles, Doctrines, Axioms, Rules, Standard, Assumptions, Canon etc. These are basic assumptions & norms on which the whole system of accounting is developed. These gives the basic structure & outline within which the procedures & systems can be varied as per the situation & need of an entity.

Accounting Concepts:
Meaning:

• Accounting Concepts is generally used to mean a ‘Notion’ only or mental idea about something.
• It is a principle which is taken to be self-evident or axiomatic (Le., something which does not require to be proved) which has already been proved to be true.
• In other words, it may be an assumption or axiom constituting the supposed basis of a system.
• It is considered to be of a more fundamental character and universally acceptable which may be applied in all possible cases. It will have greater general applicability.
• These postulates are either descriptive (explanatory) or suggestive (normative).
• There is no authoritative list of these concepts.

Accounting Principles:
Meaning:

• Accounting principles are the norm or rules which are to be followed in treating various items of Assets, Liabilities, Expenses, Incomes etc.
• Example – (i) Inventory should be valued at lower of cost & net reliable value, (ii) Fixed Assets should be depreciated over its useful life, (iii) Valuation norms for current & permanent investments etc.
• An accounting principle can have alternative methods to apply it. Like in case of inventory we have methods of cost measurement by FIFO or weighted average.

Accounting Conventions:
Meaning:

• It refers to the general agreement on the usage and practices in social or economic life, i.e., it is a customary practice, rule, method or usage.
• In other words, it is an accounting procedure followed by the accounting community on the basis of long-standing customs.

Question 2.
What are Fundamental Accounting Assumptions? Explain them in detail.
Answer:
Fundamental Accounting Assumptions:

• Fundamental accounting assumptions underline the preparation and presentation of financial statements.
• They are usually not specifically stated because their acceptance and use are assumed.
• Disclosure is necessary if they are not followed.
• The Institute of Chartered Accountants of India issued Accounting Standard (AS-1) ‘Disclosure of
• Accounting Policies’ according to which the following have been generally accepted as fundamental accounting assumptions: (i) Going Concern, (ii) Consistency and (iii) Accrual.

Question 3.
Periodicity concept.
Answer:
Periodicity concept:

• Accounts are prepared for a fixed period usually a year.
• Only transactions of that period has to come in that year’s accounts.
• Period is kept uniform fa period of 12 months) so that results are com¬parable.
• 1st Accounting period may be usually more or less than 12 months.
• A business entity runs continuously (going concern) hence to assess its performance and see the financial position on regular basis, it is broken up into smaller, uniform time periods known as accounting period.
• Now the Income-tax Act & Companies Act, 2013 both requires the Accounting year to be from 1 st April this year to 31 st March of next year.

Question 4.
Business Entity Concept
Answer:
Business Entity Concept:

• A distinction is made between the concern & its owner.
• Only those transaction which affects the concern is recorded in its books of account i.e. transactions affecting owner but not the concern will not be recorded in concerns books.

Although, we will study accounting of business concerns, but in the same manner personal account books can also be maintained by any individual.

Question 5.
Cost Concept
Answer:
Cost Concept:

• The assets & properties are recorded at its cost to the concern & not at its market value.
• Except stock which may be valued at cost or market price whichever is lower.
• As per this concept Fixed assets are recorded at their acquisition cost & then depreciated over its useful life.
• Example : Building purchased for ₹ 10 lakh. Its market value is ₹ 11 lakh. In account book building will be recorded at cost i.e. ₹ 10 lakh.

Question 4.
Dual Aspect Concept
Answer:
Dual Aspect Concept:

• Each transaction has double effect of equal amounts on Assets, Liabilities and Capital (Expenses & Income will result in to profit/loss which is part of capital).
• Therefore at any time the accounting equation is: Assets = Liabilities + Capital or Capital = Assets – Liabilities
• In other words, capital, i.e. the owner’s share of the assets of firm, is always what is left out of assets after paying off outsiders.
• Due to this dual aspect, we have double entry system of accounting.

Question 5.
Money Measurement Concept
Answer:
Money Measurement Concept:

• Accounting records only those transactions which are expressed in monetary terms.
• Although quantitative records are also kept as subsidiary records but that is not part of financial account books.
• The use of a building(depreciation or rent) and the use of clerical services (salaries) can be added up only through money values and not otherwise.
• Example – Loss of a Managerial Personnel cannot have a specific monetary value, hence, cannot be recorded in account books although it is significant event.

Question 6.
Realization Concept.
Answer:
Realization Concept:

• Income is accounted only when it is realised.
• Realised means cash is received or a right to receive is established.
• Example – A sale is recognised as income even when amount is not yet collected.
• Income recognition (Le. accounting) is postponed, when there is no reasonable certainty of realisability.

Question 7.
Accrual Concept.
Answer:
Accrual Concept:

• The expenses or Income of periodic nature accrues on day to day basis.
• Therefore we make provision for interest etc. up to last date of accounting year although it may become due/payable on a later date.
• Following accrual concept means following mercantile system of accounting.
• Example of such items are Interest, Rent, Salary, Depreciation etc.
• As per accrual concept/Mercantile system, the income & expenses should be recognised (Le. accounted):
• In the accounting period to which they relate (Le. the period in which benefit/goods/services is given or taken)
• Not in the period in which actual money is received or paid.

Example.
Loan ₹ 10 lakh taken on 1.1.06 @ 15% interest. Interest is payable annually. Accounting year ends on 31.3.06.
Answer:
Interest for 3 months from 1.1.06 to 31.3.06 ₹ 37,500 will have to be accounted even though it is neither paid, nor due, but only accrued.
Accrual is a Fundamental accounting assumption.

Question 8.
Going Concern Concept
Answer:
Going Concern Concept:

• It implies that the concern will be continuing the business for foreseeable future.
• It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.
• If such an intention or need exist, the financial statements may have to be prepared on a different basis and, if so, the basis is disclosed.
• Because of this, expenditure is divided into capital & Revenue expenditure & the fixed Assets are valued at cost less Depreciation.
• Because of this account of the whole life is divided into smaller accounting periods (periodicity concept).

Going concern is a fundamental accounting assumption.

Question 9.
Matching Principle.
Answer:
Matching Principle:

• If any income is credited in the P&L A/c then all expenses incurred or to be incurred for earning this income, should also be debited in the same years P&L A/c.
• Similarly if expenses are debited the corresponding income should also be credited in the same P&L A/c.
• To meet this requirement we make provision for closing stock, outstanding/prepaid expenses & outstanding/Advance income.
• Future incomes are wot anticipated rather related expenditures are carried forward to future period like prepaid expense & closing stock.
• If income is preponed for matching, it will be violation of realisation Concept & will also be against prudence principle.

Question 10.
Substance over form.
Answer:
Substance over form:
As per concept of Substance over form, the transaction should be recognized as per the economic reality of the transaction & not mere legal form.

Example.
A sales land to ‘B’ and gives possession of the land to B & receives full consideration. But sale deed is not yet registered for want of NOC from local authority.
Answer:
As per substance over form concept, A should recognize sale of land and consequent profit or loss and B should recognize Land as an asset in its books. Both will make suitable disclosure in notes to accounts.

Question 11.
Convention of Disclosure.
Answer:
Convention of Disclosure:

• All material information which is relevant for the proper disclosure of true & fair position, should be disclosed prominently in the accounts & financial statements.
• Disclosure of specified information is required by law and by Accounting Standards also, which is the minimum disclosure.

Question 12.
Convention of Materiality
Answer:
Convention of Materiality:

• All material i.e. important/significant items or information should be properly accounted & disclosed in the accounts & financial statements.
• That means immaterial items can be given a convenient accounting treatment.
• Example – Stationery, Postage, such items are treated as expense in the period of purchase even though some unconsumed balance may be there.

Question 13.
Convention of Consistency
Answer:
Convention of Consistency:
1. Consistency means the same Accounting principles & policies are followed, which were followed for preparing previous years accounts.

2. Same accounting principles & policies should be followed consistently from year to year unless change is required:

• to comply with some legal/statutory requirement or
• to comply with Accounting Standards or
• to show better information.

This consistency makes the information of different accounting year, comparable.
It is a fundamental accounting assumption.

Question 14.
Convention of Prudence
Answer:
Convention of Prudence/Conservative approach:

• An accountant is supposed to be conservative therefore expenses or losses are provided if there is possibility of its occurrence, but incomes are provided only if there is certainty of its earning.
• It is application of a caution while estimating & accounting, such that expense & liabilities are not understated & income & assets are not overstated.
• But it does not justify Creation of hidden reserve by deliberate understatement of Assets & incomes & overstatement of Liabilities & expenses.

Question 15.
Distinguish between Going Concern concept and Cost concept
Answer:
Going Concern Concept:

• It implies that the concern will be continuing the business for foreseeable future.
• It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.
• If such an intention or need exist, the financial statements may have to be prepared on a different basis and, if so, the basis is disclosed.
• Because of this, expenditure is divided into Capital & Revenue Expenditure & the Fixed Assets are valued at cost less Depreciation.
• Because of this account of the whole life is divided into smaller accounting periods, (periodicity concept) Going concern is a fundamental accounting assumption.

Cost Concept:

• The assets & properties are recorded at its cost to the concern & not at its market value.
• Except stock which may be valued at cost or market price which ever is lower.
• As per this concept Fixed assets are recorded at their acquisition cost & then depreciated over its useful life.
• Example – Building purchased for ₹ 10 lakh. Its market value is ₹ 11 lakh. In books of account building will be recorded at cost i.e. ₹ 10 lakh.

True or False

Question 1.
Prudence is a concept to recognize unrealized profits and not losses.
Answer:
False: Prudence is a concept to recognize future or anticipated losses and not profits.

Question 2.
As per AS-1, Fundamental Accounting Assumptions are Going Concern, Full Disclosure and Accrual Concept.
Answer:
False: As per AS-1, Fundamental Accounting Assumptions are Going Concern Concept, Consistency and Accrual Concept.

Question 3.
The financial statement must disclose all the relevant and reliable information in accordance with the full disclosure principle.
Answer:
True: The financial statement must disclose all the relevant and reliable information to comply with AS-1 Disclosure of Accounting Policies.

Question 4.
Accrual concept implies accounting on cash basis.
Answer:
False: Accrual concept implies accounting on ‘accrual’ basis not on cash basis.

Question 5.
As per Concept of Conservatism, the accountant should provide for all possible losses, but should not anticipate income.
Answer:
True: As per Concept of Conservatism, the accountant should provide for all possible losses, but should not anticipate income.

Question 6.
The economic life of an enterprise is artificially split into periodic intervals in accordance with the going concern assumptions.
Answer:
True: The economic life of an enterprise is artificially split into periodic intervals in accordance with the accounting period concept. The going concern assumption states that an enterprise will continue its operation for indefinite period of time.

Debentures – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Debentures – CA Foundation Accounts Study Material

Question 1.
Meaning of debentures.
Answer:
Meaning of debentures:
→ Debenture means “an instrument in writing issued by a company under its common seal, acknowledging its indebtedness for a certain sum of money and undertaking to repay it on or after a fixed future date.”

→ According to sec. 2(12) of the Companies Act, 1956 (now Section 2(30) of Companies Act, 2013) “Debenture include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

Characteristic features of a debenture:

• It is issued by the company and is in the form of a certificate of indebtedness.
• It usually specifies the date of redemption. It also provides for the re-payment of principal and interest at specified date or dates.
• It generally creates a charge on the undertaking or undertakings of the company.
• Usually the words pari passu appear in the terms and conditions of debentures.
• This means that all the debentures of a particular class will receive the money proportionately in case the company is unable to discharge the whole obligation.

Question 2.
Discount on debentures.
Answer:
Discount on debentures:

• The discount is a capital loss and it should be written off as early as possible.
• Even whole amount can be written off in the year of issue itself against share premium or any other capital profit.
• Otherwise Debenture Discount can be written off over the lifetime of debentures as follows (applying matching principle):
• If the Debentures are redeemable at the end of a period, then the Discount will be written off equally over that period.

Question 3.
Issue of Debentures as Collateral Security.
Answer:
Issue of Debentures as Collateral Security:
Issue of Debentures as Collateral Security means issue of debentures as an additional security, i.e., in addition to the prime security. It is to be realised only when the prime security fails to pay the amount of the loan. For example, when a company takes a loan of ₹ 10,00,000 from a bank, it may have to issue debentures as collateral security in addition to the principal security.

Debentures issued as a collateral security can be dealt with in the book in two ways:
(i) First Method:
Journal entry is not passed in the books of account at the time of issue of debentures as collateral security. However, it is disclosed by way of information below debentures, which are shown as Long-term Borrowings under Non-Current Liabilities or as Short-term Borrowings under Current Liabilities.

(ii) Second Method:
Debentures issued as collateral security may be recorded in the books of account. The Journal entry passed is :
Debentures Suspense A/c          Dr.         [This appears on the assets side]
To …. % Debentures A/c                           [This appears on the liabilities side]
When the loan is paid the above entry is cancelled by means of a reverse entry.

Question 4.
Premium on issue of debentures and Premium on redemption of debentures.
Answer:
Premium on issue of debentures and Premium on redemption of debentures:

Premium on Issue of Debentures	Premium on Redemption of Debentures
1. It is a capital profit and used in writing off the capital loss.	It is a capital loss.
2. The balance of premium on issue of Debentures Account, (Securities Premium) is shown on the liabilities side, under the head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’.	It is a liability and appears under the head ‘Non-Current Liabilities’ and sub-head ‘Long-term Borrowing’ till the redemption of debentures.

Question 5.
Company issued 1000,9% debentures @ ₹ 100 each, in following manner
Application ₹ 40
Allotment ₹ 30-10
First call ₹ 20
Second and final call ₹ 10
Mr. R holder of 20 debentures failed to pay the 1st and 2nd call money. Company decided to charge ₹ 35 as Interest on calls-in-arrear. Give necessary journal entries in the books of the company.
Solution:
Journal Entries

Question 6.
A Company purchased some plant costing ₹ 4,30,000 at an agreed price of ₹ 4,00,000. Company decided to issue its 896 debentures of ₹ 100 each against purchased consideration. Give necessary accounting entries in the following
cases:-
(a) If debenture were issued @ ₹ 100 per debenture
(b) If debenture were issued @ ₹ 80 per debenture
(c) If debenture were issued @ ₹ 125 per debenture
Solution:
Journal Entries

Working Note:

Question 7.
A Company took a bank loan of ₹ 5,00,000 from SBI and issued its 6000, 10% debentures of ₹ 100 each as collateral security to loan. Give necessary accounting treatment.
Solution :
Ist method:
When debenture issued as collateral security are not shown as issued debentures in the balance sheet of the company.

(i) Bank a/c                                                                                            Dr. To Bank loan a/c (Being bank loan taken on issue of 6000, 10% debentures of ₹ 100 each as collateral security)	5,00,000	5,00,000
(ii) No entry required for issuing debentures.

Balance sheet (Extract) as at ………….

Note:
(1) Long term borrowings:

	₹
Bank Loan from SBI (on collateral security of 6,000, 10% debentures of ₹ 100 each).	5,00,000

Question 8.
A Company issued 1000, 12% debentures of ₹ 100 each on 1st Jan 2016 at a premium of 10%. Interest was given/payable on 30th June and 31st December, every year subject to 10% TDS. Give necessary journal entries for the year 2016.
Solution:
Journal Entries

Question 9.
ABC company issued 1000, 9% debentures of ₹ 100 each at a discount of 5% on 1st Jan, 2011. These debentures were to be redeemed after 5 years. Show necessary journal entries at the time of issue of debentures. Also prepare discount on issue of 9% debentures a/c.
Solution :
At the time of issue:
Journal Entries

Discount on issue of 9% debenture a/c

Balance sheet as at 31st December 2011

Assets	Note No.	₹
Non-current assets other non-current assets		3,000
Current assets other current assets		1,000

Working Note:
(1) \(\frac{₹ 5,000}{5 \text { years }}\) = ₹ 1,000/-

Question 10.
Suppose company decided to redeem its debentures in the following manner

• At the end of the year 2011 ₹ 20,000
• At the end of the year 2012 ₹ 30,000
• At the end of the year 2013 ₹ 10,000
• At the end of the year 2014 ₹ 20,000
• At the end of the year 2015 ₹ 20,000

Calculate the amount to be written off at the end of every year.

At the beginning of the year or before redemption

Question 11.
Pure Ltd. issues 1,00,000 12% Debentures of ₹ 10 each at ₹ 9.40 on 1st January, 2018. Under the terms of issue, the Debentures are redeemable at the end of 5 years from the date of issue.
Calculate the amount of discount to be written-off in each of the 5 years.
Solution:
Total amount of Discount = 1,00,000 x 0.60 = ₹ 60,000

At the end of Year	Amount of outstanding debentures	Ratio	Amount of discount to be written off
1st	10,00,000	1/5	60,000 = 12000
2nd	10,00,000	1/5	60,000 = 12000
3rd	10,00,000	1/5	60,000 = 12000
4th	10,00,000	1/5	60,000 = 12000
5th	10,00,000	1/5	60,000 = 12000

Question 12.
On 1st January 2018, Ankit Ltd. issued 10% debentures of the face value of ₹ 20,00,000 at 10% discount. Debenture interest after deducting tax at source @10% was payable on 30th June and 31st December every year. All the debentures were to be redeemed after the expiry of five year period at 5% premium.
Pass necessary journal entries for the accounting year 2018.
Solution:
Journal Entries

True or False

Question 1.
Debenture Redemption Premium Account and Discount on issue of debentures Account are Nominal Accounts.
Answer:
False: Debenture Redemption Premium Account is a Personal Account but Discount on issue of Debentures Account is a Nominal Account.

Question 2.
Now Debentures can be issued at Par/Premium but not at discount.
Answer:
False: Debentures can be issued at Par/Premium/discount since there are no restrictions on issue of debentures at discount.

Question 3.
Like Shares a Company can issue debentures with voting rights.
Answer:
False: A Company cannot issue debentures with voting rights.

Browsing through Free Consent – CA Foundation Law Notes help students to revise the complete subject quickly.

Free Consent – CA Foundation Business Law Notes

What is Consent?
Section 13:
“Two or more persons are said to consent when they agree upon the same thing in the same sense ”.

Consent involves a union of the wills and an accord in the minds of the parties. When the parties agree upon the same thing in the same sense, they have consensus ad idem. If there is no consent, there is no contract. Salmond states it as error in consensus.

What is Free Consent?
Section 14 lays down that consent is not free if it is caused by –

• coercion
• undue influence
• fraud
• misrepresentation
• mistake.

If the consent is not free then it is known as error in causa. The effect of absence of free consent on contract depends on various factors as mentioned in this chapter. Let us see them all one by one.

What is Coercion?
Coercion is defined by section 15 of the Act as follows: Coercion is the:

• committing or threatening to commit, any act forbidden by the Indian Penal Code or
• unlawful detaining, or threatening to detain, any property
• to the prejudice of any person whatever
• with the intention of causing any person to enter into an agreement.

Explanation – It is immaterial whether the Indian Penal code is or is not in force in the place where the coercion is employed.

Whether threat to commit suicide amounts to coercion? The Madras High Court in Amiraju v Seshamma (1918) held by majority that threat to commit suicide amounts to coercion. The Court observed that though suicide was not punishable by IPC, yet it was one forbidden by the IPC, since an attempt to commit suicide is punishable.

In this case a person threatened to commit suicide if his wife and son did not contract with his brother to release certain disputed property in his favour. The court held that the contract was caused by coercion.

Consequences of coercion:
A contract brought about by coercion is voidable at the option of the party whose consent was so caused. [Sec. 19].

What is Undue Influence?
A contract is said to be induced by undue influence where:

• one of the parties is in a position to dominate the will of the other
• he uses the position to obtain an unfair advantage over the other Sec. 16(1).

Section 16(2) provides that a person is deemed to be in a position to dominate the will of another where:
1. Where he holds a real or apparent authority over the other (For ex- master & servant, ITO & Assessee)

2. Where he stands in a fiduciary relationship to the other. Fiduciary relationship means a relationship of mutual trust and confidence. Such a relationship is supposed to exist in the following cases – father and son; guardian and ward; solicitor and client; doctor and patient; preceptor and disciple; trustee and beneficiary etc.

3. Where a party makes a contract with a person whose mental capacity is temporarily or per-manently affected by reason of age, illness, or mental or bodily distress.

4. Where the contract is apparently unconscionable (i.e.; unfair). Example: an unfair money lending transaction.

The following relationships usually raise a presumption of undue influence, viz:

• Parent and child
• guardian and ward
• trustee and beneficiary
• doctor and patient
• lawyer and client
• spiritual guru and disciple.

This list, however, is not exhaustive.
There is no presumption of existence of a power to dominate the will of another in the following cases:

• Landlord and tenant
• Creditor and debtor
• Husband and wife.

It has been held by judicial decisions that in all these cases, the party alleging undue influence must prove that undue influence existed.

Example I:
A, a man enfeebled by disease of age, is induced by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B has employed undue influence.

Example II:
A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B prove that the contract was not induced by undue influence.

Example III:
A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Burden of Proof. Section 16(3):
“Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, (unfair, unreasonable) the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.”

Thus, in case of unconscionable transactions, the dominant party is under the burden to prove that undue influence was not employed. (In other cases, the burden of proof is on the weaker party to prove that undue influence was employed.)

The presumption of undue influence can be rebutted by the dominant/stronger party by showing that:

• All material facts were disclosed to the party who is alleging exercise of undue influence.
• The consideration was adequate.
• The party alleging exercise of the undue influence was in receipt of independent advice and was free to exercise it.
• The transaction was fair.

Pardanashin women:
A pardanashin woman is one who, by virtue of the custom of her community, is required to live behind a veil and is totally secluded from ordinary social interaction. Any contract made by such a women is under the presumption of undue influence.

Effect of Undue Influence:
(a) According to Section 19 of the Contract Act, when a contract is induced by undue influence, it is voidable at the option of the aggrieved party, i.e., the party whose consent is obtained by undue influence.

According to Section 19 A, any such contract may be set aside by the Court absolutely. However, if the aggrieved party has received any benefit thereunder, it may be set aside upon such terms and conditions as are just in the eyes of the Court.

Example: A, a money-lender, advances ₹ 10,000 to B, a farmer and by undue influence, induces B to execute a bond for ₹ 20,000 with interest at 48 percent per year. The court may set the bond aside, ordering B to repay ₹ 10,000 with such interest as may seen just.

Difference between Coercion and Undue Influence:

Points	Coercion	Undue influence
Type of force	Coercion involves use of physical force.	Undue influence involves use of mental pressure.
Relationship	In case of coercion, there is no relationship between the parties to the contract.	Whereas in case of undue influence some sort of relationship generally exists between the two parties.
Third Party	Coercion may be employed either against the party to the contract or against any third person who is not a party to the contract.	Undue influence is exercised against a person who is a party to the contract. No third party is involved in creating undue influence.
Presumption	The Court cannot draw the presumption of coercion.	The Court may draw the presumption of undue influence if the circumstances so warrant it.
Effect	The contract is voidable at the option of one of the parties of the contract.	The contract is either voidable or the Court may enforce it in a modified form.

What is Misrepresentation?
Representation is a statement or assertion, made by one party to the other, before or at the time of the contract, regarding some fact relating to the contract. Misrepresentation arises when the representation made is untrue but the person making it believes it to be true. There is no intention to deceive. Misrepresentation is misstatement of facts by one, which misleads the other.

Section 18 of the Contract Act classifies cases of misrepresentation into three groups as follows:
(a) Unwarranted Assertion:
When a person makes a positive statement of material facts honestly believing it to be true though it is false, such act amounts to misrepresentation.

Example:
X while selling his car to Y, informs him that the car runs 18 kilometres per litre of petrol. X himself also believes this. Later on, Y finds that the car runs only 12 kilometres per litre. This is a case of misrepresentation by X.

(b) Breach of duty:
“Any breach of duty, without an intent to deceive, which brings an advantage to the person committing it, by misleading another to his prejudice amounts to misrepresentation”. Under this heading would fall cases where a party is under a duty to disclose certain facts and does not do so and thereby misleads the other party.

Such a duty exist between the insurer and the insured; banker and customer; landlord and tenant; seller and buyer; and all contracts of utmost good faith. In English law such cases are known as cases of “constructive fraud.”

Example:
X while selling his land to Y, told him that all the farms on the land were fully let out. But he negligently omitted to inform him that the tenants had given notice to quit. Here, X is liable for misrepresentation.

(c) Innocent Mistake:
If one of the party causes the other, however, innocently, to make a mistake as to the nature or substance of the agreement, it is considered misrepresentation.

Example:
In a case, X chartered a ship to Y, which was described in the charter-party (lease or hire contract), and was represented to him as being not more than 2,800 tonnage registered. It turned out that the registered tonnage was 3,045 tons.

Y refused to accept the ship in fulfilment of the charter-party (i.e., an agreement between a ship owner and merchant for the use of a ship). It was held that Y was entitled to avoid the charter-party by reason of erroneous statements as to tonnage (The Ocean Steam Navigation Co. v. Soonderdas Dhurumsey, 1890, 14 Bom. 241).

Consequences of Misrepresentation:
In case of misrepresentation the aggrieved party can:

• Avoid the agreement, or
• Insist that the contract be performed and that he shall be put in the position in which he would have been if the representation made had been true. But if the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary diligence, he has no remedy. [Sec. 19]

“Ordinary diligence” means such diligence as a reasonably prudent man would consider necessary, having regard to the nature of the transaction.

Example:
A informs B that his estate is free from encumbrance. B thereupon buys the estate. In fact, the estate is subject to mortgage, though unknown to A also. B may either avoid the contract or may insist on its being carried out and the mortgage debt redeemed.

What is Fraud?
The term “Fraud” includes all acts committed by a person with a view to deceive another person. “To deceive” means to “induce a man to believe that a thing is true which is false”. Fraud is a false statement or wilful concealment of a material fact with an intent to deceive another party.

Section 17 of the Contract Act states that “Fraud” means and includes any of the following acts:
(i) False Statement:
“The suggestion as to a fact, of that which is not true by one who does not believe it to be true”. A false statement intentionally made is fraud.

Example:
X while selling his car to Y says that it is of the latest model and brand-new knowing fully well that it is a used car of old model. His representation or statement amounts to fraud.

(ii) Active Concealment:
“The active concealment of a fact by one having knowledge or belief of the fact.” Mere non-disclosure is not fraud where the party is not under any duty to disclose all facts. But active concealment is fraud.

Example:
X, a scooter dealer, showed a scoqter to Y, X knew that its handle and body are cracked which he had repaired in such a way as to defy detection. The defect was subsequently discovered by Y. Hence he refused to buy the scooter. Here, the contract could be avoided by Y as his consent was obtained by fraud.

(iii) Intentional non-performance:
“A promise made without any intention of performing it”.
Example: Purchase of goods without any intention of paying for them.

(iv) Deception:
“Any other act fitted to deceive”.

Example:
X, with an intention to deceive Y, makes a false statement to him that the sales from his shop are to the tune of ₹ 2,000 per day, although X is aware that they amount to ₹ 1,000 per day only. Y is induced to buy the shop. Here, the statement of X amounts to fraud.

(v) Fraudulent act or omission:
“Any such act or omission as the law specially declares to be fraudulent”. This clause refers to provisions in certain Laws, which declare certain acts or omissions to be fraudulent.

Example:
Thus, under section 55 of the Transfer of Property Act the seller of immovable property is bound to disclose to the buyer all material defects. Failure to do so amounts to fraud. In the insolvency legislations, the fraudulent preference to creditors is not allowed.

Note:
A deceit which does not deceive is no fraud. This means that if the promisee is not deceived or did not rely on the representation then there is no fraud. Fraud must have been made with an intention to deceive and must actually deceive the other party. Also, the party subjected to fraud must have suffered some loss.

Consequences of Fraud:
A party who has been induced to enter into an agreement by fraud has the following remedies open to him. [Sec. 19]

• He can avoid the performance of the contract.
• He can insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true.
• The aggrieved party can sue for damages.

Can Silence be Fraudulent?
“Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself equivalent to speech”. [Explanation to sec. 17]

Example I:
H sold to W certain pigs. The pigs were suffering from fever and H knew it. The pigs were sold “with all faults”. H did not disclose the fever to W. Held. There was no fraud [ Ward v. Hobbs (1878) A. C. 13],

Example II:
A sells by auction to B, a horse which A knows to unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A. Mere non-disclosure is not fraud. If there is no duty to speak.

Example III:
A and B, being traders enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

From the above, following rules can be deduced:
→ The general rule is that mere silence is not fraud.

→ Silence is fraudulent, “if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak”. The duty to speak, i.e. disclose all facts exists where there is a fiduciary relationship between the parties (such as in father and son; guardian and ward, etc, and also in the insurance contracts, marriage contracts, partnership contract etc which are contracts based on good faith [contracts of uberimae Fidel]). The duty to disclose may also be an obligation imposed by statute.

