SUGGESTED ANSWERS BY ICAI FOR CA IPCC MAY 2011...

SUGGESTED ANSWERS BY

ICAI FOR CA IPCC

MAY 2011 EXAMS

(GROUP-I)

Compiled by: CAsmsindia Group

Source: www.icai.org

ATTENTION

Now you can Receive the Latest Updates to Download more such E-Books, Articles, Notes & Exam strategies on your Mobile for FREE.

Just SMS: ON CAsmsindia & send it to 9870807070. You also get the Latest Official News & Announcements of ICAI & the best of CAclubindia

directly on your Mobile through SMS.

STAY CONNECTED through CAsmsindia !!!

INDEX

S. NO. SUBJECT PAGE NO.

1. ACCOUNTING 1-24

2. BUSINESS LAWS, ETHICS & COMMUNICATION 25-39

3. COST ACCOUNTING & FINANCIAL MANAGEMENT 40-63

4. TAXATION 64-89

PAPER – 1 : ACCOUNTING Question No. 1 is compulsory

Answer any five questions from the remaining six questions. Wherever necessary suitable assumptions should be made by the candidates.

Working Notes should form part of the answer.

Question 1 Answer the following question: (a) The abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2011, are as follows:

Liabilities `

Equity share capital (` 100 each) 15,00,000 12% Preference share capital (` 100 each) 8,00,000 13% Debentures 3,00,000

On 31st March, 2011, BXE Ltd. agreed to take over AXE Ltd. on the following terms: (1) For each preference share in AXE Ltd., ` 10 in cash and one 9% preference share

of ` 100 in BXE Ltd. (2) For each equity share AXE Ltd. ` 20 in cash and one equity share in BXE Ltd. of

` 100 each. It was decided that the share in BXE Ltd. will be issued at market price ` 140 per share.

(3) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of ` 10,000. Actual expenses amounted to ` 12,500.

You are required to compute the amount of purchase consideration. (b) On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern

had taken an insurance policy of ` 60,000 which was subject to the average clause. From the books of accounts, the following particulars are available relating to the period 1st January to 30th March 2011. (1) Stock as per Balance Sheet at 31st December, 2010, ` 95,600. (2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000 (3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000. (4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000.

No approval has been received in respect of 2/3rd of the goods sold on approval. (5) The average rate of gross profit is 20% of sales. (6) The value of the salvaged goods was ` 12,300.

© The Institute of Chartered Accountants of India

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011

2

You are required to compute the amount of the claim to be lodged to the insurance company.

(c) Shiv and Mohan are partners in a firm sharing profits and losses equally. On 31st March, 2011, the balances of their capital accounts were ` 3,00,000 and ` 2,00,000 respectively. The average profits of the firm are ` 1,36,000 and the rate of normal profit is 20%.

On 1st April, 2011 they agreed to admit Hari as a partner for one fourth share. Hari will bring ` 1,00,000 as capital.

You are required to compute the value of the goodwill of the firm on admission of Hari, if goodwill is to be calculated on the basis of: (1) 5 years purchase of super profit (2) Capitalization method (3) 3 years purchase of average profit.

(d) On 1st April, 2010, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share (face value ` 10 each). He provides you the further information: (1) On 20th June, 2010, he purchased another 10,000 shares of P Ltd. at ` 16 per

share. (2) On 1st August, 2010, P Ltd. issued one equity bonus share for every six shares held

by the shareholders. (3) On 31st October, 2010, the directors of P Ltd. announced a right issue which entitle

the holders to subscribe three shares for every seven shares at ` 15 per share. Shareholders can transfer their rights in full or in part.

Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and subscribe the rest on 5th November, 2010.

You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2011. (4 х 5 = 20 Marks)

Answer (a) Calculation of purchase consideration

`

I Payment made to shareholders of 8,000* preference shares of AXE Ltd. :

Cash @ ` 10 per share (8,000 preference shares x ` 10) 80,000

* 8,00,000

100æ öç ÷è ø

= 8,000 preference shares


PAPER – 1 : ACCOUNTING

3

9% Preference shares in BXE Ltd. @ ` 100 each 8,00,000 8,80,000 II Payment made to Equity shareholders of 15,000* equity

shares of AXE Ltd. :

Cash @ ` 20 per share (15,000 shares x ` 20) 3,00,000 Equity shares in BXE Ltd. issued at market price ` 140

each (15,000 shares x ` 140)

21,00,000

24,00,000 Total purchase consideration 32,80,000

Note: Re-imbursement of liquidation expenses of AXE Ltd. to the extent of ` 10,000, will not be included in the calculation of purchase consideration.

(b) Computation of claim for loss of stock

` Stock on the date of fire i.e. on 30th March, 2011 (W.N.1) 62,600 Less: Value of salvaged stock (12,300) Loss of stock 50,300

Amount of claim = Insured valueTotal cost of stock on the date of fire

x Loss of stock

= 60,000 50,30062,600

æ ö´ç ÷è ø

48,211 (approx.)

A claim of ` 48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance company. Working Notes: 1. Calculation of closing stock as on 30th March, 2011

Memorandum Trading Account for (from 1st January, 2011 to 30th March, 2011)

Particulars Amount (`)


To Opening stock 95,600 By Sales (W.N.3) 2,42,000 To Purchases (1,70,000- 30,000)

1,40,000

By Goods with customers (for approval) (W.N.2)

26,400

To Wages (50,000 – By Closing stock (Bal. fig.) 62,600

* 15,00,000

100æ öç ÷è ø

= 15,000 equity shares



4

3,000) 47,000 To Gross profit (20% on sales)

48,400

3,31,000 3,31,000 2. Calculation of goods with customers Since no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of

` 49,500) hence, these should be valued at cost i.e. ` 33,000 – 20% of ` 33,000 = ` 26,400.

3. Calculation of actual sales Total sales – Sale of goods on approval = ` 2,75,000 – ` 33,000 = ` 2,42,000.

(c) Valuation of goodwill (1) 5 years purchase of super profit

` Average profit 1,36,000 Less : Normal profit @ 20% of (` 3,00,000+ ` 2,00,000) (1,00,000) Super profit 36,000

Value of goodwill = 5 ´Super profit = 5 ´ ` 36,000 = ` 1,80,000

Value of goodwill of the firm will be ` 1,80,000. (2) Capitalisation method

Normal value of business = Average profit Normal rate of profit

= 1,36,00020%

= ` 6,80,000

` Normal value of business 6,80,000 Less: Actual capital employed – Shiv – Mohan

3,00,000 2,00,000

(5,00,000)

Value of goodwill of the firm will be 1,80,000

(3) 3 years purchase of average profits Goodwill = 3 ´ Average profit



5

= 3 ´ ` 1,36,000 = ` 4,08,000 Value of goodwill of the firm will be ` 4,08,000. (d) In the books of Rajat

Investment Account (Equity shares in P Ltd. )

Date Particulars No. of shares

Amount (`)

Date Particulars No. of shares

Amount (`)

1.4.10 20.6.10

To Balance b/d To Bank A/c

50,000 10,000

7,50,000 1,60,000

5.11.10 By Bank A/c (sale of rights) (W.N.3)

-

20,000 1.8.10 To Bonus

issue (W.N.1) 10,000 - 31.3.11 By Balance c/d

(Bal. fig.) 90,000 11,90,000

5.11.10 To Bank A/c (right shares) (W.N.4)

20,000

3,00,000

90,000 12,10,000 90,000 12,10,000

Working Notes:

(1) Bonus shares = 50,000 + 10,0006

= 10,000 shares

(2) Right shares = 50,000 + 10,000 + 10,0007

3´ = 30,000 shares

(3) Sale of rights = 130,000 shares× ×3

` 2= ` 20,000

(4) Rights subscribed = ` 230,000 shares × × 153

= ` 3,00,000

Question 2 Amit and Sumit are partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet as on 31st March 2011 is given below:

Liabilities Amount `

Assets Amount `

Capital Accounts: Land & building 3,20,000 Amit 1,76,000 Investments (Market value ` 55,000) 50,000 Sumit 2,54,000 Debtors 3,00,000 Loan from Puneet 3,00,000 Less: Provision for doubtful debts 10,000 2,90,000



