Explain the nature and extent of surety liability. State the circumstances in which surety is discharged from his liability. Therefore, where the liability of the principal is held to be not enforcement on the ground of the contract being illegal, there is no question of surety being made liable. If the principal debtor happens to be minor and the agreement made by him is void, the surety too cannot be made liable in respect of the same because the liability of the surety is coextensive with that of the principal debtor.

 

Liability of Surety:-

According to Section 128, “The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.” The provision that the surety’s liability is coextensive with that of the principal debtor means that his liability is exactly the same as that of the principal debtor. It means that on a default having been made by the principal debtor, the creditor can recover from the surety all what he could have recovered from the principal debtor. 

For instance, the principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The creditor may recover from the surety the sum of Rs. 10,000/- plus interest becoming due thereon as well as the amount spent by him in recovering that amount. This may be further explained by the following 

Example. 

A guaranteed to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C, the acceptor, is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. If the principal debtor’s liability is reduced, e.g., after the creditor has recovered a part of the sum due from him out of his property, the liability of the surety is also reduced accordingly. 

Case Law 

 Narayan Singh v. Chattarsingh,

Nature and extent :-

It has been held that if the principal debtor’s liability is scaled down in an amended decree or otherwise extinguished in whole or in part by a statute, the liability of the surety would also portent be reduced or extinguished. In this case, the liability of an agriculturist, who was the principal debtor, was Act, 1957. It was held that the effect of scaling down the principal debtor’s liability was that the surety’s liability had also been reduced accordingly. The surety’s liability was considered to be reduced for another reason also, and that was that if the surety is made liable for the full amount, he in his turn will become entitled to recover the same from the principal debtor, and this will eventually negative the benefit conferred upon the agriculturist principal debtor under the statute. 

If the principal debtor’s liability is affected by illegality, so is also that if the surety. Therefore, where the liability of the principal is held to be not enforcement on the ground of the contract being illegal, there is no question of surety being made liable. If the principal debtor happens to be minor and the agreement made by him is void, the surety too cannot be made liable in respect of the same because the liability of the surety is coextensive with that of the principal debtor. It has been held in an English case, that the guarantees of the loan or an overdraft to an infant are void, because the loan to the infant itself is void.

Discharge of surety from liability:-

When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished or comes to an end, he is said to be discharged from liability. The modes of discharge of a surety, as recognized by the Indian Contract Act, are as under:

1. By Revocation

2. By Notice Sec.(130)

3. By Death of Surety Sec.(131)

4. By Novation Sec.(62)

5. By Notice (Section 130)

According to Section 130:“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.” This Section permits revocation of guarantee by the surety:

A. When it is a continuing guarantee, and

B. As regards future transactions, only.

This can be done by a notice by the surety to the creditor in that regard. Once notice revoking guarantee is issued, the liability of the surety would fasten only up to that date and not thereafter. 

The following illustrations make it clear that when the surety gives a notice of revocation, his liability continues to exist for the transactions already made, but is revoked as regards future transactions, i.e., the transactions made subsequent to the notice.

A. in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees . be discounted bill for C to the extent of 2000 Rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges C from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C. (Sita Ram Gupta v/s Punjab National Bank)

B. By Surety’s death (Section 131) :-

According to Section 131 “The death of a surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.”

C. By Novation ( Section 133) :-

A contract of guarantee is said to be discharged by novation when a fresh contract is entered into either between the same parties or between others parties, the consideration being the mutual discharge of the old contract. The original contract of gurantee comes to an endand the surety under original contract is discharged.

2. By conduct of creditor

A. Variance in terms of contract, Sec. (133)

B. Release of the principal debtor, Sec. (134)

C. Arrangement between principal debtor and creditor, Sec. (135)

D. creditor act or omission impairing surety eventual remedy, Sec. (139)

E.  Loss of security, Sec. (141)

By variance in the terms of contract (Section 133) :-

When the surety has undertaken liability on certain terms, it is expected that they will remain unchanged during the whole period of guarantee. If there is any variance in the terms of the contract between the principal debtor and the creditor, without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there, and he is not liable on the altered contract because it is different from the contract made by him. Section 133, which makes a provision in this regard, is as follows: “Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor discharges the surety as to transactions subsequent to the variance.”

Illustration: 

A, becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of the loses on overdrafts, B allows a customer to overdraft and the bank loses a sum of money. A is discharged from his surety ship by the variance made without his consent, and is not liable to make good this loss.

By release or discharge of the principal debtor (Section 134) :-

The provision concerning the discharge of the surety on the release or discharge of the principal debtor as contained in Section 134 and its 

Illustrations, is as under:

134. Discharge of surety by release or discharge of principal debtor.-

 The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

Example

A Contract with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber, C is discharged from his surety ship.”

C. By Arrangement:-

Section 135 mentions further circumstances when a contract between the creditor and the principal debtor can result in the discharge of the surety. The Section is as under:

 “135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor. – 

A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.”

According to this Section, a contract between the creditor and the principal debtor discharges the surety in the following three circumstances:-

1. When the creditor makes composition with the principal debtor,

2. When the creditor promises to give time to the principal debtor, and

3. When the creditor promises not to sue the principal debtor.

“137 Creditor’s forbearance to sue does not discharge surety.- 

Mere forbearance on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

Illustration

B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his surety ship.”

(D)  By creditor’s act or omission impairing surety’s eventual remedy (Section 139):-

Section 139 incorporates the rule that when the act or omission on the part of the creditor is inconsistent with the interest of the surety, and the same results in impairing surety’s eventual remedy against the principal debtor, the surety is discharged thereby. Section 139 is as follows:

“139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy. If the creditor does any act which is inconsistent with the right of the surety, or omits to do an act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”

(e) By loss of the security by the creditor (Section 141) :-

According to Section 141, the surety is entitled to all the securities which the creditor has against the principal debtor at the time when the contract of surety ship is entered into. If the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. For instance, the seller of the goods allows the buyer to take away the goods without insisting for the payment of the price for the same the surety who guarantees the payment of the price by the buyer, is discharged from his liability.     