Example:
A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has just come of age. Here the relation between parties would make it A’s duty to tell B if the horse is unsound.

3. Silence is fraudulent where the circumstances are such that “Silence is in itself equivalent to speech”.
Example:
B says to A – “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech.

Difference between Misrepresentation and Fraud:

Points of Difference	Misrepresentation	Fraud
1. Different intention:	In misrepresentation there is no intention to deceive.	Fraud implies an intention to deceive.
2. Different Belief:	The person believes it to be true.	The person believes and makes false statements.
3. Different Rights:	In case of misrepresentation the only remedy is rescission. There can be no suit for damages.	In case of fraud the aggrieved party can rescind the contract. He can also sue for damages.
4. Different Defence:	The aggrieved party cannot avoid the contract if he had the means to discover the truth with ordinary diligence.	But in case of fraud excepting fraud by silence, the contract is voidable even though the party defrauded had the means of discovering the truth with ordinary diligence.

What Is mistake? What Is The Effect Of Mistake On Contract?
Mistake may be defined as an erroneous belief concerning something.
It may be of two kinds:

• Mistake of Law
• Mistake of Fact.

(1) Mistake of Law:
Mistake of law may be of two types –
(a) Mistake of general law of country
Every one is deemed to be conversant with the law of his country, and hence the maxim “ignorance of law is no excuse.” Mistake of law, therefore, is no excuse and it does not give right to the parties to avoid the contract.

If a mistake of law leads to a formation of contract, section 21 enacts that “a contract is not voidable because it was caused by a mistake as to any law in force in India’’. A person cannot get any relief on the ground that he had entered into a contract in ignorance of law.

Illustration:
A and B make a contract grounded on the erroneous belief that a particular debts is barred by the Indian law of limitation; the contract is not voidable.

(b) Mistake of Foreign Law:
Mistake of foreign law is treated as ‘mistake of fact’. Here the law relating to factual mistakes will apply.

(2) Mistake of fact:
Mistake of Fact may be of two types:
(a) Bilateral mistake
In case of bilateral mistake of essential fact, the agreement is void ab-initio. Section 20 provides that “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement is void.’’ Thus for declaring an agreement void ab-initio under this section, the following three conditions must be fulfilled:
→ Both the parties must be under a mistake.

→ Mistake must relate to some fact and not to judgment or opinion etc. An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact (Explanation to Section 20).

On the basis of judicial decisions, the mistakes which may be covered under this condition may broadly be put into the following heads:
→ Mistake as to the existence of the subject-matter of the contract.
Example : A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.

→ Mistake as to the title of the subject-matter.
Example : A believed that she had inherited rights over a fishery from her father. B, her cousin brother, also believed in A’s rights. B agreed to take the fishery on lease from A. Actually the fishery belonged to B. The agreement, caused by mistake as to title, was held to be void (Cooper v. Phibbs (1867) LR HL 149).

→ Mistake as to the quantity of the subject-matter.
Example : P wrote to H inquiring the price of rifles and suggested that he might buy as many . as 50. On receipt of the information, he telegraphed “Send three rifles.”But because of the mistake of the telegraph authorities, the message transmitted was “Send the rifles. ” H dispatched 50 rifles. Held: There was no contract between the parties. However, P could be held liable to pay for three rifles on the basis of an implied contract [Henkel v. Pape (1870) 6 Ex. 7].

→ Mistake as to the quality of the subject-matter.
Example : Xagreed to sell to Yan antique item believed by X to be of the 18th Century. What Xpossessed was actually of the 20th century. So the bilateral mistake about quality of the subject-matter makes it a void agreement.

(b) Unilateral Mistake:
Where only one of the contracting parties is mistaken as to a matter of fact, the mistake is a unilateral mistake. Regarding the effect of unilateral mistake, on the validity of a contract, sec. 22 provides that “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”.

Law regarding unilateral mistake:
(1) Contract Valid. As a rule, a unilateral mistake is not allowed as a defence in avoiding a contract i.e., it has no effect on the contract and the contract remains valid.

(2) Contract voidable. If the unilateral mistake is caused by fraud or misrepresentation etc., on the party, the contract is voidable and can be avoided by the injured party.

(3) Agreement void ab-initio. In the following two cases, where the consent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent, no contract will arise even though there is a unilateral mistake only.

(a) Mistake as to the identity of person contracted with, where such identity is important. If A intends to contract with B only, but enters into contract with C believing him to be B, the contract is void.

Example:
→ In Cundy v. Lindsay & Co., (1878) 3 App. Cas. 459., A company (Lindsay & Co.) had regular dealing with a firm Blenkiron & Co., having office in Wood Street. Another person with a similar name, Blenkarn, maintaining an office in the same street, sent an order on its printed letter head to the company for purchase of some goods. The company were led to believe that the order came from the famous firm they knew. They sent the goods.

The fraudulent Blenkarn sold the received goods down to Cundy. In a suit by Lindsay against Cundy for recovery of goods, it was held that as Lindsay never intended to contract with Blenkarn, there was no contract between them and as such even as innocent purchaser of the goods from Blenkarn did not get a good title, and must return them or pay their price.

→ Further, “Mistake as to the identity” of a party is to be distinguished from “mistake as to the attributes” of the other party. Mistake as to attributes, for example, as to the solvency or social status of that person cannot negate the consent. It can only vitiate consent. It therefore, makes the contract merely voidable for fraud.

→ Thus, where X enters into a contract with Y falsely representing himself to be a rich man, the contract is only voidable at the option of Y. Again where the identity of the party contracted with is immaterial, mistake as to identity will not avoid a contract. Thus, if X enters a shop introduces himself as Y and purchased some goods for cash, the contract is valid.

Example:
→ Philips v. Brooks (1919) 2 KB 243 – In this case a man, N, called in person at a jeweller’s shop and chose some jewels, which the jeweller was prepared to sell him as a casual customer. He tendered in payment a cheque which he signed in the name G, a person with credit. Thereupon N was allowed to take away the jewels which N pledged with B who took them in good faith.

Held, the pledge, B, had a good title since the contract between N and the jeweller could not be declared void on the ground of mistake but was only voidable on the ground of fraud. Horridge, J. held that although the jeweller believed the person to whom he was handling the jewels was G, he in fact contracted to sell and deliver to the person who came into his shop. The contract, therefore, was not void on the ground of mistake but only voidable on the grounds of fraud.

(b) Mistake as to the nature and character of a written document. The second cir-cumstance in which even an unilateral mistake may make a contract absolutely void is where the consent is given by a party under a mistake as to the nature and character of a written document.

The rule of law is that where the mind of the signatory did not accompany the signature; i.e., he did not intend to sign; in contemplation of law, he never did sign the contract to which his name is appended and the agreement is void abinitio.

Example:
In case of Foster v. MacKinnon (1868) LR 4 CP 704, an old illiterate man was made to sign a bill of exchange, by means of a false representation that it was a guarantee.
Held : the contract was void.

Browsing through Reconstitution and Dissolution of a Firm – CA Foundation Law Notes help students to revise the complete subject quickly.

Reconstitution and Dissolution of a Firm – CA Foundation Business Law Notes

Reconstitution of A Firm:
Incoming and outgoing Partners: The constitution of a firm may be changed by the introduction of a new partner; death, retirement, insolvency and expulsion of a partner; or by the transfer of a partner’s share to an outsider. All these are included within the term reconstitution of a firm. Upon reconstitution, the rights and liabilities of the incoming and outgoing partners have to be determined. The provisions of the Partnership Act regarding such cases are stated below.

Introduction of a New Partner (Sec. 31):
A new partner can be introduced only with the consent of all the partners. The share of profits which a new partner is entitled to get is fixed at the time he becomes a partner. He is liable for all . the debts of the firm after the date of his admission but he is not responsible for any act of the firm done before he became a partner, unless otherwise agreed. These rules do not apply to a minor becoming a partner under Sec. 30.

The incoming partner may, however, assume liability for past debts by novation that is, by tripartite agreement between (a) the creditor (b) the partners and (c) the incoming partner.

Retirement of a Partner (Sec. 32):
A partner may retire –

• with the consent of all the other partners,
• in accordance with the terms of the agreement of partnership or
• where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

A retiring partner remains liable for the partnership debts contracted while he was a partner. He may however be discharged from any liability to any third party for acts of the firm done before his retirement by novation, if it is so agreed with the third party and the partners of the reconstituted firm. Such agreement may be implied from the course of dealing between the firm and the third party after he had knowledge of the retirement.

The retired partner continues to remain liable to third parties for all acts of the firm until public notice is given of the retirement. Such notice may be given either by the retired partner or by any member of the reconstituted firm.

A retired partner is not liable for the debts of the firm incurred after public notice of his retirement. A sleeping partner may retire without giving a public notice of his retirement because he is not known to be a partner to third parties.

Expulsion of a partner (Sec. 33):
A partner can be expelled only when the following conditions are fulfilled:

• When the contract of partnership contains a provision for expulsion under stated circumstances.
• The power to expel is exercised in good faith by the majority of the partners.
• The expelled partner has been given notice of the charges against him and has been given an opportunity to answer the charges.

The liabilities of an expelled partner for the debts of the firm are the same as those of retired partner.

Insolvency of a partner (Sec. 34):
When the partner of a firm is adjudicated an insolvent, he ceases to be a partner from the date on which the order of adjudication was passed by the court. Whether the firm is thereby dissolved or not depends on the terms of the agreement between the partners.

Death of Partners (Sec. 35):
Ordinarily the death of partner has the effect of dissolving the firm. But it is competent for the partners to agree that the firm will continue to exist even after the death of partner.

Transfer of interest (Sec. 29):
What are the Rights of Transferee of Partner’s share?
Transferee’s rights: A share in a partnership is transferable like any other property, but as the Ik 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 one (section 29 of the Partnership Act). The Supreme Court in Narayanappa v. Krishnappa( 1966) has held that the £ assignee will enjoy only the rights to receive the shares of the profits of the assignor and amount of profits agreed to by other partners.

The rights of such a transferee may be noted as follows:
(a) During the continuance of partnership:
During the continuance of partnership, such transferee is entitled to receive the share of the profits of the transferring partner. However, he is bound to accept the profits as agreed to by the partners i.e. he cannot challenge the accounts.

A transferee of a Partner’s share is not entitled:

• to interfere with the conduct of the business.
• to require accounts or
• to inspect books of the firm.

(b) On the dissolution of the firm:
On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled against the remaining partners:

• to receive the share of the assets of the firm to which the transferring partners was entitled.
• for the purpose of ascertaining the share, to an account as from the date of the dissolution.

Rights and liabilities of an outgoing partner:
(I) Rights of an outgoing partner – An outgoing partner possesses following rights:
(a) Right to carry on competing business – An outgoing partner has the right to carry on the business competing with that of the firm, and he may advertise such business (Sec. 36). But section 36 imposes some
restrictions on his activities in order to prevent unfair competition with the firm. The restrictions imposed upon outgoing partner are:

• he may not use firm’s name,
• he may not represent himself as carrying on the business on behalf of the firm
  or
• he may not solicit the customers or the persons who were already dealing with the firm before he left the firm. The above restrictions are subject to a contract to the contrary.

However, the firm may enter into an agreement with the retiring partner not to do competitive business, and then he will not be entitled to carry on competitive business. This agreement will not be void as it will not be treated as an agreement in restraint of trade.

(b) Right to share subsequent profit in certain cases:
As per section 37, in case the accounts of the outgoing partners continue to remain unsettled and the remaining partner continues to run the business, such a partner is entitled to receive his share of profit or interest at the rate of 6% p.a. on the amount of his share in the firm.

(II) Liabilities of an outgoing partner – These may be classified into two stages:
(a) Liability for acts done before leaving the firm:
A retiring partner is liable for the acts done and debts incurred before his retirement, but he may be exempted from this liability in case on an agreement made by him with the third party and the remaining partners of the reconstituted firm.

(b) Liability for acts done after leaving the firm:
In case of retirement of a partner, a public notice is essential to this effect. If it is not given, the retiring partner will continue to be liable to third parties for the acts of the firm even after his retirement. A public notice is not essential in case of sleeping and deceased partners who is not known to be partner, and so will not be liable for such acts.

Dissolution of Firm (Secs. 39 To 55):
Dissolution of partnership and dissolution of firm:

Dissolution of firm	Dissolution of Partnership
It involves closing down of the business as the partnership between all the partners comes to an end.	It involves a change in the relationship amongst the partners due to retirement, expulsion etc., and the business of the firm does not necessary come to an end. It leads to reconstitution of firm.

Modes of dissolution of firm:
A firm may be dissolved on any of the following grounds:
1. By agreement (Sec. 40):
A firm may be dissolved any time with the consent of all the partners of the firm. Partnership is created by contract, it can also be terminated by contract.

2. By Compulsory Dissolution (Sec. 41):
A firm is dissolved-

• by the adjudication of all the partners or of all the partners but one as insolvent, or
• by the happening of any event which makes the business of the firm unlawful.

3. Dissolution on the happening of certain contingencies (Sec. 42):
Subject to contract between the partners, a firm is dissolved –

• if constituted for a fixed term, by the expiry of that term
• if constituted to carry out one or more adventures of undertakings, by the completion thereof,
• by the death of a partner, and
• by the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned cases. Such a provision is valid.

4. Dissolution by notice (Sec. 43):
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of communication of the notice.

5. Dissolution by the Court (Sec. 44):
At the suit of a partner, the court may dissolve a firm on any one of the following grounds:
A. Insanity:
If a partner has become of unsound mind. The suit for dissolution in this case can be filed by the next friend of the insane partner or by any other partner.

B. Permanent incapacity:
If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. The suit for dissolution in this case must be brought by a partner other than the person who has become incapable.

C. Guilty conduct:
If a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business. The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner who is guilty of misconduct.

D. Persistent breach of agreement:
If a partner wilfully and persistently commits breach of the partnership agreement regarding management or otherwise conducts himself in such a way that it is not reasonably practicable for the other partriers to carry on business in partnership with him.

E. Transfer of whole interest:
If a Partner has transferred the whole of his interest in the firm to an outsider or as allowed his interest to be sold in execution of a decree. Transfer of partner’s interest does not by itself dissolves the firm. But the other partners may ask the court to dissolve the firm if such a transfer occurs.

F. Loss:
If the business of the firm cannot be carried on except at a loss. Since the motive, with which partnerships are formed, is acquisition of gain, the courts have been given discretion to dissolve a firm in cases where it is impossible to make profits.

G. Just and Equitable clause:
If the court considers it just and equitable to dissolve the firm. This clause gives a discretionary power to the court to dissolve a firm in cases which do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution.

Consequences of dissolution:
a. Rights & liabilities of partners on dissolution (Secs. 45 to 55):
When the firm is dissolved, the business of the firm is wound up, the assets are realised to pay the debts and the surplus, if any is distributed amongst the partners. For the purposes of winding up of the firm, the partners possess certain rights and are subject to certain liabilities. These are discussed below.
1. Right to have the business wound up (Sec. 46):
On the dissolution of a firm, a partner has the right

• to have the business of the firm wound up and the debts of the firm settled out of the property of the firm.
• to have the surplus distributed among the partners according to their rights.

2. Continuing authority of partners for purpose of winding up (Sec. 47):
The partners authority to act for the firm and to bind their co-partners continues even after dissolution of the firm for the following two purposes :

• to wind up the affairs of the firm (for example recovering money from debtors).
• to complete transaction begun but unfinished at the time of the dissolution.

3. Right to share in personal profits earned after dissolution (Sec. 50):
Every partner has a right to share in any secret profits derived by any partner under any transaction carried out in the firm name or by use of the property or business connection of the firm, after the dissolution but before winding up.

4. Right to have premium returned on premature dissolution (Sec. 51):
Where a partner has paid a premium (goodwill) on entering into partnership for a fixed j term, and the firm is dissolved before the expiration of that term, he shall be entitled to repayment of the whole or a reasonable part of the premium. The amount of repayment will depend upon (a) the terms upon which he became a partner & (b) length of the time during which he was a partner.

Example:
X entered into a partnership, in a firm for a period of 10 years and paid ₹ 5,00,000 as premium. The firm was dissolved after expiration of 3 years because of the insolvency of a partner. Here, X shall be entitled to ₹ 3,50,000 (5,00,000/10 3 = 1,50,000; 5,00,000 – 1,50,000 = 3,50,000) as return of premium.

No such premium shall be paid to the partner if such premature dissolution:

• is due to death of a partner, or
• is due to his own misconduct or
• is as per agreement which contains no provision for the return of premium.

5. Rights where partnership contract is rescinded for fraud or misrepresentation (Sec. 52):
Where a partner was induced to join the firm by the fraud or misrepresentation of any other partner, the aggrieved partner has the right to rescind the partnership agreement and is entitled:
→ to a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him;

→ to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm,

→ to be indemnified by the partner or partners guilty of fraud or misrepresentation against all the debts of the firm.

6. Right to restrain the use of firm name or firm property (Sec. 53):
After a firm is dissolved, every partner, may restrain any other partner:
→ from carrying on a similar business in the firm name or

→ from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up. However, it will not affect the right of any partner or his representative who has bought the goodwill of the firm to use the firm name.

b. Liabilities of partners on dissolution:
1. Continuing liability until public notice (Sec. 45):
If a public notice is not given of the dissolution of a firm the partners continue to be liable to third parties for any act done by any of them after dissolution.

2. Liability for continuing authority of Partners for purpose of winding up (Sec. 47):
After the dissolution of the firm, the partners continue to be liable for acts done to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution.

Mode of settlement of accounts after dissolution:
The partners may lay down their own procedure for the settlement of accounts after dissolution. In the absence of a prior agreement between the partners in this regard, the accounts may be settled in accordance with the provisions provided in sections 48, 49 and 55 of the Indian Partnership Act which are discussed below:
(i) Goodwill shall be included in the assets and it might be sold separately or along with other property of the firm.

(ii) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, for the balance, the partners shall individually subscribe in their profit sharing ratio.

(iii) Assets of the firm, including partners’ contributions to make deficiencies of capital, shall be applied firstly, for paying the debts of the firm to third parties, secondly if there remains any surplus, it shall be utilized in paying each partner the amount of advances given to the firm. Such payments are made in the ratio of advances made by the partners. For example, if X gives an advance of ₹ 50,000 and Y of ₹ 60,000, then the ratio of payment shall be 5:6.

thirdly, if still there remains any surplus, it shall be utilized for paying each partner rateably on account of capital. For example, the capitals of X, Y and Z have been contributed for ₹ 6,00,000, ₹ 7,00,000 and ₹ 8,00,000 respectively. Here, the proportion of capital shall be 6 : 7 : 8. and finally, the residue to be divided amongst partners in their profit sharing ratio.

(iv) In case one of the partners is insolvent and nothing is recoverable from him, then, the de-ficiency of such a partner is borne by the solvent partners in the ratio of their capitals in accordance with the rule in Garner v. Murray.

(v) Payment of firm debts and separate debts: According to Section 49 of Partnership Act, where there are debts of the firm as well as individual debts of the partners, then the following rules shall apply:
→ The property of the firm shall be first utilized in payment of the debts of the firm; and if there remains any surplus, then the share of each partner in such surplus shall be applied in payment of his individual debts, or if there is no such individual debt then his share shall be paid to him.

→ The individual property of any partner shall be applied first in the payment of his individual debts; and if there remains any surplus, it shall be utilized in the payment of the debts of the firm.

Public Notice (Sec. 72):
1. The Partnership Act requires that a public notice must be given in each of the following cases:
(a) On minor attaining majority:
A minor partner on becoming a major must give public notice of his intention to remain or not to remain a partner. [Sec. 30(5)]

(b) Retirement of a partner:
When a partner retires from the firm, he must give public notice to terminate further liability. [Sec. 32(3)]

(c) Expulsion of a partner:
When a partner is expelled from the partnership business he must give public notice to terminate further liability. [Sec. 33]

(d) Dissolution of the firm:
When a partnership firm is dissolved, the partners of the dissolved firm must give public notice to terminate further liability [Section 45(1)]

2. Mode of the Public Notice:
According to Sec. 72 the Public Notice becomes effective when the following steps have been taken:
(a) The notice has been published in the Official Gazette.

(b) The notice has been published in at least one vernacular newspaper (i.e. which is published in Indian language) circulating in the district where the concerned firm has its place or principal place of business.

(c) If the firm is registered, the notice has been sent to the Registrar of Firms.

3. Consequences of not giving public notice:
(a) On minor attaining majority:
If a minor is admitted to the benefits of partnership under Section 30 he has to give public notice within 6 months of his attaining majority or of his obtaining knowledge that he has been admitted to the benefits of partnership, whichever date is later. If he fails to give notice, that he has elected to become or not to become a partner in the firm, he shall become a partner in the firm on the expiry of the said 6 months and is liable as a partner of the firm.

(b) Retirement of a partner:
If a retiring partner does not give a public notice of the retirement from the firm under section 32, he and the other partners shall continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement.

(c) Expulsion of a partner:
If in case of expulsion of a partner from the firm a public notice is not given, the expelled partner and the other partners shall continue to be liable to third parties dealing with the firm as in the case of a retired partner. [Section 33],

(d) Dissolution of the firm:
If a public notice is not given on dissolution of a registered firm, the partners shall be liable to third persons of any act done by any of them which would have been an act of the firm if done before the dissolution (section 45).

When public notice is given of the dissolution of a firm, no partner shall have authority to bind the firm except for certain specific purposes as given in Section 47. According to this section, after the dissolution of a firm, the authority of each partner to bind the firm and their mutual rights and obligations of the partners shall continue :

• so far as may be necessary wind up the affairs of the firm
• to complete transactions begun but unfinished at the time of the dissolution.

Browsing through CA Foundation Business Economics Notes Chapter 3 Theory of Production and Cost help students to revise the complete subject quickly.

Theory of Production and Cost – Business Economics CA Foundation Notes Chapter 3

Meaning of production:
→ Production is one of the important economic activity that takes place in any economy apart from consumption and investments.

→ An individual firm is the micro-economic unit which undertake the production of goods and services.

→ A firm’s survival depends upon whether it is able to achieve optimum efficiency in production by minimizing the cost of production.

→ Production is the transformation of resources into goods and services. In other words, production is the act of transformation of Inputs into Output which satisfies the wants of some people. Example – Inputs of sugarcane, capital and labour are used to produce Sugar.

→ Production also includes production of Services like those of lawyers, teachers, doctors, etc.

→ The amount of goods and services that an economy is able to produce determines whether it is rich or poor. A country like U.S.A. is a rich country as its production level is high.

→ Man cannot create or destroy matter.

→ In Economics, the term production means creation of economic utilities in the matter i.e. in the things that already exist.

→ Thus, production means creation of those goods and services which have economic utilities i.e. exchange value.

→ According to James Bates and J.R. Parkinson, “Production is the organized activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy the demand of such transformed resources.”

→ Professor J. R. Hicks has defined production “as any activity whether physical or mental, which is directed to the satisfaction of other people’s wants through exchange.”

→ The definition indicates that the term production covers the whole process from creation of utilities till the satisfaction of human wants.

→ Utilities may be created or added in many ways, such as :
1. Form Utility:

• It is created by changing the form of raw materials into finished goods for man’s use.
• Example – converting raw cotton into cotton fabric.
• Form utility is created by manufacturing industries.

2. Place Utility:

• It is created by transporting goods from one place to another.
• Example – when goods are taken from factory to marketplace, place utility is created.
• Transport services are involved in creation of place utility.

3. Time Utility:

• It is created by making things available when they are required.
• Example – Banks create time utility by granting overdraft facilities.

4. Service Utility (Personal Utility):
It is created by providing personal services to the customers by professionals likes lawyers, doctors, bankers, shopkeepers, teachers, transporters, etc.

Factors of Production:

Land:
→ Generally, land means earth’s surface.

→ However, in economics land refers to all the free gifts of nature i.e. natural resources. Land includes natural resources:

• on the surface of earth; Example – Soil, forest, plots of land, etc.
• below the surface of earth, Example – mineral deposits, etc. and
• above the surface of earth, Example – climate, sunshine, rain, etc.

→ Land has the following characteristics:

• Primary Factor. Land is the original and primary or natural factor of production. It provides various natural resources for production.
• Free Gift of Nature. Land is the creation of nature and not man made. It is a free gift of nature to mankind.
• Inelastic Supply. Land is fixed in supply. Its supply cannot be either increased or decreased by any human efforts. However, its supply is relatively elastic from the point of view of a firm.
• Lacks Geographical Mobility. Land cannot be moved bodily from one place to another. However, land is said to be mobile in the sense it can be put to many alternative uses.
• Passive Factor. Land does not yield any result unless human efforts and capital are employed.
• Heterogeneous. Land differs in nature, fertility, uses and productivity from one place to another.
• Permanent. It means that land cannot be destroyed. The productive power of soil is original and indestructible according to Ricardo.
• Diminishing Returns. The land is subject to the Law of Diminishing Returns more quickly in the cultivation of land.

Labour:

• Labour in economics means any work whether physical or mental done in exchange for some monetary reward.
• Anything done out of love and affection is not labour in economic sense.
• Labour has the following peculiarities (characteristics) which makes it different from other factors:

1. Labour is inseparable from labourer:

• All other suppliers of factors can be separated from the factors which they supply.
• Example – Land can be separated from its owner.
• However, the labourer cannot be separated from the work which he performs.
• Example – A doctor has to attend his patients in person. Labour is connected with Human Efforts.

2. Human Factor:

• It is a live factor of production. Hence, labour has feelings and temperament.
• So it is very much affected by surroundings, working, conditions, motivation, leisure, recreation, working hours, etc.

3. Highly perishable:

• Labour cannot be stored for future use. It is highly perishable.
• A day lost without work means a day’s work gone forever.
• Hence, labourer has weak bargaining power and has to accept even low wages.

4. The labourer sells his services and not himself:
In the labour market it is labour which is brought and sold and not the labourer.

5. Heterogeneous:

• Labour power differs from labourer to labourer.
• Labour power depends upon physical strength, education, skill, training, efficiency,
• Hence, labour can be classified as unskilled, semi-skilled and skilled labour.
• The skilled labour is called as human capital.

6. Mobile.

• Labour is a mobile factor.
• Labour is much less mobile than capital.
• Labourer is human being and hence has attachment with his family, custom, religion, culture, etc. and so is hesitant to move from one place to another.

7. Active Factor:
Labour is the most active factor of production. Other factors are made operative with the use of labour.

8. Labour has sociological characteristics:

• Employment of labour involves problems relating to labour welfare.
• Example – Social security like provident fund, gratuity, medical benefits, pension, etc.
• Other factors do not have such characteristics.

9. Supply curve of labour is backward sloping.

10. The supply of labour is inelastic in short run.

Capital:
→ In ordinary language, capital is used in the sense of money.

→ But in economics the term ‘Capital’ means man made stock of goods like factories, machines, tools, equipments, raw materials, dams, canals, transport vehicles, etc. which are used in production.

→ Thus, ‘Capital’ in economics is used in the sens(e of real capital i.e. capital goods.

→ Capital has therefore, been rightly defined as “produced means of production” and as “man made instrument of production”.

→ Land and labour are primary or original factors of production. But capital is produced by man working with nature to help in the production of further goods.

Following are the main characteristics of capital:
1. Capital is man made:
Capital is not produced by nature. It is artificial as it is produced by man.

2. Capital is productive:
Use of capital increases the overall productivity in a given process. It provides tools and implements to labour for production.

3. Supply of capital is elastic:

• The supply of capital can be adjusted to demand.
• The stock of capital depends on capital formation.
• Thus, by raising the rates of savings and investments the supply of capital can be increased.

4. All capital is wealth:

• Capital is that part of wealth which is used in further production of wealth.
• Hence, capital has all the characteristics of wealth like utility, scarcity, transferability and price.

5. Capital is a passive factor:
It alone is unable to produce anything. It is ineffective without the use of labour and land.

6. Capital is the most mobile factor:
It has both place as well as occupational mobility.

7. Capital is durable:
Physical capital assets like plant and machinery, factory buildings, etc. last over a long time in the process of production. However, they are subject to depreciation.

8. Capital involves social cost:

• In the creation of capital, the money to be used for present consumption has to be diverted.
• Sacrifice of present consumption and enjoyment of the people is treated as a social cost.

Types of capital:

→ Fixed Capital. Those durable physical assets which can be repeatedly used in the process of production for long periods are called fixed capital.
Example – Machinery, Plant, Tools, Factories, Railways, etc.

→ Circulating or Working Capital. Working capital refers to those goods which are used up in the single act of production. Such goods are used only ONCE in production.
Example – raw materials, power, fuel, etc. They are single use producer’s goods.