6

General Reserve 30,000 Stock 1,10,000 Employer’s provident fund 10,000 Cash at bank 50,000 Creditors 50,000 8,20,000 8,20,000 They decided to admit Puneet as a new partner from 1st April, 2011 on the following terms: (1) Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet. (2) Puneet’s loan account will be converted into his capital. (3) The Goodwill of the firm is valued at ` 3,00,000. Puneet will bring his share of goodwill in

cash and the same was immediately withdrawn by the partners. (4) Land and building was found undervalued by ` 1,00,000. (5) Stock was found overvalued by ` 60,000. (6) Provision for doubtful debts will be made equal to 5% of debtors. (7) Investments are to be valued at their market price. It was decided that the total capital of the firm after admission of new partner would be ` 10,00,000. Capital accounts of partners will be readjusted on the basis of their profit sharing ratio and excess or deficiency will be adjusted in cash. You are required to prepare: (a) Revaluation A/c (b) Partners’ capital A/cs (c) Balance Sheet of the firm after admission of a new partner (16 Marks) Answer

Revaluation A/c

Particulars ` Particulars `

To Stock 60,000 By Land & building 1,00,000 To Provision for doubtful debts 5,000 By Investments 5,000 To Profit transferred to Amit’s capital A/c 24,000 Sumit’s capital A/c 16,000 1,05,000 1,05,000



7

Partners’ Capital Accounts

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet ` ` ` ` ` ` To Amit’s capital A/c

-

-

60,000

By Balance b/d By Puneets' Loan A/c

1,76,000 -

2,54,000 -

- 3,00,000

To Puneet’s capital A/c

- - 30,000 By Puneet’s capital A/c

60,000

30,000

-

To Bank A/c 60,000 30,000 - By Bank A/c (W.N.2) - - 90,000 To Balance c/d

4,00,000

3,00,000

3,00,000

By Revaluation A/c

24,000 16,000 -

By General reserve

18,000

12,000

-

By Bank 1,82,000 18,000 - 4,60,000 3,30,000 3,90,000 4,60,000 3,30,000 3,90,000

Balance Sheet as on 1st April, 2011 (After admission of a new partner - Puneet)

Liabilities Amount Assets Amount ` ` Capital accounts Land and building (3,20,000 + 1,00,000) 4,20,000 Amit 4,00,000 Investments 55,000 Sumit 3,00,000 Debtors 3,00,000 Puneet 3,00,000 Less: Provision for doubtful debts (15,000) 2,85,000 Creditors 50,000 Stock (1,10,000 – 60,000) 50,000 Employers’ provident fund*

10,000

Cash at bank (W.N. 3) 2,50,000

10,60,000 10,60,000

Working Notes: (1) Calculation of incoming partner’s share, new profit sharing ratio and sacrificing

ratio Amit Sumit

Old profit sharing ratio 3/5 2/5

* It is assumed that Employer’s Provident Fund represents employer’s contribution to provident fund which is yet to be deposited. Hence, the same represents a current liability.



8

Surrendered by old partners 3/5 x 1/3 = 1/5 2/5 x 1/4 = 1/10 Remaining share 3/5 – 1/5 = 2/5 2/5 – 1/10 = 3/10

Puneet’s total share in profits = 1/5 + 1/10 = 3/10

New profit sharing ratio of Amit : Sumit : Puneet =2/5 : 3/10 : 3/10 = 4:3:3

Sacrificing ratio of Amit : Sumit is 1/5 : 1/10 : or 2:1

(2) Calculation of share of goodwill by old partners Goodwill of the firm was ` 3,00,000

Share of Puneet in goodwill = ` 3,00,000 3 10

´ = ` 90,000

Goodwill will be distributed among the old partners in their sacrificing ratio of 2:1 i.e. ` 60,000 by Amit and ` 30,000 by Sumit.

(3) Calculation of closing balance of bank account after admission Bank A/c

Particulars Amount Particulars Amount (`) (`) To Balance b/d 50,000 By Amit’s capital A/c 60,000 To Puneet’s capital A/c 90,000 By Sumit’s capital A/c 30,000 To Sumit’s capital A/c 18,000 By Balance c/d 2,50,000 To Amit’s capital A/c 1,82,000 3,40,000 3,40,000

Question 3 The Balance Sheet of Mars Limited as on 31st March, 2011 was as follow:

Liabilities ` Assets ` Share Capital: Fixed Assets: 1,00,000 Equity shares of ` 10 each fully paid up

10,00,000

Land and building Current Assets

7,64,000 7,75,000

Reserve and surplus Stock Capital reserve 42,000 Sundry debtors 1,60,000 Contingency reserve Profit and loss A/c

2,70,000 2,52,000

Less : Provision for doubtful debts 8,000

1,52,000



9

Current Liabilities & Provisions Bill receivable 30,000 Bills payable 40,000 Cash at bank 3,29,000 Sundry creditors 2,26,000 Provisions for income tax 2,20,000 20,50,000 20,50,000

On 1st April, 2011, Jupiter Limited agreed to absorb Mars Limited on the following terms and conditions: (1) Jupiter Limited will take over the assets at the following values:

`

Land and building 10,80,000 Stock 7,70,000 Bills receivable 30,000

(2) Purchase consideration will be settled by Jupiter Ltd. as under: 4,100 fully paid 10% preference shares of ` 100 will be issued and the balance will be settled by issuing equity shares of `10 each at ` 8 paid up.

(3) Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ` 5,000. (4) Sundry debtors realized ` 1,50,000. Bills payable were settled for ` 38,000. Income tax

authorities fixed the taxation liability at ` 2,22,000 and the same was paid. (5) Creditors were finally settled with cash remaining after meeting liquidation expenses

amounting to ` 8,000 You are required to: (i) Calculate the number of equity shares and preference shares to be allotted by Jupiter

Limited in discharge of purchase consideration (ii) Prepare the Realisation account, Bank account, Equity shareholders account and Jupiter

Limited’s account in the books of Mars Ltd. (16 Marks) Answer (i) Calculation of number of shares to be allotted

Particulars Amount (`) Land and building 10,80,000 Stock 7,70,000 Bills receivable 30,000 Total 18,80,000



10

Amount discharged by issue of preference shares 4,10,000 Number of preference shares to be issued (4,10,000/100) 4,100 shares Amount discharged by issue of equity shares (` 18,80,000 – 4,10,000) 14,70,000 Number of equity shares to be issued (` 14,70,000 / 8) 1,83,750 Shares

(ii) Ledger Accounts in the books of Mars Limited Realization Account

Particulars ` Particulars ` To Land and building 7,64,000 By Provision for doubtful debts 8,000 To Stock 7,75,000 By Bills payable 40,000 To Sundry debtors 1,60,000 By Sundry creditors 2,26,000 To Bills receivable 30,000 By Provision for taxation 2,20,000 To Bank A/c –liquidation expenses

3,000 By Jupiter Ltd. (purchase consideration)

18,80,000

To Bank A/c- bills payable 38,000 By Bank A/c- sundry debtors 1,50,000 To Bank A/c –income tax 2,22,000 To Bank A/c –sundry creditors 2,16,000 To Profit transferred to equity shareholders A/c

3,16,000

25,24,000 25,24,000

Bank Account

Particulars ` Particulars ` To Balance b/d To Realisation A/c (payment received

3,29,000 By Realisation A/c (liquidation expenses)

3,000

from debtors) 1,50,000 By Jupiter Ltd. 5,000 To Jupiter Ltd. (liquidation expenses) 5,000 By Bills payable 38,000 By Income tax 2,22,000

By Sundry creditors (Bal.fig.)

2,16,000

4,84,000 4,84,000

Equity Shareholders Account

Particulars ` Particulars ` To 10% Preference shares 4,10,000 By Equity share capital A/c 10,00,000



11

in Jupiter Limited By Capital reserve 42,000 To Equity shares in Jupiter Limited

14,70,000 By Contingency reserve By Profit and loss A/c

2,70,000 2,52,000

By Realisation A/c (profit) 3,16,000 18,80,000 18,80,000

Jupiter Limited Account

Particulars ` Particulars ` To Realisation A/c 18,80,000 To 10% Preference shares in

Jupiter Limited 4,10,000

To Equity shares in Jupiter Limited

14,70,000

18,80,000 18,80,000

Question 4 The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March 2010 and 2011:

Liabilities 31-3-2010 `

31-3-2011 `

Equity share capital (` 10 each) 10,00,000 12,50,000 Capital reserve 10,000 Profit and loss A/c 4,00,000 4,80,000 Long term loan from the bank 5,00,000 4,00,000 Sundry creditors 5,00,000 4,00,000 Provision for taxation 50,000 60,000 24,50,000 26,00,000 Assets ` `

Land and building 4,00,000 3,80,000 Machinery 7,50,000 9,20,000 Investment 1,00,000 50,000 Stock 3,00,000 2,80,000 Sundry debtors 4,00,000 4,20,000 Cash in hand 2,00,000 1,40,000 Cash at bank 3,00,000 4,10,000 24,50,000 26,00,000



12

Additional information: (1) Depreciation written off on land and building ` 20,000. (2) The company sold some investment at a profit of ` 10,000, which was credited to Capital

Reserve. (3) Income-tax provided during the year ` 55,000. (4) During the year, the company purchased a machinery for ` 2,25,000. They paid

` 1,25,000 in cash and issued 10,000 equity shares of ` 10 each at par. You are required to prepare a cash flow statement for the year ended 31st March 2011 as per AS 3 by using indirect method. (16 Marks)

Answer In the books of Lotus Ltd.