3. By invalidation of Contract

A. Guarantee obtain by misrepresentation  Sec(142)

B. Guarantee obtained by concealment Sec(143)

C. Failure of co-surety to join surety Sec(144)

Guarantee obtain by misrepresentation Sec(142) :- 

Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

Guarantee obtained by concealment invalid Sec (143) :-

Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid. Illustrations

A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B' s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

Failure of co-surety to join surety Sec(144) 

Guarantee on contract that creditor shall not act on it until co- surety joins.- Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co- surety, the guarantee is not valid if that other person does not join.  

Emergency Provisions Part XVIII of the Constitution of India contains Articles 352-360 which deals with 'Emergency Provisions'. There are three kinds of provisions according to the Constitution.

Introduction

Part XVIII of the Constitution of India contains Articles 352-360 which deals with 'Emergency Provisions'. There are three kinds of provisions according to the Constitution. 

National Emergency 

State Emergency 

Financial Emergency 

National Emergency 

Article 352 deals with the National Emergency. An emergency arising from the threat to the security of the country is called National Emergency. A national emergency can be proclaimed by the President of India when he is satisfied that a grave security threat exists to the national. The threat can either be by war, external aggression or armed rebellion. 

The expression "Proclamation of Emergency" or "Emergency" deals only with Clause (1) of Article 352 of the Constitution of India and it does not include articles 356 and 360. 

In the case of Minerva Mills vs Union of India AIR 1980, SC held that there is no bar to judicial review of the validity of the proclamation of emergency issued by the president under 352(1). However, court's power is limited only to examining whether the limitations conferred by the constitution have been observed or not. It can check if the satisfaction of the president is valid or not. If the satisfaction is based on mala fide or absurd or irrelevant grounds, it is no satisfaction at all.

Prior to 44th amendment, duration of emergency was two months initially and then after approval by the houses, it would continue indefinitely until ended by another proclamation. However after 44th amendment, the period is reduced to 1 month and then 6 months after approval.

Grounds for Proclamation of Emergency 

Before the 44th amendment to the Constitution of India, the following are the grounds under which the President can proclaim emergency. 

War 

External Aggression 

Internal Disturbance 

However, the term Internal Disturbance is too vague and might also include political agitations in the country. Hence, the 44th amendment replaced this with armed rebellion. After the 44th amendment the following are the grounds under with a National Emergency can be proclaimed by the President. 

1. War 

2. External Aggression 

3. Armed Rebellion. 

War 

When a violent struggle between two countries with the use of armed forces. It also includes when a country has made a formal declaration of a war against India. 

External Aggression 

External aggression has wide meanings. It covers unilateral attacks with force by one state against another State without a formal declaration of war. As long as the other State has not answered with similar hostile attacks, it can be constituted an external aggression. 

Publication of Proclamation of Emergency 

There is no prescribed format in which a Proclamation of Emergency needs to be published. The publication can be made in any manner deemed fit in order to be known to public. 

Effects of Proclamation of emergency  The following are the effects arising out of proclamation of emergency in art 352. Art 353

A. executive power of the Union shall extend to giving directions to any state.

B. parliament will get power to make laws on subjects that are not in Union list.

if the emergency is declared only a part of the count, the powers in 1 and 2 shall extend to any other part if that is also threatened.

Art 354 Provisions of art 268 to 279, which are related to taxation, can be subjected to exceptions as deem fit by the president. Every law such made shall be laid before each house of the parliament.

Art 355 says that it is the duty of the Union to protect States against external aggression.

Art 358 While proclamation of emergency declaring that security of India or any part of the territory of India is threatened due to war or external aggression, is in operation, the state shall not be limited by art 19. In other words, govt may make laws that transgress upon the freedoms given under art 19 during such emergency. However, such a law will cease to have effect as soon as emergency ends. Further, every such law or very executive action that transgresses upon freedoms granted by art 19 must recite that it is in relation to the emergency otherwise, it cannot be immune from art 19.

It also says that any acts done or omitted to be done under this provision cannot be challenged in the courts after the end of emergency.  In the case of M M Pathak vs Union of India AIR 1978, SC held that the rights rights granted by 14 to 19 are not suspended during emergency but only their operation is suspended. This means that as soon as emergency is over, rights transgressed by a law will revive and can be enforced. In this case, a settlement that was reached before emergency between LIC and its employees was rendered ineffective by a law during emergency. After emergency was over, SC held that the previous settlement will revive. This is because the emergency law only suspended the operation of the existing laws. It cannot completely wash away the liabilities that preexisted the emergency.

Art 359 This article provides additional power to the president while proclamation of emergency is in operation, using which the president can, by an order, declare that the right to move any court for the enforcement of rights conferred by part III except art 20 and 21, shall be suspended for the period the proclamation is in operation of a shorter period as mentioned in the order. Further, every such law or every executive action recite that it is in relation to the emergency.

In the case of Makhan Singh vs State of Punjab AIR 1964, SC distinguished between art 358 and 359 as shown below:

 Art 358 Art 359    

1. Freedoms given by art 19 are suspended. Fundamental rights are not suspended. Only the courts cannot be moved to enforce fundamental rights.    

2. Any actions done or omitted to be done cannot be challenged even after emergency. 

3. Any action done by the legislature or executive can be challenged after the suspension is over.    

Art 19 is suspended for the period of emergency. Right to move courts is suspended for the period of emergency or until the proclamation of the president to remove suspension.    

Effective all over the country. May be confined to an area.  

Art 83(2) While the proclamation is in operation, the president may extend the normal life of the Lok Sabha by one year each time up to a period not exceeding beyond 6 months after proclamation ceases to expire.

Provisions in case of failure of constitutional machinery in States Art 356 says that if, upon the report of the Governor of a state, the president is satisfied that the govt. of the state is cannot function according to the provisions of the constitution, he may, by proclamation, assume to himself all or any of the functions of the govt, or all or any of the powers vested in the governor, or anybody or any authority in the state except the legislature of the state. The power of the legislature of the state shall be exercised by the authority of the parliament.

Under this article, president can also make such incidental and consequential provisions which are necessary to give effect to the objectives of the proclamation. This includes suspension of any provision of this constitution relating to any body or authority in the state.

However, this article does not authorize the president to assume the powers vested in the High Courts.