→ Sunk Capital. Sunk capital is the capital which is used to produce only one single commodity. It can be put to a single specialized use only.
Example – A brick kiln can be used only to bake brick and nothing else. Sunk capital therefore, lacks occupational mobility.

→ Floating Capital. Floating capital is that which can be put to several uses.
Example – electricity, money, leather, etc.

→ Real Capital. Real capital refers to the physical capital goods like machinery, raw material, factory buildings, etc. which help in production.

→ Human Capital. The human capital is in the form of people who are equipped with education, skills, training, good health, etc. A faster economic growth can be achieved with the accumulation of human capital.

→ Tangible Capital. Tangible capital is one which can be seen and touched.
Example – machinery, tools, etc. in other words, it is real capital.

→ Intangible Capital. It cannot be seen or touched. It can only be felt.
Example – goodwill, etc.

→ Money Capital. It is in the form of shares, debentures, bonds, stock certificates, etc. Money is invested in expectations of returns.

→ Individual Capital. Capital resources having personal or private ownership of an individual or group of individuals is called individual capital.
Example – Tata Enterprises.

→ Social Capital. The capital which is owned by the society as a whole is called as social capital.
Example – roads, railways, schools, dams, canals, etc.

Capital Formation:

• Capital formation means a sustained increase in the stock of real capital in a country.
• It is thus, an addition of capital goods like machines, tools, factories, transport facilities, power, etc. in the country.
• Such capital goods are used for further production of goods and thus increases the production capacity of the country.
• Capital formation is also known as investment.
• Capital formation plays an important role in the development of an economy generally, higher the rate of
• capital formation, more economically developed an economy would be.

There are mainly three stages of capital formation which are as follows:
1. Savings:
→ Savings represents that part of income which is not consumed. Level of savings in a country depends on –

• ability to save
• willingness to save.

(i)

• Ability to save depends upon the income of an individual.
• Higher the income, higher is the savings.
• This is because with the increase in income the propensity to consume falls and propensity to save increases.
• This is true in case of both the individuals and the economy.

(ii)

• A person with ability to save must also have willingness to save.
• Willingness to save depends upon individual’s concern about future. If a person is foresighted and wants to make future secure, he will save more.
• Willingness to save also depends upon family affection, desire for the growth and promotion of business, desire for prestige and power habits, sound banking system, stability in the money value, State’s taxation policy, etc.

2. Mobilization of Savings:

• The money so saved by the households must enter into circulation i.e. must be mobilized and make them available to the businessmen or entrepreneurs who require it for investment purposes.
• This requires a network of banks, financial institutions (like UTI, IDBI, etc.), insurance companies, etc.
• Such facilities help to promote high rate of mobilization and canalization of savings.

3. Investments:

• The final stage is the investment of savings into capital assets like machinery, tools, buildings, dams, etc.
• Investment requires a large number of honest, dynamic, daring, efficient and skilled entrepreneurs in the economy.
• Investments also depends upon the factors like expected profits, rate of interest, size of market, stability in the money value, internal peace and security, fear of foreign aggression, etc.

Entrepreneur:

• The most important factor in production i.e. enterprise is provided by entrepreneur.
• An entrepreneur is a person or group of persons who bring together the different factors of production i.e. land, labour and capital at one place; combine them in right proportions; initiate the process of production by making them work together and bear the risks and uncertainty involved in it.
• He is therefore also called the organizer, the manager or risk bearer.

An entrepreneur performs the following functions:
1. Initiating a business enterprise:

• The first function of an entrepreneur is to start a business. For this he brings together the different factors of production like land, labour and capital.
• He pays them their respective remuneration i.e. rent for land, wages to labour and interest to capital.
• Any surplus left after factor payment is his reward i.e. profit which is not fixed.
• If his planning goes wrong he may also incur losses.

2. Risk and Uncertainty bearing:
→ Main function of an entrepreneur is to bear risk and uncertainty. According to Prof. F. H. Knight there are two types of risks namely –

• Foreseeable or insurable risks, example – risk of fire, thefts, accidents, etc.
• Unforeseeable or non-insurable risk, example – technological risks due to inventions, fluctuations in demand due to change in fashion etc., trade cycles, changes in govt, policies, etc.

→ Foreseeable risks can be predicted and hence can be insured. Such risks do not cause uncertainty and thus do not give rise to profits.

→ Unforeseeable risks involve uncertainty and give rise to profits.

→ True entrepreneurship lies in bearing non-insurable risks and uncertainties.

3. Innovations:

• Prof. Joseph A. Schumpeter considers innovation as the true function of the entrepreneur.
• Innovation refers to all those changes in the production process the objective of which is to reduce the cost of production and increase profits.
• Innovations in wider sense includes introduction of new or improved production methods, a new machine, a new plant, use of a new source of raw material, change in the internal organizational set-up, etc.
• Such innovations give rise to profits but temporarily because once these are adopted by other firms, the profits could disappear.
• Hence, entrepreneur has to continuously introduce new innovations and contribute to technological progress and economic growth of the country.

Enterprise’s objectives and constraints:
→ Earning profit is considered to be the prime objective of every business. However, earning profit cannot be the only objective of the business because an enterprise functions in the economic, social, political and cultural environment. Hence, an enterprise has to set us objectives in relation to such environment. The objectives of an enterprise are as follows:
(1) Organic objectives: The basic purpose of all kinds of enterprises is to Survive and Exist i.e. to stay alive. This is possible only when it is able to recover its costs and earn profits. Once the enterprise is assured of its survival, it will aim at growth and expansion.

• Growth as on objective has gained importance with the rise of professional managers. H.L. Marris’s and other economists assert that managers of a corporate firm are interested in maximizing the growth rate rather than in profit maximization.
• Owners are interested in profits, capital, market share and public reputation.
• For growth and expansion of the firm it is necessary that adequate profits are made so as to provide internal funds for further investment.
• Growth and profit are both positively related to the size of the firm. Both of the objectives converge in one namely A Steady growth in the size of the firm.
• Managers prefer balanced rate of growth over profits. The growth rate and growth is measured in terms of sales, number of branches, number of employees, etc.

(2) Economic Objectives: The basic and important objective of every business is to earn profit. Accordingly therefore, the firm determines the price and output policy in a manner that profits can be maximized.

• Investors expect sufficient returns from their company. Similarly, creditors and employees are also interested in profitable enterprise.
• The definition of profits in economic sense has different meaning than accountants definition of profits.
• Accounting Profit = Total Revenue – Accounting Cost (Explicit Cost)
• Economic Profit = Total Revenue – Economic Cost (i.e. Explicit + Implicit Cost)
• Profit maximization objective has been criticized because all firms do not aim to maximize profits.

Example :

• Some firm try to achieve Security with reasonable level of profit.
• Some firms may try to Maximise Sales (Prof. Baumol)
• Some economists point that owners and managers of a company try to Maximise their utility rather than profit.

(3) Social Objectives: A business enterprise is an integral part of society. It lives in a society. It cannot grow unless it meets the needs of the society. It makes use of resources of j society. Therefore, it owes something to society. Some of the important social objectives j of business are –

• To maintain continuous and desired quantity of unadulterated goods of standard quality.
• To avoid unfair trade practices.
• To avoid profiteering and anti-social practices.
• To create opportunities for gainful employment for the people in the society. A business should specially consider the handicapped, disabled and poor people.
• To avoid air, water or noise pollution.

(4) Human Objectives: Employees are precious resources who contribute abundantly to the success in business. Therefore, the overall development of its employees, keep them motivated and taking care of employees should be major objectives of an organization.

The common human objectives are –

• To provide fair deal to the employees at different levels.
• To provide good working conditions.
• To pay competitive and satisfactory wages and salaries.
• To impart training to employees and keep updating their knowledge.
• To provide opportunities to employees in decision making process on the matters affecting them.

(5) National Objectives: An enterprise should try to fulfil the nations need and aspirations. It should work towards implementation of national plans and policies. Some of the national objectives are –

• To remove inequality of opportunities and provide opportunities to all irrespective of caste and religion to work and to progress.
• To produce according to national priorities.
• To help country achieve self-sufficiency in production of all types of goods and thus reduce dependence on other countries.
• To provide education and training to young men to bring about skill formation for achieving growth and development.
• All the enterprises have multiple objectives and therefore, the need to set priorities by balancing of the objectives.

In the pursuit of the above objectives an enterprise’s action may get constrained in following ways –

• Lack of knowledge and information about many variable that affect business.
• Constraints may be experienced due to governments’ restrictions on the production, price and movement of factors.
• There may be infrastructural bottleneck.
• Changes in business and economic conditions; change in government policies about location, prices, taxes, etc.; natural calamities like fire, flood, famine, etc.
• Constraints are also faced due to inflation, rising interest rates, unfavourable exchange rate, capital and labour costs, etc.

Enterprise’s Problems
→ A business enterprise face many problem from its start, through its life time till it is closed down. Following are the main problems:
(1) Problems relating to objectives: An enterprise functions in the economic, social, political
and cultural environment. Therefore, it has a set of many objectives in relation to its environment.

• These multifarious objectives many times conflict with one another. Hence, the enterprise faces the problem of choosing and striking balance between them.
• Example – Social responsibility objective may run into conflict with expansion of production activity resulting in pollution.

(2) Problems relating to location and size of the plant: An enterprise has to decide about the Location of its plant. In doing so, it has to consider many costs like cost of labour, facilities and cost of transportation to decide where its plant should be located.

→ Another problem faced is about SIZE of the firm, whether it should be a small scale or large scale unit. Before deciding upon the scale of operations several aspects will have to be considered like technical, managerial, marketing, financial, etc.

(3) Problems relating to selecting and Organising physical facilities: A firm has to decide about the nature of production process to be used and the type of equipments required for it. This will depend upon the require volume of production
→ This choice will be based on –

• the evaluation of costs of different equipments
• efficiency

→ It has also to prepare layout of plant.

(4) Problems relating to Finance: A firm also has to do good financial planning. For this an enterprise will have to determine –

• amount of funds required
• demand and cost of its products
• profits on investments, and
• capital structure

(5) Problems relating to Organisation Structure: An enterprise faces problem relating to organizational structure. It has to divide the total work of the enterprise by creating different departments in order to carry on the specialized functions by each department.

• It has to clearly define the roles and relationships of all positions also.

(6) Problems relating to Marketing: For survival and growth, a firm has to properly do marketing of its products and services.

• It has to identify its actual and potential customers, tools of marketing, etc.
• After identifying the market, the firm has to decide upon product, promotion, price and place aspects.

(7) Problems relating to Legal Formalities: Many legal formalities are to be carried out at the time of formation, during the life time and at closure.
Example – assessing various taxes and paying, maintenance of records, filing various returns, adhering to laws formulated by Govt., etc.

(8) Problems relating to Industrial Relations: This problem relates to winning worker’s co-operation, enforcing discipline among workers, workers participation in management, dealing with trade unions, etc.

Production Function:
→ Output is a function of inputs i.e. factor services such as land, labour and capital which are used in production. In other words, production is a transformation of Physical Inputs into Physical Output.

→ The functional relationship between physical inputs and physical output, per unit of time under a given state of technology is called production function.

→ It can also be expressed in the form of a mathematical equation in which output is the dependent variable and inputs are the independent variables.
Q = f (a, b, c …………. n)
Where –
Q denotes quantity of output of a commodity per unit of time
f stands for function of i.e. depends on a, b, c,… n denotes quantity of various inputs.

Assumptions of Production Function:
The production function is based on the following assumptions:

• It is specified with reference to a specified period of time.
• It is assumed that the state of technology remains the same, during the period of time.
• It is assumed that the firm uses best and most efficient technique available in production.
• It is assumed that the factors of production are divisible into viable units.

The production function can be explained under two heads:
1. The short run production function in which input – output relations are analysed where –

• One input is variable, all other inputs are fixed, (described as the Law of Variable Proportions) OR
• Two inputs are variable, all other factors are fixed (explained with the help of isoquants)

2. The long run production function in which input- output relations are analysed where all the inputs are variable (described as the Law of Returns to Scale).
Cobb-Douglas Production Function:
Q = f (L, K). Where –
Q = Output; L = Labour; K = Capital

→ Paul H. Douglas and C.W. Cobb of the U.S.A. studied the production function of the American manufacturing industries. This production function applies to the whole of manufacturing in U.S.A. rather than to an individual firm. In this case, output is manufacturing production and inputs used are labour and capital.

→ The conclusion of study is that labour contributed 3 /4th and capital about 1 /4th in the manufacturing production.

Fixed Inputs (Fixed Factors) and Variable Inputs (Variable Factors):

Comparison	Fixed Inputs	Variable Inputs
(i) Meaning	1. The factors which cannot be easily and quickly changed and require long time to make adjustment in them with the changes in the level of output are called fixed inputs or fixed factors of production. 2. In other words, factor inputs whose quantity does not vary from day-to-day are called as fixed inputs.	1. The factors which can be easily and quickly changed and readily adjusted with the changes in the level of output are called variable inputs or variable factors of production. 2. In other words, factor inputs whose quantity may vary from day-to-day are called as variable inputs.
(ii) Examples	1. Examples of fixed inputs – buildings, machinery, plant, top management, etc. 2. It requires long time to make variations in them. 3. Example – To construct a new factory building with a larger area and capacity.	1. Examples of variable inputs – ordinary labour, raw-material, power, fuel chemicals, etc. 2. It can be readily changed.
(iii) Relation with Output	1. Fixed inputs do not vary with the level of output. 2. Its quantity remains the same, whether the output is more or less or zero in Short run.	1. Variable inputs vary directly with the level of output. 2. Such factors are required more, when output is more; less, when output is less and zero, when output is zero in Short run.
(iv) Cost	1. The cost of the fixed inputs is called Fixed cost. 2. In the short run the firm has to bear the fixed cost even if the output is zero. 3. Since the quantity of fixed inputs remains the same, fixed cost remains the same whatever be the level of output.	1. The cost of the variable inputs is called Variable cost. 2. Since variable inputs vary directly with the level of output, variable costs are also positively related with output. If output is zero, variable cost is also zero. 3. If output is increased variable cost also increases and vice-versa.

Short Run (Short Period) & Long Run (Long Period):

Comparison	Short Run	Long Run
(i) Meaning	1. The short run is defined as the period of time in which some factors of production or at least one factor is fixed i.e. does not vary with output 2. Thus, in the short period some factors are Fixed Factors → Example – Factory building, machinery, management, etc. and some are Variable factors. → Example – Labour, raw-material, power, fuel, etc..	1. The long run is defined as the period of time in which all factors may vary. 2. In the long run, all factors become variable and so there is no distinction between fixed and variable factors.
(ii) Scale of Production OR Size of the Firm	1. In the short run, the output is produced with a Given scale of production i.e. the size of plant or firm (and so the production capacity) remains unchanged. 2. Hence, production can be increased or decreased only by changing the amount of variable factors	1. In the long run, the output is produced with the Change in the scale of production i.e. the size of plant or firm can be increased (and so the production capacity). 2. Hence, production can be increased by varying all factors i.e. fixed factors (of short period) as well as variable factors.
(iii) Production Law	The production function which is studied in the short run period is called as the Law of Variable Proportions.	The production function which is studied in the long run period is called as the Law of Returns to Scale.
(iv) Decisions about Change in factors	1. The decisions to change the amount of variable factors (like raw material, labour, etc.) are taken very frequently depending upon changes in demand of the commodity. 2. Hence, short run is the ‘Actual production period’ during which some factors are fixed while some are variable. 3. Thus, firms operate in the short run period.	1. The decisions to change the amount of fixed factors i.e. scale of production or to close down the firm are taken only once in a while. 2. Hence, long run is the ‘Planning period’. 3. Thus, firms plan in the long run period.
(v) Nature of Supply	1. In the short run period, supply can be adjusted up to a limited extent as per changes in demand. 2. In other words, supply is relatively inelastic.	1. In the long run period, supply can be fully adjusted as per changes in demand. 2. In other words, supply is relatively elastic.
(vi) Nature of Cost	1. In short run period, cost is classified as Fixed Cost and Variable Cost. 2. Fixed cost is the cost of fixed inputs and Variable cost is the cost of variable inputs. 3. Fixed cost is the main feature of short run period	1. In long run period All costs are variable. 2. Variable cost is the main feature of long run period.
(vii) Effect on Price	1. In short-run, the price determination of a commodity is more influenced by – → The demand forces than supply forces because supply in short-run is relatively inelastic. → The UTILITY of the commodity.2. The short-run price is called Sub-Normal Price	1. In long-run, the price determination of a commodity is more influenced by – → The supply forces than demand forces because supply in long-run is relatively elastic. →  The Cost of Production of the commodity.2. The long-run price is called Normal Price.
(viii) Average Cost Curve	1. The short-run average cost curve is ‘U’ shaped. 2. Its U-shape is explained with the Law of Variable Proportions.	1. The long-run average cost curve is also U shaped. 2. But its U- shape is not as prominent as short-run average cost curve. 3. Its U-shape is explained with the Law of Returns to Scale. 4. Long-run average cost curve is also called ‘Planning Curve’ and ‘Envelope Curve’.
(ix) Profit of Firms	In the short-run period – (a) The firms under perfect competition on being at equilibrium may earn normal profits, super normal profits or incur losses. (b) The monopoly firm on being at equilibrium may earn normal profits, super normal profits or incur losses. (c) The firms under monopolistic competition on being at equilibrium may earn normal profits, super normal profits or incur losses.	In the long run period – (a) The firms under perfect competition earn only Normal profits and operate at optimum level. (b) The monopoly firm can earn Super Normal profits and operate at sub-optimum level. (c) The firms under monopolistic competition earn only Normal Profits and operate at sub-optimum level.

Concepts of Product:
→ Product i.e. output refers to the volume of goods produced by a firm in a particular period of time.

→ There are three concepts relating to the physical production by factors namely –

• Total Product (TP),
• Average Product (AP), and
• Marginal Product (MP).

1. Total Product (TP).

• The total output produced by all the factors per unit of time is called total product.
• Total product increases with an increase in the variable factor input.
• Column Nos. (1) and (2) of the following table shows a total product schedule.

2. Average Product (AP):
→ The. average product means the total product per unit of a variable factor.

→ In other words, it is the total product divided by the number of units of a variable factor.
Average Product = \(\frac { Total Product }{ No.of units of Variable factor }\)
OR AP = \(\frac { TP }{ QVF }\)

→ Column No. (3) of the following table shows the average product of variable factor.

3. Marginal Product (MP):
→ The marginal product means addition made to total product by the use of an extra unit of variable factor.

→ It may be stated as –
MP = TP_n – TP_n-1
where,
MPn = Marginal product when ‘n ’ units of variable factors are used
TP = Total Product
n = number of units of variable factors used.

→ Marginal Product may also be defined as the change in total output due to use of additional unit of variable factor
MP = \(\frac { ∆ TP}{ ∆ QVF }\)
Where –
∆ = a small change Column No. (4) of the following table shows the marginal product schedule.
Table: Product Schedule

Units of Variable factor Example – Labour	Total Product(TP)	Average Product(AP)	Marginal Product(MP)
1	10	10	10
2	30	15	20
3	60	20	30
4	80	20	20
5	90	18	10
6	90	15	0
7	85	12.1	-5

→ Average product and Marginal product are related to one another.
(i)

• When average product of the variable factor is rising, marginal product of the variable factor is more than its average product.
• So when average product curve is rising, the marginal product curve will lie somewhere above it.

(ii)

• When average product of the variable factor is falling, marginal product of the variable factor is less than its average product.
• So when average product curve is falling, the marginal product curve will lie somewhere below it.

(iii)

• When average product of the variable factor is maximum and constant, marginal product is equal to average product.
• In other words, the marginal product curve cuts the average product curve at its maximum point.

Law of Variable Proportions:
→ The Law of Variable Proportions examines the production function i.e. the input-output relation in short run where one factor is variable and other factors of production are fixed.

→ In other words, it examines production function when the output is increased by varying the quantity of one input.

→ Thus, the law examines the effect of change in the proportions between fixed and variable factor inputs on output in three stages viz. Increasing returns, diminishing returns and negative returns.

→ Statement of the Law :
“As the proportion of one factor in a combination of factors is increased, after a point first the marginal and then the average product of that factor will diminish”. (F. Benhan)

→ The law operates under some assumptions which are as follows:

• There is only one factor which is variable. All other factors remain constant.
• All units of variable factor are homogeneous
• It is possible to change the proportions in which the various factors are combined.
• The state of technology is given and is constant.

The three stages of the law can be explained with the help of the following schedule and diagram.
Table : Law of variable proportions

Stage I : The Law of Increasing Returns to Factor –

• During this stage, total product (TP) increases at an increasing rate upto the point of inflexion ‘I’ and thereafter it increases at diminishing rate.
• This is because marginal product (MP) of the variable factor increases upto point ‘M’ on MP curve and then start falling.
• Rising MP also pulls up average product (AP), which goes on rising, in the first stage.
• Rising AP indicates increase in the efficiency of variable factor i.e. labour.
• Stage I ends where AP is maximum and is equal to MP as shown by point ‘C’ in the diagram.

The law of increasing returns operates because of the following two reasons:
1. Indivisibility of fixed factors –

• Due to indivisibility, the quantity of fixed factors is more than the quantity of variable factors.
• So when the quantity of variable factors is increased to work with fixed factors, output increases speedily due to full and effective utilisation of fixed factors.
• In other words, efficiency of fixed factors increases.

2. Efficiency of Variable Factor Increases –
Due to increase in the quantity of variable factor, it becomes possible to introduce Divison of Labour leading to Specialistion. This results in more output per worker.

Stage II : The Law of Diminishing Returns to Factor –

• In second stage, TP continues to increase at diminishing rate. It reaches the maximum at point ‘D’ in the diagram, where the second stage ends.
• In this stage, both AP and MP of variable factor are falling- though remains positive. That is why this stage is called as the stage of diminishing returns.
• At the end of this stage MP becomes, zero as shown by point ‘B’ in the diagram and corresponding to highest point ‘D’ on TP curve.

The law of diminishing returns operate due to the following two reasons:
1. Indivisibility of fixed factors –

• Once the optimum proportion between indivisible fixed factors and variable factors is reached (as in Stage I) with any further increase in the quantity of Variable factor, the fixed factors become inadequate and are overutilised.
• The fine balance between fixed and variable factor gets disturbed. This causes AP and MP to diminish.

2. Imperfect Substitutability of factors:

• Variable factors are not perfect substitute of fixed factors.
• The elasticity of substitution between factors is not infinite.

Stage III : The Law of Negative Returns to Factor –

• In third stage, TP falls and so, TP curve slopes downward. MP becomes negative and the MP curve goes below the X-axis. AP continues to fall.
• As the MP of variable factor becomes negative, this stage is called the stage of negative returns.
• In this stage the efficiency of fixed and variable factors fall and factor ratio becomes highly sub-optimal.

The law of negative returns operate due to the following reasons:

• The quantity of the variable factor becomes too excessive compared to fixed factors. They get in each other’s way and so TP falls and MP becomes negative.
• Too large number of variable factors also reduce the efficiency of fixed factors.

Conclusion -Where to operate?

• A rational firm will not produce either in Stage I or in Stage III.
• In stage I, the marginal product of fixed factor is negative as its quantity is more than variable factor.
• In stage III, the marginal product of variable factor is negative as its quantity is too large than fixed factor.
• Therefore, firm would seek to produce in Stage II where both AP and MP of Variable factor are falling.
• At which point to produce in this stage will depend on the prices of factor inputs.

Law of Returns to Scale:
→ The Law of Returns to Scale examines the production function i.e. the input – output relation in long run where increase in output can be achieved by varying the units of All factors in the same proportion.

→ Thus, in long run all factors become variable.

→ It means that in long run the scale of production and the size of the firm can be increased.

→ The law of returns to scale analyse the effects of scale on the level of output as –
1. Increasing Returns to Scale:

• When the output increases by a greater proportion than the proportion increases in all the factor inputs, it is increasing returns to scale.
• Example – When all inputs are increased by 10% and output rises by 30%.
• The reasons of increasing returns to scale are – internal and external economies of scale; indivisibility of fixed factors; improved organisation; division of labour and specialisation; better supervision and control; adequate supply of productive factors, etc.

2. Constant Returns to Scale:

• When the output increases exactly in the same proportion as that of increase in all factor inputs, it is constant returns to scale.
• Example – When all inputs are increased by 10% and output also rises by 10%.
• The reason of constant returns to scale is that beyond a certain point, internal and external economies are Neutralised by growing internal and external diseconomies.

3. Diminishing Returns to Scale:

• When the output increases by a lesser proportion than the proportion increase in all the factor inputs, it is diminishing returns to scale.
• Example – When all inputs are increased by 20% but output rises by 10%.
• The reason of diminishing returns to scale is increased internal and external diseconomies of production.
• Internal diseconomies like difficulties in management, lack of supervision and control, delay in decision-making etc.
• External diseconomies like insufficient transport system, high freights, high prices of raw materials, power cuts, etc.

→ The law of returns to scale can also be illustrated with the help of the following schedule and diagram.
Table : Law of returns to scale

Units of Labour & Capital	Marginal Product (Units)	Total Product (Units)	Remarks
1 2	200 300	200 500	Stage I Increasing Returns
3 4 5	400 400 400	900 1300 1700	Stage II Constant Returns
6 7 8	300 200 100	2000 2200 2300	Stage III Diminishing Returns.

Returns to Factor and Returns to Scale:

	Returns to Factor	Returns to Scale
1. Meaning	1. Returns to factor refers to the various production sizes where one factor is variable and other factor of production are fixed. 2. In other words, it examines production function when the output is increased by varying the quantity of one input. 3. It examines the effect of Change in the proportions between inputs on output.	1. Returns to scale refers to the various production sizes where increase in output can be achieved by varying the units of All Factors in the Same Proportions. 2. It show the effects on output when all factor inputs are varied in the same proportion simultaneously.
2. Nature of Inputs	1. Quantities of some inputs are fixed while the quantities of other inputs vary. 2. In other words, there are Fixed and Variable factors of production.	1. Quantities of all inputs can be varied. 2. In other words, all factors of production are Variable.
3. Time Element	Returns to factor is called a Short Run production function.	Returns to scale is called a Long run production function.
4. Application	It does not apply where the factors must be used in fixed proportion to produce a commodity.	It does apply where the factors must be used in fixed proportions to produce a commodity.
5. Stages of Law	1. The law has three stages namely – Increasing Returns to factor, Diminishing Returns to Factor, & Negative Returns to factor 2. Of the three stages, diminishing returns pre-dominate.	1. The law has three stages namely – Increasing Returns to Scale, Constant Returns to Scale, Diminishing Returns to Scale. 2. All the three stages of return appear.
6. Causes of Operation	1. Increasing returns to factor is due to indivisibility of fixed factors and division of labour and specialisation. 2. Diminishing returns is due to non- optimal factor proportion and imperfect substitutability of factors. 3. Negative returns fall in the efficiency of fixed and variable factors.	1. Increasing returns to scale is due to increased internal and external economies. 2. Constant returns to scale is due to the fact that internal and external economies are neutralised by growing internal and external diseconomies. 3. Diminishing returns is due to internal and external diseconomies of scale.
7. Scale of Production	1. The scale of output is unchanged and the production plant or the size and efficiency of the firm remain constant. 2. This is because, only one factor is variable and all other factors are fixed.	1. The scale of output can be increased and so the size of the firm too can be expanded. 2. This is because all factors are variable and hence can be increased in the same proportion simultaneously.

Production Optimisation:

Isoquants:
An iso-product curve or isoquant is a curve, which represents the various combinations of two variable inputs that give the same level of output. As all combinations on the iso-product curve give the same level of output, the producer becomes indifferent to these combinations. That is why iso-product curve are also called ‘production indifference curve’ or ‘equal product curve’. To understand consider the following production isoquant schedule.

In the schedule I above, the producer is indifferent whether he gets combination A, B, C, D or E. This is because all the combinations of capital and labour give the same level of output i.e. 100 units.

By plotting the above combinations on a graph, we can derive an iso-product curve as shown in the following figure:

In the diagram, quantity of capital is measured on X-axis and quantity of labour on Y-axis.

The various combinations A, B, C, D, E of capital and labour are plotted and on joining them we derive an iso-product curve. All combinations lying on the iso-product curve yield the same level of output i.e. 100 units and hence technically equally efficient.

If the production schedule II is also plotted on the graph, we will get another iso-product curve IQ₂₀₀. This will lie above the IQloo as the combinations contain greater quantities of capital and labour. A set of iso-product curves is called iso-product curve map.

In the diagram, it can be observed that each iso-product curve is labelled in terms of output. All combinations lying of IQ₁₀₀ give the output of 100 units and all the combinations lying on IQ₁₀₀ give the output of 200 units. Higher iso-product curve represent higher level of output. Also it indicates how much more output can be achieved.