Cash Flow Statement for the year ending 31st March, 2011

` ` I Cash flow from Operating Activities Net Profit before tax for the year (W.N.1) 1,35,000 Add: Depreciation on machinery (W.N.2) 55,000 Depreciation on land & building 20,000 Operating profit before change in working capital 2,10,000 Add: Decrease in stock 20,000 Less: Increase in sundry debtors (20,000) Less: Decrease in sundry creditors (1,00,000) Cash generated from Operations 1,10,000 Less: Income tax paid (W.N.3) (45,000) Net cash generated from operating activities 65,000 II Cash flow from Investing activities Purchase of machinery (2,25,000 – 1,00,000) (1,25,000) Sale of investment (W.N. 4) 60,000 Net cash used in investing activities (65,000) III Cash flow from financing activities Issue of equity shares (2,50,000-1,00,000) 1,50,000 Repayment of long term loan (1,00,000) Net cash generated from financing activities 50,000 Net increase in cash and cash equivalents 50,000



13

Cash and cash equivalents at the beginning of the year (2,00,000 + 3,00,000)

5,00,000

Cash and cash equivalents at the end of the year (1,40,000+4,10,000)

5,50,000

Working Notes: 1. Calculation of Net Profit before tax

` Increase in Profit & Loss (Cr.) balance 80,000 Add: Provision for taxation made during the year 55,000 1,35,000

2. Calculation of Depreciation charged during the year on Machinery account Particulars Amount (`) Particulars Amount (`) To Balance b/d 7,50,000 By Depreciation (Bal.fig.) 55,000 To Bank 1,25,000 By Balance c/d 9,20,000 To Equity share capital 1,00,000 9,75,000 9,75,000

3. Calculation of tax paid during the year Provision for Taxation A/c

Particulars Amount (`) Particulars Amount (`) To Cash (Bal.fig.) 45,000 By Balance b/d 50,000 To Balance c/d 60,000 By Profit and Loss A/c 55,000 1,05,000 1,05,000

4. Calculation of sales value of investment sold Investment A/c

Particulars Amount (`) Particulars Amount (`) To Balance b/d 1,00,000 By Bank A/c (Bal.fig.) 60,000 To Capital reserve (Profit on sale of investments)

10,000

By Balance c/d 50,000

1,10,000 1,10,000



14

Question 5 The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31st March, 2011.

Receipt Amount (`) Payments Amount (`)

To Balance b/d 1,02,500 By Salaries 2,08,000 To Subscriptions* By Stationery 40,000 2009-10 4,500 By Rent 60,000 2010-11 2,11,000 By Telephone expenses 10,000 2011-12 7,500 2,23,000 By Investment 1,25,000 To Profit on sports meet 1,55,000 By Sundry expenses 92,500 To Income from investments 1,00,000 By Balance c/d 45,000 5,80,500 5,80,500 Additional information: (1) There are 450 members each paying an annual subscription of ` 500. On 1st April, 2010

outstanding subscription was ` 5,000. (2) There was an outstanding telephone bill for ` 3,500 on 31st March, 2011. (3) Outstanding sundry expenses as on 31st March, 2010 totalled ` 7,000. (4) Stock of stationery: On 31st March, 2010 ` 5,000 On 31st March, 2011 ` 9,000 (5) On 31st March, 2010 building stood in the books at ` 10,00,000 and it was subject to

depreciation @ 5% per annum. (6) Investment on 31st March, 2010 stood at ` 20,00,000. (7) On 31st march, 2011, income accrued on the investments purchased during the year

amounted to ` 3,750. Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the Balance Sheet as at that date. (16 Marks)

* In the questions paper, the years have been wrongly printed as 2008-09 (instead of 2009-10), 2009-10 (instead of 2010-11) and 2010-11 (instead of 2011-12). However, in the question given above, these corrections have been incorporated.



15

Answer Park View Club

Income and Expenditure Account for the year ending on 31st March 2011

Expenditure Amount (`)

Income Amount (`)

To Salaries 2,08,000 By Subscriptions (W.N. 2) 2,25,000 To Stationery consumed (W.N.3) 36,000 By Profit on sports meet 1,55,000 To Rent 60,000 By Income on investments 1,00,000 To Telephone expenses 10,000 Add: Outstanding on 31.3.11 3,500

13,500

Add: Income accrued 3,750 1,03,750

To Sundry expenses 92,500 Less: Outstanding on 31.3.10 (7,000) 85,500 To Depreciation of building 50,000 To Surplus (excess of income over expenditure)

30,750

4,83,750 4,83,750

Balance Sheet as at 31st March 2011

Liabilities Amount (`)

Assets Amount (`)

Capital fund (W.N.1) 31,05,500 Outstanding subscriptions 14,500 Add: Surplus 30,750 Subscriptions received in advance Outstanding telephone bills

31,36,250 7,500 3,500

Investment (20,00,000+1,25,000) 21,25,000 Add: Interest accrued on investments 3,750 Building 10,00,000

21,28,750

Less: Depreciation (50,000) 9,50,000 Stock of stationery 9,000 Cash balance 45,000 31,47,250 31,47,250

Working Notes: (1) Balance Sheet as at 31st March 2010

Liabilities Amount (`) Assets Amount (`) Outstanding sundry expenses 7,000 Building 10,00,000



16

Capital fund (Bal.fig.) 31,05,500 Investments 20,00,000 Stock of stationery 5,000 Cash balance 1,02,500 Outstanding subscriptions 5,000 31,12,500 31,12,500

(2) Calculation of subscriptions accrued during the year Subscription A/c



To Outstanding Subscriptions (as on 1.4.10)

5,000 By Cash A/c By Outstanding subscriptions

2,23,000

To Income & Expenditure A/c 2,25,000 (as on 31.3.11) (Bal.fig.) 14,500 To Subscriptions received in advance for 2011-12

7,500

2,37,500 2,37,500 (3) Calculation of stationery consumed during the year

` Stock of stationery as on 31 March, 2010 5,000 Add: Purchased during the year 2010-11 40,000 45,000 Less: Stock of stationery as on 31st March, 2011 (9,000) Stationery consumed 36,000

Question 6 Mr A runs a business of readymade garments. He closes the books of accounts on 31st March, 2010. The Balance Sheet as on 31st March, 2010 was as follows:

Liabilities ` Assets `

A’s capital a/c 4,04,000 Furniture 40,000 Creditors 82,000 Stock 2,80,000 Debtors 1,00,000 Cash in hand 28,000 Cash at bank 38,000 4,86,000 4,86,000



17

You are furnished with the following information: (1) His sales, for the year ended 31st March, 2011 were 20% higher than the sales of

previous year, out of which 20% sales was cash sales. Total sales during the year 2009-10 were ` 5,00,000. (2) Payments for all the purchases were made by cheques only. (3) Goods were sold for cash and credit both. Credit customers pay be cheques only. (4) Deprecition on furniture is to be charged 10% p.a. (5) Mr A sent to the bank the collection of the month at the last date of the each month after

paying salary of ` 2,000 to the clerk, office expenses `1,200 and personal expenses ` 500.