Art 357 provides that in the case of proclamation under art 356 

1. parliament can confer upon the president the power of legislature of the state to make laws or the power to delegate the power to make laws to anybody else.

2. The parliament or the president can confer power or impose duties on the Union or Union officers or Union authorities.

3. President can authorize the expenditure from the consolidated fund of the stat pending sanction of such expenditure by the parliament.

Financial Emergency

Art 360 provides that if the president is satisfied that a situation has arisen whereby the financial security of India or the credit of India or of any part of India is threatened; he may make a declaration to that effect. Under such situation, the executive and legislative powers will go to the center.  

This article has never been invoked.

Changes made by 44th Amendment 44th amendment substantially altered the emergency provisions of the constitution to ensure that it is not abused by the executive as done by Indira Gandhi in 1975. It also restored certain changes that were done by 42nd amendment. The following are important points of this amendments-

"Internal disturbance" was replaced by "armed rebellion" under art 352.

1. The decision of proclamation of emergency must be communicated by the Cabinet in writing.

2. Proclamation of emergency must be by the houses within one month.

3. To continue emergency, it must be re approved by the houses every six month.

Emergency can be revoked by passing resolution to that effect by a simple majority of the houses present and voting. 1/10 of the members of a house can move such a resolution.

Art 358 - Under this article art 19 will be suspended only upon war or external aggression and not upon armed rebellion. Further, every such law that transgresses art 19 must recite that it is connected to art 358. All other laws can still be challenged if they violate art 19.

Art 359, under this article, suspension of the right to move courts for violation of part III will not include art 20 and 21.  Reversed back the term of Lok Sabha from 6 to 5 years.

Contract of Agency Define pledge. Discuss the essential elements of a pledge. He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of misconduct, he is not entitled to receive the remuneration. Illustration: A employs B to recover Rs. 1000 from C. Through B’s misconduct, the money is not recovered. B is entitled to no remuneration for his services and must make good the loss.

Introduction:-

        The law of agency governs situations where one person (agent) is appointed to act as the representative of another (principal) in the context of contractual negotiations.  Generally, this system will be adopted for a number of reasons, for example it may not be practical for one person to personally enter into all the contracts he/she would wish.  Moreover, where a company enters into contractual negotiations, it is important that someone be appointed as an agent to act on behalf of that entity. Section 182 of the Indian Contract Act defines an agent as person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented is called the “principal”.

Essentials of a Contract of Agency :-

1. There should be an agreement between the principal and the agent:  

        It is an essential element of a valid agency. According to this element, the agency must be created by an agreement between the principal and the agent. Thus, there must be an agreement by which a person is appointed as an agent by the other. The agreement may be express (i.e., by words of mouth or of the case.

2. The agent must act in the representative capacity:  

        It is the most important essential element of a valid agency. The agent must act in the representative capacity, i.e., he must represent his relationship of his principal with the third persons. Thus the true nature of the relationship should be seen if the agent acts in representative capacity and had the power to bind his principal with the third persons, the relationship is that of ‘agency’.

3. The principal must be competent to contract (Sec 183)

         It is another important essential element of a valid agency. The principal must be competent to enter into a valid contract, i.e., he must be of sound mind, and have attained the age of majority (i.e., he should have completed 18 years of age). Thus, a minor or a person of unsound mind (i.e., insane person) cannot appoint an agent to act on his behalf [Section 183]. An appointment of an agent, made by an incompetent person is void. It may be noted that an agent acting on behalf of an incompetent principal will be personally liable, for his acts, to third persons with whom be contracts.

4. The agent need not be competent to contract (sec: - 184) 

        Generally, an agent incurs no personal liability while contracting on behalf of his principal. Therefore, it is not necessary that he should be competent to contract. Thus any person may become an agent and he need not be competent to contract [Section 184]. Even a minor can be appointed as agent, and the principal shall be bound by the acts of such an agent. It may, however, be noted that such an incompetent agent shall not be liable to the principal. Thus, the principal cannot recover any compensation from an incompetent agent for losses caused by misconduct or unauthorized acts of such agent. It is, therefore, in the interest of the principal to appoint a competent person as his agent.

5. The consideration is not necessary (sec: - 185) 

        An agency is valid even without consideration. Thus, no consideration is required for the creation of a valid agency relationship [Section 185]. Generally, an agent is remunerated by way of commission for the services rendered by him. However, no consideration is necessary for the validity of the appointment of the agent

Creation of Agency An agency may be created in the following ways:

By Express Authorit.The authority of any agency may be expressed in words spoken or written. For example, a contract of agency can be written by means of power of attorney.

By Implied Authority:

        The authority of an agent can be interred from the circumstances of the case. Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing the shop and is in the habit of ordering goods from C in the name of A for the purpose of the shop and of paying to them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

By Necessity: 

        Sometimes, exigencies of circumstances require a man to act for another as an agent, though not appointed as such. Illustration: A horse was sent by rail. The owner had not taken delivery of the same at the destination. So, the station master had to feed it. It was held that the station master had become an agent by necessity and was therefore entitled to recover the charges incurred by him.

Agency by necessity (in case of husband and wife) According to S142 Contract Act 1950, 

        An agency may arise by necessity or in an emergency. Agency of necessity means a person may become the agent of another without being appointed as such under certain circumstances. For example, a deserted wife or a wife who is justified in leaving her husband and she has not working, can claim for the necessities of life from her husband according to the income and position of the husband even though her husband unwilling to fulfill this pledge. However, if she is has been given an adequate allowance and can support her own life either in money or in earning capacity, then there is no arise of agency by necessity as in case Biberfield v. Berens [1952] 2 All ER 237.

By Holding Out: 

        Where a master usually sends his servant to pledge his credit for certain mangdfgfd he is bound by the acts of the servant for similar purposes though done without his consent.

By Estoppel: 

         When one man by words or conduct causes another to believe that some other person is his agent and that another person had acted on that belief, he would be stopped from denying the authority of that another person to act on his behalf. Illustration: a tells B in the presence and within the hearing of P that he (A) is P’s agent and P does not contradict this statement B, on the faith of this statement, subsequently enters into a contract with A, taking him to be P’s agent. P is bound by that contract.

