The Negotiable Instruments Act, 1881

(b)(i) (A) Modes of Negotiation: Section 14 of the Negotiable Instruments Act, 1881 defines Negotiation as the transfer of a negotiable instrument to another person in such a manner as to constitute the transferee the holder thereof.

By Delivery Only: A bearer instrument (or one endorsed in blank) can be negotiated by mere delivery without any endorsement. The instrument passes from hand to hand by physical delivery alone.

Applicable when: The instrument is a bearer instrument (payable to bearer), or

The instrument has been endorsed in blank by the last endorsee, converting it into a bearer instrument.

(B)By Delivery & Indorsement: An order instrument (payable to a specified person or order) can only be negotiated by endorsement and delivery. Both acts are necessary:

Indorsement: The holder must sign on the back of the instrument (or on a slip affixed to it 'allonge'), and

Delivery: Physical delivery of the instrument to the transferee.

Without delivery, endorsement alone does not constitute valid negotiation.

Alternative Answer (b)(i)

Negotiation by delivery [Section 47 of the Negotiable

Instruments Act, 1881]: Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.

Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.

Negotiation by delivery and indorsement [Section 48]

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.

(ii)(A) Why is delivery essential for negotiation? [Section 46]

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

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

The contract on a negotiable instrument until delivery remains incomplete and revocable. The delivery is essential not only at the time of negotiation but also at the time of making or drawing of negotiable instrument. The rights in the instrument are not transferred to the indorsee unless after the indorsement the same has been delivered.

(B)Circumstances where instruments cannot be negotiated even

by delivery: If a person makes the indorsement of instrument but before the same could be delivered to the indorsee, the indorser dies, the legal representatives of the deceased person cannot negotiate the same by mere delivery thereof. (Section 57)

If the endorsement on an order instrument is forged, delivery of such instrument cannot complete a valid negotiation; a forged endorsement is no endorsement (Section 58).

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 4(b) (New Scheme).

(a)(i) A Promissory Note for ₹ 25,000 payable to 'the person who brings

the lost dog: According to Section 4 of the Negotiable Instruments Act, 1881, “A 'promissory note' is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.” The payee must be certain; either a named person, or 'bearer'. The undertaking to pay must be unconditional.

In the given case, the promissory note was made payable to the unidentified person who would bring the lost dog. Since the payee was uncertain at the time of making the instrument, the requirement of payment to a “certain person” is not fulfilled.

Therefore, the instrument is not a valid promissory note under Section 4 of the Negotiable Instruments Act, 1881.

(ii)A signed bearer cheque delivered by Alok to Anand as reward for

finding the dog: Under Section 6 of the Negotiable Instruments Act, 1881, a cheque is a bill of exchange drawn on a specified banker and payable on demand.

A signed bearer cheque delivered by Alok to Anand after the dog was found is a valid cheque. The fact that the service had already been completed does not affect the validity of the cheque as a negotiable instrument. A bearer cheque is payable to the person who presents it (the bearer).

Therefore, the bearer cheque is a valid negotiable instrument and Anand can claim payment on it.

(iii)A self-drawn and self-accepted Bill of Exchange by Alok,

delivered to Anand: Under Section 5 of the Negotiable Instruments Act, 1881, a “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

A 'self-drawn and self-accepted' bill of exchange means Alok is both the Drawer and the Drawee/Acceptor - i.e., Alok has drawn a bill upon himself and accepted it.

Under Section 5 of the NI Act, where the drawer and drawee are the same person, the holder has the option of treating it as a Promissory Note or a Bill of Exchange. If treated as a Promissory Note, the instrument is valid - it is essentially Alok's promise to pay Anand.

The self-drawn self-accepted bill is a valid instrument. The holder (Anand) may treat it as a Promissory Note under Section 5, and it is enforceable against Alok.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 6(a) (New Scheme).

(b)What is a Promissory Note?

According to Section 4 of the Negotiable Instruments Act, 1881, A 'Promissory Note' is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Essential Elements of a Promissory Note

(1)In writing- It must be in writing to be legally enforceable, an oral promise to pay is not sufficient.

(2)There must be an express promise to pay . Mere acknowledgement of debt is insufficient.

(3)The promise to pay should be definite and unconditional . Therefore, instruments payable on performance or non-performance of a particular act or on the happening or non-happening of an event, are not promissory notes. However, the promise to pay may be subject to a condition, which according to the ordinary experience of mankind, is bound to happen.

(4)A promissory note must be signed by the maker otherwise it is incomplete and ineffective.

(5)Promise to pay money only.

(6)Promise to pay a certain sum.

(7)The maker and payee must be certain, definite and different

persons. A promissory note cannot be made payable to the bearer (section 31 of the Bank of India Act, 1934, RBI Act). Only the Reserve Bank or the central government can make or issue a promissory note 'payable to bearer'.