Analysis of bank pass book for the year ending 31st March 2011 disclosed the following:

`

Payment to creditors 3,00,000 Payment of rent up to 31st March, 2011 16,000 Cash deposited into the bank during the year 80,000 The following are the balances on 31st March, 2011:

`

Stock 1,60,000 Debtors 1,20,000 Creditors for goods 1,46,000 On the evening of 31st March 2011, the cashier absconded with the available cash in the cash book. You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2011 and Balance Sheet as on that date. All the workings should form part of the answer. (16 Marks)

Answer Trading and Profit and Loss Account for the year ending 31st March 2011

Particulars ` Particulars ` To Opening stock 2,80,000 By Sales (W.N. 3) To Purchases (W.N. 1) 3,64,000 Credit 4,80,000 To Gross profit 1,16,000 Cash 1,20,000 6,00,000 By Closing stock 1,60,000 7,60,000 7,60,000



18

To Salary 24,000 By Gross profit 1,16,000 To Rent 16,000 To Office expenses 14,400 To Loss of cash (W.N. 6) 23,600 To Depreciation on furniture 4,000 To Net Profit 34,000 1,16,000 1,16,000

Balance Sheet as on 31st March, 2011

Liabilities ` Assets ` A’s Capital 4,04,000 Furniture 40,000 Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000 Less: Drawings (6,000) 4,32,000 Stock 1,60,000 Debtors 1,20,000 Creditors 1,46,000 Cash at bank 2,62,000 5,78,000 5,78,000 Working Notes: (1) Calculation of purchases

Creditors Account

Particulars ` Particulars `

To Bank A/c 3,00,000 By Balance b/d 82,000 To Balance c/d 1,46,000 By Purchases (Bal.fig.) 3,64,000 4,46,000 4,46,000

(2) Calculation of total sales

`

Sales for the year 2009-10 5,00,000 Add: 20% increase 1,00,000 Total sales for the year 2010-11 6,00,000

(3) Calculation of credit sales

`

Total sales 6,00,000



19

Less: Cash sales (20% of total sales) (1,20,000) 4,80,000

(4) Calculation of cash collected from debtors Debtors Account

Particulars ` Particulars ` To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000 To Sales A/c 4,80,000 By Balance c/d 1,20,000 5,80,000 5,80,000

(5) Calculation of closing balance of cash at bank Bank Account

Particulars ` Particulars ` To Balance b/d 38,000 By Creditors A/c 3,00,000 To Debtors A/c 4,60,000 By Rent A/c 16,000 To Cash A/c 80,000 By Balance c/d 2,62,000 5,78,000 5,78,000

(6) Calculation of the amount of cash defalcated by the cashier

` Cash balance as on 1st April 2010 28,000 Add: Cash sales during the year 1,20,000 1,48,000 Less:Salary (` 2,000x12) 24,000 Office expenses (` 1,200 x 12) 14,400 Drawings of A (` 500x12) 6,000 Cash deposited into bank during the year 80,000 1,24,400 Cash balance as on 31st March 2011 (defalcated by the cashier) 23,600

Question 7 Answer any four of the following: (a) A and B are partners in a firm and share profits and losses equally. A has withdrawn the

following sum during the half year ending 30th June 2010:



20

Date Amount `

January 15 5,000 February 10 4,000 April 5 8,000 May 20 10,000 June 18 9,000

Interest on drawings is charged @ 10% per annum. Find out the average due date and calculate the interest on drawings to be charged on 30th June 2010.

(b) Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of closing of its accounts for the year ending 31st March 2011, the historical cost and net realizable value of the items of the closing stock are determined as follows:

Items Historical cost `

Net realizable value `

P 5,70,000 4,75,000 Q 9,80,000 10,32,000 R 3,16,000 2,89,000 S 4,25,000 4,25,000 T 1,60,000 2,15,000

What will be the value of closing stock for the year ending 31st March, 2011 as per AS 2 “Valuation of Inventories”?

(c) X,Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On 31st March, 2011 Y retires and X and Z decide to share profits and losses in the ratio of 5:3. Then immediately, W is admitted for 3/10th shares in profits, 2/3rd of which was given by X and rest was taken by W from Z . Goodwill of the firm is valued at ` 2,16,000 W brings required amount of goodwill.

Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W if they do not want to raise goodwill in the books of accounts.

(d) “In business today, the accounts which were earlier maintained in a manual form, are replaced with computerized accounts”. Explain the significance of computerized accounting system in modern time.

(e) On 1st October, 2010, the debit balances of debtors account is ` 77,500 in the books of M/s Zee Ltd. Transactions during the 6 months ended on 31st March 2011 were as follows:



21

`

Total sales (including cash sales ` 14,000) 84,000 Payment received from debtors in cash 38,000 Bills receivable received 26,000 Discount allowed to customers for prompt payment 1,000 Goods rejected and returned back by the customer 2,550 Bad debts recovered (written off in 2009) 900 Interest debited for delay in payment 1,250

You are required to prepare a Debtors Account for the period ending 31st March in the General of M/s Zee Ltd. (4 х 4 = 16 Marks)

Answer (a) Calculation of Average due date

(Base Date 15th Jan, 2010) Date Amount

` No. of days Product

` January 15 5,000 0 0 February 10 4,000 26 1,04,000 April 5 8,000 80 6,40,000 May 20 10,000 125 12,50,000 June 18 9,000 154 13,86,000 36,000 33,80,000

Average due date = Base date + Total product daysTotal amount

´

= 15th Jan + 33,80,00036,000

days

= 15th Jan + 94 days (approx.) = 19th April, 2010

Number of days from 19th April, 2010 to 30th June, 2010 = 72 days Interest on drawings from 19th April to 30th June @10%:



22

= ` 36,000 72 10365 100

´ ´

= ` 710 Hence, interest on drawings ` 710 will be charged from A on 30th June, 2010.

(b) As per para 5 of AS 2 “Valuation of Inventories, inventories should be valued at the lower of cost and net relizable value. Inventories should be written down to net realizable value on an item-by-item basis. Valuation of inventory (item wise) for the year ending 31st March 2011

Item Historical Cost Net realizable value Valuation of closing stock

` ` ` P 5,70,000 4,75,000 4,75,000 Q 9,80,000 10,32,000 9,80,000 R 3,16,000 2,89,000 2,89,000 S 4,25,000 4,25,000 4,25,000 T 1,60,000 2,15,000 1,60,000 23,29,000

The value of inventory for the year ending 31st March 2011 = ` 23,29,000. (c) Journal Entries

Date Particulars L.F. Dr. (`) Cr.(`) 31.3.11 X’s capital A/c Dr. 39,000 Z’s capital A/c Dr. 33,000 To Y’s capital A/c (3/9 х ` 2,16,000) 72,000 (Being Y’s share of goodwill adjusted in the capital

accounts of gaining partners in their gaining ratio 13:11 – Refer Working Note.)

Cash A/c Dr. 64,800 To W’s capital A/c (3/10 х ` 2,16,000) 64,800 (Being the amount of goodwill brought in by W) W’s capital A/c Dr. 64,800 To X’s capital A/c 43,200 To Z’s capital A/c 21,600 (Being the goodwill credited to sacrificing partners in

their sacrificing ratio 2:1)



23

Working Note: Calculation of gaining ratio of X and Z Gaining ratio = New ratio – Old ratio For X = 5/8-4/9 = 13/72 Z = 3/8-2/9 = 11/72 Gaining ratio = 13:11

(d) In modern time, computerized accounting systems are used in various areas. The significance of the computerized accounting system is as follows: (1) Increase speed, accuracy and security - In computerized accounting system, the

speed with which accounts can be maintained is several fold higher. Besides speed, level of accuracy is also high in computerized accounting system.

(2) Reduce errors - In computerized accounting, the possibilities of errors are also very less unless some mistake is made while recording the data.

(3) Immediate information - In this system, with an entry of a transaction, corresponding ledger posting is done automatically. Hence, trial balance will also be automatically tallied and the user will get the information immediately.

(4) Avoid duplication of work - Computerized accounting systems also remove the duplication of the work.

(e) Total Debtors account in the General Ledger of M/s Zee Ltd. Date Particulars Amount Date Particulars Amount ` ` 1.10.10 To Balance c/d 77,500 1.10.10 to

31.3.11 By General Ledger Adjustment A/c:

1.10.10 to 31.3.11

To General Ledger Adjustment A/c:

Cash collected 38,000

Sales (84,000-14,000) 70,000 Bills Receivable A/c 26,000

Bills receivable Discount allowed 1,000 (Bill dishonored) 8,500 Sales return 2,550 Bank (Noting charges) 250 31.3.11 By Balance c/d 89,950

Interest 1,250 1,57,500 1,57,500



24

Working Note: 1. Bad debts of the year 2008-09 recovered in 2010-11 will not appear in the ‘Total

Debtors account. It will be credited to profit & loss account. 2. Bills receivables of ` 5,000 endorsed to the supplier will not be shown in the ‘Total

Debtors account because at the time of endorsement Supplier’s account will be debited and Bills receivable account will be credited.


PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION Question No. 1 is compulsory.

Attempt any five questions from the remaining six questions.

Question 1 (a) What is the law relating to determination of compensation, on breach of contract,

contained in section 73 of the Indian Contract Act, 1872 ? (5 Marks) (b) (I) State whether the following statements are correct or incorrect.: (2 х 1= 2 Marks)

(i) An agreement with a minor may be ratified on his attaining majority. (ii) A cheque marked “Not-Negotiable” is not transferable.

(II) Choose the correct answer from the following : (3 х 1= 3 Marks) (i) Which one of the following statements is not true about minor’s position in the

firm: (a) He can not become a partner in the firm. (b) A minor and a major can enter into an agreement of partnership. (c) He can be admitted to the benefits in the firm. (d) He can become a partner on becoming a major.