By Ratification or Expost Eacto Agency: 

        Section 196 of the Indian Contract Act lays down that where acts are done by one person on behalf of another, but without his knowledge of authority, he may elect to ratify or to disown such acts. If he ratifies them the same effects will follow as if they had been performed by his authority. Thus ratification relates back to the date of the original contract and binds the principal as if he has expressly authorized it.

Termination of Contract of Agency:-

        Termination of agency may take place in two ways either by the operation of law or by the act of parties.

A. By operation of Law

B. By act of parties

Termination of agency by the operation of law. The following are the situations where the agency is terminated by the operation of law.

Expiry of time: 

        At times contract of agency may get formed for a particular period. In such a case after expiry of that agreed period, termination of agency takes place.

Fulfillment of object: 

        At times the contract of agency may be found for a particular objective or to do a particular venture. In such a case termination of agency takes place after completion of that venture.

Death or lunacy of either party (sec:-209)

         whenever principal or agent come across death or lunacy, agency contract gets terminated.

Insolvency of Principal: 

        Principal should have capacity to contract. When principal becomes insolvent, He foregoes capacity to contract and termination of agency takes place. But the act is silent with regard to insolvency of agent. As minor also can act as agent, it can be conformed that insolvent person may act as agent.

Destruction of subject matter:  

When subject matter of contract gets destructed, agency contract comes to an end.

Principal – Alien Enemy: When principal is alien and war breaks out between the countries, then principal becomes alien enemy and agency contract gets terminated.

Liquidation of company: On account of legal entity company may act either as principal or agent. Whatever the status may be, if company enters into liquidation, termination of agency takes place.

Termination of Sub-agency (sec:-210) When ever man agency gets terminated on account of any reason, sub-agency also goes off. 

Termination of agency by the act of Parties. 

The following are the situations where the agency is terminated by the act of parties.

Termination of agency by the Principal: 

        Principal can terminate the contract of agency by giving notice to agent. By doing so if agent comes across any suffering. Principal has to compensate the agent.

Termination of agency by the Agent:     

    Agent also can terminate the agency contract by giving notice to principal but by doing so if principal comes across any suffering, agent has to compensate.

Termination of agency by both the parties to the contract: 

        By means of mutual understanding between principal and agent, the contract of agency may come to an end.

Rights of an Agent :-

He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of misconduct, he is not entitled to receive the remuneration. Illustration: A employs B to recover Rs. 1000 from C. Through B’s misconduct, the money is not recovered. B is entitled to no remuneration for his services and must make good the loss.

He is entitled to retain the goods, papers and other property, movable on immovable, of the principal for his claims.

The agent has a right to be indemnified by the principal for all lawful acts. Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A does not send the goods to B and C sues B breach of contract. B informs A of the suit and A authorizes him to defend the suit. B defends and is compelled to pay damages etc. A is liable to B for such damages etc.

Duties of an Agent

He should act according to the directions of the principal and in default, indemnify the principal for the loss, if any

In the absence of instructions, he must act according to the trade custom. Illustration: A, an agent engaged in carrying on for B, a business, in which it is the custom, to invest from time to time, at interest the monies which may be in hand, omits to make such investment. A, must make good to B the interest usually obtained by such investment.

In case of difficulty, he must be diligent in communicating with the principal and obtaining his instruction.

He must conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of want of skill. Illustration: A, having authority to sell on credit, sells goods to B without enquiring about his solvency, B at the time of sale, is bankrupt. A must make good the loss.

He must render proper accounts on demand.

He must not delegate his authority without the consent of the principal.

He must deliver all monies including secret commission, to the principal. He can deduct his remuneration and other lawful expenses spent by him.

He should not set up his own title or title of third parties to the goods of the principal in hi hands.

If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree of skill ordinarily expected from the members of the profession. Illustration: A solicitor, who started the proceedings under a wrong section or filed a suit in a court having no jurisdiction, is liable.

He should not disclose confidential information. His interest should not conflict with his duty.

 Section 172 :

'The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor in this case is called the 'pawnor'. The bailee is called the 'pawnee' (Sec. 172)

Essential Features of Valid Pledge :-

    The legal definition of pledge, discussed in the last article, reveals the essential features of pledge which are as under 

1. Delivery of possession :- 

        It is an essential and important element of a valid pledge that the Possession of the goods must be delivered by the pawnor to the Pawnee. It may be noted that only the possession of the goods passes from one person to the other and not the ownership. The ownership remains with the pawnor. If the possession is not delivered then there cannot be a valid pledge. 

        The delivery of possession to the Pawnee may be of two kinds (a) actual delivery, (b) constructive delivery. Actual delivery means the delivery of physical possession. And constructive delivery means when there is no change of physical possession. The delivery of keys of a go down where the goods are stored is the constructive delivery. Similarly, the delivery of documents of titles which enables the Pawnee to obtain the possession is the constructive delivery of goods.

2. Delivery should be upon a contract :-

        It is another essential element of a valid pledge that the delivery of possession should be made in pursuance of a contract of pledge. Thus, the delivery of goods should be made with an intention to create a pledge. It is, however, not necessary that the delivery of the goods and the advance of money (i.e., loan) should be simultaneous. Delivery may be made before or in contemplation of advance. In such cases, a valid pledge results as soon as the advance is made. The delivery may also be made after getting the advance. In such cases, a valid pledge results as soon as the goods are delivered. 

3. Delivery should be for the purpose of security :-

        The goods should be delivered by one person to another by way of a security. The pawnor should deliver the goods to the Pawnee as a security for the payment of a loan or for the fulfillment of an obligation. It may be noted that this particular essential element distinguishes the pledge from other similar, transactions. Thus, where the object of delivery of goods is to provide a security for the payment of a loan, the transaction is a pledge. And where the delivery is for some other purpose then it may be a bailment and not a pledge. 