Marginal Rate of Technical Substitution:
The rate at which one factor of production is substituted in place of the other factor without any change in the level of output is called as the marginal rate of technical substitution. Consider the following schedule.

Each of the factor combinations in the table above yields same level of output. Moving from com-bination A to B, one unit of capital replaces 4 units of labour. Similarly, moving from B to C, one unit of capital now replaces only 3 units of labour and so on. It implies that labour and capital are imperfect substitutes. That is why MRTSKL is continuously diminishing. We can measure MRTSKL on an iso-product curve.

‘Iso-Cost Line’ OR ‘Equal Cost Lines’:
Iso-cost line (also known Equal Cost Line; Price Line; Outlay Line; Factor Price Line) shows the various combinations of two factor inputs which the firm can purchase with a given outlay (i.e. budget) and at given prices of two inputs.

Example:
A firm has with itself ₹ 1,000 which it would like to spend on factor ‘X’ and factor ‘Y’.
Price of factor ‘X’ is ₹ 20 per unit.
Price of factor ‘Y’ is ₹ 10 per unit.
Therefore, if the firm spends the whole amount on factor X, it can buy 50 units of X and if the whole amount is spent on factor Y, it can buy 100 units of Y. However, in between these two extreme limits, it can have many combinations of X and Y for the outlay of ₹ 1,000. Graphically it can be shown as follows –

In the diagram OP shows 100 units of Y and OM shows 50 units of X. When we join the two points P and M, we get the iso-cost line. All the combinations of factor X and factor Y lying on iso-cost line can be purchased by the firm with an outlay of ₹ 1,000. If the firm increases the outlay to ₹ 2,000, the iso-cost line shifts to the right, if prices of two factors remains unchanged. The slope of the iso-cost line is equal to the ratio of the prices of two factors. Thus,
Slope of line PM = \(\frac { Price if X }{ Price of Y }\)

Producer’s Equilibrium OR Production Optimization:
A firm always try to produce a given level of output at minimum cost. For this it has to use that combination of inputs which minimizes the cost of production. This ensures maximization of profits and produce a given level of output with least cost combination of inputs. The least-cost combination of inputs or factors is called producer’s equilibrium or production optimization. This is determined with the help of (a) isoquants, & (b) iso-cost line.

An isoquant or iso-product curve is a curve which shows the various combinations of two inputs that produce same level of output. The isoquants are negatively sloped and convex to origin. The slope of isoquants shows the marginal rate of technical substitution which diminishes. Thus, MRTS_xy

Iso-cost line shows the various combination of two factor inputs which the firm can purchase with a given outlay and at given prices of inputs. There can be different outlays and hence different iso-cost lines. Slope of iso-cost line shows the ratio of the price of two inputs i.e. \(\frac{P_{x}}{P_{y}}\)

Which will be the least cost combination can be understood with the help of following figure. Suppose firm wants to produce 300 units of a commodity. It will first see the isoquant that represents 300 units.

In the adjoining diagram we find that all combinations a, b, c, d and e can produce 300 units of output. In order to produce 300 units firm with try to find out least cost combination. For this it will super impose the various iso-cost lines on isoquant as shown in the diagram.

The diagram shows that combination ‘C’ is,the least cost combination as here isoquant is tangent to iso-cost line HI. All other combinations a, b, d and e lying on isoquant cost more as these points lie on higher iso-cost lines. Hence, the point of tangency of isoquant and iso-cost line shows least cost combination. At the point of tangency.

Slope of iso-quant = Slope of iso-cost line
∴ MRTS_xy = \(\frac{P_{x}}{P_{y}}\)
Thus, the firm will choose OM units of factor X and ON units of factor Y and be at equilibrium as the marginal physical products of two factors are proportional to the factor prices.

Internal Economies and Diseconomies:
→ Internal economies are those benefits which accrue to a firm when it expands the scale of production.

→ Internal economies are the result of the firm’s own efforts independent of the actions of other firms.

→ These economies are particular to the individual firms and are different for different firms depending upon the size of the firm.
The main types of internal economies are as follows –
1. Technical Economies:

• The large scale production is associated with technical economies.
• As the firm increases its scale of production, it becomes possible to use better plant, machinery, equipment and techniques of production.
• Following are the main forms (causes/reasons) of technical economies

Economies of superior techniques:

• A large sized firm can use sophisticated and costly machines and equipments.
• Use of superior techniques reduces the cost of production per unit and increases aggregate output.

Economies of increased dimensions:

• A large firm can get the mechanical advantage in using large machines and other mechanical units to produce more output.
• Example – A Large boiler, large furnace, etc. can be operated by same team as required by smaller boiler, furnace, etc.

Economies of linked processes:
A large sized firm can develop its own sources of raw material, means of transportation, distribution system, etc.

Economies of the use of By-products:

• A large sized firm can avoid all kinds of wastage of materials. The firm can use its by- products and waste material to produce another material.
• Example – Sugar industry can make alcohol out of the molasses.

Economies of specialization:
A large sized firm can introduce greater degree of division of labour and specialisation.

2. Managerial Economies:

• Large sized firms can introduce division of labour in managerial tasks.
• They can employ business executive of high skill and qualification to look after the functioning of various departments like production, finance, sales, advertising, personnel, etc.
• This helps to increase the efficiency and productivity of managers resulting in reduction in managerial costs.

3. Commercial Economies:

• A large sized firm is able to reap economies of bulk purchases.
• It can get discounts from suppliers, railways, transport companies, etc.
• It enjoys prompt and regular supply of raw materials.
• A large sized firm can also afford to spend large amount of money on advertising, publicity, etc.
• It can also give various concessions to wholesale and retail dealers and customers and thus capture markets for its product.

4. Financial Economies:

• A big firm enjoys goodwill among lenders or investors.
• For raising finance it can either borrow from bank as it can offer better security or it can raise finance by issuing shares, debentures and by inviting public deposits. Such opportunities are not available to small firms.

5. Risk Bearing Economies :

• A large firm is better placed to face the uncertainties and risks of business.
• A big firm producing many variety of goods is in a better position to withstand economic ups and downs. Therefore, it enjoys economies of risk bearing.

→ Internal diseconomies means all those factors which raise the cost of production per unit of a particular firm when the scale of production is expanded beyond the point of optimal capacity.

→ Such diseconomies of scale are as follows:
1. Production Diseconomies :

• Production diseconomies sets in when expansion of firm’s production beyond optimum size leads to rise in the cost per unit of output.
• Example – Use of inferior or less efficient factors due to non-availability of efficient factors raises the per unit cost of output.

2. Managerial Diseconomies:

• As the scale of production increases burden on management also increases.
• Co-ordination of work among different departments becomes difficult. Supervision and control over the activities of subordinates becomes difficult, decision taking is delayed, etc.
• As a result, wastage increase and the efficiency and productivity decrease.
• Per unit cost starts rising.

3. Technical Diseconomies :

• Every equipment has an optimum point at which it works more efficiently and economically.
• Beyond optimum point they are overworked and may result in breakdowns, heavy cost of maintenance, etc.

4. Financial Diseconomies:

• Expansion of production beyond the optimum scale results in increase in the cost of capital.
• It may be due to increased dependence on external finances.

5. Marketing Diseconomies:

• Selling diseconomies set in if the scale of production is expanded beyond optimum level.
• The advertisement expenditure and marketing overheads increase more proportionately with the scale.

External Economies and Diseconomies:
→ External economies are those benefits which accrue to all the firms operating in a given industry from the growth and expansion of that industry.

→ External economies are not related to an individual firm’s own cost reduction efforts.

→ These are common to all the firms in an industry and shared by many firms or industries.

→ The main types of external economies are as follows –
1. Technological Economies:

• When the whole industry expands, it may result in the discovery of new technical knowledge, firms pool manpower and finance for research and development resulting in new and improved methods of production and new inventions.
• Use of improved and better machinery improves production function and cost of production per unit falls.

2. Economies of Localization :

• When in an area, many firms producing the same commodity are set up, it is called localization of an industry.
• Due to localization there is expansion of railways, post & telegraph, banking services, insurance, setting up of booking offices by transport, companies, setting up of powerful transformer by electricity department, etc.
• All the firms get these facilities at low prices.

3. Economies of Information :

• As pointed earlier, firms pool their resources for research and development.
• All firms get the benefit of the research in terms of market information, technical information, information about governments economic policies, information about availability of new source of raw material, etc.
• Also, specialized journals give information about latest developments.

4. Cheaper Inputs:

• When an industry expands its needs for raw materials, machines, etc. also expand.
• This may result in exploration of new and cheaper sources of raw materials, machinery, etc.
• Also, the industries producing such inputs also expand in scale.
• Therefore, they can supply these inputs at lower prices.
• As a result the cost of production per unit of the firm using these inputs falls.

5. Growth of Ancillary Industries :

• With the growth of an industry, many firms specialized in the production of inputs like raw material, tools, machinery, etc. come up.
• Such firms are called ancillary units which provides inputs at lower cost to the main industry.
• Likewise, some firms may get developed by processing the waste products of the industry.
• Thus, wastes are converted into by-products. This reduces the cost of production in general.

6. Development of Skilled Labour:

• When an industry expands specialized institutions like colleges, training centers, management institutes, etc. develop.
• This results in continuous availability of skilled labour like technicians, engineers, management experts, etc.

7. Better transportation & Marketing Facilities :

• When an industry expands many specialized transporters also develop.
• The firm in need of specialized transport service can get them easily at cheaper rates.
• Also many new marketing outlets and specialized marketing institutions develop. The firm need not spend on developing its own marketing outlets.
• This reduces the cost.

→ The growth and expansion of an industry in a particular area beyond optimum level results in many disadvantages for firms in the industry.

→ Such disadvantages increases the costs of production of each firm.

→ Therefore, they are called external diseconomies. Some of the external diseconomies are as follows:
1. Diseconomies of Scarcity of Inputs :

• When an industry expands its need for raw materials, machines, tools and equipments, etc. also expands.
  Some inputs are such which cannot be totally substituted.
• The firms supplying these inputs come under pressure and may supply inputs at a higher price.
• This raises the cost of production per unit of the firm who uses these inputs.

2. Diseconomies of Strains on Infrastructure :

• Due to concentration of firms in an area infrastructural facilities become inadequate over a time.
• Example – Excessive pressure on transport system results in delayed transportation of raw materials and finished goods.
• Other facilities like electric power supply, communication system, water supply, etc. are also over taxed.
  This puts strain on infrastructural facilities resulting in increased cost of production.

3. Diseconomies of High Factor Prices :

• With the concentration of an industry in a particular area, the demand for factors of production rises.
• Thus, the prices of the factors of production go up resulting in increased cost of production.

4. Diseconomies of Expenditure on Advertising:

• Expansion of an industry also means increase in the number of firms.
• This means increase in competition among the firms.
• This forces a firm to spend more and more on advertising.
• This raises per unit cost.

Internal and External Eonomies:

Theory of Cost:

• In the production analysis we had considered quantitative relationship between inputs and outputs.
• In the cost analysis we are concerned with financial side of production i.e. the cost behaviour in relation to size of output, scale of operations, prices of factors of production, etc.
• Therefore, a businessman must have a clear understanding of various concepts of costs.

Cost Concepts:
→ Accounting Costs and Economic Costs.
1. Accounting costs are those cash payments which firms make to outsiders for purchasing or hiring the services of various productive factors which do not belong to the entrepreneur.

2. The accounting costs are in the nature of contractual payments to the factor suppliers.
Example – Contractual payments like wages, rent on hired land, interest on borrowed capital, cost of power and fuel, purchase of raw-materials, insurance premium, transportation, advertising, taxes, etc.

3. These costs are recorded in firm’s account book.

4. All these money expenses are also known as Explicit Costs or accounting costs as they form part of the cost of production and accounted by the firm.

5. Economists take a broader view of the cost concept. Economist’s cost refer to what may be called Full costs or economic costs.

6. Economic Costs = Explicit costs (or accounting costs) + Implicit costs (or imputed costs)

7. Thus, economic cost is the sum total of accounting costs (also called explicit costs) and implicit cost (also called imputed costs or opportunity cost)

8. Implicit costs are costs of self owned and self supplied resources by an entrepreneur which are generally not recorded in the firm’s account book. There is no contractual obligation for payment to any body else.
Example – An entrepreneur may utilise his own building or his own capital or may act as a manager of his firm himself.

9. For these productive services, he does not pay rent or interest or salary to himself although the payments accrue to him.

10. These are implicit or imputed (estimated) costs of various factors owned and supplied by the owner himself.

11. When an entrepreneur invests capital in his business, devotes his time and skills in his business, he has to forego the opportunity of investing his, capital, time and skills elsewhere.

12. Implicit costs involves the sacrifice of alternatives that have been foregone in the production of a commodity.

13. Hence, implicit costs are also called “opportunity cost” and forms part of the economic costs.

14. A firm earns economic profits or normal profit when it recovers both explicit costs as well as implicit costs.

15. Thus, normal profit is a part of implicit cost. Profit earned over and above normal profit is called super normal profit.

Outlay Cost and Opportunity Cost:
1. Outlay costs involve actual outlay of funds on wages, material, rent, interest etc. Outlay costs involve financial expenditure at some time and thus are recorded in the books of account.

2. Our wants are unlimited and resources are scarce but have alternative uses. Hence, the prob¬lem of choice among the alternative uses of a given resource for particular purpose arises.

3. This is because, the use of a resource in producing a commodity always involves the loss of opportunity of production of some other commodity.

4. The sacrifice or loss of alternative use of a given resource is termed as “ opportunity cost.”

5. Thus, the opportunity cost is measured in terms of the foregone benefits from the next best alternative use of a given resource.
Example – The opportunity cost of producing a car is production of 10 scooters sacrificed, which could have been produced with the same amount of factors that make a car.

6. Hence, opportunity costs relate to sacrificed alternatives. They are Not recorded in the books of account.

7. The concept of opportunity cost is useful in the determination of relative prices of goods, normal remuneration to a factor, in decision making and in analysing optimum allocation of resources.

Direct (or Traceable) Costs and Indirect (or Non-Traceable) Costs:
1. A direct or traceable cost is one which can be identified easily and indisputably with a unit of operation,
→ Example  – a product, a department, a plant or a process.
→ Example – In the production of shoes, the cost of leather is a direct cost.

2. Indirect Costs or Non-Traceable Costs or Common Costs are those costs that are not traceable to plant, department and operation as well as those that are not traceable to individual final products but are charged to jobs or products in standard accounting practice.

3. Such costs although not directly traceable to the product may bear some functional relationship to production and may vary with output in some definite way.
Example – Electric Power. Such common costs which are incurred for general operation of business and benefits all products jointly are called indirect cost.

Incremental costs and Sunk Costs:
1. Incremental costs are related to the concept of marginal cost. While marginal cost refer to additional cost of producing an extra unit of output, incremental cost refers to the total additional cost when business decisions are taken like-to expand the production, hire more workers, materials, machinery, equipment, replace old plant and machinery, etc.

2. Sunk costs refer to the costs which has been already incurred in the past and cannot be recovered. It also includes an expenditure that has to be made in future under past commitments or contractual agreements. Sunk costs are irrelevant for decision making as it cannot be recovered. Sunk costs do not vary with the changes in business activity. Such costs also act as an important barrier to entry of firms into business. Example – expenses on advertising, R & D, special equipments, etc.

Historical costs and Replacement costs:

• Historical costs are those costs on purchase of assets in the past.
• Replacement costs refer to the expenditure to be made for replacing old assets.
• Instability in asset prices make the two costs differ.

Private costs and Social costs:
1. Private costs are those costs which are incurred or provided for by firms. These may be either explicit or implicit since they form part of total cost of production, it implies they figure in business decisions. Therefore, private costs are internalized cost.

2. Social costs refer to the total cost to the society due to business activity. Social costs include both private cost and the external cost. It includes resources for which the firm is not required to pay the price like – atmosphere, rivers, lakes, roads, etc. and the cost in terms of disutility created like pollution of all types.

Cost Function:
→ Cost function is the functional relation between Costs and Output.

→ The Production function of a firm and the Prices it pays for the inputs determine the firm’s cost function.

→ Thus, cost function refers to the relation between Cost of a product and the various Determinants of its cost.

→ It can also be expressed in the form of a mathematical equation in which unit cost or total cost is the dependent variable and the prices of various inputs are independent variables.
C = f (0,S,T,U,P ….. )
Where
C is cost
O is the level of output
S is the size of plant
T is time under consideration
P is the prices of factors of production.

→ Production function determines the cost function.

→ Therefore, the behaviour of cost of production and the shapes of the cost curves depend upon the laws of returns.

→ The Law of returns to factor determine the shapes of short – period cost curves while the Law of returns to scale determine the shapes of long – period cost curves.

Short Run Total Costs:
Total Cost (in short run) = Total Fixed Cost + Total Variable Cost

Points	Fixed Cost	Variable Cost
1. Meaning	1. Fixed costs are incurred on the use of the fixed inputs. 2. Fixed inputs cannot be varied in the short run. 3. Therefore, fixed costs do not change with changes in output in short run. 4. Fixed costs are thus, Independent of output. 5. These include both Explicit Costs and Implicit Costs.	1. Variable costs are incurred on the use of the variable inputs. 2. Variable inputs can be varied in the short run. 3. Therefore, variable costs changes with the changes in output i.e. they increase or decrease when output rises or falls. 4. Variable costs thus, DEPEND on output.
2. Can Be Zero Or Not?	1. Fixed cost can never be zero. 2. If the level of output falls to ZERO, fixed costs are to be incurred in the short run. 3. In other words, if firm closes down for some time in short run but remains in business, these costs have to be borne by it	1. Variable cost can become zero. 2. If the level of output falls to zero, variable costs also falls to zero. 3. In other words, if a firm shuts down for some time in short run, it will not incur any variable cost as it will not use variable factors of production.
3. Examples	Example – Contractual rent, maintenance cost, property taxes, interest on capital invested, wages of permanent staff, depreciation, etc.	Example – wages of labour employed, prices of raw materials, power and fuel, expenses on transport, etc.
4. Determinant Factors	The examples of fixed cost above have no bearing on the volume of production.	1. The examples of variable cost above are closely related to the volume of production. 2. Hence variable costs are the determinant factor.
5. Relation With Output	Fixed cost have no relation with output in short run because these costs remain constant whatever be the level of output.	1. Variable costs are positively related with output. 2. If output is zero, variable cost is also zero. 3. If output is increased variable cost also rises FIRST at diminishing rate due to increasing return to factor AND THEN at an increasing rate due to diminishing returns to factor.
6. Function Of ?	Fixed Costs are therefore function of TIME.	Variable Costs are therefore function of Output.
7. Price Determination	In short run, the firm do not bother about recovering the fixed costs as it has to bear these costs even at zero level of output.	1. In short run, the firm must recover the variable costs to remain in business. 2. In other words firm’s Average Revenue ≥ Average Variable cost
8. Other Names	1. Fixed costs are also known as Over Head Costs as these costs are common to all the units of commodity produced. 2. They are also known as Supple Mentary Costs because the volume of output produced does not directly depend upon them.	Variable costs are also known as Prime or Direct Costs as all the units produced depend directly on them.

Semi Variable Cost:
Stair-step Variable Cost – Short run average cost:
→ For the purpose of making decisions about operations, unit cost functions or average costs are more useful than the total cost functions.

→ We examine here three of these unit cost functions namely –

• Average Fixed Cost (AFC),
• Average Variable Cost (AVC),
• Average Total Cost (ATC).

1. Average Fixed Cost:
→ Average Fixed Cost is the fixed cost per unit of output. Thus,
→ Average Fixed Cost = \(\frac { Total Fixed Cost }{ Total Output }\)
→ OR AFC = \(\frac { TFC }{ Q }\)

→ The above table shows that as the output increases, AFC goes on falling.

→ The reason being TFC is spread over larger quantities of output.

→ When graphed, the AFC curve slopes downwards from left to right throughout its length.

→ The AFC curve comes closer and closer to the X – axis but not touch the X-axis as TFC can never be zero.

→ AFC curve will not touch Y-axis also because at zero level of output, TFC is a Positive value. Any positive value divided by zero will provide infinite value.

→ The AFC curve is a Rectangular hyperbola because mathematically it shows the same level of TFC at all its points and geometrically the area of every rectangle on this curve at all points will be equal to the area of every other rectangle.

2. Average Variable Cost:
→ Average variable Cost is the variable cost per unit of output. Thus,
→ Average variable Cost = \(\frac { Total Variable Cost }{ Total Output }\)
→ OR AVC = \(\frac { TVC }{ Q }\)

→ The above table shows that as the output expands, average variable cost falls initially due to increasing returns to the variable factor.

→ It is minimum at the optimum capacity output.

→ Beyond optimum capacity average variable cost rises very sharply due to diminishing returns to variable factor.

→ Thus, AVC and Average product of variable factor are inversely related.

→ When graphed, AVC curve declines over some range of output, reaches the minimum at optimum capacity, as at point ‘M’ in the above diagram and then goes on rising as output increases.

→ Thus, AVC curve is U-shaped indicating three phases decreasing phase, constant phase and increasing phase corresponding to the three phases of Average product of variable factor in the law of Variable Proportions.

3. Average Total Cost: {Or Simply Average Cost): .
→ Average Total Cost is the cost per unit of output. Thus,
→ Average Total Cost or Average Cost = \(\frac { Total Cost }{ Total Output }\)
→ ATC or AC = \(\frac { TC }{ Q }\)
→ ATC or AC = \(\frac { TFC }{ Q }\) + \(\frac { TVC }{ Q }\)
→ A TC or AC = AFC + AVC

→ The above table shows that as output increases, ATC falls initially, reach its minimum and then rises due to the Law of variable proportions.

→ Since, ATC = AFC + AVC, it follows that the behaviour and shape of the ATC curve depends upon the behaviour of AVC curve and AFC curve.

→ In the beginning, the ATC curve falls sharply when output expands. REASON being, initially both AVC and AFC curves fall.

→ When AVC curve starts rising, but AFC curve continue to fall steeply, the ATC will continue to fall. REASON being, fall in AFC curve is MORE than the RISE in AVC curve.

→ As output further increases, ATC curve rises. REASON being, there is sharp rise in AVC which offsets the, fall in AFC. Thus, ATC curve first fall, reach its minimum and then rise.

→ Therefore, ATC curve is ‘U’- shaped for the same reasons for which the AVC is a ‘U’ – shaped curve.

4. Marginal Cost.
→ Marginal Cost is addition to the total cost caused by producing one more unit of output.

→ Thus, marginal cost is the cost of the additional unit of output.

→ It is measured by the change in total cost resulting from a unit increase in output. Thus,
MC_n = TC_n – TC_n-1 Or MC = \(\frac { ∆ TC }{ ∆Q }\) where, ∆ = change

→ Example – If 5 units are produced, total cost = ₹ 206
If 6 units are produced, total cost = ₹ 236
Marginal Cost of 6th unit of output = ₹ 30

→ The Marginal Cost is Independent of Fixed Cost.

→ In the short period, total fixed cost are constant for all levels of output.

→ The only change in total cost when output changes is Change in Variable Cost. Hence, marginal cost is affected only by the variable cost.

→ Therefore, marginal cost can also be defined as a change in TVC as a result of a unit change in output. This can be proved as follows –
MC_n = TC_n – TC_n-1
since, TC = TFC + TVC
MC_n = (TVC_n + TFC _n) – (TVC _n-1 + TFC _n-1 )
= TVC_n + TFC_n – TVC _n-1 – TFC _n-1.
= TVC_n – TVC_n-1

→ The above table shows that as the output increases, MC initially falls due to increasing returns to factor but finally MC rises due to diminishihg returns to factor.

→ Thus, marginal cost is the inverse of the marginal product of the variable factor.

→ When graphed, the MC curve first declines, reaches minimum and then goes on rising as output increases.

→ Thus, MC curve is U – shaped, this is due to the operation of the law of returns to factor and due to TC or TVC (AC or AVC).

→ MC curve passes through the minimum points of AVC and ATC curves

→ MC curve reaches its minimum point earlier to the minimum points of AVC and ATC curves.

Relationship between Average Cost and Marginal Cost:
→ Average Total Cost or Average Cost is the Cost per unit of output. Thus,
Average Total Cost = \(\frac { Total Cost }{ Total Output }\)
or AC = \(\frac { TC }{ Q }\)

Example – Suppose the total cost of producing 5 units of a commodity is ₹ 230, then average cost will be \(\frac { ₹ 230 }{ 5 units }\) = ₹ 46

→ Marginal Cost is addition to the total cost caused by producing one more unit of output. Thus, marginal cost is the cost of the additional unit of output. Symbolically, .
MC_n = TC_n – TC_n-1
Example – The total cost of producing 5 units is ₹ 206 and that of 6 units is ₹ 236. Then, marginal Cost of producing one more unit = ₹ 236 – ₹ 206 = ₹ 30.

→ The relationship between Average Total Cost and Marginal Cost can be illustrated with the help of following table and graph.
Table : Relationship between Average Cost and Marginal Cost

→ Both the table and diagram above bring out the relationship between average cost and mar-ginal cost clearly as follows:
1. Both AC and MC are derived from total cost of production. They are derived from the same source

2.

• When average cost falls with increase in output, marginal cost also falls and is less than average cost.
• It means that marginal cost falls faster.
• Thus, when AC curve is falling, MC curve will be below AC curve.
• MC curve reaches minimum point ‘C’ earlier then AC curve.
• Then, MC curve start rising from point ‘C’ to point ‘P’ even when the AC curve is falling

3.

• The MC curve cuts the AC curve at its minimum point. ‘P’ in the diagram.
• It is the minimum point on AC curve i.e. point of optimum capacity where the average cost is minimum.
• Points ‘A’ and ‘B’ on the AC curve shows higher average cost due to under and over utilization of plant capacity at respective points..
• At point ‘P’ where the MC curve cuts the AC curve i.e. at point of optimum capacity, MC = AC.

4.

• When AC rises, with increase in output, MC also rises and is higher than AC. It means that MC rises faster.
• Thus, when AC curve is rising, MC curve will be above the AC curve.

5. At zero level of output, MC is indeterminate.

6. Between AC and MC, it is MC which brings about changes (i.e. rise or fall) in AC and not other way round.
Thus –

• When MC < AC, it pulls down AC and AC falls
• When MC = AC, AC is constant and at its minimum
• When MC > AC, it pulls up AC and AC rises.

7. The concept of MC is more significant in finding out equilibrium output while that of AC in finding profit and loss.

Long Run Average Cost Curve :

• Long run is a period of time during which the firm can vary all inputs.
• In short run we have seen that, some inputs are fixed and others can be varied to increase the level of output.
• But in long run all inputs are variable.
• In the short run, the size of the plant is fixed. The size of plant cannot be increased or reduced.
• However, in the long run the firm has sufficient time to bring about changes in the size of plant (i.e. machinery building etc.) in order to expand or contract output.
• Thus, in the long run the firm moves from one plant to another. It can increase the size of plant to increase its output or can have smaller plant if it has to reduce output.
• The long run average cost curve shows the minimum possible average cost for producing various levels of output.
• Consider the following figure –
  
• In the fig., a smooth long run average cost curve has been shown which has been labelled as LAC.
• The LAC curve envelopes infinite short run average cost curves each representing a plant. Hence, SACs are also called plant curves.
• In the fig., the LAC curve is derived as a tangent to all the short run average cost curve from SAC₁ to SAC₇.
• Thus, it is U- shaped.
• In the long run, a firm can produce a particular output by building a relevant size of plant and operate on the corresponding SAC.
• It selects that size of plant i.e. SAC which gives the lowest cost of producing the given output.
• In the fig., seven short run average cost curves SAC₁, to SAC₇ corresponding to seven different plants are drawn.
• In the fig., if the firm wants to produce OA level of output, it will operate on SAC₁ at a cost of AG per unit.
• If the firm produce OA level of output with SAC₂ it will cost AK per unit to produce which is more.
• Similarly, if the firm wants to produce OB level of output with SAC₁ it will cost more i.e. BL per unit.
• So the firm to produce OB output will have to increase the size of plant and operate with SAC₂ where the cost per unit is less i.e. BH per unit.
• Thus, larger outputs can be economically produced i.e. at lowest cost with the bigger plants and small output can be economically produced i.e. at lowest cost with smaller plants.
• In the fig., OQ is the optimum output as it is being produced at the minimum point of LAC and corresponding SAC i.e. SAC₄. Thus, the long run average cost is minimum at output OQ.
• If the firm is producing less than optimum output OQ, the other plants are underutilized than their full capacity.
• If the firm is producing more than optimum output OQ, the other plants are overutilized than their full capacity.
• The fig., shows that LAC curve is not tangent to the minimum points of the SAC curves.
  → When LAC curve is sloping downwards, it is tangent to falling portions of SACs.
  → When LAC curve is rising upwards, it is tangent to rising portions of SACs.
• LAC curve is also called planning curve. Thus is because firm plans output in the long run but operates in the short run i.e. by choosing a plant on LAC corresponding to the given output.
• Thus, LAC helps the firm to make choice about the size of plant for producing a particular output at minimum cost.
• However, modern firms face ‘L’ shaped cost curve.