(ii) The delivery of goods by one person to another for some specific purpose and time is known as: (a) Mortage (b) Pledge (c) Bailment (d) Charge

(iii) An agency in which the agent himself has interest in the subject matter of agency is called: (a) Agency by estoppel (b) Agency by holding out (c) Agency by necessity (d) Agency coupled with interest

(c) Explain clearly the concept of “perpetual-succession and “common-seal” in relation to a company incorporated under the Companies Act, 1956. (5 Marks)

(d) What is the law and procedure relating to registration of a non-profit organization as a company under the Companies Act, 1956 ? (5 Marks)



26

Answer (a) Compensation on Breach of Contract: Section 73 of the Indian Contract Act, 1872

provides that when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from such breach or which the parties knew when they made the contract, to be likely to result from the breach of it. Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach. The explanation to the section further provides that in estimating the loss or damage from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

(b) (I) (i) Incorrect (ii) Incorrect (II) (i) (b) A minor and a major can enter into an agreement of partnership.

(ii) (c) Bailment. (iii) (d) Agency coupled with interest

(c) Perpetual Succession and Common Seal: A company is a juristic person with a perpetual succession. It never dies nor does its life depends upon the life of its members. It is not in any manner affected by insolvency, mental disorder or retirement of any of its members. It is created by a process of law and can be put to an end only by the process of law. Members may come and go but the company can go on forever (until dissolved). It continues to exist even if all its human members are dead.

Since a company had independent existence and since all acts of the company are done in the name of the company, it enjoys a “Seal” known as common seal. Common seal is equivalent to signature of the company and is affixed on all documents issued by the company. Common seal of the company is kept in safe custody by a responsible officer of the company.

(d) Registration of Non-Profit Organisation: An association of persons set up for promoting commerce, art, science, religion, charity or any other useful object and intends to apply its profits or other income in promotion of its objects can be registered as a company under the Companies Act, 1956. However, it has to prohibit payment of any dividend to its members.

The association has to apply to the Central Government for issuing a licence. Through this licence the Central Government shall direct the Registrar of Companies to register the association as a company with limited liability without the addition of words “limited” or “private limited” to its name. Therefore, the association may be registered accordingly.


PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

27

The association has to fulfill the conditions needed for registration as a company, i.e. it must have its name, its Memorandum of Association, its Articles of Association and signatures of its founder members with two witnesses. On registration it will have the same privileges and obligations as a limited company has.

Question 2 (a) During the financial year 2010-2011 Mr. Ram was a temporary employee in Ayurved

Products Limited and drawing a salary of ` 6000/- per month . On the basis of charge of violent behavior within the premises of the company, he was prevented from working in the company for 60 days pending inquiry. Since there was no adverse conclusion against him, he was reinstated in the service with back salary. He worked for the remaining ten months in that financial year and thereafter resigned from the service. Afterwards, when bonus was paid to others employees, the company refused to pay bonus to Mr. Ram. Decide, whether Mr. Ram will be entitled to bonus under the provisions of the Payments of Bonus Act, 1965? (8 Marks)

(b) State the elements which create discrimination in employment in the business organizations. (8 Marks)

Answer (a) Payment of Bonus: As per Section 9 of the Payment of Bonus Act, 1965, an employee

shall be disqualified from receiving bonus under this Act, if he is dismissed from service for (a) fraud; or (b) riotous or violent behavior while on the premises of the establishment; or (c) theft, misappropriation or sabotage of any property of the establishment.

If an employee is guilty of riotous and disorderly behavior he is disqualified for bonus but if such employee because of riotous act, is being prevented from working in the company, pending enquiry and later on he is reinstated as there is no adverse findings, with back wages, will be entitled for bonus [Gannon India Ltd. Vs. Niranjan Das (1984) 2LLJ.223].

In the given case Mr. Ram has worked as a temporary employee for 10 months continuously, so he is qualified and entitled to bonus. Here, a temporary workman is also entitled to bonus on the basis of total number of days which he has completed. After completion of the required period of services for the entitlement to bonus if a workman resigns, he will be entitled to bonus.

Therefore, refusal of company is not valid and Mr. Ram will be entitled to the bonus from every angle according to Section 9 of the Payment of Bonus Act, 1965.

(b) Elements of Discrimination: Generally, the discrimination means to distinguish one object from another or treating people differently. It is usually intended to refer to the



28

wrongful act of making a difference in treatment or favour on a basis other than individual merit. Such discrimination may also be related in employment in business organization. The elements which create discrimination may be summarized as follows: (i) If the decision against one or more employees is taken which is not based on

individual merit, such as the ability to perform a given job, seniority or other morally legitimate qualification.

(ii) If the decision has been derived solely from racial or sexual prejudice, false stereotypes other kind of morally unjustified attitude against members of which the employee belongs.

(iii) If the decision has a harmful or negative impact on the interests of the employees, perhaps costing them jobs, promotions or better pay.

Discrimination in employment is wrong because it violates the basic principle of justice by differentiating between people on the basis of characteristics (race or sex) that are not relevant to the tasks they must perform. Looking to these aspects law has also been changed to conform to these moral requirements and to minimize the discrimination in employment in this respect.

Question 3 (a) How is the amount of gratuity, payable to employees in a seasonal as well as other

establishments, calculated under the provisions of the Payment of Gratuity Act, 1972? What is the maximums amount of gratuity payable under the said Act ? (8 Marks)

(b) What are the tips for improving inter-personal skills in a business organization ? (8 Marks)

Answer (a) Payment of Gratuity: Section 4 of the Payment of Gratuity Act, 1972 stipulates the manner in which the

amount of gratuity payable to an employee will be calculated. In the case of establishments other than seasonal establishments, the employer shall pay

the gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of 6 months. In the case of piece rated employees, daily wages shall be computed on the average of the total wages received by him for a period of 3 months immediately preceding the termination of his employment and for this purpose the wages paid for any overtime work shall not be taken into account.

In the case of a monthly rated employee 15 days wages shall be calculated by dividing the monthly rate of wages last drawn by 26 and by multiplying the quotient by 15.

In the case of seasonal establishment the employees can be classified into two groups – (i) Those who work throughout the year and



29

(ii) Those who work only during the season. The former are entitled to get the gratuity at the rate of 15 days wages for every

completed year of service or part thereof in excess of 6 months. The latter are entitled to receive gratuity at the rate of 7 days for each season.

As per the Payment of Gratuity (Amendment) Act, 2010, the ceiling on the gratuity amount ` 3,50,000 has been increased to ` 10 lakhs.

(b) Tips for improving interpersonal skills: Lines of communication must be open between people who rely on one another to get

work done. Poor interpersonal communication skills, which include active listening, result in low productivity simply because one does not have the tools needed to influence, persuade and negotiate which are necessary for workplace success. To get this success the following tips are suggested: (i) Congruency in communication elements: If the words used are incongruent with

the other interpersonal communication dynamics interpersonal communication is adversely affected. Since communication is shared meaning, words must send the same message as the other interpersonal communication dynamics – body language, facial expression, posture, movement, tone of voice to help emphasize the truth, sincerity and reliability of the communication. A consistent message ensures effective communication.

(ii) Listening effectively: Effective or active listening is very important skill to enhance interpersonal communication. Listening helps to build strong personal relationships. The process of communication completes when the message as intended by the sender is understood by the receiver. Most of the persons assume that listening is natural trait, but practically very few of us listen properly. One needs to give the communicator of the message sufficient attention and make an effort to understand his view point.

Question 4 (a) Whether shares at premiums can be issued by a company ? What are the purposes for

which the share premium account can be used under the provisions of the Companies Act, 1956 ? (8 Marks)

(b) What are the fundamental principles of ethics applicable to the persons of finance and accounting profession ? (4 Marks)

(c) Explain the merits and limitations of oral communication. (4 Marks)

Answer (a) Share at Premium: If the market exists, a company may issue its shares at premium i.e. the price higher than

their normal value. There is no restriction contained in the Companies Act, 1956 on the



30

sale of shares at a premium. But SEBI (ICDR) Regulations, 2009 have to be observed as they indicate when an issue has to be at par and when premium is chargeable. Premium may be received in cash or kind, where the value of assets received by a company as a consideration for allotment is greater than the normal value of shares, it is in essence an allotment at a premium. An amount equal to extra value of the assets would have to be carried to the Securities Premium Account. The amount to the credit of share premium account has to be maintained with the same sanctity as share capital and can be reduced only in the manner of share capital. The act does regulate the disbursement of the amount collected as premium.

Such account be used in the following ways by the company – (a) It may be applied to issue to the members as fully paid by way of bonus the

unissued shares of the company. (b) It may be used to write off preliminary expenses. (c) It may be used to write off commission or discount account. (d) It may be spent in providing for the premium payable on the redemption of

preference shares or debentures of the company. (b) Principles of Ethics The fundamental principles relating to ethics as applicable to accounting and finance

professionals are as follows: (i) The principle of integrity: Integrity means veracity. The principle requires all

accounting and finance personnel to be honest and straight-forward in discharging their respective professional duties.