4. Delivery should be upon a condition to return :-

        It is also an important element of a valid pledge. The goods should be delivered to the Pawnee as a security for some loan or for the fulfillment of the promise. When such loan is repaid or promise is fulfilled, the security should be returned to the pawner

Duties of Pawnee :-

        Pledge being a special kind of bailment, the duties of a Pawnee is just like a bailee. Thus a pawnee’s duties may be enumerated as follows:

1. To take reasonable care of the goods pledged.

2. Not to make any unauthorized use of the goods pledged.

3. Not to mix the goods pledged with his own goods.

        Not to do nay act in violation of the terms of the contract of pledge and of the provisions of the Contract Act. For example, he should not sell the goods pledged without a reasonable notice to the pawnor.

To return the goods pledged on the receipt of his full dues.

        To deliver any accretion to the goods pledge, e.g., bonus shares must also be delivered where shares from the subject-matter of pledge. The accretion remains the property of the pawnor (M.R. Dhawan vs Madan Mohan)

 Rights of Pawnor :-

Enforcement of Pawnee’s duties,

Defaulting pawnor's right to redeem(Sec. 177)

Article 266 (1) of the Constitution of India, a Consolidated Fund Of State ( a separate fund for each state) has been established where all revenues both tax revenues such as Sales tax/VAT, stamp duty etc..and non-tax revenues such as user charges levied by State governments.

 

Consolidated Fund of India

Art- 266- Under Article 266 (1) of the Constitution of India, all revenues ( example tax revenue from personal income tax, corporate income tax, customs and excise duties as well as non-tax revenue such as licence fees, dividends and profits from public sector undertakings etc. ) received by the Union government as well as all loans raised by issue of treasury bills, internal and external loans and all moneys received by the Union Government in repayment of loans shall form a consolidated fund entitled the 'Consolidated Fund of India' for the Union Government.

Similarly, under Article 266 (1) of the Constitution of India, a Consolidated Fund Of State ( a separate fund for each state) has been established where all revenues ( both tax revenues such as Sales tax/VAT, stamp duty etc..and non-tax revenues such as user charges levied by State governments ) received by the State government as well as all loans raised by issue of treasury bills, internal and external loans and all moneys received by the State Government in repayment of loans shall form part of the fund.

The Comptroller and Auditor General of India audits these Funds and reports to the Union/State legislatures when proper accounting procedures have not been followed.

Contingency Fund of India

The Contingency Fund of India established under Article 267 (1) of the Constitution is in the nature of an imprest (money maintained for a specific purpose) which is placed at the disposal of the President to enable him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the Parliament. Approval of the legislature for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained to ensure that the corpus of the Contingency Fund remains intact. The corpus for Union Government at present is Rs 500 crore (Rs 5 billion) and is enhanced from time to time by the Union Legislature. The Ministry of Finance operates this Fund on behalf of the President of India.

Similarly, Contingency Fund of each State Government is established under Article 267(2) of the Constitution – this is in the nature of an imprest placed at the disposal of the Governor to enable him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the State Legislature. Approval of the Legislature for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained, whereupon the advances from the Contingency Fund are recouped to the Fund. The corpus varies across states and the quantum is decided by the State legislatures.

State the rights of a surety against the principal debtor, creditor and co-sureties.

Against principal debtor

Right of subrogation:-After paying the guaranteed debt, the surety steps into the shoes of the creditor and acquires all the rights which the latter had against the principal debtor (i.e., he gets subrogated to all the rights and remedies available to the creditor) (Sec. 140). 

If the creditor has the right to stop goods in transit or has a lien, the surety, on payment of all he is liable for, will be entitled to exercise these rights.

Right of indemnity :-

The surety is entitled to be indemnified by the principal debtor for all payments rightfully made by him (Sec. 145).

Right against the Creditor:-

1. Right to securities Sec(141)

2. Right to claim set off

3. Rights against the creditor

Right to securities Sec(141) :-

The surety can, after paying the guaranteed debt, compel the creditor to Assign to him all the securities taken by the creditor either before or at the time of the contract of guarantee, whether the surety was aware of them or not.

Claim to any set off :-

The surety on being called upon to pay can claim any set-off to which the principal debtor is entitled from the creditor.

Right against Co-sureties:-

Right to claim contribution

Surety can ask his co-sureties to contribute the amount when principal debtor comes across default. If they have given guarantee for equal amounts, they have to contribute equally. In case where guarantee is given for in equal amounts, the mode of contribution differs from England law to Indian law. 

As per England law contribution is to be made in the ratio of guarantee amounts. But as per Indian law the deficit amount is to be distributed to all sureties equally and every surety will contribute share of deficit or guarantee amount whichever is less.

Discuss the various kinds of Guarantee. and also discuss Revocation or termination of a continuing guarantee. A becomes surety to B for the amounts he lends to C up to Rs.10,000 at 20 percent per annum. Afterwards, when B had already lent Rs.6,000 to C they mutually agree that the rate of interest for the subsequent loans should be reduced to 10 percent only. A is discharged from the liability for the subsequent loans.

Kinds of Guarantee:-

A guarantee may be given for the payment of debt , for the payment of the price of goods sold on credit, the good conduct or honesty of a person employed in a particular office. In last case, the guarantee is called a fidelity guarantee. A guarantee may be given for existing or future , debt or obligation. In the former case it is called retrospective guarantee and in latter case it is termed as  prospective  guarantee. A guarantee may be in respect of a single transaction or a number of transactions.

Specific guarantee-

 When a guarantee extends to a single transaction or debt it is called as a specific  or simple  guarantee. It comes to an end when the guaranteed debt is duly discharged or the promise is duly performed.

Continuing guarantee- 

When a guarantee extends to a series of transactions, it is called as continuing guarantee( Sec. 129 ). The liability of the surety in case of a continuing guarantee extends to all the transactions contemplated until the evocation of guarantee.

 Examples 

S guarantees payment of C, a tea dealer, to the amount of Rs.10,000 for any tea he may from time to time supply to P. C supplies P with tea to the value above Rs.10,000 and P pays for it to C. Afterwards C supplies P with tea to the value of Rs.20,000P fails to pay it. The guarantee given by S is a continuing guarantee and he is accordingly  liable to C to extent of Rs.10,000. 