(8)Stamping: A promissory note must be properly stamped in accordance with the provisions of the Indian Stamp Act and such stamp must be duly cancelled by maker's signatures or initials on such stamp or otherwise.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 4(b) (New Scheme).

(a)(i) According to Section 61 of the Negotiable Instruments Act, 1881, when a bill is made payable “after sight”, the maturity period is calculated from the date of acceptance of the bill by the drawee. The period of holding the bill by the payee before presenting it for acceptance does not affect the commencement of the maturity period.

In the present case, Mr. K draws a bill payable 60 days after sight in favour of Mr. J. Although Mr. J keeps the bill for 30 days before presenting it to Mr. N, the drawee, the maturity period will not begin until the date on which Mr. N accepts the bill.

Therefore, the maturity period of the bill commences from the date of acceptance by Mr. N.

(ii)(A) No, Mr. Mohan’s right to recover the amount does not get affected due to the delay in presentation of the promissory note two days after the due date because of unforeseen circumstances as it is provided under Section 75A of the Negotiable Instruments Act, 1881.

(A)ALTERNATE ANSWER

Yes, the delay in presentation could affect Mr. Mohan's right to recover the amount. According to section 64 of the Act, a promissory note must be presented for payment at maturity. Failure to do so may discharge the maker from liability to the extent of any loss caused by the delay.

(B)Excuse for delay in presentment for acceptance or payment (Section 75A)

Delay in presentment for acceptance or payment is excused if the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the cause of the delay ceases to operate, presentment must be made within a reasonable time.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 6(a) (New Scheme).

(b)(i) As per Section 46 of the Negotiable Instruments Act, 1881, delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the property in the instrument to the person to whom it is delivered. The delivery can be, actual or constructive. Actual delivery takes place when the instrument changes hand physically. Constructive delivery takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on his behalf or when the indorser, after indorsement, holds the instrument as an agent of the indorsee.

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

(ii)Difference between promissory note and bill of exchange

SUGGESTED ANSWER

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 4(b) (New Scheme).

(a)(i) Section 20 of the Negotiable Instruments Act, 1881 reads as “Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp.

The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount. Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder”.

In the instant case, Anjali is not liable to honour the promissory note to Manish for ₹ 17000. She is liable only for ₹ 15000.

(ii)Presentment for payment [Section 64 of the Negotiable Instruments Act, 1881]

As per section 64 of the Negotiable Instruments Act, 1881, promissory notes, bill of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided.

SUGGESTED ANSWER

In default of such presentment, the other parties thereto are not liable thereon to such holder.

So, presentment for payment must be made to the person primarily liable on the instrument, or in their absence, at the proper place during the usual business hours.

In this case, Priya presented the bill at Sanjay’s office during regular business hours, but since Sanjay was not present, she left the bill with his assistant.

While leaving the bill with the assistant might be considered a practical step, it does not fulfil the strict legal requirement of presenting the bill directly to the drawee (Sanjay) or his authorised representative for payment.

Therefore, the presentation of the bill by Priya to Sanjay’s assistant is not valid under law.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 6(a) (New Scheme).

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

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

Section 46 also lays down that when an instrument is conditionally or for a special purpose only, the property in it does not pass to the

SUGGESTED ANSWER

transferee, even though it is indorsed to him, unless the instrument is negotiated to a holder in due course.

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

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

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

(ii)As per section 11 of the Negotiable Instruments Act, 1881, a

promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be an inland instrument.

In the instant case, the bill of exchange was:

•Drawn in India (since it was drawn by Reliable Limited, an Indian company).

•Accepted in India (Manish, a resident of Mumbai, accepted the bill in Mumbai).

•Payable outside India, in Los Angeles, USA.

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

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 6(a) (New Scheme).

(b)As per Section 76 of the Negotiable Instruments Act, 1881:

No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment, in any of the following cases:

(a)(i) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or

(ii)if the instrument being payable at his place of business, he closes such place on a business day during the usual business hours, or

(iii)if the instrument being payable at some other specified place, neither he nor any person authorised to pay it attends at such place during the usual business hours, or

SUGGESTED ANSWER

(iv)if the instrument not being payable at any specified place, he cannot after due search be found;

(b)as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment;

(c)as against any party if, after maturity, with knowledge that the instrument has not been presented-

he makes a part payment on account of the amount due on the o instrument,

or promises to pay the amount due thereon in whole or in part, o

or otherwise waives his right to take advantage of any default in o presentment for payment;

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

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 4(b) (New Scheme).

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 4(b) (New Scheme).

