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Report No. 67

4.11. Points of difference and similarity.-

There are differences as well as similarities between bonds and promissory notes. In the first place, a promissory note, in its proper and legal form, could not well be confounded with a bond under clause (a), i.e., a bond with a condition, for such a promissory note must be "an unconditional undertaking"; nor could it be mistaken for a bond under clause (c) to deliver grain, as the subject of a promissory note can be "money only". As to simple bonds for money falling under clause (b) , such bonds could not be mistaken for promissory-notes executed in the ordinary form, i.e., payable to 'order' or to 'bearer' which constitutes their negotiability, because instruments so worded are expressly excluded by clause (b).

4.12. A further distinction between a 'bond' as described in clause (b) and a promissory note which is not expressed so as to indicate negotiability is sometimes thus stated. The language of a bond indicates an "obligation", while that of a note constitutes a "promise" or undertaking to pay. But this distinction, though easy to formulate in theory, proves difficult in practice. The distinction between these instruments when loosely worded, is often difficult to trace. There are situations where a document can fall under both. If there is, in an instrument, in unconditional undertaking to pay money to a specified person, and the instrument is attested, it will, prima facie, fall under both the definitions, i.e. the definitions of 'promissory note' and 'bond'.

4.13. Instruments not expressed.-

An objection could be raised that since the instrument is not expressed to be payable to order or bearer, it falls within the definition of 'bond', because the negative requirement in that definition is not fulfilled. But, as to this objection, attention must be invited to section 13 of the Negotiable Instrument Act.1 One of the Explanations to that section (as amended in 1919) provides (in effect), that a bill of Exchange, pronote or cheque payable to a specified person is to be regarded as payable to his order, unless there are provisions restricting its transferability. It is this provision which has caused some controversy. Is this provision in section 13 of the Negotiable Instruments Act to be read for the purposes of interpreting section 2(5)(b), Stamp Act, (i.e. the portion referring to 'not payable to order or bearer'), or is it to be disregarded for the purposes of the Stamp Act?

Thus, a pronote payable to X is, under the amendment, to be regarded as payable to 'X or order' (by virtue of the Explanation), if there are, in the instrument, no words prohibiting transfer or indicating an intention that it shall not be transferable.2 A promissory not 'payable to A' was not negotiable before the amendment. But, after the amendment, by virtue of the Explanation, the words 'payable to A' mean 'payable to A', or order, and such a note is thus rendered negotiable, unless it is expressly made 'payable to A only', thereby prohibiting its transfer.

1. Section 13, Negotiable Instruments Act (as amended in 1919).

2. (a) Bibi Kazmi Begun? v. Lachman Lid Sao, AIR 1930 Pat 239 (240).

(b) Gulabgir v. Nathmal, AIR 1932 Nag 23 (25).

(c) Bankidas v. Tanabai, AIR 1929 Nag 274 (275).

(d) Forbes, Forbes, Campbell and Co. v. Official Assignee, Bombay, AIR 1925 Born 173.

4.14. Section 13, Negotiable Instruments Act-History.-

The history of section 13 of the Negotiable Instruments Act, referred to above, is of interest. To be negotiable, a promissory note, a bill of exchange or a cheque must be made payable to order or bearer under the section. Even if it was not made expressly payable to order or bearer', the custom and usage of merchants in Bombay recognised a cheque from which the word 'bearer' was struck out, and the word 'order' was not substituted therefor, as an 'order' cheque and, as such, negotiable. In a Bombay case,1 however, the High Court refused to recognise this custom as, if recognised, it would have the effect of overriding the express provisions of law in section 13 of the Negotiable Instruments Act, (as it then stood). This decision caused a great deal of hardship to the mercantile community, and to remove the hardship, an Explanation was added to section 13 of that Act, by an amending Act (Act 8 of 1919) to the following effect:-

"Explanation 1.-A promissory-note, bill of exchange or cheque is payable to order which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable."

1. Desabhai v. Virchand, AIR 1919 Born 73.

4.15. Question of applicability to Stamp Act of amended section 13-shades of view.-

The question whether this provision (i.e., the amendment in section 13 of the Negotiable Instruments Act) is to be read for the purposes of the Stamp Act also, has caused a difference of opinion amongst the High Courts,1 as also amongst the Judges in the same High Court.2 The documents involved in the cases before the various High Courts did not contain the words 'or order'. The question arose whether the provision (that the instrument must not be payable to order or bearer), was satisfied. Answer to the question depended on whether the above provision of the Negotiable Instruments Act, as amended, was, or was not, to be taken into account for the purposes of the Stamp Act also.