There can be continuing guarantee for a fixed period. A continuing guarantee only speaks of continuing transactions and not the period of such transactions

Revocation or termination of a continuing guarantee- A continuing guarantee may be revoked: 

1. By notice. A continuing guarantee may at any time be revoked by the surety as to the future transactions, by the notice to the creditor. ( Sec. 130)

2. By the death of surety. The death of the surety generally operates as a revocation of a continuing guarantee, so far as regards future transactions ( Sec. 131 )

3. By variance in terms of the contract. Any variance, made without surety’s consent, in the terms of the contract , between the principal debtor and the creditor, discharges  the surety as to the transactions subsequent to the variance. (Sec. 133 )    

Example. 

A becomes surety to B for the amounts he lends to C up to Rs.10,000 at 20 percent per annum. Afterwards, when B had already lent Rs.6,000 to C they mutually agree that the rate of interest for the subsequent loans should be reduced to 10 percent only. A is discharged from the liability for the subsequent loans.

4. By novation. A continuing guarantee can be also determined by the novation which means substitution of the new contract for the old one.

Release or discharge of principal debtor. 

If the principal debtor is released or discharged by any contract between the creditor and the principal debtor or by any act or the omission of the creditor, the continuing guarantee is terminated.( Sec. 134 )

Arrangement with the principal debtor. 

If without the consent of surety there is a contract between the creditor and the principal debtor, by which the creditor makes the composition of debt with the principal debtor or gives him time for the repayment of the debt or promises not to sue him, the continuing guarantee terminates .( Sec. 135 )

Act or omission imparting surety’s eventual remedy. 

If the creditor does any act which is inconsistent with the rights of the surety or omits to do any act which his duty to the surety requires him to do and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the continuing guarantee.

Loss of security

If the creditor loses, or without the consent of the surety parts with the security given to him by the principal debtor at the time of the contract , the continuing guarantee terminates. ( Sec. 141 )

The term agent applies to anyone who by authority performs an act for another, and includes a great many classes of persons to whom distinctive names are given.

 

Kinds of Agents: -  

    The term agent applies to anyone who by authority performs an act for another, and includes a great many classes of persons to whom distinctive names are given. There may be various types of agents whose powers and duties are settled by usage and custom of trade recognized by the courts of law. The important one are classified as under: 

1. Express or Implied Agents:- 

    An express agent is one who is appointed verbally or by writing. An implied agent is one whose appointment is to be inferred from the conduct of the parties. 

2. General, Special or Universal Agents:- 

    A general agent is one who is employed to transact generally all the business of the principal in regard to which he is employed. A special agent has only authority to do some particular act or represent his principal in some particular transaction. A universal agent is one who is authorized to transact all the business of his principal of every kind and to do all the acts which the principal can lawfully do and can delegate. 

3. Agent or Sub-agent:- 

    An agent derives his authority directly from the principal. A sub-agent derives his authority from the agent who has been appointed to do the act. One broad classification of agents is mercantile or commercial agents and non-mercantile or non-commercial agents. 

4. Mercantile Agents:- 

The following are some of the important mercantile agents.

Factor :- 

    A factor is a mercantile agent to whom possession of goods is given for sale. Generally speaking, he is a person to whom goods are consigned for sale by a merchant residing abroad, or at a distance from the point of sale. He usually sells the goods in his own name. He has ostensible authority to dispose of the goods or to do such things as are usual in the conduct of his business. He cannot barter or pledge the goods. He has a general lien for the balance of account as between himself and the principal. 

Auctioneer :-

    An auctioneer is an agent who is appointed to sell goods at a public auction for remuneration. He may or may not be entrusted with the possession or control of the goods which he sells. He may be agent both for the seller and buyer. The auctioneer can sue for the purchase price in his own name.  An auctioneer has implied authority to sell the goods without any restriction. Hence a sale by him in violation of the instruction is binding on the owner. If the owner directs the auctioneer not to sell below a reserve price and the auctioneer sells it below that price, the sale is even then binding on the owner except in cases where the buyer knew that there was limitation on the auctioneer’s authority. 

c) Broker:- 

    A broker is a mercantile agent who is employed to make contracts for the purchase and sale of goods for a commission called brokerage. A broker unlike a factor is not entrusted with the possession of the goods. Even the documents of title are not made over to him. His business is to find purchasers for those who wish to sell, and sellers for those who wish to buy. His duty is to bring parties together to bargain for them in various matters. He makes contracts in the name of his principal and not in his own name. He is a mere negotiator or in senses a middleman.

d) Commission Agent:- 

    A commission agent is a mercantile agent who in consideration of a certain commission engages to purchase or sell goods for his principal. He buys and sells goods in the market on the best terms and in his own name. His only interest in the transaction is his commission. All profits and losses accrue to the principal. A commission agent may or may not be in actual possession of the goods. His position is very similar to that of the broker. 

e) Del Credere Agent:- 

    A Del credere agent is an agent who is in consideration of a extra remuneration guarantees to his principal the performance of the contract by the other party. This Del Credere commission is a higher reward than is usually given in the form of commission. He occupies the position of a guarantor as well as of an agent. But his liability is secondary and arises only on the insolvency or failure of the other party. A Del Credere agent is appointed generally when the principal deals with persons about whom he knows nothing. A Del Credere agent is the person who is not dropped out after establishing the link between principal and third person. 

f) Banker:- 

    The relation between a banker and a customer is either that of debtor and creditor or of an agent and principal. When the banker advances money to this customer as a loan, banker is the creditor and customer the debtor. But the banker acts as agent of his customer when he buys or sells securities, collects cheques, dividends, bills, etc. on behalf of his customer. 

g) General Agent and Particular Agent:- 

    A general agent is one who represents the principal in all matters concerning a particular business. A particular agent is one who is appointed for a specific purpose e.g. to sell a particular article. Factors and commission agents are usually general agents. When general agents are appointed it is usual to execute a general power of attorney by which the agent is given authority to do certain things. A particular agent may be appointed by executing a special power of attorney by which the agent is authorized to do a specific thing. A power of attorney must be written and stamped. A man dealing with a particular agent is bound to find out the limits of the authority of the act and act accordingly. 

Non-Mercantile Agents:- 

    Non-mercantile agents include counsel, solicitor, guardian, promoters, wife, receiver, insurance agent etc. 