(a)Section 138 of the Negotiable Instruments Act, 1881 covers dishonor of cheques for insufficiency of funds in the account.

(i)Section 138 shall not apply, unless the cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.

In the instant case, Alok’s defenses are not valid as Manish presented the cheque within one month i.e. within the validity period of three months.

(ii)Section 138 shall not be applied unless the below conditions are complied with:

(a)Demand for the payment through the notice: The payee or the

holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and

(b)Failure of drawer to make payment: The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

The complaint can be filed after 45 days of dishonor of the cheque i.e., 30 days of notice period +15 days of the receipt of the said notice.

Therefore, in the instant case, since Manish sent notice to Alok for outstanding debts but Alok ignored the notice, Manish can file a suit against Alok and can file a complaint within 45 days of dishonor of cheque.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2026, 6(a) (New Scheme).

(a)According to section 138 of the Negotiable Instruments Act, 1881, where any cheque drawn by a person on an account maintained by him with a banker-

•for payment of any amount of money

•to another person from that account

•for the discharge, in whole or in part, of any debt or other liability, [A cheque given as gift or donation, or as a security or in discharge of a

SUGGESTED ANSWER

mere moral obligation, or for an illegal consideration, would be outside the purview of this section]

•is returned by the bank unpaid,

•either because of the-

amount of money standing to the credit of that account is o insufficient to honor the cheque, or

that it exceeds the amount arranged to be paid from that o account by an agreement made with that bank,

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

Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability.

(i)In the given question, Rohan received a cheque from Ram, for ₹ 51,000 as a gift for his marriage. In terms of section 138, cheque

given as a gift does not fall within this section. Hence, Ram would not be held liable for dishonour of cheque.

(ii)The explanation to the section provides that for the purpose of section 138 only a legally enforceable debt or other liability is to be taken into consideration. The cheque of ₹ 51,000 was issued in the

nature of a gift and not as a part of the payment for the balance amount of car. Hence, Rohan was not justified in considering the dishonour of cheque, an offence under section 138 of the Negotiable Instruments Act, 1881.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 6(a) (New Scheme).

(b)Rules as to compensation (Section 117 of the Negotiable Instruments Act, 1881):

The compensation payable in case of dishonour of promissory note, bill of exchange or cheque, by any party liable to the holder or any endorsee, shall be determined by the following rules:

SUGGESTED ANSWER

(a)the holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it;

(b)when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;

(c)an endorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at 18% per annum from the date of payment until tender or realisation thereof, together with all expenses caused by the dishonour and payment;

(d)when the person charged and such endorser reside at different places, the endorser is entitled to receive such sum at the current rate of exchange between the two places;

(e)the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 4(b) (New Scheme).

(b)(i) According to Section 138 of the Negotiable Instruments Act, 1881, where any cheque drawn by a person on an account maintained by him with a banker-

•for payment of any amount of money

•to another person from that account

•for the discharge, in whole or in part, of any debt or other

liability, [A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section]

•is returned by the bank unpaid,

•either because of the-

account by an agreement made with that bank,

SUGGESTED ANSWER

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

When section 138 shall not apply: unless the below given conditions are complied with-

(a)Cheque presented within validity period : The cheque has been presented to the bank within a period of three months from the date on which it is drawn or within the period of its validity, whichever is earlier.

(b)Demand for the payment through the notice : the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and

(c)Failure of drawer to make payment : the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

(ii)(A) According to the definition of cheque under section 6 of the Negotiable Instruments Act, 1881, a cheque is a species of bill of exchange. Thus, it should fulfil all the essential characteristics of a bill of exchange.

The following two features distinguish a cheque from bill

(a)Must be drawn on a specified banker

(b)It must be payable on demand

Thus, all cheques are bills while all bills are not cheques.

(B)Ambiguous Instrument: Section 17 of the Act, reads as: “Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly.”

SUGGESTED ANSWER

Thus, an instrument which is vague and cannot be clearly identified either as a bill of exchange, or as a promissory note, is an ambiguous instrument.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 4(b) (New Scheme).

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

Where any cheque drawn by a person on an account maintained by him with a banker-

•for payment of any amount of money

•to another person from that account

•for the discharge, in whole or in part, of any debt or other liability, [A

cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section]

•is returned by the bank unpaid,

•either because of the-

account by an agreement made with that bank,

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

In the instant case,

(i)Since Y’s cheque was dishonoured by the Bank due to insufficiency of funds in his account, he shall be deemed to have committed an offence and shall, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. 20,000, or with both.

SUGGESTED ANSWER

(ii)A cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, or for an illegal consideration, would be outside the purview of this section. Hence, if Y issued a cheque as a donation to Mr. Z, he shall not be liable under section 138 of the Act.

Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, June 2024, 6(a) (New Scheme).