(ii) The principle of objectivity: The principle requires accounting and financial professionals to stick to their professional and financial judgement without bias, conflicting interests, or under influence of others.

(iii) The principle of confidentiality: The principle requires accounting and financial professionals to refrain from disclosing confidential information related to their work.

(iv) The principle of professional competence and due care: The financial and accounting professional need to update their professional skill in the modern competitive environment.

(v) The principle of professional behavior: The principle requires accounting and financial professional to comply with relevant laws and regulations and avoid such action which may result into discrediting the profession.

(c) Oral Communication – its merits and limitations - Communication through the spoken word is known as oral communication. Some of the merits of oral communication are as under:

(i) saves time and money;



31

(ii) immediate feed back; (iii) saves paper work; (iv) an effective tool for exhortation; (v) builds a healthy climate; (vi) best tool during emergency. Some of the limitations of Oral Communication are: (i) Greater chances of misunderstanding; (ii) Bad speaker; (iii) Ineffective for lengthy communication; (iv) Lower retention rate; (v) No legal validity;

(vi) Difficult to fix responsibility. Question 5 (a) Point out the differences between a “Cheque” and a “Bill of Exchange” under the

Negotiable Instruments Act, 1881. (8 Marks) (b) State with reasons whether the following statements are correct or incorrect: (2 х 2 = 4 Marks)

(i) The responsibility of the corporate management lies towards shareholders only. (ii) Creation of proper ethical environment requires a proper understanding of the

reasons which lead to an unethical behavior. (c) “Importance of communication is increasing day-by-day in the business organizations”.

State the reasons for this increasing importance. (4 Marks) Answer (a) Cheque and Bill of Exchange Following are the difference between a cheque and a bill of exchange:-

1. In cheque, the drawee is always a bank, whereas in a bill of exchange, the drawee may be a bank or any other person.

2. In cheque, days of grace are not allowed, whereas in a bill of exchange, 3 days of grace are allowed for payment.

3. Notice of dishonour is not needed in a cheque, whereas notice of dishonour is usually required in case of a bill of exchange.



32

4. A cheque can be drawn to bearer and made payable on demand, whereas a bill of exchange cannot be drawn to bearer, if it is made payable on demand.

5. Cheque does not require presentment for acceptance. It needs presentment for payment. Bill of Exchange, sometimes, requires presentment for acceptance and it is advisable to present them for acceptance even when it is not essential to do so.

6. Cheque does not require to be stamped in India, whereas bill of exchange must be stamped according to Law.

7. A cheque may be crossed whereas a bill of exchange cannot be crossed. 8. A cheque being a revocable mandate, the authority may be revoked by counter

manding payment, and is determined by notice of the customer’s death or insolvency. This is not so in a bill.

9. The drawer of a bill of exchange is discharged from liability, if it is not duly presented for payment but the drawer of a cheque is not discharged by delay of the holder in presenting the cheque for payment unless the drawer has suffered some loss due to delay.

(b) (i) Incorrect: The traditional governance model positions management is accountable solely to the shareholders only. But a growing number of corporations accept the constituents other than shareholders are affected by corporate activity and that the corporations must, therefore, be responsible to them. These may be enumerated as follows:

(a) Employees (b) Trade Unions (c) Customers (d) Shareholders and investors (e) Suppliers (f) Local Communities (g) Government (h) Competitors.

(ii) Correct: A creation of a proper ethical environment requires a proper understanding of the reasons which lead to an unethical behavior. The reasons may be summarized as follows:

(a) Emphasis on short term results (b) Ignoring small unethical issues (c) Economic Cycles (d) Change in accounting rules.



33

(c) Reasons for increasing importance of communication: It is true that importance of communication is increasing day by day in the business organizations. The reasons for this growth may be stated as follows: (a) Growth in the size and multiple locations of organization: Most of the

organizations are growing larger and large in size. The people working in these organizations may be spread over different states of a country or over different countries. Keeping in touch, sending directions across and getting feedback is possible only when communication lines are kept working effectively.

(b) Growth of trade unions: Over the last so many decades trade unions have been growing strong. No management can be successful without taking the trade unions in confidence. Only through effective communication can a meaningful relationship be built between the management and workers.

(c) Growing importance of human relations: Workers in an organization are not like machines. They have their own hopes and aspirations. Management has to recognize them above all as sensitive human beings and work towards a spirit of integration with them which effective communication helps to achieve.

(d) Public Relations: Every organization has a social responsibility, towards customers, government, suppliers and the public at large. Communication with them is the only way an organization can project a positive image of itself.

(e) Advance in Behavioural Sciences: Modern management is deeply influenced by exciting discoveries made in behavioural sciences like psychology, sociology, transactional analysis etc. All of them throw light on subtle aspects of human nature and help in developing a positive attitude towards life and building up meaningful relationships. And this is possible only through communication.

(f) Technological advancement: The world is changing very fast, owing to scientific and technological advancements. These advancements deeply affect not only methods of work but also the composition of groups. In such a situation proper communication between superiors and subordinates becomes very necessary.

Question 6 (a) Describe the procedure for converting a private company into a public company under

the provisions of the Companies Act, 1956. (8 Marks) (b) State in brief the guidelines for managing ethics and to prevent the need for whistle-

blowing in the work place. (4 Marks) (c) What are the characteristics of group personality ? (4 Marks)



34

Answer (a) Conversion of a private company into a public company: The procedure for conversion of a private company into a public company is as follows:

(1) Take necessary decision in its board meeting and fix up time, place and agenda for convening Annual General Meeting.

(2) Amend Memorandum of Association to change its name by removing the word “Private” by a special resolution. Approval of the Central Government is not necessary.

(3) Pass a Special Resolution deleting from its articles the requirement of a private company under Section 3(1). A copy of the Special Resolution must be filed with the Register of Companies within 30 days. It becomes a public company on the date of alteration. [Section 44(1)].

(4) Increase the number of shareholders/members to at least 7 and number of directors to atleast 3.

(5) Within 30 days from the passing of Special Resolution, a prospectus or a statement in lieu of prospectus in the prescribed form must be filed with the Registrar (Section 44).

(6) The aforesaid prospectus or the statement in lieu of prospectus must be in conformity with Part I and II of Scheduled II or with Part I and II of Schedule IV respectively.

(7) The company has to apply to the Registrar of Companies for the issue of a fresh Certificate of Incorporation, for the changed name, namely, the existing name with the work “Private” deleted.

(b) Managing ethics and preventing whistle-blowing: The focus on core values and sound ethics, the hall mark of ethical management, is

being recognized as an important way to ensure the long term effectiveness of governance structures and procedures and to avoid the need for whistle blowing. Employers, who understand the importance of work place ethics, provide their work force with an effective framework and guiding principles of identity and address ethical issues as they arise. These guidelines for managing ethics and to avoid the need for whistle-blowing in the work place may be summarized as follows:- (a) Have a Code of Conduct and ethics. (b) Establishment of open communication. (c) Make ethical decisions in group and make decision public whenever appropriate. (d) Integrate ethics with other management practices.



35

(e) Use of cross functional teams when developing and implementing the ethics management programme.

(f) Appointing an ombudsman. (g) Creating an atmosphere of trust. (h) Regularly updating of policies and procedures (i) Include a grievance policy for employees (j) Set an example from the top.

(c) Characteristics of group personality Following are the characteristics of group personality:

(a) Spirit of conformity: Individual member soon come to realize that in order to gain recognition, admiration and respect from others they have to achieve a spirit of conformity. Our beliefs, opinions and actions are influenced more by group opinion than by an individual’s opinion even if it is an expert opinion.

(b) Respect for group values: Any working group is likely to maintain certain values and ideals which make it different from others. In order to deal effectively with a group we must understand its values which will guide us in foreseeing its programmes and actions.

(c) Resistance to change: It has been observed that a group generally does not take kindly to social change. On the other hand the group may bring about its own changes, whether by dictation of its leader or by consensus. The degree to which a group resists change serves as an important index of its personality. It helps us in dealing with it efficiently.

(d) Group prejudice: Just as hardly any individual is free from prejudice, groups have their own clearly evident prejudice. It is a different matter that the individual members may not admit their prejudiced attitude to other’s race, religion, nationality etc. But the fact is that the individual’s prejudices get their intensified while coming in contact with other members of the group holding similar prejudices.

(e) Collective power: Groups are always more powerful than individuals, how so ever influential the individual may be. That is why individuals may find it difficult to speak out their minds in groups. There is always the risk of the one-against many situations cropping up.