Centre State Relations Indian Constitution has made elaborate provisions, relating to the distribution of the taxes as well as non-tax revenues and the power of borrowing, supplemented by provisions for grants-in-aid by the Union to the States.

Introduction

        The Constitution of India provides a dual polity with a clear division of powers between the Union and the States, each being supreme within the sphere allotted to it. The Indian federation is not the result of an agreement between independent units, and the units of Indian federation cannot leave the federation.

        Thus the constitution contains elaborate provisions to regulate the various dimensions of the relations between the centre and the states. The relations between centre and state are divides as:

• Legislative relations

• Administrative relations 

•Financialrelations

 

LEGISLATIVE RELATIONS Articles 245 to 255 in Part XI of the Constitution deal with the legislative relations between the Centre and the State.

Extent of laws made by Parliament and by the Legislatures of States-

        The Parliament can make laws for the whole or any part of the territory of India. Territory of India includes the states, UTs and any other area for the time being included in the territory of India. Whereas, the state legislature can make laws for whole or any part of state. The Parliament can alone make ‘extra territorial legislation’ thus the laws of the Parliament are applicable to the Indian citizens and their property in any part of the world.

Subject-matter of laws made by Parliament and by the Legislation of States-

        The Constitution divides legislative authority between the Union and the States in three lists- the Union List, the State List and the Concurrent List. The Union list consists of 99 items. The Union Parliament has exclusive authority to frame laws on subjects enumerated in the list. These include foreign affairs, defense, armed forces, communications, posts and telegraph, foreign trade etc.

The State list consists of 61 subjects on which ordinarily the States alone can make laws. These include public order, police, administration of justice, prison, local governments, agriculture etc. The Concurrent list comprises of 52 items including criminal and civil procedure, marriage and divorce, economic and special planning trade unions, electricity, newspapers, books, education, population control and family planning etc. Both the Parliament and the State legislatures can make laws on subjects given in the Concurrent list, but the Centre has a prior and supreme claim to legislate on current subjects. In case of conflict between the law of the State and Union law on a subject in the Concurrent list, the law of the Parliament prevails.

Residuary powers of legislation (Art.248)

        The constitution also vests the residuary powers (subjects not enumerated in any of the three Lists) with the Union Parliament. The residuary powers have been granted to the Union contrary to the convention in other federations of the world, where the residuary powers are given to the States. However, in case of any conflict, whether a particular matter falls under the residuary power or not is to be decided by the court.

Parliament’s Power to Legislate on State List

        Though under ordinary circumstances the Central Government does not possess power to legislate on subjects enumerated in the State List, but under certain special conditions the Union Parliament can make laws even on these subjects.

a) In the National Interest (Art.249)

        If the Rajya Sabha declares by a resolution supported by not less than 2/3 of its members present and voting, that it is necessary or expedient in the national interest that the Parliament should make laws with respect to any matter enumerated in the State List (Art.249). After such a resolution is passed, Parliament can make laws for the whole or any part of the territory of India. Such a resolution remains in force for a period of 1 year and can be further extended by one year by means of a subsequent resolution.

b) Under Proclamation of National Emergency (Art.250)

        Parliament can legislate on the subjects mentioned in the State List when the Proclamation of National Emergency is in operation. However, the laws made by the Parliament under this provision shall cease to have effect on the expiration of a period of six months after the Proclamation has ceased to operate, except as respects things done or omitted to be done before the expiry of the said period.

c) By Agreement between States (Art. 252)

        The Parliament can also legislate on a State subject if the legislatures of two or more states resolve that it is lawful of Parliament to make laws with respect to any matter enumerated in the State List relating to those State.  Thereafter, any act passed by the Parliament shall apply to such states and to any other state which passes such a resolution. The Parliament also reserves the right to amend or repeal any such act.

d) To Implement Treaties (Art. 253) 

        The Parliament can make law for the whole or any part of the territory of India for implementing any treaty, international agreement or convention with any other country or countries or any decision made at any international conference, association or other body. Any law passed by the Parliament for this purpose cannot be invalidated on the ground that it relates to the subject mentioned in the State list.

e) Under Proclamation of President’s Rule (Art.356) 

        The President can also authorize the Parliament to exercise the powers of the State legislature during the Proclamation of President’s Rule due to breakdown of constitutional machinery in a state. But all such laws passed by the Parliament cease to operate six months after the Proclamation of President’s Rule comes to an end.

Centre’s control over State Legislation

The Constitution empowers the centre to exercise control over the state’s legislature in following ways:

a) The governor can reserve certain types of bills passed by the state legislature for the consideration of the President. The President enjoys absolute veto over them.

b) Bills on certain matters enumerated in the State List can be introduced in the state legislature only with the previous sanction of the President as imposing restrictions on freedom of trade and commerce.

c) The President can direct the states to reserve money bills and other financial bills passed by the state legislature for his consideration during a financial emergency.

Administrative Relations- 

        The administrative jurisdiction of the Union and the State Governments extends to the subjects in the Union list and State list respectively. The Constitution thus defines the clauses that deal with the administrative relations between Centre and States.

 DURING NORMAL TIMES

1. Executive Powers of State be exercised in compliance with Union Laws: Article 256         lays down that the executive power of every State shall be so exercised as to ensure compliance with the laws made by Parliament and any existing laws which apply in that State, and the executive power of the Union shall extend to the giving of such directions to a state as may appear to the Government of India to be necessary for that purpose.

2. Executive Powers of State not to interfere with Executive Power of Union: Article 257 of the Constitution provides 

        That the executive power of every state shall be so exercised as not to impede or prejudice the exercise of the executive power of the Union, and the executive power of the Union shall extend to giving of such directions to a state as may appear to the Government of India to be necessary for that purpose.  In short, the Union Government can issue directions to the state Government even with regard to the subjects enumerated in the state list.

3. Maintain means of communication of National or Military importance: 

        The Union Government can give directions to the state with regard to construction and maintenance of the means of communication declared to be of national or military importance.

4. Protection of the Railways: 

        Union can issue State Governments necessary directions regarding the measures to be taken for the protection of the railways within the jurisdiction of the State.  It may be noted that the expenses incurred by the State Governments for the discharge of these functions have to be reimbursed by the Union Government.