Why Long Run Average Cost Curve is of U-shape?

• As seen in the fig., LAC curve is U-shaped.
• The shape of LAC curve depends on the Law of Returns to Scale.
• As the firm expands, there is increasing returns to scale which means fall in long run average cost due to economies of scale.
• When decreasing returns to scale occur it means rise in long run average cost due to diseconomies of scale.
• This explains why LAC curve is U-shaped.

This Relations of Partners – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Relations of Partners – CA Foundation Business Law Study Material

Question 1.
Explain the rights of a partner, under the Indian Partnership Act, 1932.
Answer:
Rights of partners
Subject to contract between the partners, the Partnership Act confers the following rights upon the partners of a firm:

1. Right to take part in the conduct of the business [Sec.l2(a)]
Every partner has a right to take part in the conduct of the business of the firm. The partners among themselves may agree to entrust the work of management to one or more of them.

2. Right to be consulted[Sec.l2(c)]
Every partner has a right to be consulted and heard before any matter is decided. Ordinary matters may be decided by majority opinion but matters of fundamental nature would require unanimity.
The matters which are to be decided by unanimous consent of all the partners are discussed below :

• Nature of business [Sec. 12]
• Admission of a partner [Sec. 31(1)].
• Transfer by a partner of his interest in the firm [Sec. 29],
• Admission of a minor to the benefits of partnership [Sec. 30(1)].

3. Right to access to books [Sec. 12(d)]
Every partner has a right to have access, to inspect and copy any of the records and books of the firm.

4. Right to share the profits [Sec. 13(b)]
Every partner has the right to share equally in the profits earned and to contribute equally to the losses sustained by the firm. This provision is irrespective of the amount of capital contribution made or business expertise offered. However, they may agree to share the profits in some other ratio.

5. Right to interest on Capital [Sec. 13(c)]
Every partner has the right to interest on capital, if so agreed, out of profits only.

6. Right to interest on advances [Sec. 13(d)]
A Partner is entitled to receive interest at 6% p.a. on any advance, in excess of the agreed amount of capital, made for the purposes of the business.

7. Right to indemnity [Sec. 13(e)]
Every partner has a right to claim indemnity from the firm in respect of payments made or liabilities incurred by him (a) in the ordinary and proper conduct of the business, and (h) in doing such act, in an emer¬gency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

8. Right to prevent the introduction of a new partner [Sec. 31(1)]
Every partner is entitled to prevent the admission of a new partner into the firm.

9. Right to retire [Sec. 32(1)]
A partner to retire from the firm (a) with the consent of all other part¬ners, or (b) in accordance with the terms of the deed, or (c) by giving a notice to all other partners, of his intention to retire.

10. Right not to be expelled [Sec. 33]
Every partner has the right to continue in the partnership and not to be expelled from the firm.

11. Right to carry on competing for business after retirement [Sec. 36(1)]
Every outgoing partner has a right to carry on a competitive business under certain conditions.

12. Right to dissolve the firm (Sec. 43)
Where the partnership is at will, the firm may dissolve by any partner giving notice in writing to all the other partners of his intention to dis¬solve the firm.

Question 2.
What are the duties conferred on the partners under the Indian Partnership Act, 1932?
Answer:
1. General Duties of Partners:
Section 9 of the Partnership Act lays down that all the partners are bound:

• to carry on the business of the firm to the greatest common ad¬vantage,
• to be just and faithful to each other, and
• to render to any partner or his legal representative the true ac¬counts and
• to render full information of all things affecting the firm.

2. Duty to indemnify for loss caused by fraud:
According to Section 10 of the Partnership Act, every partner shall indemnify (reimburse or pay back) the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

3. Duty to attend diligently to his duties [Sec. 12(b)]:
Every partner is bound to attend diligently to his duties in the conduct of the business.

4. Duty to work without remuneration [Sec. 13(a)]:
A partner is normally not entitled to receive any remuneration for taking part in the business of the firm. However if the partnership agreement provides or business custom allows, a partner can be given remuneration.

5. Duty to contribute to the losses [Sec. 13(b)]:
The partners shall contribute equally to the losses sustained by the firm without regard to the capital contribution made by the firm.

6. Duty to indemnify for wilful neglect [Sec. 13(/)]:
A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.

7. Duty to use firm’s property exclusively for the firm (Sec. 15):
Subject to contract between the partners, the property of the firm shall be held exclusively for the purposes of the business of the firm.

8. Duty to account for personal profits derived [Sec. 16(a)]:
If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm in the firm’s name, he shall account for that profit and pay it to the firm.

9. Duty not to compete with the business of the firm [Sec. 16(b)]:
No partner can carry on a business that is competing with that of the firm without the consent of the other partners, otherwise, the partner carrying on such a business will have to account for and pay to the firm all profits made by him in that business.

10. Not to assign (transfer) his interest in the firm (Sec. 29):
It is the duty of a partner not to assign his interest in the firm to a stranger (outsider) without the consent of all other partners.

Question 3.
What is meant by “implied authority”? What are the statutory restrictions on implied authority as stipulated in the Indian Partnership Act, 1932?
OR
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to do certain acts. State the acts which are beyond the implied authority of a partner under the provisions of the Indian Partnership Act, 1932
Answer:
Meaning of implied authority
Meaning of Implied Authority. The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be express or implied. Where the authority to a partner to act is expressly conferred by an agreement it is called express authority. It is implied when the law presumes certain powers exercisable by every partner unless negatived by a contract to the contrary.
According to Sec. 19(1) of the Act, “the act of a partner which is done to carry on, in the usual way business of the kind carried on by the firm “is called Implied Authority of partner. It is subject to the following 3 conditions:

(1) The act done by the partner must relate to the normal business of the firm and must be within the scope of the business of the firm. For example, if the partner of a firm dealing in electronic goods, purchases some wine in the name of the firm, the firm would not be liable.

(2) The act must be done in the usual way i.e., in the normal course. What is the usual way of carrying on the business, will depend on the nature of the business, customs and usages in that kind of business, and circumstances of each particular case.

(3) The act must be done in the name of the firm, or in any other manner expressing or implying an intention to bind the firm, by the partner in the capacity of a partner.
Limitation on Implied authority or Statutory Restrictions on Implied Authority [Sec. 19(2)]
Sec. 19(2) contains the list of acts regarding which a partner does not have an implied authority unless there is usage or custom or contract to the contrary. Accordingly, a partner cannot:

• submit a dispute relating to the business of the firm to arbitration;
• open a banking account on behalf of the firm in his own name;
• compromise or relinquish any claim or portion of a claim by the firm;
• withdraw a suit or proceeding filed on behalf of the firm;
• admit any liability in a suit or proceeding against the firm;
• acquire immovable property on behalf of the firm;
• transfer immovable property belonging to the firm; or
• enter into partnership on behalf of the firm.

Question 4.
What is the position of a minor as a partner in the firm, under the provisions of the Indian Partnership Act, 1932?
Answer:
According to Sec. 11 of the Indian Contract Act, an agreement by or with a minor is void. As such, he is incapable of entering into a contract of partnership. But with the consent of all the partners, for the time being, a minor may be admitted to the benefits of the partnership.
The position of a minor partner may be studied, under two heads:
1. Position before attaining majority
(1) Rights:

• He has a right to such share of the property and of profits of the firm as may have been agreed upon.
• He has also a right to have access to and inspect and copy any of the accounts, but not books of the firm. [Sec. 30(2)]
• When he is not given his due share of profit, he has a right to hie a suit for his share of the property of the firm. But he can do so only if he wants to sever his connection with the firm. [Sec. 30(4)].

(2) Liabilities: The liability of the minor partner is confined only to the extent of his share in the profits and property of the firm. Over and above this, he is neither personally liable nor is his private estate liable.

2. Position on attaining majority
On attaining majority, a minor who has been admitted to the benefits of the partnership must give public notice of his intention to become or not to become a partner in the firm. The public notice must be given by him in this instance within 6 months of his attainment of the majority or acquiring knowledge that he had been admitted to the benefits of partnership, whichever date is later.
If he fails to give a public notice he is deemed to have become a partner in the firm on the expiry of the said six months [Sec. 30(5)]

(1) Where he elects to become a partner:

• He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership;
• His share in the property and profits of the firm is the share to which he was entitled as a minor partner [Sec. 30(7)];
• He is entitled to all rights & is bound by all the duties of a partner.

(2) Where he elects not to become a partner:

• His rights & liabilities continue to be those of a minor up to the date of the public notice;
• His share is not liable for any acts of the firm done after the date of the public notice;
• He is entitled to sue the partners for his share of the property and profits in the firm.

Question 5.
Discuss the rights and liabilities of an outgoing partner under the Indian Partnership Act, 1932.
Answer:
Rights and liabilities of an outgoing partner
The following are the rights & liabilities of an outgoing partner :

(I) Rights of an outgoing partner
An outgoing partner possesses the following rights:
(a) Right to carry on competing for business
An outgoing partner has the right to carry on the business competing with that of the firm, and he may advertise such business (Sec. 3 6). But section 3 6 imposes some, restrictions on his activities in order to prevent unfair competition with the firm. The restrictions imposed upon outgoing partners are:

(a) he may not use the firm’s name,
(b) he may not represent himself as carrying on the business on behalf of the firm, or
(c) he may not solicit the customers or the persons who were already dealing with the firm before he left the firm. The above restrictions are subject to a contract to the contrary.

However, the firm may enter into an agreement with the retiring partner not to carry on competing business, then he will not be entitled to carry competitive business & such an agreement will not be treated to be in restraint of trade provided reasonable restrictions have been imposed on the outgoing partner & the restriction intend to safeguard the interest of the firm.

(b) Right to share subsequent profit in certain cases
As per section 37, in case the accounts of the outgoing partners continue to remain unsettled and the remaining partners continue to run the business, such a partner is entitled to receive his share of profit or interest at the rate of 6% p.a. on the amount of his share in the firm. Alternatively, he may claim such share in the subsequent profits of the firm as is attributable to his share in the capital employed in the business of the firm [on account of non-settlement of accounts.]

(II) Liabilities of an outgoing partner
These may be classified into two stages.
(a) Liability for acts done before leaving the firm
A retiring partner is liable for the acts done and debts incurred before his retirement, but he may be exempted from this liability in case of an agreement made by him with the third party and the remaining partners of the reconstituted firm.

(b) Liability for acts done after leaving the firm
In the case of the retirement of a partner, a public notice is essential to this effect. If it is not given, the retiring partner will continue to be liable to third parties for the acts of the firm even after his retirement. Public notice is not essential in case of a sleeping or deceased partner who is not known to be a partner, and so as such will not be liable for future acts, of the firm.

Question 6.
What Is the liability of the firm, for misapplication by partners?
Answer:
Liability of firm for misapplication by Partners. (Sec. 27)
Where – (a) a partner acting within in his apparent authority receives money or property from a third party and misapplies it or
(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

Question 7.
State the modes by which a partner may transfer his interest in the firm in favor of another person under the Indian Partnership Act, 1932. What are the rights of such a transferee?
Answer:
According to the provisions of section 29 of the Indian Partnership Act, 1932, a share in the partnership is transferable like any other property. But since the partnership relationship is based on good faith and mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights & privileges as the original partner. Further, the transfer of an interest of a partner in the firm can be done only with the consent of all the other partners. The rights of such a transferee are as follows :

(a) During the continuance of partnership
During the continuance of partnership, such transferee is entitled to receive the share of the profits of the transferring partner. However, he is bound to accept the profits as agreed to by the partners ie. he cannot challenge the accounts.
A transferee of a Partner’s share is not entitled:

• to interfere with the conduct of the business.
• to require accounts or
• to inspect books of the firm.
• On the dissolution of the firm

On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled against the remaining partners:

• to receive the share of the assets of the firm to which the transferring partner was entitled; and
• for the purpose of ascertaining the share, to an account as from the date of the dissolution.

Question 8.
List the acts which are considered to fall within the scope of implied authority of a partner.
Answer:
The implied authority of a partner generally includes the following acts :

1. To purchase goods for the purpose of the business of the firm on cash or credit
2. To effect the sale of the goods of the firm on a cash or credit basis.
3. To settle the accounts with debtors & creditors of the firm within the scope of his authority.
4. To receive payments from the debtors of the firm, on behalf of the firm and issue receipts with respect to the same.
5. To engage or hire employees or servants for the purpose of the conduct of the business of the firm.
6. To hire the services of an attorney to maintain or defend a suit in relation to the business of the firm.
7. To borrow money for the purpose of the business of the firm.
8. To pledge the goods of the firm as a security for the borrowings on behalf of the firm & for the purpose of the business of the firm.
9. To draw, accept, endorse or negotiate any P/N, B/E, or cheque in the name & on behalf of the firm.

Question 9.
How can a partner be admitted into the firm? What are the rights and liabilities of a newly introduced partner?
Answer:
A partner can be admitted into a partnership firm only with the consent of all the partners. The share in the profits of the firm to which the incoming partner shall be entitled to, along with his rights and duties shall be fixed by way of mutual agreement at the time of his admission.

Rights of an incoming Partner:
Thus an incoming partner on his admission shall be entitled to the share in profits and property of the firm as fixed by way of mutual agreement at the time of his admission. Further, he shall be entitled to all such rights of a partner as conferred by the Indian Partnership Act, 1932, unless the same has been restricted by a contract to the contrary with the existing partners.

Liabilities of an incoming partner:
1. Generally an incoming partner is not liable for the acts of the firm, done prior to his admission.
2. However, in the following instances, the incoming partner shall be liable for the acts of the firm done before his admission:

• If the incoming partner assumes liability for the past debt by novation that is by a tripartite agreement between the creditor; the existing partners & the incoming partner.
• a minor who had been admitted to the benefits of the partnership shall be liable for all the acts of the firm done since he was admitted to the benefits if he decides to become a partner on attaining majority.

3. An incoming partner shall be liable for all the acts of the firm, done after his admission.

Question 10.
What are the legal consequences of the Insolvency of a Partner?
Answer:
The following are the legal consequences of the insolvency of a partner:

1. A partner who is adjudicated as insolvent ceases to be a partner in the firm on the date on which the order of adjudication is made by the Court.
2. Ordinarily but not invariably, the insolvency of a partner results in the dissolution of the firm from the date of the order of adjudication. Thus subject to a contract between the partners, the firm is dissolved on the date of adjudication.
3. If a contract to the contrary exists and the firm continues to carry on business with the remaining partners after the insolvency of one, then the estate of the insolvent partner shall not be liable for any of the acts of the firm, done after the date of the order.
4. The firm is also not liable for any of the acts of the insolvent partner done after the date of order of adjudication.
5. In case the firm is not dissolved, the share of the insolvent partner, in the firm, shall vest in the Official Assignee or Receiver.
6. Further, no public notice is required to be given on the insolvency of a partner.

Question 11.
What are the legal consequences of the Death of a partner?
Answer:
The following are the legal consequences of Death of a Partner :
1. In the absence of a contract to the contrary, the death of partner results in the dissolution of the firm.
2. Where under a contract, a firm is not dissolved on the death of a partner, the estate of the deceased partner shall not be liable for the acts of the firm done after his death.
3. However, the estate of the deceased partner shall be liable for the acts of the firm done prior to his death except the following :

• For the money borrowed by surviving partners so as to pay for the goods ordered during the lifetime of the deceased partner.
• For the goods ordered during the lifetime of the deceased partner but delivered after his death.

4. Further no public notice is required on the death of a partner.

Question 12.
What is the provision related to the effect of notice to an acting partner of the firm as per the Indian Partnership Act, 1932?
Answer:
According to the provisions of Section 24 of the Indian Partnership Act, 1932, notice to an acting partner with respect to any matter relating to the affairs of the firm, operates as a notice to the firm, except in case of fraud committed by that partner or with the connivance/consent of that partner.
Thus the notice to an active partner serves as a notice to the rest of the partners just as a notice to the agent operates as a notice to the Principal. However, for the notice to be binding on all the other partners, it must be an actual notice (not constructive), received by an active partner (& not a dormant partner) & relate to the business of the firm.

Question 13.
Discuss the provision regarding personal profit earned by a partner under the Indian Partnership Act, 1932.
Answer:
According to the provisions of section 16 of the Indian Partnership Act, 1932, subject to a contract between the partners:

• If a partner derives any profits for himself from any transaction of the firm or from the use of the property or business connection of the firm or from the name of the firm, he shall account for that profit and pay it to the firm.
• If a partner carries on any business of the same nature as and competing with that of the firm, then he shall be liable to account for and pay to the firm all profits made by him in that business.

Question 14.
X, Y and Z are partners in a partnership firm. They were carrying their business successfully for the past several years. Spouses of X and Y fought in lady’s clubs on their personal issues and X’s wife was hurt badly. X got angry about the incident and he convinced Z to expel Y from their partnership firm. Y was expelled from the partnership without any notice from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from the firm. What are the criteria for the test of good faith in such circumstances?
Answer:
Hint:- According to provisions of Section 33 of the Indian Partnership Act, 1932, a partner can be expelled from a firm on the fulfilment of the following conditions :
1. When the power of expulsion of a partner is expressly conferred on the partners in the deed of partnership.
2. The power of expulsion must be exercised by a majority of partners in the interest of the firm.
3. The power of expulsion must be exercised in good faith. Further, the power of expulsion is said to have been exercised in good faith only if

• The expelled partner has been served with a notice of charges against him
• The expelled partner has been given a reasonable opportunity of being heard by the other partners
• The expulsion is in the interest of the firm.

In the given case it is evident that the expulsion of Y was not valid since it was not done in good faith.
Thus Y, the expelled partner shall have a right to sue the other partners for reinstatement in the firm.

Question 15.
A B and C are partners of a partnership firm ABC & Co. The firm is a dealer in office furniture. A was in charge of purchase and sale, B was in charge of maintenance of accounts of the firm and C was in charge of handling all legal matters. Recently through an agreement among them, it was decided that A will be in charge of maintenance of accounts and B will be in charge of purchase and sale. Being ignorant about such an agreement, M, a supplier supplied some furniture to A, who ultimately sold them to a third party. Referring to the provisions of the Indian Partnership Act, 1932, advise whether M can recover money from the firm. What will be your advice in case M was having knowledge about the agreement?
Answer:
HintThe acts of a partner which are performed by him for the purpose of carrying on the business of the firm, in the usual way shall be binding on the firm. Further, the partners may by contract between them impose certain restrictions on the implied authority of a partner. However such a restriction shall be effective against a third party provided the third party has knowledge of such a restriction. Thus if any restriction on the implied authority of a partner has been imposed, the firm shall be bound by the act of such a partner which falls outside of the scope of his actual restricted authority provided the third party has no knowledge of such restriction on the authority.

Thus M can recover the money from the firm since he is not aware of the restrictions on the implied authority of A and he is acting in good faith.
However, if M had the knowledge of the restriction he cannot recover the money from the firm.

Question 16.
A B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D, a supplier of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of use in the ordinary course of the firm’s business. A does not give the stationery to the firm, instead brings it to his own use. Supplier D, who is unaware of the private use of stationery by A, claims the price from the firm. The firm refuses to pay for the price, on the ground that the stationery was never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932 decided:

• Whether the Firm’s contention shall be tenable?
• What would be your answer if a part of the stationery so purchased by A was delivered to the firm by him, and the rest of the stationery was used by him for private use, about which neither the firm nor the supplier D was aware?

Answer:
HintThe firm is liable for the acts of a partner within the scope of his implied authority. Further, if the partner receives any money or property from a third person in the course of business of the firm & misapplies it or where a firm in the course of business receives money or property and the same is misapplied by a partner while in the custody of the firm, the firm shall be liable to compensate the third party.
Further, it is a duty of the partner to indemnify the firm for the loss sustained by it due to his fraud or misconduct:

• This firm’s contention is not valid and it shall be bound to pay the price irrespective of the fact of not having received the stationery.
• Where the stationery has been delivered to the firm and then it is used by A for private purpose, then also the firm shall be bound to make payment to D.

In both the above cases the firm can sue A for the loss sustained by it due to A’s misconduct.

Question 17.
Ram & Co. a firm consists of three partners A, B, and C having one-third share each in the firm. According to A and B, the activities of C are not in the interest of the partnership and thus want to expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act, 1932. (C.A. Foundation RTP Nov. 2018)
Answer:
HintRules with respect to expulsion;
Thus A & B can expel C, provided the power of expulsion is conferred by the partnership deed and the expulsion is being done in good faith, in the interest of the firm, after affording C a reasonable opportunity of being heard and a notice with respect to the same is served on C.

Question 18.
Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st October 2018, Mr. P retired from the partnership but failed to give public notice of his retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired about some refrigerators with the latest techniques. Mr, X, who was exhibiting his refrigerators with the new techniques was impressed with the interactions of Mr. P and requested for the visiting card of the firm. The visiting card also included the name of Mr. P as a partner even though he had already retired. Mr. X supplied some refrigerators to the firm and could not recover his dues from the firm. Now, Mr. X wants to recover the dues not only from the firm, but also from Mr. P.
Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and decide whether Mr. P is liable in this situation.
Answer:
According to the provision of the Indian Partnership Act, 1932, when a person represents himself or knowingly permits himself to be represented as a partner in the firm, when in fact he is not, then he is liable like a partner in the firm to anyone who on the faith of such representation has given credit to the firm. Thus when a person by his words or conduct has wrongly induced a third party to believe that he is a partner then he shall be liable as a partner by holding out, to such a party, under the law of estoppel. This rule is also applicable to a former partner who has retired from the firm without giving proper public notice of his retirement. In such a case a person who even subsequent to the retirement of the partner, gives credit to the firm on the belief that he was a partner, shall be entitled to hold him liable, under the law of estoppel as a partner by holding out.

Thus applying the above provisions in the given case it can be concluded that Mr. P becomes a partner by holding out because he failed to give public notice of his retirement and made representations on behalf of the firm. Thus Mr. X can recover the amount not only from the firm but also from Mr. P under the law of estoppel.

Question 19.
Mr. A, Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in the business of trading of branded furniture. The name of the partners was clearly written along with the firm name in front of the head office of the firm as well as on the letterhead of the firm. On 1st October 2018, Mr. C passed away. His name was neither removed from the list of partners as stated in front of the head office nor from the letter-heads of the firm. As per the terms of the partnership, the firm continued its operations with Mr. A and Mr. B as partners. The accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also determined on 10th October 2018. But the same was not paid to the legal heirs of Mr. C. On 16th October 2018, Mr. X, a supplier supplied furniture worth ₹ 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not repay the amount due to heavy losses. Mr. X wants to recover, the amount not only from M/s ABC & Co., but also from the legal heirs of Mr. C.
Analyse the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.
Answer:
According to section 35 of the Indian Partnership Act, 1932, where under a contract between the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death. Further, in order that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or to the persons dealing with the firm.

Thus applying the above-stated provisions in the given case, it can be concluded that Mr. X, the supplier may sue M/s. ABC & Co. for the recovery of his dues, but he cannot hold the legal heirs of Mr. C liable, since Mr. C’s estate shall not be liable for transactions of the firm made after his death i.e. after 1st October, 2018.

Question 20.
Ram, Mohan and Gopal were partners in a firm. During the course of the partnership, the firm ordered sunrise Ltd. to supply a machine to the firm. Before the machine was delivered, Ram expired. The machine, however, was later delivered to the firm. Thereafter, the remaining partners became insolvent and the firm failed to pay the price of the machine to Sunrise Ltd.
Explain with reasons:

• Whether Ram’s private estate is liable for the price of the machine purchased by the firm?
• Against whom can the creditor obtain a decree for the recovery of the price?

Answer:
Hint: Where under a contract between the partners, the firm is not dissolved by the death of a partner, & the remaining partners continue to carry on the business of the firm, then the estate of the deceased partner shall not be liable for any acts of the firm done after his death. Thus the estate of the deceased partner shall not be liable for the liabilities of the firm arising after his death.
In the given case order for the supply of the machine is given to Sunrise Ltd. by the firm during the lifetime of Ram, which does not result in the creation of any liability. The machine is delivered subsequent to the death of Ram.

• Thus Ram’s estate shall not be liable for the price of the machinery.
• The creditor shall have a right of action against the surviving partners & recover the amount from the partnership assets and the partners’ assets since they have become insolvent.

Question 21.
X, Y & Z carry on business in partnership business as merchants trading between Mumbai & London. Wheaton, a merchant in London to whom they sent their consignments secretly allows the share of commission which he received upon such consignments in consideration of Z using his influence to obtain consignments for him. Is Z liable to account to the firm the monies so received by him?
Answer:
Hint: Duty of the partner to account for any secret profits earned by him in the course of conduct of the business of the firm by virtue of the use of the property or name or connections of the firm. Thus here Z shall be liable to account for the share of commission that he receives from Wheaton during the course of conduct of the business of the firm.

Question 22.
M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the business of carpet manufacturing and exporting to foreign counties. On 25th Aug. 2016, they inducted Mr. G an expert in the field of carpet manufacturing as their partner. On 10th Jan. 2018, Mr. G was blamed for unauthorized activities and thus expelled from the partnership by the united approval of the rest of the partners.

• Examine whether action by the partners was justified or not?
• What should have the factors to be kept in mind prior to expelling a partner from the firm by other partners according to the provisions of the Indian Partnership Act, 1932?

Answer:
According to the provisions of section 33 of the Indian Partnership Act, 1932, generally, a partner cannot be expelled from a firm, except on the fulfilment of the following conditions:

• the power of expulsion must have existed in the contract between the partners.
• the power of expulsion must have been exercised by a majority of the partners &
• it has been exercised in good faith.

Further expulsion is deemed to have been made in good faith only if

• the expulsion is in the interest of the partnership,
• the partner to be expelled is served with a notice
• and he is given a reasonable opportunity of being heard.

In the given case X, Y, Z, the senior partners of M/s. XYZ & Associates expel Mr. G unanimously on the grounds of unauthorised activities.

(i) Thus applying the above-stated provisions it is evident that the action of the partners was not justified, since all the conditions required for the lawful expulsion of Mr. G were not duly complied. Expulsion of Mr. G would have been valid if such a power existed in the contract of partnership & if all conditions of ‘expulsion made in good faith’ were satisfied.

2. The partners before unanimously expelling Mr. G should have assured that

• the power of expulsion must have existed in the partnership deed;
• Mr. G. should have been served with a notice of expulsion;
• Mr. G should have been given an opportunity of being heard.

Browsing through Comprehension Passages – CA Foundation BCR Notes Pdf help students to revise the complete subject quickly.

Comprehension Passages – BCR Notes CA Foundation

Comprehension means understanding. An unknown passage that perturbs the candidate is not familiar with is given to judge whether the candidate understands the language and the contents. The given text is followed by a set of questions that the candidate is expected to answer.

A comprehension exercise consists of an unseen passage and the questions based on that passage. Questions are set to test the ability of students to understand the contents of the given passage and to infer information and meaning from it Students require the ability to understand the meaning of the passage and also the ability to answer the questions in their own words. They require command over English. It is often assumed that a person can grasp the meaning of a passage completely if he is familiar with the meaning of words used in it. Truly speaking, all the three components of language – sound, syntax and word contribute to meaning.

Therefore, complete understanding of a passage requires familiarity with the sound meaning, syntax meaning and word meaning of the passage. Sound meaning is particularly significant in conversation and public speaking. To comprehend a text, utmost attention should be paid to word meaning and grammar. The order of words in a sentence has a meaning of its own example.
I saw her crossing the road.
I saw her cross the road.
In science and technology, the denotation of most words is fixed. Therefore, word meaning does not offer a special problem. However, the context or situation can make a difference in meaning. For example, the word thermometer means one thing in a hospital and quite another in the chemistry lab. Similarly, the word glasses have one meaning in a bar and quite another with an old man who wants to watch TV.

Hints for Answering Questions to an unseen passage:

• Read the passage quickly to get the general idea.
• Read again but a little slowly so as to know the details in the passage.
• Study each question and underline the words in the passage which contain answer to the question. Mark the question number against the relevant lines in the passage.
• Write answers to the questions one by one.
• Use complete sentences in each answer.
• Use the same verb and tense in your answer which is used in the question.
• Never begin an answer with ‘because’.
• Answers should be brief, clear and to the point.
• If you are asked to give the meaning of any words or phrases, write the meaning as clearly as possible in your own words. Your definition should be in conformity with the part of the speech.