Several shades of view seem to be current on the subject-

(1) Section 13, Negotiable Instruments Act (as amended in 1919), is to be read for the purposes of the Stamp Act also, and, therefore, an instrument containing an unconditional undertaking to pay to a specified person, if there is no express restriction on transfer, is to be excluded from the definition of 'bond', as it is to be treated as payable to order, though not so expressed.3

(2) Section 13, Negotiable Instruments Act is not to be so read, as the section is intended to define what is a 'negotiable instrument', and is not relevant to the definition of 'bond' for the purposes of the Stamp Act.4

(3) The matter must be determined on a consideration of the intention of the parties. Did the parties intend the instrument to have the commercial character of a pronote, or was it the intention only to record the obligation by the party undertaking to pay? In a case which went up to the Privy Council,5 this test was applied, and, in his usual forceful way, Lord Atkin described the anomaly that would arise if the net of negotiability were cast wide.6

(4) Negotiability is not a pre-requisite of the document being regarded as a pronote, for the purposes of the Stamp Act.7 Section 13 of the Negotiable Instruments Act (as amended) should be taken into account, for the purposes of the Stamp Act also.

From the discussion in a Gujarat case,8 and in a Bombay case,9 it would appear that this controversy is still subsisting. A clarification is, therefore, desirable.

1. See the case-law reviewed in-

(a) Kadorilal v. Sukhlal, AIR 1968 MP 4 (8, 9), paras. 10 to 12 (Golwalkar and Bhave, JJ.)

(b) J. Sahab v. M.H. Gandly, AIR 1773 Born 27.

2. e.g. Raja Rajeshwari Debi, AIR 1959 All 583 (FB).

3. Kadorilal v. Sukhlal, AIR 1968 MP 4 (DB).

4. (a) Khetra Mohan v. Jamini Kanta Devan, ILR 54 Cal 445: AIR 1937 Cal 472;

(b) Ram Narayan, AIR 1962 Pat 325 (329) (Ramaswami, C.J. and Chaudhary, J.).

(c) AIR 1973 Born 27.

5. Mohd. Akbar Khan v. Attar Singh, AIR 1936 PC 171 (Lord Atkin).

6. See also Gaupaldas, AIR 1941 Nag 1.

7. Jagjivandas v. Gumanbhai, AIR 1968 Guj 1 (5, 6), para. 5 (Bhagwati and Shah, JJ.).

8. Parshottanr v. Ishzvar Bhai, AIR 1971 Guj 252 (A.D. Desai and D.P. Desai, JJ.).

9. AIR 1973 Born 27.

4.16. Recommendation regarding section 2(5)(b).-

In order to clarify the position, we recommend that the words "expressed to be", should be added in clause (b), before the words "payable to order or bearer". Though it could be argued that to treat such a document as a bond, would create disharmony between the Stamp Act and the Negotiable Instruments Act, we are deliberately making this recommendation, in view of the fact that if the document is regarded as a promissory note, then1 the document cannot be admitted in evidence under the existing law, even on payment of the deficiency and penalty. We do not see any strong reason why the category of documents not admissible on payment of penalty should be enlarged.

1. Section 35, Proviso (a).

4.17. Recommendation regarding clause (b).- We, therefore, recommend that clause

"(b) any instrument attested by a witness and not expressed to be payable to order or bearer, whereby a person obliges himself to pay money to another."

4.18. Section 2(5)(c)-Stipulation for delivery in pursuance of an agreement.-

Clause (c) of the definition of "bond" includes any instrument attested by a witness "whereby a person obliges himself to deliver grain or other agricultural produce to another. There is a conflict of decisions on the question whether an attested instrument containing a stipulation for the delivery of grain or other agricultural produce in pursuance of an agreement for the sale of such article is a "bond" within this clause. The majority view is that such an instrument will be a "bond", and chargeable as such.1 Thus, in a Bombay case,2 it was held, following an earlier decision,3 that an ordinary agreement for a sale of a crop or mortgage of a crop becomes a bond if it is attested by witnesses. The attestation is a necessary characteristic of the bond, but it is not an essential characteristic of a document incorporating mortgage of crop or sale of crop, as the validity of these transactions does not depend upon the attestation of the document, and they can be carried out by documents which are not attested.