Question 7 (a) Write a short note on the composition and functions of the Central Board of Trustees

under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. (4 Marks) (b) Which documents are required to be filed with the Registrar of Companies at the time of

registration of a company under the provisions of the Companies Act, 1956 ? (4 Marks)



36

OR State the conditions whereunder the issuing of prospectus is not necessary under the

provisions of the Companies Act, 1956 . (c) State the pressures which are faced by the finance and accounting professionals’ in an

organization in the compliance of fundamental principles of ethics. (4 Marks) OR

Write a note on ecological ethics. (d) How is “noise” a barrier to effective communication ? (4 Marks)

OR Explain the concept of “Negotiation”. What are its techniques ?

Answer (a) Central Board of Trustees: Under Section 5 of the Employees’ Provident Funds and Miscellaneous Provisions Act,

1952, the Central Board of Trustees consists of the following: (a) Chairman and Vice-Chairman appointed by the Central Government. (b) Central Provident Fund Commissioner as ex-officio member. (c) More than 5 officials of Central Government. (d) Not more than 15 persons representing the State Government. (e) 10 persons representing employees appointed by the Central Government. (f) 10 persons representing employers appointed by the Central Government.

The functions of the Board are as follows: The fund of Employees’ Provident Funds Scheme (EPF) under Section 5, Employees Pension Scheme under Section 6A and Employees’ Deposit Linked Insurance Scheme (EDLI) under Section 6C is vested in the Central Board of Trustees. The fund is administered by them as provided in the scheme. The Central Board will perform other functions as may be required under any provisions of PF Scheme, pension scheme and Insurance scheme (Section 5A).

(b) Filing of document with the Registrar of Companies: After getting the name approved, the following documents along with the application and

prescribed fee, are to be filed with the Registrar:- (1) Memorandum of Association [Section 33(1)(a)] (2) Articles of Association, if any [Section 33(1)(b)]



37

(3) The agreement, if any, which the company proposed to enter into with any individual for appointment as its Managing or Whole Time Director or Manager [Section 33(1)(c)].

(4) A declaration that the requirements of the Act and the rules framed there under have been complied with. This declaration is required to be signed by an advocate of the Supreme Court or High Court or an attorney or a pleader having the right to appear before High Court or a Company Secretary or a Chartered Accountant in whole time practice in India who is engaged in the formation of a company, or by person named in the Articles as a Director, Manager or Secretary of the company [Section 33(2)].

(5) In the case of a public company having share capital, where the Articles name a person as director/directors, the list of the directors and their written consent in prescribed form to act as directors and take up qualification shares.(Section 266).

(6) Apart from the above, the company must give a notice regarding the situation of its registered office under Section 146 within 30 days of registration.

(OR) (b) Non-issuing of Prospectus: As per Section 56 of the Companies Act, 1956, the issue of prospectus is not necessary

in the following cases - (1) Where shares or debentures are offered to existing holders of shares or debentures. (2) When the issue relates to shares or debentures uniform in all respects, with shares

or debentures previously issued and dealt in or quoted in a recognized stock exchange.

(3) Where a person is bona-fide invited to enter into an underwriting agreement. (4) Where shares are not offered to the public.

(c) Pressures faced by finance and accounting professionals: The finance and accounting professionals are supposed to support the legitimate and

ethical objectives established by the employer. As they are having responsibilities to an employing organization, may be under pressure to act or behave in ways that could directly or indirectly threaten compliance with the fundamental principles. Such pressures may be explicit or implicit which may come from supervisor, manager, director or another individuals. Such pressures which are being faced by finance and accounting professionals may be stated as follows: (a) To act contrary to Law or Regulation. (b) To act contrary to technical a professional standards. (c) To facilitate unethical or illegal earnings management strategies.



38

(d) Lie to, or otherwise intentionally mislead other, in particular the auditors of the employing organization or Regulators.

(e) To issue or otherwise be associated with, a financial or non financial report that materially misrepresents the facts, including statements, in connection with. For example:

(i) The financial statements (ii) Tax compliance (iii) Legal compliance, or

(iv) Reports required by securities regulators. OR

(c) Note on Ecological Ethics: The problem of pollution and other environmental issues can best be framed in terms of our duty to recognize and preserve the ecological systems within which we live. An ecological system is an interrelated and interdependent set of organisms and environments, such as a lake, in which the fish depend on small aquatic organisms, which in turn live off decaying plant and fish waste products. Since the various parts of an ecological system are interrelated, the activities of one of its parts will affect all other parts. Business and all social firms are parts of a larger ecological system.

Business firms depend on the natural environment for their energy, material resources, waste disposal and that environment in turn is affected by the commercial activities of business firms. Unless business recognize the interrelationship and interdependencies of the ecological systems within which they operate and unless they ensure that their activities will not seriously injure these systems one cannot hope to deal with the problem of pollution.

Ecological ethics is based on the idea that the environment should be protected not only for the sake of human being but also for its own sake. The issue of environmental ethics goes beyond the problem relating to protection of environment or nature in terms of pollution, resource utilization or waste disposal. It is the issue of exploitive human nature and attitudes that should be addressed in a rational way. Problems like global warming, ozone depletion and disposal of hazardous waste that concern the entire world. They require international co-operation and have to be tackled at the global level.

(d) Noise as barrier to communication: Noise is the first and foremost barrier to communication. It means “interference that

occurs in a signal and prevents you from hearing sounds properly. In a factory the continuous noise made by machines makes oral communication difficult. In the same way, same technical problems in a public address system or a static in a telephone or television cable will distort the sound signal and affect communication. Adverse weather



39

conditions or some fault in the ultramodern telecommunications systems may also spoil the effect. Further, the sender may resort to ambiguous or confusing signals. The receiver may mess up the message owing to inattention or may spoil decoding because of wrong or unexpected interpretation. The receiver’s prejudices may also come in the way of his understanding the message in the right spirit. Thus the communication is always likely to affected by ‘noise’ that stands for so many things. Some of the factors contributing towards noise factors are as follows: (a) Poor Listening: A last moment communication with deadline may put too much

pressure on the receiver and may result in resentment. (b) In appropriate Channel: Poor choice of channel of communication can also be

contributory to them in understanding of the message. (c) Network breakdown: Some time staff may forget to forward a letter or there may

be professional jealousy resulting in closed channel. OR

(d) Negotiation: Negotiation occurs when two or more parties either individuals or groups discuss specific proposals in order to find a mutually acceptable agreement. Whether it is with an employer, family member or business associate, we all negotiate for things each day like higher salary, letter service or solving a dispute with a co worker or family member. Negotiation is a common way of settling conflicts in business. When handled skillfully, negotiation can improve the position of one or even both but when poorly handled; it can leave a problem still unsolved and perhaps worse than before.

Techniques for Negotiation: (a) Spiraling agreements: Begin by reaching a minimums agreement even

though it is not related to the objectives and build, hit by hit, on this first agreement.

(b) Changing of position: Formulate the proposals in a different way, without changing the final result.

(c) Gathering information: Ask for information from the other party to clarify their position

(d) Making the cake bigger: Offer alternatives that may be agreeable to the other party, without changing the terms.

(e) Commitments: Formalize agreements orally and in writing before ending the negotiation.


PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory.

Attempt any five questions from the remaining six questions. Working Notes should form part of the answer.

Question 1 (a) You are given two financial plans of a company which has two financial situations. The

detailed information are as under: Installed capacity 10,000 units Actual production and sales 60% of installed capacity Selling price per unit ` 30 Variable cost per unit ` 20 Fixed cost: Situation ‘A’ = ` 20,000 Situation ‘B’ = ` 25,000 Capital structure of the company is as follows:

Financial Plans XY XM ` ` Equity 12,000 35,000 Debt (cost of debt 12%) 40,000 10,000 52,000 45,000

You are required to calculate operating leverage and financial leverage of both the plans. (b) You are given the following information of a worker:

(i) Name of worker : ‘X’ (ii) Ticket No. : 002 (iii) Work started : 1-4-11 at 8 a.m. (iv) Work finished : 5-4-11 at 12 noon (v) Work allotted : Production of 2,160 units (vi) Work done and approved : 2000 units (vii) Time and units allowed : 40 units per hour (viii) Wage rate : ` 25 per hour


PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

41

(ix) Bonus : 40% of time saved (x) Worker X worked 9 hours a day. You are required to calculate the remuneration of the worker on the following basis: (i) Halsey plan and (ii) Rowan plan

(c) Prepare a Store Ledger Account from the following transactions of XY Company Ltd. April, 2011 1 Opening balance 200 units @ ` 10 per unit. 5 Receipt 250 units costing ` 2,000 8 Receipt 150 units costing ` 1,275 10 Issue 100 units 15 Receipt 50 units costing ` 500 20 Shortage 10 units 21 Receipt 60 units costing ` 540 22 Issue 400 units The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO. Shortage will be charged as overhead.

