Principle: A person is said to be of sound mind for the purpose of making a contract if, at the time…

The correct choice is: “Mr. X cannot enter into contract because he is of unsound state of mind when he entered into contract.”

The principle (Section 12 of the Indian Contract Act, 1872) makes soundness of mind depend on the person’s condition at the time when he makes the contract. Section 12 adds that a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. The facts state as a given that X was of unsound mind when he entered into the contract with Y. At that moment he was not capable of understanding it or forming a rational judgment about it, so he could not make a valid contract, and the agreement is void (Section 11). Y cannot enforce it.

The two ‘burden of proof’ options misstate the position. A person who is usually of sound mind is presumed sane, so whoever alleges unsoundness at the time of contracting must prove it. That would normally be X, since he is the one relying on it, but he would have to prove that he was of unsound mind, not sound mind. Here, however, the facts have already settled the point. So “Mr. X can enter into contract but the burden is on the other party to prove that he was of unsound state of mind at the time of contract.” and “Mr. X can enter into contract but the burden is on Mr. X to prove that he was of sound state of mind at the time of contract.” do not answer the question. “Mr. X can be sued by Mr. Y because a person who is usually of sound mind is always bound by his contracts.” contradicts the principle, which looks only at the time of contracting.