Illustration 1:
Gandhi does not reject machinery as such. He observes: “How can I be against all machinery when I know that even this body is a most delicate piece of machinery? The spinning-wheel is a machine; a little tooth-pich is a machine. What I object to is the craze for machinery not machinery, as such. The craze is for what they call labour saving machinery. Men go on saving labour till thousands are without work and thrown on the open street to die of starvation. I want to save time and labour not for a fraction of making but for all.

I want the connection of wealth not in the hands of a few but in the hands of Today machinery merely helps a few to ride on the backs of millions. The impetus behind it all is not the desire to save labour but greed. It is against this system that I am fighting with all my might. The machine should not cut off the limbs of man ……. Factories run by power driven machinery should be nationalised and controlled by the state. The supreme consideration is man – Mahatma Gandhi.
Questions:
1. Why does Gandhiji accept machinery?
2. What are the evil effects of employers’ craze for machinery?
3. How, according to Gandhiji, can the evils of factories run by machines be avoided ?
4. How can machinery save time and labour?
5. Explain the following phrases:
(a) Not the desire to save but greed
(b) With all my might.
6. Write down the sentence wherein Gandhiji says human being is more important than the machine.
Answer:
1. Gandhiji accepts machinery because even human body is a delicate machine. He gives the example of the spinning wheel which is a machine.
2. Employers’ urge for machinery causes unemployment and starvation of workers. It also leads to concentration of wealth in the hands of a few persons who exploit workers.
3. According to Gandhiji the evil effects of factories run by machines can be avoided by nation-alisation and control of factories by the State.
4. Machinery can save time and labour because machines work faster and require fewer hands.
5. (a) It means the greed of employers to maximise their gain rather than the desire to save the labour of their workers,
(b) It means with all my strength.
6. “The machine should not cut off the limbs of man”.

Illustration 2:
Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and’freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. It is fitting that at this solemn moment we take the pledge of dedication to the service of India and her people and to the still larger cause of humanity.

At the dawn of history India started on her unending quest, and trackless centuries are filled with her striving and the grandeur of her success and her failures. Through good and ill fortune alike she has never lost sight of that quest or forgotten the ideals which gave her strength. We end today a period of ill fortune and India discovers herself again. The achievement we celebrate today is but a step, an opening of opportunity, to the greater triumphs and achievements that await. Are we brave enough and wise enough to grasp this opportunity and accept the challenge of the future?

Freedom and power bring responsibility. That responsibility rests upon this Assembly, a sovereign body representing the sovereign people of India. Before the birth of freedom we have endured all the pains of labour and our hearts are heavy with the memory of this sorrow. Some of those pains continue even now. Nevertheless, the past is over and it is the future that beckons to us now. That future is not one of ease or resting but of incessant striving so that we may fulfil the pledges we have so often taken and the one we shall take toady.

The service of India means the service of the millions who suffer. It means the ending of poverty and ignorance and disease and inequality of opportunity. The ambition of the greatest man of our generation has been to wipe every tear from every eye. That may be beyond us, but as long as there are tears and suffering, so long our work will not be over.

– Jawaharlal Nehru

Questions:
1. In what does the “service of India” consist, according to the author?
2. What are the ideals which India has never forgotten?
3. Mention some of the responsibilities of freedom and power.
4. This speech is concerned with the living as well as the dead. In what way does Nehru appeal to his listeners? What motive urges Nehru to rouse the India of today to action?
5. Quote the line that has a direct reference to Mahatma Gandhi.
Answer:
1. According to Nehruji the ‘service of India’ consist of eradicating poverty, ignorance and dis-ease.
2. The ideals which India has never forgotten is to wipe every tear from every eye.
3. The responsibilities of freedom and power a?e to serve millions who suffer.
4. Nehruji appeals to his listeners by exhorting them with hope and bright future. The motive of service to mankind urges Nehruji to rouse the India of today to action.
5. “The ambition of the greatest man of our generation has been to wipe every tear from every eye”.

Comprehension Passages Notes Exercise Questions

Read the passage given below and answer the questions that follow:
1. The universe around us is not a continuum, a sort of a pea-soupy structure less fog. Common experience tells us that it is made up of objects, matter, and other associated phenomena that we can describe or measure. We soon realise that each of these “things” has a uniqueness that we detect through touch, taste, hearing, smell, or sight, and that each is distinguishable to a greater or lesser degree. With our unaided senses, we have no difficulty in distinguishing the sky and the land from the water, a gas and a solid from a liquid, the living from the non-living.

On a more refined level, we can discriminate degrees of roughness, intensity and shade of colour (provided we are not colour blind), and an acid taste from one that is salty, sweet, or bitter. But human powers of sensory discrimination are limited. We hear only within a certain range of sound waves, and see only a certain portion of the light spectrum. When we try to go beyond these limits, we can no longer directly comprehend the physical nature of things and must resort to instruments to pen¬etrate areas outside our naturally circumscribed sphere.

Instruments, therefore, act as extended senses. The 200 inch Hale telescope on Mount Palomar reaches across millions of light-years to bring distant galaxies of the macrocosm to reveal other wise invisible worlds. Similarly, the photographic plate, more sensitive than our eyes, extends our use of light rays. Ordinarily we can see only a minute portion of the electromagnetic spectrum, but by utilising photosensitive surfaces we can detect the long infrared rays on one side of the spectrum and the short ultraviolet rays X-rays, and even cosmic rays on the other.
Questions:
(i) What does the author mean by naturally circumscribed sphere and Instruments, therefore , act as extended senses?
(ii) In how many ways each “thing” be distinguished.
(iii) Why can’t we directly comprehend the physical nature of every thing?
(iv) What is the use of instruments in perception?
(v) What do we do to gain the knowledge of “things” in the universe?

2. Read the given passage and answer the questions that follows:
The Cinema is the only art invented by science. It was born and bred in the West in a terminological environment and so its manifestations in predominantly agricultural countries are a somewhat curious phenomenon of more sociological than aesthetic interest. What is remarkable is that with political independence and the rise of a national awareness of technology, a new minority cinema appears in many of these societies and quickly acquires compelling aesthetic and humanist values. Their content is increasingly charged with aspirations for a better life and their form with delight in a new medium.

In many of these countries, television is limited in its spread and its creative abilities, either by the lack of resources or by the constrictions of governmental ownership or both. The cinema on the other hand reflects a more vital and spontaneous expressing of the secret hopes and fears, ideals and enthusiasms of a country’s people. A small serious-creative cinema grows alongside the larger more conventional product and begins to engage the attention of select national and international audience. Examples of this can be seen in Sri Lanka, the Philippines. Hong Kong, Thailand, Korea and that is by no means an exhaustive list.
Questions:
(i) Why is Cinema called an ‘art invented by science’?
(ii) How is cinema in third-world countries of more sociological than ‘aesthetic’ interest?
(iii) What is meant by ‘minority cinema’? What has led to the rise of this cinema?
(iv) What do you understand by ‘content’ and ‘form’?
(v) How are television and cinema contrasted?
(vi) What are the two kinds of cinema to be seen in developing countries?
(vii) In line I, ‘was’ has been used as …………..
(viii) Give Present and Past forms of ‘born’ and ‘bred’.
(ix) Which parts of speech are reflected by the following words (as underlined in the passage):
By, increasingly, conventional, attention, Sri Lanka.

3. Read the following passage and answer the questions that follow:
The main justification advanced for capital punishment is that it deters others from committing the same crimes. But statistics show that capital punishment is not a deterrent. Every state that has abolished capital punishment has actually had a decline rather that an increase in capital crimes.

And in England, where there has been a long decline in the use of capital punishment, there has been a similar decline in capital crimes. It is a well-known joke that when pick pockets were publicly hanged in England, other pickpockets plied their trade among the crowds watching the hanging. A deterrent indeed! Surely life imprisonment would be at least an equal deterrent.

On the other hand, (capital punishment is an absolute hindrance to rehabilitation and to the correction of a mistake). All modern criminologists recognize that the purpose of punishment is to bring about rehabilitation, but how can you rehabilitate a dead man? Furthermore it is being more and more realized that most criminals are sick. It certainly seems more reasonable to treat them than to kill them.

Additionally, it happens occasionally that an innocent man is put to death. What restitution can there be for such a horrible mistake? A compassionate society should not legalize murder, but should carry on programmes of rehabilitation. The constitution forbids cruel and inhuman punishment.

Certainly sentencing someone to die is inhumane and cruel. Seldom does the condemned know his executing date until it is close at hand. Thus he is in agony about his fate. If he is to be punished, he should be imprisoned only. He should not be condemned to die at a specific date. Capital punishment is a relic of a barbarous age. There has been a continuous decline in its use for centuries. Surely the time has come to abolish it altogether. It may be a one hundred per cent deterrent as far as the victim is cornered, but it does no other good, and it does degrade our society.
Questions:
(i) What does the author feel about capital punishment as a deterrent?
(ii) How according to author, should a com-passionate society deal with criminals?
(iii) What does the author want to prove with his joke about pick pockets?
(iv) What are the bad effects of capital punishment?
(v) What are the author’s objections to this kind of punishment?
(vi) What has been the justification for capital punishment?
(vii) What has been the experience of states abolishing capital punishment?

4. Read the passage below and answer the questions that follow:
All warm-blooded animal are incredibly help-less at first. Young birds and young bats must be taught to fly. Thousands of young seals and young sea lions are drowned every year. They never learn to swim “naturally”, the mother has to take them out under her flipper and show them how, birds sing without instruction, but they do not sing well unless they have had an opportunity of hearing older and more adept members of their species.

Older harvest mice build better nests than beginners. It is said that the young elephant does not seem to know at first what his trunk is for; it gets in his way and seems more of a hindrance than a help until his parents show him what to do with it. Insects, indeed, seem to start life completely equipped with all necessary reflexes, but even there the concept of “instinct” seems to require some modification, for they improve their talents with practice. Young spiders, for example, “begin by making quite primitive little webs, and only attain perfection in their art in course of time” and older spiders, if deprived of their spinnerets, will take to hunting.
Questions:
(i) What is the main idea in this paragraph?
(ii) Are warm-blooded animals dependent on being taught survival skills?
(iii) Do insects have instincts? Why do you say so?
(iv) Describe two things that warm-blooded animals must learn.
(v) Do you think the author is serious or is he writing tongue-in-cheek? Why?
(vi) What would an elephant use his trunk for?
(vii) What part of speech are the following:
→ Incredibly
→ Naturally
→ Necessary
(viii) Rewrite the entire passage in the simple past tense.

5. Read the following passage and answer the questions given at the end:
Nehru’s decision to opt for the mixed economy has almost universally been misunderstood and has been seen as the result to foreign influence.

Fabian socialism and Soviet centralized planning. But Nehru was always searching in every facet of his life and activity for the middle path that Lord Buddha has commended. His policy of non-alignment with its accent on negotiations and mediation was one expression of such a temperament and so also his concept of secularism that did not deny the life of the spirit and all that it implies.

His preference for a mixed economy falls in the same category. He genuinely believed that this path would help promote economic growth and social peace at the same time. No one can possibly claim that his total approach- a mixed economy, secularism, democracy and non-alignment-has not been productive of results.

It is a tribute to Nehru’s foresight that unlike most Third World countries, we are still a functioning democracy and a reasonable human society where the rulers feel obliged at least to profess high standards of public morality. I am emphasizing the essentially Indian origin of the concept of mixed economy in order to make the point that we can deviate from the search for a middle path for long only at the cost of grave violence to ourselves. The forms may differ. But the search for a middle path between capitalism and socialism has to go on. A Latin American type of economy and society is inconceivable in India.
Questions:
(a) Why has Nehru’s policy of mixed economy been misunderstood?
(b) Why did Nehru advocate mixed economy for India?
(c) What does, in the passage, prove that Nehru’s approach was right?
(d) What would happen if mixed economy were discarded?
(e) What was Nehru searching for in every facet of life?

6. Read the passage below and answer the questions following it:
There are situations in which we may not wish to use the most technically accurate language because it could hurt or offend our audience. For example, when breaking the news of a death to a close friend or member of the family, many people avoid blunt words such as died and prefer expressions such as passed away. This use of language is referred to as EUPHEMISM.

Euphemistic language is commonly used by people when talking about death, certain kinds of illness (e.g. cancer), sex and other bodily functions such as excretion. It even affects the languages used to describe certain parts of the body. For example, that part which is most accurately referred to as the belly is much more frequently called the stomach (inaccurate) or tummy (euphemistic). There is another way in which you can unintentionally offend your audience, and that is by exhibiting linguistic ‘tics; and using hackneyed phrases, or tired once-fashionable expression as CLICHES.

In the good old days it was all down to the private individual to earn an honest penny and make ends meet, but in this day and age all that’s gone by the board, Life’s a lottery and when push comes to solve, it’s every man for himself. Everybody uses cliches from time to time. They are formulate that save time and thought. Usually they either add nothing to what we are saying or just give a general impression of the line we are taking or the attitude we are presenting.
Questions:
(a) What is euphemism?
(b) In what circumstances is euphemism used?
(c) What is the other way in which one can offend his audience?
(d) How is cliche useful?
(e) Explain the underlined sentences.

7. Read the following passage and answer the questions given at the end:
We have now to consider mass movements in which the principles of non-violence are applied to the relations between large groups or entire populations and their governments. Of these, the movements best known to English speaking readers are those organized by Gandhiji in South Africa and later in India. The South African movement may be described as completely successful. The discriminatory legislation against the Hindus was repealed in 1914, entirely as the result of non-violent resistance and non-co-operation on the part of the Indian population.

In India, several important successes were recorded, and it was shown that very large groups of men and women could be trained to respond to the most brutal treatment with a quiet courage and equanimity that profoundly impressed their persecutors, the spectators in the immediate vicinity and, through the press, the public opinion of the entire world. The task of effectively training very large number in a very short time proved, however, too great and rather than all his movement degenerate into civil war, Gandhiji suspended the activities of his non-violent army.
Questions:
(a) Where did the non-violent movements take place?
(b) What was Gandhiji’s achievement in South Africa?
(c) What was the reaction in India?
(d) Why did Gandhiji suspend his movement?
(e) Give the meanings of any two words:
→ repealed
→ equanimity
→ degenerate

8. Read the following passage and answer the questions that follow:
Economists, ethicists and business sages persuade us that honesty is the best policy, but their evi¬dence is weak. We hoped to find data that would support their theories and thus, perhaps encour¬age higher, standards of business behaviour. To our surprise, our pet theories failed to stand up. Treachery, we found, can pay. There is no compelling economic reason to tell the truth or keep one’s word punishment for the treacherous in the real world is neither swift nor sure.

Honesty is, in fact, primarily a moral choice. Business people do tell themselves that, in the long run, they will do well by doing good. But there is little factual or logical basis for this conviction. Without values, without a basis preference for right over wrong, trust based on such self-delusion would crumble in the face of the temptation. Most of us choose virtue because we want to believe in ourselves and have others respect and belief in us.

And for this, we should be happy, We can be proud of a system in which people are honest because they want to be, not because they have to be. Materially too, trust based on morality provides great advantages. It allows us to join in great and exciting enterprises that we could never undertake it we relied on a economic incentives alone.

Economists tell us that trust is enforced in the market place through retaliation of reputation. If you violate a trust your victim is apt to seek revenge and others are likely to stop doing business with you, at least under favourable terms. A man or woman with a reputation for fair dealing will prosper. Therefore, profit maximizers are honest. This sound plausible enough until you look for concrete examples. Cases that apparently demonstrate the lawful consequences of trust turns out to be few and weak, while evidence the tracery can pay seems compelling.
Questions:
(i) What does the another think about the theory “honesty is the best policy”.
(ii) Why does the another say that one can be proud of the present situation?
(iii) Why do economists and athieists want use, to believe?
(iv) Which is the material advantage which the author sees in being honest?
(v) Why do businessman, according to economists, remain honest?
(vi) Explain the use of words/phrases – ‘stand up’, ‘self-delusion’, ‘retaliation of reputation’.
(vii) Give the passage an appropriate title.

9. Read the following passage and answer the questions that follow:
Education, taken in the most extensive sense, is properly that which makes the man. One method of education, therefore, would only produce one kind of men, but the great excellence of human nature consists in the variety of which it is capable. Then instead of endeavouring, by uniform and fixed systems of education, to keep mankind always the same, let us give free scope to everything which may bid fair for introducing more variety amongst us. The various character of the Athenians was certainly preferable to the uniform character of the Spartans or to any uniform national character whatever Uniformity is the characteristic of the brute creation.

Among them every species of bird build their nests with the same materials and in the same forms the genius and disposition of one individual is that of all and it is only education which men give them that raises any of them much above others. But it is the glory of human nature that the operations of reason, though variable and by no means in-fallible, are capable of infinite improvement. We come into the world worse provided than any of the brutes but when their faculties are at a full stand and their enjoyments incapable of variety or increase our intellectual powers are growing apace, were are perpetually deriving happiness from new sources, and even before we leave this world are capable of testing the felicity of angels.
Questions:
(i) What is the author’s notion of education?
(ii) What is the problem that confronts us?
(iii) How were Athenians preferable to Spartans?
(iv) How can we constantly derive pleasure from new source?
(v) Bring out the difference between uniform and fixed systems of education.
(vi) What contributes to the capability of infinite improvement?
(vii) Explain the italicised portion.

10. Read the following passage and answer the questions that follow:
Ever since after the discovery of transistor by Brattain and Shockley in 1948, attempts are being , made of make smaller and smaller transistors. And in 1959, it was Richard R Feynman who predicted a technological world composed of self repheating molecules whose purpose would be the production of nanosized objects. Almost 40 years after Feynman’s initial proposition, the nanometic scale looms large on the research agenda. This was about the same time that Ari Aviram and Mark Ratner, at IBM, proposed the idea of a single molecules rectifier.

Scientific discoveries and inventions have, in fact, propelled man to challenge new frontiers. Nanotechnology is one such technological wonder that we are experiencing now. Coverage of various events led to the recognition of nanotechnology as an area for special emphasis. These included recognition of new phenomena that would be necessary to extend the progress associated with the general area of information technology, scientific discoveries of new instruments and materials, and an awareness of an information frontier that offered a rich supply of new principles, phenomena, materials and opportunities to enrich social functions.

In fact, with the evolving strength of disciplines, the fertile frontier of discoveries requiring knowledge across discipline boundaries had been some-what neglected for decades. This is where the concept and trust in nanotechnology represents a substantial difference to the manner in which knowledge and technological innovation is pursued. Semiconductor behaviour has provided the electronics engineers with remarkably productive developments and semiconductor industry is edging closer to the word of nanotechnology where components are miniaturised to the point of individual molecules and atoms. Miniaturisation is known to follow Moore’s law since its depiction in 1960.

Nanotechnology was originally defined in the 1970s as the science of manipulating atoms and single molecules. Its remit has since expanded to embrace all technologies capable of building ‘ structures at the scale of a billionth of a metre. Until the 1990s, atomic manipulations were developed with sustainability in mind. Hope was that building machines from the bottom up atom by atom, rather than top down, etching them from larger blocks, would minimise the energy and materials expended in manufacturing. US industrial lobbies then broadened the definition as a way of accessing public funds earmarked for materials and chemistry research and development. These Answer the following questions based on your comprehension of the above passage:
Questions:
(i) Who discovered transistor and in which year?
(ii) What did Feynman predict in 1959?
(iii) What are the three major areas, the recognition of which could benefit from nanotechnology?
(iv) What had been neglected for decades?
(v) Describe the developing relationship between semiconductors and nanotechnology
(vi) Give the original definition of nanotechnology and its present extended meaning.
(vii) What did the National Nanotechnology Initiative (1999).

10 A. Read the following passage and answer the questions that follow:
Science deals with the positive world, the visible world that we can see and hear and touch. It applies positive methods of experiment and ob¬servation. Nehru is convinced that methods and approach of science have revolutionized human life more than anything else in the long course of history. Science has opened doors and avenues leadings up to the very portals of what has long been considered the unknown. The technical achievements of science have transformed an economy of scarcity into one of abundance.

It has made the world progress by reaps and bounds and helped man to build up a glittering civilization. It has added so much to the power of man’that since time he appeared on this earth, he has begun to feel that he can triumph over his physical environment and shape it as he likes it. Indeed man has become a geological force. He is changing the face of this planet chemically, physically and in many other ways.

But science ignores the ultimate purposes and looks at face alone. Not to speak of the ultimate purposes, science does not understand even the immediate purpose. So when man has acquired so much power and knowledge to mould the world after his heart’s desire, he does not know how to do it. Though science has made man so powerful in the control of nature, he has no power to control himself.

Perhaps new developments in biology, psychology and similar sciences may help man to understand and control himself more than he has been able to do so far. But it is also possible that before that time arrives the progress of science, unconnected with moral discipline and ethical considerations will lead to the concentration of power in the hands of few evil and selfish men. In their ambition to dominate others, they will destroy this glittering civilization and the very achievements of sciences.

It is the critical temper of science that searches for truth and knowledge. It is the courage to refuse to accept anything without test and trial and the capacity to change the previous result in the light of new evidence. It is essential not only for application of science but for the solution of many problems of life also. There are scientists who apply methods of science in their sphere of work, but lack the critical temper of science in their day-to-day life. The scientific temper needs to be the way of life. The ultimate purposes of man may be said to be to gain knowledge, to realize and to appreciate goodness and beauty. The methods of science are applicable to these. Therefore to face life, we need and temper and approach of science, allied of course, to philosophy, metaphysics and all that lies beyond. Questions
(i) What are the benefits of science?
(ii) What is the negative impact of science?
(iii) Why the author recommends the scientific approach despite the fact that it ignores the ultimate purpose of life?

11. Read the given passage carefully and answer the questions that follow:
Our Earliest Ancestors
(a) The story of our ancestors on their long road to human civilization begins in East Africa, at a gorge called Olduvai, where scientists stumbled across the fossilized remains of animals that provide an invaluable link with past. What is more, quantities of strangely shaped stones were found nearby, which could have been crude tools for cutting and slicing meat. Then came other significant discoveries – the fossilized remains of skills, not altogether human, but with features markedly similar to those of humans. Such finds, together with the strangely-shaped, stones, were likely evidence of creatures which were developing a primitive intelligence, and not relying just on jaws and teeth to get their food.

(b) Even so, discoveries such as these are pain¬fully few. This is not surprising when we consider how rare it is to find a few bones of anything that perished countless years ago. When a creature died on the open plains of Africa, the scent of its decay sooner or later attracted other animals of all kinds. They devoured the soft tissue and crushed the bones in their jaws. Hardly any trace of its existence would be left. A very few carcass¬es, however, sank into the muddy shores of lakes or rivers where they lay hidden from other animals. Then the gradual process of fossilization began. Ever so slowly, bone and tissue turned into stone.

(c) Fossil finds alone will not tell the whole story, however. Scientists have to take into account what the world was like when our earliest ancestors began to appear. Two million years ago, the gorge at Olduvai would have held a great lake, and around its shores animals would have swarmed in abundance. But their world was slowly changing as the planet underwent major alterations of climate. A drastic cooling of the earth’s surface meant that the rich forests of Africa began to die off, and the almost endless canopy of trees broke up into scattered areas, each isolated from the other.

So, too, the lush plants and vegetation began to dwindle; the forests no longer provided an ever ready supply of food for the creatures that roamed them, as bare, open grassland took over the landscape. Now, in their struggle to survive, they had to keep moving to where food could be found. It was about that time, so scientists believe, that our ancestors emerged. They faced the same problems as their fellow creatures; they, too, had to learn how to search out food in the wide plains of Africa and acquire essential skills of survival.

(d) But these ancestors of ours did not acquire – these skills overnight, nor did they enter these open plains like people rushing to stake a claim in empty territory; they were competing for a place in environment already significantly populated with other animals, experts by now in exploiting the food re-sources of the open plains Our ancestors shared the same habitat with creatures that would snap at their feet, trying to steal their meal as they were eating it, or would pace menacingly around nearby. It was physically , impossible to master them: our ancestors simply had to stay out of their reach.

(e) Besides, life on the African plain was very much at the mercy of the different weather seasons. The dry season meant lean times, and many animals had to be content with tough, low-quality vegetation, which was the only food around in any quantity. But our ancestors did not go on depending on this poor quality food. They began looking for new opportunities to get at tastier foods.

(f) What they discovered was that the African plains contained plants that hid their juicier parts underground. In the dry season, when other edible plants above ground grew scarce, the roots and bulbs of these special plants provided rich and healthy eating-but all of it below the surface, available only to animals that could claw it out. Lacking the specialized claws and teeth needed to get at these prized foods, our ancestors learnt how to fashion a stick or stone to dig out the succulent roots of plants.

(g) By now our ancestors were clearly acquiring an even more valuable skill, that of knowledge-not just in knowing how to make simple instruments, but in knowing their own habitat in close detail. They came to recognize the habits of other creatures, and to turn them to their advantages.

Circling vultures promised the remains of some animal killed not far away, a meal for the taking if they got there soon enough. They knew that adult antelopes, while impossible to catch, sometimes left their young in grass and went off to browse. Our hungry ancestors could pluck die infant like, ready fruit, if they knew here to look.

(h) In time they probably came to relay a great deal on communicating knowledge such as this to one another. This communication undoubtedly gave them the edge over many of their four-footed rivals in prizing out the secret scraps of energy-giving food that dotted the landscape.

They could make something of a living that way, if they relied on each other and carefully avoided known dangers. Our early ancestors managed to survive, if too only barely. A hard road lay ahead on their progress towards dominion over the Earth. (875 words)
Questions:
(i) On the basis of your reading of the passage answer the following questions as briefly as possible.

• Why did it take a long time to discover evidence of our ancestors?
• What is the discovery that led the scientists to believe that the primitive man was not an unintelligent creature?
• What are fossils? Why do scientists study fossils?
• How did the dwindling forests affect the life of our ancestors?
• What threat did the wild animals pose for our ancestors?
• Why was is not possible for our ancestors to master the animals around them?
• How did knowledge of their habitual help our ancestors?
• How did our ancestors manage to survive in the hostile conditions?

(ii) Pick out the words/phrases from the passage which mean the same as: (Do any 2).

• Discovered, something by chance (para 1).
• Got control of (para 3).
• In a situation where someone or something has complete power over you (para 5).

12. Read the passage given below carefully and answer the questions that follow:
(a) So great is our passion for doing things for ourselves, that we are becoming increasingly less dependent on specialized labour. No one can plead ignorance of a subject any longer, for there are countless do it-yourself publications. Armed with the right tools and materials, newly-weds gaily embark on the task of decorating their own homes. Men of all ages spend hours of their leisure time installing their own fireplaces, laying-out their own gardens; building garages and making furniture.

Some really keen enthusiasts go so far as to make their own record players and radio transmitters. Shops cater for the do-it- yourself craze not only by running special advisory services for novices, but by offering consumers bits and pieces which they can assemble at home. Such things provide an excellent outlet for pent up creative energy, but unfortunately not all of us are born handymen.

(b) Wives tend to believe that their husbands are infinitely resourceful and versatile. Even husbands who can hardly drive a nail in straight are supposed to be born electricians, carpenters, plumbers and mechanics. When lights fuse, furniture gets rickety, pipes get clogged, or vacuum cleaners fail to operate, wives automatically assume that their husbands will some how put things right. The worst thing about the do-it-yourself game is that sometimes husbands live Under the delusion that they can do any¬thing even when they have been repeatedly proved wrong. It is a question of pride as much as anything else.

(c) Last spring my wife suggested that I can in a man to look at our lawn mower. It had broken down the previous summer, and though I promised to repair it, I had never got round to it. I wouldn’t hear of the suggestion and said that I would fix it myself. One Saturday afternoon I hauled the machine into the garden and had a close look at it.

As far as I could see, it only needed a minor adjustment: a turn of a screw here, a little tightening up there, a drop of oil and it would be as good as new. Inevitably the repair job was not quite so simple. The mower firmly refused to mow, so I decided to dismantle it. The garden was soon littered with chunks of metal which had once made up a lawn mower. But I was extremely pleased with myself. I had traced the cause of the trouble. One of the links in the chain that drives the wheels had snapped.

(d) After buying a new chain I was faced with the insurmountable task of putting the confusing jigsaw puzzle together again. I was not I surprised to find that the machine still refused to work after I had reassembled it, for the simple reason that I was left with several curiously shaped bits of metal which did not seem to fit anywhere. I gave up in despair.

The weeks passed and the grass grew. When my wife nagged me to do something about it, I told her that either I would have to buy a new mower or let the grass grow. Needless to-say that our house is now surrounded by a jungle. Buried somewhere, in deep grass there is a rusting lawn-mower which I have promised to repair one day. (539 words)
Questions:
(1) Answer the following questions briefly.