5. To ensure welfare of Scheduled Tribes in the States: 

        Union can direct the State Governments to ensure execution of schemes essential for the welfare of the Scheduled Tribes in the States.

6. To secure instruction in the mother-tongue at the primary stage of education: 

        Union can direct the State Governments to secure the provision of adequate facilities for instruction in the mother-tongue at the primary stage of education to children belonging to linguistic minority groups.

7. To ensure development of the Hindi language: 

Union can direct the State Governments to ensure the development of the Hindi language.

8. To ensure government of a State is carried on in accordance with the provision of the Constitution: 

        Union can direct the State Governments to ensure that the government of a State is carried on in accordance with the provision of the Constitution. If any State failed to comply with any directions given by the Union in exercise of its executive power, then President may hold that, a situation has arisen in which the Government of the State cannot be carried on in accordance with the provisions of the Constitution. Thus he may proclaim President’s Rule in that State.

9. Delegation of Union’s function to State: 

        The President of India can entrust to the officers of the State certain functions of the Union Government.  However, before doing so the President has to take the consent of the state Government.  But the Parliament can enact law authorizing the Central Government to delegate its function to the State Governments or its officers irrespective of the consent of such State Government. On the other hand, a State may confer administrative functions upon the Union, with the consent of the Union only.

10. Appointment of High Dignitaries: 

        Union has major say in appointment and removal of Governor and appointment of Judges of High Court and Members of State Public Service Commission.

11. All India Services: 

        The presence of the All India Services - the Indian Administrative Services, Indian police Services - further accords a predominant position to the Union Government.  The members of these services are recruited and appointment by the Union Public Service Commission.  The members of these services are posted on key posts in the states, but remain loyal to the Union Government.

12. Union to adjudicate Inter-State River Water Dispute: 

        The Parliament has been vested with power to adjudicate any dispute or complaint with respect to the use, distribution or control of the waters of, or in any inter-state river or river-valley. In this regard, the Parliament also reserves the right to exclude such disputes from the jurisdiction of the Supreme Court or other Courts.

DURING EMERGENCIES

1. Under President’s Rule: 

        The State Governments cannot ignore the directions of the Union Government, otherwise the President can take the action against the Government of the State stating that the administration cannot be carried on the accordance with the provisions of the Constitution and thus can impose President's rule on the State.  In such an eventuality the President shall assume to himself all or any of the functions of the state Government.

2. Under Proclamation of National Emergency: 

        During a Proclamation of National Emergency, the power of the Union to give directions extends to the giving of directions as to the manner in with the executive power of the State is to be exercised relating to any matter.

3. Under Proclamation of Financial Emergency: 

        During a Proclamation of Financial Emergency, Union can direct the State Governments to observe certain canons of financial propriety and to reduce the salaries and allowances of all or any class of person serving in connection with the affairs of the Union including the Judges of the Supreme Court and High Courts. Union also requires all Money Bills or Financial Bills to be reserved for the consideration of the President after they are passed by the Legislature of the State.

It is thus, evident that in the administrative sphere the States cannot act in complete isolation and have to work under the directions and in cooperation with the Center.

FINANCIAL RELATIONS

        Indian Constitution has made elaborate provisions, relating to the distribution of the taxes as well as non-tax revenues and the power of borrowing, supplemented by provisions for grants-in-aid by the Union to the States.

Article 268 to 293 deals with the provisions of financial relations between Centre and States.

• The Constitution divides the taxing powers between the Centre and the states as follows:

        The Parliament has exclusive power to levy taxes on subjects enumerated in the Union List, the state legislature has exclusive power to levy taxes on subjects enumerated in the State List, both can levy taxes on the subjects enumerated in Concurrent List whereas residuary power of taxation lies with Parliament only.

• The distribution of the tax-revenue between the Union and the States stands as follows:

a) Duties Levied by the Union but Collected and Appropriated by the States: Stamp duties on bills of Exchange, etc., and Excise duties on medical and toilet preparations containing alcohol. These taxes don’t form the part of the Consolidated Fund of India, but are assigned to that state only.

b) Service Tax are Levied by the Centre but Collected and Appropriated by the Centre and the States.

c) Taxes Levied as Well as Collected by the Union, but Assigned to the States: These include taxes on the sale and purchase of goods in the course of inter-state trade or commerce or the taxes on the consignment of goods in the course of inter-state trade or commerce.

d) Taxes Levied and Collected by the Union and Distributed between Union and the States: Certain taxes shall be levied as well as collected by the Union, but their proceeds shall be divided between the Union and the States in a certain proportion, in order to effect on equitable division of the financial resources. This category includes all taxes referred in Union List except the duties and taxes referred to in Article 268, 268-A and 269; surcharge on taxes and duties mentioned in Article 271 or any Cess levied for specific purposes.

e) Surcharge on certain duties and taxes for purposes of the Union: Parliament may at any time increase any of the duties or taxes referred in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part the Consolidated Fund of India.

• Grants-in-Aid Besides sharing of taxes between the Center and the States, the Constitution provides for Grants-in-aid to the States from the Central resources. There are two types of grants:-

1. Statutory Grants

2. Discretionary Grants

1. Statutory Grants: 

        These grants are given by the Parliament out of the Consolidated Fund of India to such States which are in need of assistance. Different States may be granted different sums. Specific grants are also given to promote the welfare of scheduled tribes in a state or to raise the level of administration of the Scheduled areas therein (Art.275).

2 Discretionary Grants:

     Center provides certain grants to the states on the recommendations of the Planning Commission which are at the discretion of the Union Government. These are given to help the state financially to fulfill plan targets (Art.282).

• Effects of Emergency on Center-State Financial Relations:-

1. During National Emergency: 

        The President by order can direct that all provisions regarding division of taxes between Union and States and grants-in-aids remain suspended. However, such suspension shall not go beyond the expiration of the financial year in which the Proclamation ceases to operate.

2. During Financial Emergency: Union can give directions to the States:-

a) To observe such canons of financial propriety as specified in the direction.

b) To reduce the salaries and allowances of all people serving in connection with the affairs of the State, including High Courts judges.

c) To reserve for the consideration of the President all money and financial Bills, after they are passed by the Legislature of the State.