And the bond is the basis of transaction over which is superimposed a transaction of mortgage or sale and in such a case, the document shares and retains the character of a bond along with the characteristics of mortgage or sale respectively. The other view is that the obligation to pay money and the obligation to deliver crops is incidental to and is a necessary part of the mortgage of crop or of the sale of crop respectively, and, in a transaction of mortgage of crop or of sale of crop, the element of bond, if there by any, is entirely submerged in the transaction of sale or mortgage, and it is unnatural language to describe a transaction of a sale or mortgage of a crop as a bond, simply because there happens to be an attestation of the document, and in such a case attestation may well be regarded as surplusage. The obligation to pay money and to deliver crops are exclusively referable to sale and mortgage transactions, and they should not be treated as independent covenants furnishing the basis of a bond.

There is high judicial authority in support of either of these contentions. In a Full Bench case of the Bombay High Court,4 after expressing a doubt whether the real intention of the Legislature was being carried out by interpreting the transaction in the manner in which it did, it has been held that a document recording a sale of goods if attested becomes a bond, and ceases to be exempt from duty and becomes liable to pay duty as on a bond. The judgment of the Court (which was delivered by 'Sir Lawrence Jankins) contains no discussion of law, and is based upon a previous authority of the Bombay High Court, to which the Court held, itself bound. The full Benches of the Madras High Court5 and Bombay High Court6 have held that a document resembling a promissory note, if attested, becomes a bond.

1. (a) Balli Bros (in re:), (1906) 8 Born LR 234 (238) (SB);

(b) Rupchand v. Barku, 1884 Born PJ 257;

(c) Gajraj Singh (in re:), 1887 ILR 9 All 585 (589);

(d) L.H. Sugar Factory, Pilibhit v. Moti, AIR 1941 All 243 (247, 257, 258) (Majority view-Bajpai and Verm, JJ. contra);

(e) Collector Nimar v. Lakshmichandra, AIR 1927 Nag 72 (73, 74).

2. Balli Brothers (in re:), (1906) 8 Born LR 234.

3. Rupchand v. Barku, 1884 Born PJ 257 (SB).

4. Balli Brothers (in re:), (1906) 8 Born LR 234.

5. Reference under Stamp Act (in re:), 1887 ILR 10 Mad 158 (FB).

6. Venku Ranchandrashet v. Sitaram Pandurang, 1905 ILR 29 Born 82: 6 Born LR 841 (FB).

4.19. It should, however, be noted that the Bombay High Court has, in a later decision1, held that the agreement in order to come within the definition of bond, must constitute a debt, and must be capable of specific performance. That case related to an agreement to lend money to a partnership. It was held that such an agreement does not create an obligation to pay money within clause (b). The reasoning was that an agreement to lend money is not capable of specific performance, and it creates no debt though its breach may give rise to a claim for damages.

The matter has come up more than once before the Allahabad High Court. In a case2 decided in 1936, the executant, who had received money from the other party, had mortgaged his sugarcane. There was another stipulation that the executant would supply the sugarcane exclusively to the sugar works of the mortgagee. The latter stipulation was regarded as a bond, being wholly apart and separate from the mortgage. In the same case, however, a stipulation to deliver in pursuance of sale, contained in another document-which was the third document in the case-was excluded from the definition of "bond".

1. Hitawardhak Cotton Mills v. Sorabji, 1909 ILR 33 Bonn 426 (Scott, C.)., Batchelor and Heaton, J.)

2. Board of Revenue (in re:), AIR 1936 All 481 (482) (SB of 3 Judges) portion relating to first document.

4.20. In a case,1 decided by the Allahabad High Court in 1941, the document in issue (being attested) was, on the facts, held by a majority of the judges2 to be a bond. The minority3 dissented, on the ground that the obligation to deliver grain was only incidental. According to the majority, however, this test was irrelevant.4

The same view (holding such document to be a bond) has been taken in a later Full Bench case of the Allahabad High Court.5

In many of the cases cited above, the question whether the document would be exempt under Article 5 by virtue of the exemption under that article in respect of an agreement for the sale of goods, has also been debated. That controversy was no doubt, of importance for the actual decision in each case; but that controversy should be kept apart for the present purpose, because, even if the document is exempt under Article 5, the main question to be first determined is about the scope of section 2(5)(c)-"bond".

1. L.H. Sugar Factory v. Moti, AIR 1941 All 243 (247, 258, 267, 272, 277).

2. Iqbal Ahmad, Ag. C.J., Mulla and Dar, JJ.

3. Verma and Bajpai, JJ.

4. See, particularly, Iqbal Ahmad, Ag. C.J.'s judgment, p. 247.

5. Revenue Board v. P.B. Singh, AIR 1957 All 391 (393), para. 22 (FB).

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