• Why do people not rely on specialized labour so much now-a- days, according to the writer?
• How do business organizations encourage people to do things for themselves?
• What do wives tend to believe about their husbands?

Partnership – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Partnership – CA Foundation Accounts Study Material

Question 1.
Rules applicable in absence of partnership deed.
Answer:
Rules applicable in absence of partnership deed:
In the absence of any provision in partnership deed, following provisions of partnership Act are applicable:

• Profit/Loss sharing ratio will be equal
• No interest is to be allowed on capital
• No interest is to be charged on drawings
• 6% per annum interest is to be given on partner’s loan
• No salary is to be paid to any partner
• Interest and salary, if payable, will be paid only if there is profit unless agreement provides otherwise.
• Student should use above, whenever question is silent with regard to this items.

Question 2.
Meaning of Limited Liability Partnership.
Answer:
Limited Liability Partnership:
A need has been felt to make a new legislation related to a new corporate form of business organization in India to meet with the contemporary growth of the Indian economy. It provides an alternative to the traditional partnership with unlimited liability on the one hand and the statute-based governance structure of the limited liability company on the other hand, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner.

Limited Liability Partnership (LLP) is a corporate business organization that provides the benefits of limited liability but also allows its members the flexibility of organizing their internal structure j ust like in case of a partnership, based on a mutually arrived agreement. The LLP form enables entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises and for investment by venture capital.

A LLP is a new form of legal business entity with limited liability. It is a separate legal entity where LLP itself is liable to the third parties upto the assets it owns but the liability of the partners is limited. 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. It gives the benefits of limited liability of a company and the flexibility of a partnership.

LLP is also called as a hybrid between a company and a partnership as it contains elements of both, a corporate entity as well as a partnership. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Question 3.
Salient features of LLP
Answer:
Characteristic/Salient features of LLP are:
1. A body corporate:
A LLP is a body corporate formed and incorporated under LLP Act and is a legal entity separate from the partners constituting it. [Sec. 3]

2. Separate Legal Entity:
The LLP is a separate legal entity. It is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. In other words, creditors of LLP shall be the creditors of LLP alone and not of the partners.

3. Perpetual Succession:
Death, insanity, retirement or insolvency of partners has no impact on the existence of LLP. The LLP can continue its existence irrespective of changes in partners. It can enter into contracts in its own name. It can also hold properties in its own name. It is created by law and law alone can dissolve it.

4. Absence of Mutual Agency:
The cardinal principal of mutual agency of partners in a partnership is missing in LLP. In case of LLP, the partners of LLP are agents of LLP alone and not of the other partners. Hence, no partner can be held liable on account of the independent or un-authorized actions of other partners. Thus individual partners cannot be held liable for liability incurred by another partner’s wrongful business decisions or misconduct.

5. LLP Agreement:
The partners are free to make rules related to the mutual rights and duties of the partners as per their choice. This is done through an agreement. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the LLP Act, 2008.

6. Artificial Person:
A LLP is an Artificial legal person created by law capable of enjoying all the rights of an individual. It can do everything which a natural person can do, except the contracts of very personal nature like, it cannot marry, it cannot go to jail, cannot take an oath, cannot marry or get divorce. Further, it cannot practice a learned profession like CA, Law or Medicine. A LLP is invisible, intangible, immortal but not fictitious because it really exists.

7. Common Seal:
Being an artificial person, a LLP work on its own but it has to act through its partners. Hence, it may have a common seal which can be considered as its official signature. [Section 14(c)]. It should be noted that it is not mandatory for a LLP to have a common seal. If it decides to have one, then it shall remain under the custody of some responsible official and it shall be a fixed in the presence of at least 2 designated partners of the LLP.

8. Limited Liability:
Every partner of a LLP is, for the purpose of the business of LLP, the agent of the LLP, but not of other partners (Section 26). The liability of the partners will be limited to their agreed contribution in the LLP.

9. Management of Business:
The partners in the LLP are entitled to manage the business of LLP. However, only the designated partners are responsible for legal com¬pliances.

10. Minimum and Maximum number of Partners:
Every LLP shall have least two partners and shall also have at least 2 individuals as designated partners. It is mandatory that at least one of the designated partners shall be resident in India. Further, there is no maximum limit of partners in LLP.

11. Business for profit Only:
LLP can be formed only for carrying on any lawful business with a view to earn profit. Thus, LLP cannot be formed for charitable or not-for- profit purpose.

12. Investigation:
The Central Government shall have powers to investigate the affairs of an LLP by appointment of competence authority.

13. Compromise or Arrangement:
Any compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.

14. Conversion into LLP:
A firm, private company or an unlisted public company would be allowed to be converted into LLP in accordance with the provisions of LLP Act, 2008.

15. E-Filling of Documents:
Every form or application of document required to be led or delivered under the act and rules made thereunder, shall be led in computer read¬able electronic form on its website www.mca.gov.in and authenticated by a partner or designated partner of LLP by the use of electronic or digital signature.

16. Foreign LLPs:
Section 2(l)(m) defines foreign limited liability partnership “as a limited liability partnership formed, incorporated, or registered outside India which established a place of business within India”. Foreign LLP can become a partner in an Indian LLP.

Advantages of LLP Form:
The following are the advantages of LLP form of business organization:

• It is easier to form a LLP as compared to a company.
• The partners of a LLP enjoy limited liability.
• It operates on the basis of an agreement.
• It is not rigid as far as capital structure is concerned.
• It provides flexibility without imposing detailed legal and procedural requirements.
• It is easy to dissolve an LLP as compared to a Company.

Question 4.
Essential elements to incorporate LLP.
Answer:
Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:

• Persons intending to incorporate a LLP shall decide a name for the LLP.
• A LLP shall execute a limited liability partnership agreement between the partners inter se or between the LLP and its partners. In the absence of any agreement the provisions as set out in First Schedule of LLP Act, 2008 will be applied.
• Then they shall complete and submit the incorporation document in the form prescribed with the Registrar electronically, along with the prescribed fees.
• There must be at least two partners for incorporation of LLP [Individual or body corporate].
• A LLP shall have a registered office in India so as to send and receive communications.
• It should appoint atleast two individuals as designated partners who will be responsible for number of duties including doing of all acts, matters and things as are required to be done by the LLP. At least one of them should be resident in India. Each designated partner shall hold a Designated Partner Identification Number (DPIN) which is allotted by MCA.
• As soon as the process is completed, a certificate of registration shall be issued which shall contain a Limited Liability Partnership Identification Number (LLPIN)

Steps or process for incorporating an LLP:
Step 1: Reservation of name

• The first step while incorporating a LLP is the reservation of name of LLP.
• The name of a LLP shall not be similar to that of an existing LLP, Company or a Partnership Firm.
• The applicant has to file e-form 1, for ascertaining the availability and reservation of name. 6 names in order of preference can be indicated.
• The name should contain the suffix “Limited Liability Partnership” or “LLP”.

Step 2: Incorporation

• In the second step, the applicant has to file e-form 2 for incorporating a new LLP.
• This form contains the details of the proposed LLP and the Partners and Designated Partners along with their consent to act as such.

Step 3: Execute a LLP Agreement –
→ It is mandatory to execute LLP Agreement. [Sec. 23]

→ LLP agreement shall be filed with the registrar in e-form 3 within 30 days of incorporation of LLP.

→ The contents of the LLP Agreement are enumerated below:

• Name of LLP
• Name and address of partners and designated partners
• Form of contribution & interest on contribution
• Profit sharing ratio
• Remuneration of Partners
• Rights & Duties of Partners
• Proposed Business
• Rules for governing LLP.

Question 5.
Partnership and Joint Venture Comparison.
Answer:
Partnership and Joint Venture Comparison:
→ When two or more persons join together, to do business on joint ac¬count on regular basis & to share the profits or losses such relationship is known as partnership & the persons are known as partners.

→ When two or more persons join temporarily to do a particular job or work & to share profits or losses, is known as joint venture & the persons are known as coventurer’s.

→ Partnership is a relationship between persons who have agreed to share profits or losses of a business carried on by all or any of them acting for all.

→ Whereas, a joint venture is a contractual agreement whereby two or more parties undertake an economic activity which is subject to joint control.

→ Thus joint venture is a temporary partnership formed for a particular economic activity or venture.

→ The following additional differences exist between joint venture and other forms of partnership.

• Accrual basis of accounting is followed in case of partnership and a joint venture generally follows cash basis of accounting.
• The financial results of a partnership are obtained at regular intervals i.e. on annual basis. On the other hand, the financial results of a joint venture are obtained generally at the end of the venture.

Question 6.
LLP & Partnership firm.
Answer:
LLP & Partnership firm:

Basis	LLP	Partnership
1. Regulating Act	The Limited Liability Partnership Act, 2008.	The Indian Partnership Act, 1932.
2. Body corporate	It is a body corporate.	It is not a body corporate.
3, Separate legal entity	It is a legal entity separate from its members.	It is a group of persons with no separate legal entity.
4. Creation	It is created by a legal process called registration under the LLP Act, 2008.	It is created by an agreement between the partners.
5. Registration	Registration is mandatory. LLP can sue and be sued in its own name.	Registration is voluntary. Only the registered partnership firm can sue the third parties.
6. Perpetual succession	The death, insanity, retirement or insolvency of the partner(s) does not affect its existence of LLP. Members may join or leave but its existence continues forever.	The death, insanity retirement or insolvency of the partner(s) may affect its existence. It has no perpetual succession.
7. Name	Name of the LLP to contain the word Limited Liability Partners (LLP) as suffix.	No guidelines. The partners can have any name as per their choice.
8. Liability	Liability of each partner limited to the extent to agreed contribution except in case of wilful fraud.	Liability of each partner is unlimited. It can be extended upto the personal assets of the partners.
9. Mutual agency	Each partner can bind the LLP by his own acts but not the other partners.	Each partner can bind the firm as well as other partners by his own acts.
10. Designated partners	At least two designated partners and atleast one of them shall be resident in India.	There is no provision for such partners under the Indian Partnership Act, 1932.
11. Common seal	It may have its common seal as its official signatures.	There is no such concept in partnership
12. Legal compliances	Only designated partners are responsible for all the compliances and penalties under this Act.	All partners are responsible for all the compliances and penalties under the Act.
13. Annual filing of documents	LLP is required to file: (i) Annual statement of accounts (ii) Statement of solvency (iii) Annual return with the registration of LLP every year	Partnership firm is not required to file any annual document with the registrar of firms.
14. Foreign partnership	Foreign nationals can become a partner in a LLP.	Foreign nationals cannot become a partner in a partnership firm.
15. Minor as partner	Minor cannot he admitted to the benefits of LLP.	Minor can be admitted to the benefits of the partnership with the prior consent of the existing partners.

Question 7.
LLP & Limited Liability Company.
Answer:
LLP & Limited Liability Company:

Basis	LLP	Limited Liability Company
1. Regulating Act	The LLP Act, 2008.	The Companies Act, 2013.
2. Members/Partners	The persons who contribute to LLP are known as partners of the LLP.	The persons who invest the money in the shares are known as members of the company.
3. Internal governance structure	The internal governance structure of a LLP is governed by agreement between the partners.	The internal governance structure of a company is regulated by statute (i.e., Companies Act, 2013).
4. Name	Name of the LLP to contain the word “Limited Liability Partnership” or “LLP” as suffix.	Name of the public company to contain the word “limited” and Private company to contain the word “Private limited” as suffix.
5. Number of members/ partners	Minimum – 2 members Maximum – No such limit on the members in the Act.	Private company: Minimum – 2 members Maximum – 200 members Public company: Minimum – 7 members Maximum – No such limit on the members. Members can be organizations, trusts, another business form or individuals.
6. Liability of members/ partners	The members of the LLP can be individuals / or body corporate through the nominees.	Liability of a member is limited to the amount unpaid on the shares held by them.
7. Management	Liability of a partners is limited to the extent of agreed contribution except in case of wilful fraud.	The affairs of the company are managed by board of directors elected by the share-holders.
8. Minimum number of directors/ designated partners	The business of the company managed by the partners including the designated partners authorized in the agreement.	Private Co. – 2 directors Public Co. – 3 directors

Question 8.
A, B & C were partners in a firm. Their partnership deed provides the following:
(a) Interest on capital will be allowed @ 1096 p.a
(b) Interest on drawing will be charged @ 1096 p.a
(c) A is entitled for ₹ 2000 per month as salary
(d) 1096 of the net profit is to be transferred to reserve
(e) A is entitled for 1096 of Net profit as his commission
(f) B is entitled for 1096 of Net profit as his commission after charging his commission
(g) C is entitled for 1096 of Net Profit as his commission after charging A’s commission, B’s commission & his own commission
(h) Profits were to be shared in the following manner:
(i) Upto ₹ 30,000 in equal ratio
(ii) Above ₹ 30,000 in 5 : 3 : 2
On 1st January 2015, their capital were₹ 60,000,₹ 80,000 & ₹ 50,000 respectively. During the year they withdrew ₹ 8,000, ₹ 12,000 & ₹ 6,000 respectively as their drawings. During the year 2015, the firm earned Net profit of ₹ 1,62,000, it was later discovered that while calculating profit of the year, depreciation of ₹ 18,000 on Plant was overlooked.
Prepare Profit & Loss Appropriation Account for year 2015.
Solution:
Profit & Loss Appropriation Account
for the year ended 31st, December 2015

Working Notes:
1.Calculation of Divisible Profit:

Question 9.
A, B, C were partners in a firm sharing profit in the ratio 5:3:2. They distributed their profits of ₹ 30,000 of the year in equal ratio. Give necessary entry for the effect.
Solution:

Rectified Entry:

B’s Capital A/c                Dr.	1,000
C’s Capital A/c                Dr.	4,000
To A’s Capital A/c		5,000

(Being the adjustment made for profit divided in wrong ratio)

Question 10.
The Chartered Accountants X, Y and Z form a partnership, profits being divisible in the ratio of 3 : 2 : 1 subject to the following:
i. Z’s share of profit is guaranteed to be not less than ₹ 15,000 p.a.

ii. Y gives guarantee to the effect that gross fees earned by him for the firm shall be equal to his average gross fee of the preceding five years when he was carrying on profession alone (which average works out at ₹ 25,000).
The profit for the first year of the Partnership is ₹ 75,000. The gross fees earned by Y for the firm are ₹ 16,000. You are required to show the distribution of profits.
Solution:

Summary

Question 11.
A and B were in partnership sharing profits and losses in the ratio of 3:2. In appreciation of the services of their clerk C. Who was in receipt of a salary of ₹ 2,400 p.a. and a commission of 5% on the net profit after charging such salary and commission. They took him into partnership as from 1st April, 2005, giving him one-eight share of profits.
The agreement provided that any excess over his former remuneration to which, C becomes entitled will be born by A and B in the ratio of 2:3.
The profit for the year ended 31st March, 2006, amounted to ₹ 44,400. Prepare statement showing the distribution of the profit amongst all the partners.
Solution:
(i) Share of ‘C’ as partner 44,400 X 1/8 = 5,550

(ii) C’s remuneration as clerk

Profit (-) Salary to clerk Profit before commission (-) Commission 42000 x 5/105 Profit after Salary & comm.	44,400 2,400
	42,000 2,000
	40,000

Total remuneration to ‘C’ 2,400 + 2,000 = 4,400

(iii) Excess to ‘C (i) – (ii) = 5,550 – 4,400 = 1,150 to be borne by A & B as follows:

Summary:

Question 12.
X,Y & Z start business in partnership, X put in ₹ 20,000 for the whole year, Y puts ₹ 30,000 at first and increases it to ₹ 40,000 at the end of four months but withdraws ₹ 20,000 at the end of six months, while Z puts ₹ 40,000 at first but withdraws ₹ 10,000 at the end of nine-months. At the end of the year how should they divide a profit of ₹ 79,000 on the basis of effective capital employed by each partner?
Solution:

Profit = ₹ 79,000
To be divided in the ratio of effective capital, which in monthly terms is 2,40,000 : 3,20,000 : 4,50,000, among X, Y & Z. i.e. 24 : 32 : 45

X’s share = 79,000 X 24/101= Y’s share = 79,000 X 32/101= Z’s share = 79,000 X 45/101=	18,772 25,030 35,198
	79,000

Question 13.
Partners A & B are sharing in the ratio of 3:2 (i.e. 3/5 & 2/5). They admit C. Calculate new ratio in the following alternative cases.
Solution:
(1) ‘C’ is admitted with 1/6th share.
C’s share is 1 /6th of the total profit.
∴Balance profit left for A & B = 1 – 1/6 = 5/6.
Because nothing is specified we will assume that A & B will share balance in old ratio.
∴ A’s share – 5/6 X 3/5 = 15/30 = 3/6 & B’s share = 5/6 X 2/5 = 10/30 = 2/6
Thus the new ratio of A, B & C will be 3/6, 2/6 & 1/6 or 3 : 2 : 1

(2) ‘C’ is admitted with 1 / 6th share & ‘A’ & ‘B’ decided to share equally in future.
‘C’ share = 1/6 ∴ Balance is 5/6
which will be shared equally by A & B.
∴ \(\frac { 5 }{ 6 }\) x \(\frac { 1 }{ 2 }\) = \(\frac { 1 }{ 2 }\) = \(\frac { 2.5 }{ 6 }\) and B’s are \(\frac { 5 }{ 6 }\) x \(\frac { 1 }{ 2 }\) = \(\frac { 2.5 }{ 6 }\) = \(\frac { 5 }{ 12 }\)
Thus the New Ratio of A, B & C = 5/12, 5/12, 2/12 OR 5 : 5 : 2

(3) ‘C’ is admitted with 1 / 6th share, which he purchased from B.
C’s share =1/6 which will come from B
∴ B’s New share = 2/5 – 1/6 = 12/30 – 5/30 = 7/30.
∴ A’s New share will remain as the old share i.e. 3/5 = 18/30.
Thus, the New Ratio of A, B & C will be 3/5, 7/30 & 1/6. i.e. 18/30, 7/30, 5/30 i.e. 18 : 7 : 5

(4) ‘C’ is admitted with 1 /6th share which he bought from A & B in 2:3 ratio.
C’s share is 1 / 6
Purchased from ‘A’ 1/6 x 2/5 = 2/30
Purchased from ‘B’ 1/6 x 3/5 = 3/30
∴ A’s share 3/5 – 2/30 = 18/30 – 2/30 = 16/30 & B’s share 2/5 – 3/30 = 12/30 – 3/30 = 9/30
Thus, the New Ratio of A, B, C will be 16/30, 9/30 & 5/30 le. 16:9:5

(5) ‘C’ is admitted. He purchased 1/3rd of A’s share & 2/3rd of B’s share.
C’s share = Purchased from A + Purchased from B
Purchased from A = 3/5 x 1/3 = 1/5 i.e. 3/15
Purchased from B = 2/5 x 2/3 = 4/15
∴ A’s share = 3/5 – 1/5 = 2/5 = 6/15
B’s share = 2/5 – 4/15 = 6/15 – 4/15 = 2/15
C’s share = 1/5 + 4/15 = 3/15 + 4/15 = 7/15
Thus, the New Ratio of A, B, C will be 6/15, 2/15 & 7/15 i.e. 6 : 2 : 7.
(1) When we say new partner is purchasing share that means old partners are selling their share. Similarly in case of death/retirement, outgoing partner will sell his share and other will purchase it.

(2) Similarly ratios will be worked out in case of Retirement/Death. In such cases wording may be like outgoing partners sells his share or other partner purchases share from the outgoing partner. When nothing is specified, it can be assumed that the remaining partner will continue to share in their old ratio.

Question 14.
X, Y and Z were sharing profits and losses in the ratio of 1/2: 1/3: 1/6 respectively. The firm had insured the partner’s lives severally. The surrender values of the life policies appearing in the balance sheet as at 31st March, 2006 were – X for ₹ 5,000, Y for ₹ 4,000 and Z for ₹ 3,000. The surrender values represents 50% of the sum assured in each case. Y and Z decide to share equally in future. Give the necessary journal entries assuming (a) If X retires on 31-3-2006 (b) If X dies on 31-3-2006.
Solution:

Question 15.
A, B and C were partners sharing profits, and losses in the ratio of 2:2:1. C retired on 1st July, 2005 on which date the capitals of A, B and C after all necessary adjustments stood at t 74,000, ₹ 63,750 and 42,250 respectively. A and B continued to carry on the business for six months without settling the accounts of C. During the period of six months from 1 -7-2005, a profit of ₹ 20,500 is earned by the use of the firm’s property. State which of the two options available u/s 37 of the Indian Partnership Act, 1932 should be exercised by C.
Solution:
(i) Share in the subsequent profits attributable to the use of his balance.
\(\frac{₹ 42,250}{₹ 1,80,000}\) x ₹ 20,500 = ₹ 4,812

(ii) Interest @ 6% p.a. on the use of his balance = ₹ 42,250 x 6/12 x 6/100 = ₹ 1,267.50
C should exercise option (i) since the amount payable to him under this option is more as compared to the amount payable to him under option (ii).

Question 16.
X and Y are in partnership sharing profits and losses as 3:2. They admit Z into the firm, Z paying a premium (share in goodwill) of ₹ 36,000 for 1 /6th share of the profits. As between themselves, X and Y agree to share future profits and losses equally. Draft journal entry showing the appropriation of premium (goodwill) money.
Solution:

This means that ‘X’ has sacrificed 11/60, whereas ‘Y’ has gained 1 /60 & ‘Z’ has gained 10/60. ‘Z’ is bringing ₹ 36,000 as Goodwill for 10/60 share.
∴ Total goodwill of the firm = \(\frac{36,000 \times 60}{10}\) = 2,16,000
Y is also gaining (means his new ratio is higher)
∴ He will also have to contribute towards goodwill to the extent of his gain.
∴ His contribution = 2,16,000 x 1/60 = 3,600
X has sacrified in favour of Y and Z
∴ He should get the credit for it.

Question 17.
A and B were partners in 1:1. They admitted C as a new partner for 1 / 5th share. At the time of his admission following Revaluation were made:
Building of ₹ 60,000 at ₹ 1,00,000
Plant of ₹ 40,000 at ₹ 30,000
Creditors of ₹ 50,000 at ₹ 70,000
At the time of revaluation some unrecorded investment of ₹ 20,000 were found. Show necessary Accounting treatment in the following cases:
Case I. When Revised figures of Assets and Liabilities were to be shown in the Balance Sheet of the New Firm (or When Revaluation A/c is to be prepared)
Case II. When Revised figures of Assets and Liabilities were not to be taken in the Balance Sheet of the New Firm (or When Memorandum Revaluation Account is to be prepared)
Solution:
Case I:
Revaluation Account

Journal entries:

(Being transfer of profit on revaluation to old partners in their old profit sharing ratio)
Case II:
Memorandum Revaluation Account

C’s Capital A/c                  Dr.	6,000
To A’s Capital A/c		3,000
To B’s Capital A/c		3,000

(Being adjustment of profit or loss on revaluation made among the partners)

Question 18.
A and B were partners in a firm in equal ratio. They admit C as a new partner for 1 /5th share. C introduced the required sum of capital and his share of goodwill of ₹ 4,000 in cash. On the date the following balances appears in the books of the firm:

A’s Capital A/c	36,000
B’s Capital A/c	24,000
Profit on Revaluation	12,000
General Reserve	6,000
Profit & Loss (Dr. Balance)	6,000
Workmen Compensation Fund	5,000

There was Workmen Compensation liability of 11000. Calculate the amount of capital of the Incoming Partner.
Solution:

Working Note:

	₹
Total capital of A & B for 4/5th Share (46,000+34,000)	80,000
Total capital of the firm (on the basis of capital of A&B) (80,000 x 5/4)	1,00,000
Capital of C for 1 /5th Share (1,00,000 x 1/5)	20,000

Question 19.
A and B were partners in a firm. They admit C for 1 / 5th share. C introduced ₹ 40,000 as his Capital. On the date following balances appeared in the books of the firm:

A’s Capital A/c	47,000
B’s Capital A/c	32,000
Loss on Revaluation	1,000
General Reserve	3,000
Investment Fluctuation fund	20,000

On the date Investment of the firm of ₹ 50,000 was valued at ₹ 42,000. Give necessary accounting treatment regarding Goodwill.
Solution:

Calculation of Hidden Goodwill:

Journal Entry:

C’s Capital A/c                  Dr.	13,400
To A’s Capital A/c		6,700
To B’s Capital A/c		6,700

(Being incoming partner’s current account debited for his share of goodwill & credited to old partners in their sacrificing ratio).

Question 20.
Messrs Dalai, Banerji and Malick is a firm sharing profits and losses in the ratio of 2:2:1. Their Balance Sheet as on 31st March, 2006, is shown as below:

The partners have agreed to take Mr. Mistri as a partner with effect from 1st April, 2006 on the following terms:
(a) Mr. Mistri shall bring ₹ 5,000 towards his capital and required sum of goodwill.
(b) The value of stock should be increased by ₹ 2,500.
(c) Provision for bad and doubtful debts should be provided at 10% of the debtors.
(d) Furniture should be depreciated by 10%.
(e) The value of land and buildings should be enhanced by 20%.
(f) The value of the goodwill be fixed at ₹ 15,000.
(g) General Reserve will be transferred to the Partners’ Capital Accounts.
(h) The new profit sharing ratio of Dalai, Banerji, Malick and Mistri shall be 5:5:3:2.
(i) The Outstanding liabilities include ₹ 1,000 due to Mr. Sen which has been paid by Mr. Dalai. Necessary entries were not made in the books.
Prepare –
(i) Revaluation Account
(ii) The Capital Accounts of the partners, and
(iii) The Balance Sheet of the firm as newly constituted.
Solution:
Revaluation A/c

Capital Accounts of Partners

Balance Sheet of M/s. Dalai, Banerji, Malick & Mistri as on 1st April, 2006

Working Note:
1.Calculation of Sacrifice/Gain of Partners:

2.Goodwill Treatment:

Mistri’s Capital A/c (15000 x 2/15)    Dr.	2,000
To Dalai’s Capital A/c (15000 x 1/15)		1,000
To Banerji’s Capital A/c (15000 x 1/15)		1,000

Question 21.
Gopal and Govind are partners sharing profits and losses in the ratio 60:40. The firms Balance Sheet as on 31-3-2006 was as follows:

Due to financial difficulties, they have decided to admit Guru as a Partner in the firm from 1-4-2006 on the following terms:
Guru will be paid 40% of the profits. Guru will bring in cash ₹ 1,00,000 as capital. It is agreed that goodwill of the firm will be valued at 2 years purchase of 3 years normal average profits of the firm and Guru will bring in cash for his share of Goodwill. It was also decided that the partners will not withdraw their share of goodwill nor will the goodwill appear in the books of account.

The profits of the previous three years were as follows:

• For the year ended 31-3-2004 Profit ₹ 20,000 (includes insurance claim received of ₹ 40,000).
• For the year ended 31.3.2005 Loss₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
• For the year ended 31.3.2006 Profit of ₹ 1,05,000 (includes a profit of ₹ 25,000 on the sale of assets).

It was decided to revalue the assets on 31.3.2006 as follows:

Fixed Assets	4,00,000
Investments	Nil
Current Assets	1,80,000
Loans and Advances	1,00,000

The new profit sharing ratio after the admission of Guru was 35 : 25 : 40.
Pass Journal Entries on admission, show goodwill calculation and prepare Revaluation Account, Partners Capital Accounts and Balance Sheet as on 1.4.2006 after the admission of Guru.
Solution:
Calculation & Adjustment for Goodwill.

Entry:

Cash a/c  Dr.	24,000
To Gopal	15,000
To Govind	9,000

Capital Account

Revaluation A/c

Balance Sheet as on 1st April 2006

Question 22.
The Balance Sheet of A & B, a partnership firm, as at 31st March, 2006 is as follows:

A & B share profits and losses as 1:2, They agree to admit C (who is also in business on his own) as a third partner from 1-4-2006.
The Assets are revalued as under:
Goodwill – ₹ 18,000, Land and Building ₹ 30,000, Furniture ₹ 6,000.
C brings the following assets into the partnership Goodwill ₹ 6,000, Furniture ₹ 2,800, Stock ₹ 13,600.
Profits in the new firm are to be shared equally by the three partners and the Capital Accounts are to be so adjusted as to be equal. For this purpose, additional cash should be brought in by the partner or partners concerned.
Prepare the necessary accounts and the opening Balance Sheet of new firm, showing the amounts of cash, if any, which each partner may have to provide.
Solution:
Capital Account

Revaluation A/c

Cash/Bank A/c

Balance Sheet

It represents personal goodwill of incoming partner, brought by C as asset, later on written off in new ratio.
Working Notes:
(1) Goodwill Treatment:

C’s Capital A/c (18000 x 1/3).   Dr.	6,000
To B’s Capital A/c (18000 x 1/3)	6,000

(Being adjustment for goodwill made between the partners)

(2) Calculation of Sacrifice/Gain:

Adjustment of Capital:
→ Capital can be adjusted if required by the question.

→ It can be adjusted in any ratio and taking anybody’s capital as base.

→ But if not clarified in the question then adjust in profit sharing ratio.

→ If not clarified take total capital as base, in this case partner whose cap¬ital is short will bring cash and cash will be repaid to the partner whose capital is excess. Total capital will remain unchanged.

→ If highest capital (highest capital per share of profit) is taken as base then other partners capital will fell short and they will contribute the required cash (in this question it was hinted that partner or partners shall bring cash). Total capital will increase.

→ If smallest capital (smallest capital per share of profit) is taken as base then other partners capital will show excess capital and the same will be repaid to them.

→ Adjustment of capital can be done through cash or through current account.

Question 23.
The following is the balance sheet of A and B who share profits and losses as 4/7 and 3/7:

They agree to take C into partnership and give him a share of 20 paise in the rupee subject to the following terms and conditions:

1. C is to contribute capital @ ₹ 12000 for each 10 paise share in the rupee.
2. Land and Buildings are to be increased to ₹ 40000.
3. Machinery is to be depreciated by 1096 and Furniture by ₹ 500.
4. Stock is to be appreciated by ₹ 1000.
5. Goodwill of the firm is to be valued at 2 years’ purchase of average profits of the last three years. (Profits for the last three years were ₹ 14500, ₹ 20000 and ₹ 22500.)
6. A provision of 2 1/2% is to be made for bad debts and another of ₹ 2500 for outstanding expenses.
7. A trade creditor for ₹ 1600 is not traceable for a number of years and the amount is to be written back.

Show Journal entries and capital accounts of the partners assuming no goodwill account is to be opened and the book values of assets and liabilities are not to be disturbed.
Also prepare the Balance Sheet of the new firm.
Solution:
Working notes:
(1) New Profit sharing ratio:
C comes for 20 paise share in the rupee, i.e., for share, the share left for A and B is (1 – \(\frac { 1 }{ 5 }\)) or \(\frac { 4 }{ 5 }\)
So, A’s share is \(\frac { 4 }{ 7 }\) of \(\frac { 4 }{ 5 }\) or \(\frac { 16 }{ 35 }\)
And, B’s share is \(\frac { 3 }{ 7 }\) of \(\frac { 4 }{ 5 }\) or \(\frac { 12 }{ 35 }\)
Hence, new ratio is \(\frac { 16 }{ 35 }\) : \(\frac { 12 }{ 35 }\) : \(\frac { 7 }{ 35 }\)
Value of Goodwill:
Average profit of the last three years : \(\frac{1,500+20,000+22,500}{3}\) = ₹ 19,000
Value of Goodwill on the basis of 2 years’ purchase ₹ 19,000 x 2 = ₹ 38,000

(3) Adjustment required:

Journal Entry

Capital A/c

Balance Sheet as at …..

Question 24.
On 31st March 2006, the Balance Sheet of M/s. Ram, Rahul and Rohit sharing profits and losses in proportion to their capitals, stood as follows:

On 31st March, 2006, Ram desired to retire from the firm and the remaining partners decided to carry on. It was agreed to revalue the Assets and Liabilities on that date on the following basis:
1. Land and Buildings be appreciated by 30%.
2. Machinery be depreciated by 20%.
3. Closing stock to be valued at ₹ 80,000.
4. Provision for bad debts be made at 5%.
5. Old credit balances of Sundry Creditors ₹ 10,000 be written back.
6. Joint Life Policy of the partners surrendered and cash obtained ₹ 60,000.
7. Goodwill of the entire firm be valued at ₹ 1,80,000 and Ram’s share of the Goodwill be adjusted in the Accounts of Rahul and Rohit who share the future profits equally. No Goodwill account being raised.
8. Total capital of the firm is to be the same as before retirement. Individual capital be in their profit sharing ratio.
9. Amount due to Ram is to be settled on the following basis: 5096 on re¬tirement & the balance 5096 within 1 year.
Prepare Revaluation Account, Capital Account of Partners, Rahul & Rohit. Loan Account of Ram, Cash Account and Balance Sheet as on 1.4.06 of M/s. Rahul and Rohit.
Solution:
Capital A/c

Revaluation A/c

Cash/Bank A/c

Adjustment of Goodwill

Rahul                  Dr.	30,000
Rohit                   Dr.	60,000
To Ram		90,000

Joint life policy A/

Balance Sheet as on 1st April, 2006

Question 25.
Dowell & Co. is a partnership firm with partners Mr. A, Mr. B and Mr. C, sharing profits and losses in the ratio of 10:6:4. The Balance Sheet of the firm as at 31st March, 2006 is as under:

It was mutually agreed that Mr. B will retire from partnership and in his place Mr. D will be admitted as a partner with effect from 1 st April, 2006. For this purpose, the following adjustments are to be made:
i. Goodwill is to be valued at ₹ 1 lakh but the same will not appear as an asset in the books of the reconstituted firm.
ii. Buildings and Plant & Machinery are to be depreciated by 5 per cent and 20 per cent respectively. Investments are to be taken over by the retiring partner at ₹ 15,000. Provision of 20 per cent is to be made on debtors to cover doubtful debts.
iii. In the reconstituted firm, the total capital will be ₹ 2 lakhs which will be contributed by Mr. A, Mr. C and Mr. D in their new proRt sharing ratio, which is 2 : 2 : 1.
iv. The surplus funds, if any, will be used for repaying the Bank Overdraft.
v. The amount due to the retiring partner shall be transferred to his loan account.
You are to prepare:
(a) Revaluation A/c;
(b) Partner’s Capital Accounts;
(c) Bank Account; and
(d) Balance Sheet of the reconstituted firm as on 1st April, 2006.
Solution:
Capital Account:

₹ 2,00,000 capital balance is written in new ratio 2:2:1 and the shortfall in capital account then is contributed by the new partners A, C & D.
Revaluation Account

Cash/Bank Account

Table of Goodwill Adjustment

Balance Sheet as on 1st April, 2006
G

Question 26.
X, Y and Z are partners sharing profits and losses in the proportion of 3:2:2 respectively. The Balance Sheet of the firm as on 1-1-2006 was as follows:

X retired on 1-1-2006, on which date R is admitted as a new partner. For the purpose of adjusting the rights as between old partners, goodwill to be valued at ₹ 42,000 and Sundry Debtors and Stock to be reduced by ₹ 8,000 and to ₹ 50,000 respectively. X is to receive ₹ 22,000 in cash on the date of retirement and the balance due to him is to remain as loan at 896 p.a. Repayment of loan to be made at the end of each year by annual instalments representing 2596 of the future profit before charging interest on loan.

R is to bring in ₹ 50,000 in cash as his capital on the date of admission. The new partners are to share profits and losses equally after paying the interest on X’s loan.

The net profit for the year ended 31st Dec., 2006, is ₹ 32,000 before taking into account the instalment payable to X.
You are required to show :
(a) Profit and Loss Appropriation Account for the year ended 31st Dec., 2006.
(b) Capital Accounts of the new partners; and
(c) X’s Loan Account as on 31st Dec., 2006.
Solution:
Revaluation Account

Capital Accounts

Working Notes:
1. Calculation of Gain/Sacrifice:

2. Goodwill Treatment:

Y(42,000 x 1/21)	Dr.	2,000
Z(42,000 x 1/21)	Dr.	2,000
R(42,000 x 7/21)	Dr.	14,000
To x (42,000 x 9/21)			18,000

(Being adjustment for goodwill made between the partners)
X’s Loan Account

Repayment of loan is 25°6 of profit before interest i.e. 32,000 X 25% = ₹ 8,000/- paid together with the interest accrued for the year ₹ 3,200/-

P&L Appropriation Account
For the year ended 31.12.2006

Question 27.
A, B and C were in partnership sharing profit and losses in the proportion of 4 : 3 : 3. The balances in the books of the firm as on 31-12-2006, subject to final adjustment, were as under:
Trial Balance

Adjustment: C died on 30-6-06. The Partnership deed provided that:
1. Interest was to be credited on capital accounts of partners at 1096 p.a. on the opening balance.

2. On the death of a partner, (i) Goodwill to be valued at 3 years’ purchase of average annual profits of 3 years up to the date of death, after deducting interest on capital employed at 896 p.a. & a fair remuneration for each partners; (ii) Fixed assets were to be valued by a valuer & all other assets-liabilities to be taken at book value.

3. Wherever necessary, profit or loss should be apportioned on a time basis.

4. The amount due to the deceased partner’s estate was to receive interest @ 12% p.a. from the date of the death until paid.
You ascertain that:

• Profits for three years, before charging partner’s interest were: 2003 -₹ 1,68,000; 2004 – ₹ 1,89,000; 2005 – ₹ 1,80,000;
• The independent valuation at the date of death revealed: Land and Building ₹ 1,50,000; Furniture & Fixtures ₹ 15,000;
• A fair remuneration for each of the partners would be ₹ 3 7,500 p.a. & that capital employed in the business to be taken as ₹ 3,90,000 throughout.

It was agreed among the partners that:

• Goodwill was not to be shown as an asset of the firm as on 31-12-06. Therefore adjustment for goodwill was to be made in Capital A/c;
• A & B would share equally from the date of death of C;
• Depreciation on revised value of assets would be ignored.

You are required to prepare:

• Partner’s Capital Accounts and
• Balance – Sheet of the firm as on 31-12-06.

Solution:
Partners’ Capital Account

Balance Sheet as on 31-12-2006

(1) Revaluation Account

(2) Adjustment in regard to Goodwill

(3) Profit & Loss Appropriation Account

(4) C’s Executor Loan Account

Question 28.
Firm ABC consist of 3 partners A, B and C, sharing profits and losses in the ratio 5:3:2 respectively. The partner A died on February 20,2006, Profit and Loss Account for the period upto date of death and Balance Sheet as on that date were prepared. The Balance Sheet as on that date was as given by the side.

In addition to the assets shown above, the firm had 3 life policies in the name of each partner, for insured value of 20,000 each, the premium of which were charged to Profit & Loss Account.
According to the partnership deed, on death of partner, the asset and liabilities are to be revalued by a valuer. The re-valued figures were :
(1) Goodwill ₹ 21,000, Machinery ₹ 45,000, Debtors are subject and to a provision for doubtful debts at 10% and Furniture at ₹ 7,000.
(2) Provision for taxation to be created for ₹ 1,500.
(3) Death-claim for policy in the name of A will be realised in full & the surrender values of the other 2 policies were ₹ 7,500 each.
The business will be continued by B & C, henceforth sharing profits and losses equally. The net balance due to A is transferred to a Loan account which will be paid off later.
Show Capital Account, Revaluation Account and the new Balance Sheet of the firm.
Solution:
Journal Entries

Capital Account

Revaluation Account

A’s (Legal heirs/representatives) Loan Account)

Profit on Joint Life Policy Account

Balance Sheet

Working Note:
1. Calculation of Gain/ Sacrifice:

Question 28.
A,B and C are partners in a firm sharing profits and losses as 8:5:3. The Balance Sheet as at 31st December, 2005 was as follows:

From 1st January, 2006 they agreed to alter their profit-sharing ratio as 5:6:5. It is also decided that:
(a) The fixed assets should be valued at ₹ 3,31,000;
(b) A provision of 5% on sundry debtors be made for doubtful debts;
(c) The goodwill of the firm at this date be valued at three years’ purchase of the average net profit of the last five years before charging insurance premium; and
(d) The stock be reduced to ₹ 1,12,000.
There is a joint life insurance policy for ₹ 2,00,000 for which an annual premium of ₹ 10,000 is paid, the premium being charged to Profit and Loss Account. The surrender value of the policy on 31st December, 2005 was ₹ 78,000.
The net profits of the firm for the last five years were ₹ 14,000, ₹ 17,000, ₹ 20,000, and ₹ 127,000.
Goodwill and the surrender value of the joint life policy was not to appear in the books.
Draft Journal Entries necessary to adjust the capital accounts of the partners and prepare the revised Balance Sheet.
Solution:
M/s A, B and C
Journal Entries

Balance sheet (revised)
As on 1st January, 2006

Working Note:

Question 29.
A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. Their Balance Sheet as at 31st March, 2018 stood as:

B retired on 1st April, 2018 subject to the following conditions:
(i) Office Equipments revalued at ₹ 3,27,000.
(ii) Building revalued at ₹ 15,00,000. Furniture is written down by ₹ 40,000 and Stock is reduced to ₹ 2,00,000.
(iii) Provision for Doubtful Debts is to be created @ 5% on Debtors.
(iv) Joint Life Policy will appear in the Balance Sheet at surrender value after B’s retirement. The surrender value is ₹ 1,50,000
(v) Goodwill was to be valued at 3 years purchase of average 4 years profit which were:

Year	₹
2014	90,000
2015	1,40,000
2016	1,20,000
2017	1,30,000

(vi) Amount due to B is to be transferred to his Loan Account
Prepare the Revaluation Account, Partners’ Capital Accounts and the Balance Sheet immediately after B’s retirement.
Solution:
Revaluation A/c

Partners’ Capital A/c

Balance Sheet as on 1.4.2018 (After B’s retirement)

Working Notes: Calculation of goodwill:
1. Average of last 4 year’s profit
= (90,000 + 1,40,000 + 1,20,000 + 1,30,000)/4 = ₹ 1,20,000

2. Goodwill at three years’ purchase = ₹ 1,20,000 x 3 = ₹ 3,60,000
Goodwill adjustment

Question 30.
Dinesh, Ramesh and Naresh are partners in a firm sharing profits and losses in the ration of 3 : 2 : 1. Their Balance Sheet as on 31st March, 2018 is as below :

The partners have agreed to take Suresh as a partner with effect from 1st April, 2018 on the following terms :
(i) Suresh shall bring ₹ 8,000 towards his capital.
(ii) The value of stock to be increased to ₹ 14,000 and Furniture & Fixtures to be depreciated by 10%.
(iii) Reserve for bad and doubtful debts should be provided at 5% of the Trade Receivables.
(iv) The value of Land & Buildings to be increased by ₹ 5,600 and the value of the goodwill be fixed at ₹ 18,000.
(v) The new profit sharing ratio shall be divided equally among the partners.
The outstanding liabilities include ₹ 700 due to Ram which has been paid by Dinesh. Necessary entries were not made in the books.
Prepare (i) Revaluation Account, (ii) Capital Accounts of the Partners, (iii) Balance Sheet of the firm after admission of Suresh.
Solution:
Revaluation A/c

Partner’s Capital A/c

Working Note:
Calculation of Sacrificing Ratio
Sacrificing Ratio = Old Ratio-New Ratio
Dinesh = \(\frac { 3 }{ 6 }\) – \(\frac { 1 }{ 4 }\) = \(\frac { 3 }{ 12 }\) (Sacrifice)
Ramesh = \(\frac { 2 }{ 6 }\) – \(\frac { 1 }{ 4 }\) = \(\frac { 1 }{ 12 }\) (Sacrifice)
Naresh = \(\frac { 1 }{ 6 }\) – \(\frac { 1 }{ 4 }\) = \(\frac { 1 }{ 12 }\) (Gain)
Suresh = Nil – \(\frac { 1 }{ 4 }\) = \(\frac { – 1 }{ – 4 }\) Nil – (Gain)
Sacrifice by Mr. Dinesh = 18,000 x \(\frac { 3 }{ 12 }\) = 4,500
Sacrifice by Mr. Raraesh = 18,000 x \(\frac { 1 }{ 12 }\) = 1,500
Cash A/c

Balance Sheet of the new firm as on 1.4.2018

Note: The effect of above calculation is that extra ₹ 1,000 to Z is borne by X & Y in their profit sharing ratio i.e. 3:2.

Question 31.
Monika, Yedhant and Zoya are in partnership, sharing profits and losses equally. Zoya died on 30th June 2018. The Balance Sheet of Firm as at 31st March 2018 stood as.

In order to arrive at the balance due to Zoya, it was mutually agreed that:
(i) Land and Building be valued at ₹ 1,75,000
(ii) Debtors were all good, no provision is required
(iii) Stock is valued at ₹ 13,500
(iv) Goodwill will be valued at one Year’s purchase of the average profit of the past five years. Zoya’s share of goodwill be adjusted in the account of Monika and Yedhant.
(v) Zoya’s share of profit from 1st April 2018, to the date of death be calculated on the basis of average profit of preceding three years.
(vi) The profit of the preceding five years ended 31st March were :

2018	2017	2016	2015	2014
25,000	20,000	22,500	35,000	28,750

You are required to prepare :
(1) Revaluation account
(2) Capital accounts of the partners and
(3) Balance sheet of the Firm as at 1st July 2018.
Solution:
Revaluation Account

Capital Account

Balance Sheet of the firm as at 1st July, 2018(after death)

Working Notes:
(1) Calculation of Goodwill
Profits of the past five years:

= ₹ 26,250
= 26,250 x 1 year purchase
= ₹ 26,250

(2) Treatment of Goodwill

Monika	Dr.	4,375
Yedhant	Dr.	4,375
To Zoya		8,750

(Being goodwill adjusted in the gaining ratio 1:1)

(3) Calculation of Zoya’s share of profit, upto the date of death

True or False

Question 1.
A partner who devotes more time to a business than other partners is entitled to get a salary.
Answer:
False: No partner is entitled for salary unless it is provided for in the partnership deed.

Question 2.
Partners can share profits or losses in their capital ratio, when there is no agreement.
Answer:
False: If there is no agreement profits or losses are to be shared equally among the partners.

Question 3.
The business of partnership firm must be carried on by all the partners.
Answer:
False: The business of the partnership firm can be carried on by all the partners or by any one of them acting for all.

Question 4.
Goodwill brought in by an incoming partner in cash for joining a partnership firm is taken away by the old partners in their new profit sharing ratio.
Answer:
False: When a new partner brings in cash for goodwill, it is taken away by the old partners in their sacrificing ratio.

Question 5.
Goodwill is fictitious asset.
Answer:
False: Goodwill is an intangible asset.

Question 6.
Goodwill is in the nature of personal account.
Answer:
False: Goodwill is an intangible asset so it is in nature of real account.

Question 7.
If a partner retires, then other partners have a gain in their profit sharing ratio.
Answer:
True: If a partner retires, his share of profit or loss will be shared by the other partners in their profit sharing ratio unless otherwise agreed.

Question 8.
Minor can be admitted to the benefits of LLP.
Answer:
False: Minor cannot be admitted to the benefits of LLP.

Question 9.
The objective of taking a joint life policy by the partnership firm is to secure the lives of the existing partners of the firm.
Answer:
False: The objective of taking a joint life policy is to enable the firm to make payment to the legal representatives of a deceased partner or to the retiring partner.

Question 10.
LLP has no separate legal entity.
Answer:
False: LLP has separate legal entity.

Question 11.
LLP Partners act as agents of LLP and other partners.
Answer:
False: LLP Partners act as agents of LLP and not of other partners.

Question 12.
When there is no partnership deed prevails, the interest on loan of a partner to be paid @ 6%.
Answer:
True: When there is no partnership deed then the provisions of the Indian Partnership Act are to be applied for settling the dispute. Interest on loan is payable @ 6% p.a.
as per Indian Partnership Act.

Question 13.
Limited Liability Partnership (LLP) is governed by Indian Partnership Act, 1932.
Answer:
False: LLP is governed by LLP Act, 2008.

Capital and Revenue Expenditure – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Capital and Revenue Expenditure – CA Foundation Accounts Study Material

Question 1.
Capital Expenditure
Answer:
Capital Expenditure:

• Any amount spent by actual payment or for which a liability is incurred is known as an expenditure.
• Capital Expenditure is that expenditure which results in the acquisition of an asset (tangible or intangible) which can be later sold and converted into cash or which results in an increase in the earning capacity of the business or which affords some other advantage to the firm.
• In a nutshell, if the benefits of an expenditure are expected to accrue for a long time, the expenditure is capital expenditure.
• Obvious examples of capital expenditure are land, building, machinery, patents, etc.
• All these things stay with the business and can be used over and over again.
• Expenditure which does not result in increase in capacity or in reduction of day-to-day expenses is not capital expenditure, unless there is a tangible asset to show for it.
• All amounts spent upto the point an asset is ready for use should be treated as capital expenditure.
• Examples are: Fees paid to a lawyer for drawing up the purchase deed of land, overhauling expenses of second-hand machinery, interest paid on loans raised to acquire the assets but only for the period before the asset is ready for use.
• Any expenditure incurred to bring such asset into usable condition for the 1st time is also a capital expenditure like installation expenses etc.
• Additional expenditure on such assets in future will be capitalised only if it result into significant improvement over and above its originally assessed performance.

Question 2.
Revenue Expenditure
Answer:
Revenue Expenditure:

• An item of expenditure whose benefit expires within the year or expenditure which merely seeks to maintain the business or keep assets in good working conditions is revenue expenditure.
• Examples are: Salaries and Wages, power used to drive machinery, electricity used to light the factory or offices, etc.
• Such expenditure does not increase the efficiency of the firm, nor does it result in any acquisition of fixed asset.
• Diminution in the value of assets due to wear and tear or passage of time is revenue expense.
• For instance, a piece of machinery is bought in the beginning of the year for ₹ 10,000. At the end of the year its value to the business may only be ₹ 9,000. This diminution in value ₹ 1,000 is a revenue loss.
• Stocks of materials bought will be an asset unless, consumed, to the extent the materials are used up, they will be revenue expenditure.
• Capital expenditure are shown in the Balance Sheet as assets whereas revenue expenditures are debited to P&L a/c.

Question 3.
Deferred Revenue Expenditure & Prepaid Expenses
Answer:
Deferred Revenue Expenditure & Prepaid Expenses:
→ The Guidance Note on ‘Terms used in Financial Statement’, issued by the Institute of Chartered Accountants of India, defines “deferred revenue expenditure as those expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods.”

→ In short, it refers to that expenditure that is, for the time being, deferred from being charged against income.

→ So long as deferred revenue expenditure is not written off, this is shown on the assets side of the balance sheet under the head “Miscellaneous Expenditure.”

→ Deferred revenue expenditure should be revenue expenditure by nature in the first instance, for example, advertisement. But its matching with revenue may be deferred considering the benefit to be accrued in future.

→ A thin line of difference exists between deferred revenue expenses and prepaid expenses.

→ The benefits available from prepaid expenses can be precisely estimated but that is not so in case of deferred revenue expenses.

→ Heavy advertising to launch a new product is a deferred expenses since the benefit from it will be available over the next three to five years but one cannot say precisely how long.

→ On the other hand, insurance premium paid, say, for the year ending 30th June, 2006, when the accounting year ends on 31st March, 2006 will be an example of prepaid expense to the extent of premium relating to three months’ period i.e. from 1st April, 2006 to 30th June, 2006.

→ Thus the insurance protection will be available precisely for three months after close of the year and the amount of the premium to be carried forward can be calculated exactly.

As per Accounting Standard 26 only those expenditures should be deferred which are expected to give future benefits. While solving problem, student should defer an expense item only if specifically so required by the question.

Question 3.
Capital Receipts and Revenue Receipts
Answer:
Capital Receipts and Revenue Receipts:

• Receipts which are obtained in the course of normal trading operations are revenue receipts (e.g. sale of goods, interest income etc.).
• On the other hand, receipts which are not revenue in nature are capital receipts (e.g. sale of fixed assets, secured or unsecured loans, owners’ contribution etc.).
• Subscriptions by shareholders towards share capital of a company or for purchasing its debentures are considered by the company as capital receipts.
• By the same criterion, contributions by partners or proprietors to capital of their business are capital receipts.
• Sale value of fixed assets is also a capital receipts since these are distinguishable from revenue receipts, e.g., those from sale of merchandise, rent on property, interest on investment, professional fee for services rendered, etc.
• It will be evident that capital receipts emanate out of a fund already held or arise on conversion of an asset, whereas revenue receipts flow from personal exertion, use of a capital asset or from sale or transfer of floating assets like goods.
• Revenue and capital receipts are recognized on accrual basis as soon as the right of receipt is established.
• Revenue receipts are credited to the Profit and loss account.
• On the other hand, capital receipts are not directly credited to Profit and loss account.
• For example, when a fixed asset is sold, the entire capital receipts is not credited to Profit and Loss Account. Profit or loss on sale of fixed assets is calculated and recorded in Profit and Loss Account.

True or False

Question 1.
Lease premium will be treated as revenue expenditure.
Answer:
False: Lease premium is a capital expenditure.

Question 2.
Amount received by the issue of debentures is a capital receipt.
Answer:
True: Money received by way of issue of shares or debentures by a company is a capital receipt.

Question 3.
Capital expenditure is done to restore the efficiency of an asset.
Answer:
False: Capital expenditure is done to improve the efficiency of an asset.

Question 4.
Revenue loss is not the same thing as Revenue expenditure.
Answer:
True: Revenue expenditure is incurred to receive a benefit during a cur¬rent year. Revenue loss occurs in the normal course of business and provides no benefit.

Question 5.
Any expenditure which increases the value of fixed assets is termed as capital expenditure.
Answer:
True: Expenditure that is done in connection with the acquisition of fixed assets or which leads to the increment in the value of fixed assets are classified under capital expenditure.

Question 6.
Preliminary expenses are classified under deferred revenue expenditure.
Answer:
True: Preliminary expenses are treated as deferred revenue expenditure as these can be written off over a maximum of 4-5 years. Though according to AS 26, Preliminary expenses spent in the incorporation of a company should be written off in the year it is incurred.

Question 7.
Wages paid to workers for erecting machines will be treated as revenue expenditure.
Answer:
False: Expenditure done in connection with the erection of machines is an example of capital expenditure.

Question 8.
Any heavy expenditure of revenue nature the benefit of which will be availed over a numbers of years can be classified as capital expenditure.
Answer:
False: The expenditure of this kind will be termed as Deferred revenue expenditure.

Question 9.
Capital receipts are either shown as an increase in liabilities or as a reduc-tion in the value of assets.
Answer:
True: Capital receipts are shown in the balance sheet as an increase in liabilities or as reduction in the value of assets.

Question 10.
Money spent to reduce working expenses is treated as capital expenditure.
Answer:
True: Any expenditure that reduces the working expenses will be treated as capital expenditure.

Question 11.
Interest paid on purchase of an asset in all cases, will be treated as capital expenditure.
Answer:
False: Such expenditure is classified under the head of capital expenditure if it is paid during the production/construction period. The expenditure will be treated as revenue after the asset is put to use.

Question 12.
Amount spent on experimenting which did not result in success will be treated as capital loss.
Answer:
False: It will be considered as a deferred revenue expenditure so that the burden of loss is shifted over a number of years.

Question 13.
A building of book value ₹ 45,000 got demolished and a new building having a book value ₹ 17,00,000 was constructed. Thus, ₹ 45,000 is a revenue loss and ₹ 17,00,000 is a capital receipt.
Answer:
False: ₹ 45,000 is a revenue loss but ₹ 17,00,000 is a capital expenditure.

Question 14.
Repairs amount spent on second hand machine, purchased recently, before using it will be treated as capital expenditure.
Answer:
True: Overhaul expenses (repairs) incurred to put a second hand machine in [ useable condition to derive its benefit for future periods is a capital expenditure.

Question 15.
₹ 10 lakhs were spent on the construction of a mess hall for the welfare i of the employees, ₹ 6 lakhs were received from the Government as a grant. In this case ₹ 4 lakhs will be treated as capital expenditure and ₹ 6 lakhs as capital receipt.
Answer:
False: ₹ 10,00,000 will be treated as capital expenditure since it is spent on the construction of the mess hall, though the amount has been received as a grant.

Question 16.
Amount spent in connection with the issue of capital should be considered as a capital expenditure, but legal expenses spent in connection with the issue of capital shall be considered as revenue expenditure.
Answer:
False: Legal expenses incurred on the issue of capital will be treated as capital expenditure.

Question 17.
Expenses in connection with obtaining a license for running the Cinema Hall is Revenue Expenditure.
Answer:
False: The Cinema Hall could not be started without license. Expenditure incurred to obtain the license is pre-operative expense which is to be capitalized. Such expenses are not revenue and amortized over a period of time.

Question 18.
Overhauling expenses for the engine of motor car to get better fuel efficiency is revenue expenditure.
Answer:
False: Overhauling expenses incurred for the engine of a motor car to derive better fuel efficiency will reduce the running cost, so this is a capital expenditure.

Question 19.
Amount spent for the construction of temporary huts, which were necessary for construction of the Cinema House and were demolished when the Cinema House was ready, is capital expenditure.
Answer:
True: Amount spent for the construction or acquisition of a capital asset (here, Cinema house), in whatever form, will be treated as Capital Expenditure.