(d) What is factoring? Enumerate the main advantages of factoring. (4 х 5 = 20 Marks)

Answer (a) Computation of Operating and Financial Leverage

Actual Production and Sales: 60% of 10,000 = 6,000 units Contribution per unit: ` 30 – ` 20 = ` 10 Total Contribution: 6,000 ´ ` 10 = ` 60,000

Financial Plan XY XM Situation A B A B ` ` ` `

Contribution (C) 60,000 60,000 60,000 60,000 Less: Fixed Cost 20,000 25,000 20,000 25,000 Operating Profit or EBIT 40,000 35,000 40,000 35,000 Less: Interest 4,800 4,800 1,200 1,200



42

Earnings before tax (EBT) 35,200 30,200 38,800 33,800 Operating Leverage

= EBIT

C 000,40000,60

000,35000,60

000,40000,60

000,35000,60

= 1.5 = 1.71 = 1.5 = 1.71

Financial Leverage = EBTEBIT

200,35000,40

200,30000,35

800,38000,40

800,33000,35

= 1.14 = 1.16 = 1.03 = 1.04 (b) No. of units produced and approved = 2,000 Standard time = 40 units per hour Hourly Wage Rate = ` 25 Time allowed = 40 units per hour

Time allowed for 2,000 units hours 50 40

2,000=

(i) Calculation of Remuneration under Halsey Plan:

Standard time allowed for 2,000 units : 50 hours

Actual time taken for 2,000 units : 40 hours

Time saved 10 hours

Basic wages for time taken 40 hours @ ` 25 = ` 1,000

Bonus: 40% of time saved 251010040

´´ = ` 100

Total ` 1,100

(ii) Calculation of Remuneration Under Rowan Plan:

Wages for time taken 40 hours @ ` 25 = ` 1,000

allowed Time saved Time Bonus = x (Time Taken x Hourly Rate)

50

25 10 40 ´´= = ` 200

Total ` 1,200



43

(c) Store Ledger Account

Name :- Max. Stock Level - Bin No.- Code No. :- Min. Stock Level - Location Code- Description:- Re-order level – Re-order quantity-

Date Receipts Issues Balance Qty.

Units Rate Amount Qty.

Units Rate Amount Qty. Rate Amount

` ` ` ` ` ` April 1 200 10 2,000

” 5 250 8 2,000 200 10 4,000 250 8

” 8 150 8.50 1,275 200 10 5,275 250 8

150 8.50

” 10 100 8.50 8.50 200 10 4,425 250 8 50 8.50

” 15 50 10 500 200 10 4,925 250 8 50 8.50 50 10

” 20 10 (shortage)

10 100 190 10 4,825

250 8 50 8.50 50 10

” 21 60 9 540 190 10 5,365

250 8 50 8.50 50 10 60 9

” 22 190 10 3,580 40 8

1,785 (Closing

Stock)

210 8 50 8.50 50 10 60 9



44

(d) Concept of Factoring and its Main Advantages: Factoring involves provision of specialized services relating to credit investigation, sales ledger management purchase and collection of debts, credit protection as well as provision of finance against receivables and risk bearing. In factoring, accounts receivables are generally sold to a financial institution (a subsidiary of commercial bank – called “factor”), who charges commission and bears the credit risks associated with the accounts receivables purchased by it. Advantages of Factoring The main advantages of factoring are: (i) The firm can convert accounts receivables into cash without bothering about repayment. (ii) Factoring ensures a definite pattern of cash inflows. (iii) Continuous factoring virtually eliminates the need for the credit department.

Factoring is gaining popularity as useful source of financing short-term funds requirement of business enterprises because of the inherent advantage of flexibility it affords to the borrowing firm. The seller firm may continue to finance its receivables on a more or less automatic basis. If sales expand or contract it can vary the financing proportionally.

(iv) Unlike an unsecured loan, compensating balances are not required in this case. Another advantage consists of relieving the borrowing firm of substantially credit and collection costs and from a considerable part of cash management.

Question 2 (a) You are given the following information of the three machines of a manufacturing

department of X Ltd.:

Preliminary estimates of expenses

Total (per annum)

Machines A B C (`) (`) (`) (`) Depreciation 20,000 7,500 7,500 5,000 Spare parts 10,000 4,000 4,000 2,000 Power 40,000 Consumable stores 8,000 3,000 2,500 2,500 Insurance of machinery 8,000 Indirect labour 20,000 Building maintenance expenses 20,000



45

Annual interest on capital outlay 50,000 20,000 20,000 10,000 Monthly charge for rent and rates 10,000 Salary of foreman (per month) 20,000 Salary of Attendant (per month) 5,000

(The foreman and the attendant control all the three machines and spend equal time on them.)

The following additional information is also available:

Machines A B C Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000 Ratio of K.W. Rating 3 2 3 Floor space (sq. ft.) 40,000 40,000 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.

You are required to : Calculate predetermined machine hour rates for the above machines after taking into

consideration the following factors: · An increase of 15% in the price of spare parts. · An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only. · 20% general increase in wages rates.

(b) The Marketing Manager of XY Ltd. is giving a proposal to the Board of Directors of the company that an increase in credit period allowed to customers from the present one month to two months will bring a 25% increase in sales volume in the next year.

The following operational data of the company for the current year are taken from the records of the company:

` Selling price 21 p.u. Variable cost 14 p.u. Total cost 18 p.u. Sales value 18,90,000



46

The Board, by forwarding the above proposal and data requests you to give your expert opinion on the adoption of the new credit policy in next year subject to a condition that the company’s required rate of return on investments is 40%. (8 + 8 = 16 Marks)

Answer (a) Computation of Machine Hour Rate

Basis of apportionment

Total Machines

A B C ` ` ` `

(A) Standing Charges

Insurance Depreciation Basis

8,000 3,000 3,000 2,000

Indirect Labour Direct Labour 24,000 6,000 9,000 9,000 Building

Maintenance expenses

Floor Space 20,000 8,000 8,000 4,000

Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000 Salary of

foreman Equal 2,40,000 80,000 80,000 80,000

Salary of attendant

Equal 60,000 20,000 20,000 20,000

Total standing charges

4,72,000 1,65,000 1,68,000 1,39,000

Hourly rate for standing charges

84.75 86.29 71.40

(B) Machine Expenses:

Depreciation Direct 20,000 7,500 7,500 5,000 Spare parts Final

estimates 13,225 4,600 5,750 2,875

Power K.W. rating 40,000 15,000 10,000 15,000 Consumable

Stores Direct 8,000 3,000 2,500 2,500



47

Total Machine expenses

81,225 30,100 25,750 25,375

Hourly Rate for Machine expenses

15.46 13.23 13.03

Total (A + B) 553,225 1,95,100 1,93,750 1,64,375 Machine Hour

rate 100.21 99.52 84.43

Working Notes: (i) Calculation of effective working hours: No. of holidays 52 (Sundays) + 12 (other holidays) = 64 Saturday (52 – 2) = 50 No. of days (Work full time) = 365 – 64 – 50 = 251 Hours Full days work 251 ´ 8 = 2,008 Half days work 50 ´ 4 = 200 2,208 Hours Effective capacity 90% of 2,208 1,987 (Rounded off) Less: Normal loss of time (Breakdown) 2% 40 (Rounded off) Effective running hour 1,947 (ii) Amount of spare parts is calculated as under:

A B C ` ` ` Preliminary estimates 4,000 4,000 2,000 Add: Increase in price @ 15% 600 600 300 4,600 4,600 2,300 Add: Increase in consumption @ 25% - 1,150 575 Estimated cost 4,600 5,750 2,875



48

(iii) Amount of Indirect Labour is calculated as under:

` Preliminary estimates 20,000 Add: Increase in wages @ 20% 4,000 24,000

(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost accounts.

(b) Advise regarding Change in Credit Policy Working Notes:

(1) Present Sales Value ` 18,90,000 Present Selling Price per unit ` 21 \ Present Sales Volume units 90,000

2118,90,000 ==

Expected increase in Sales Volume = 25% \ Expected Sales Volume in next year = 90,000 + 25% = 90,000 + 22,500 = 1,12,500 units (2) ` Present total cost (90,000 ´ 18) 16,20,000 Add: Variable cost on additional Sales

(22,500 ´ 14) 3,15,000

\ Total cost of future sales 19,35,000 \ Average cost per unit

500,12,1000,35,19 = ` 17.2

(3) ` Cost of Sale (1,12,500 ´ 17.2) 19,35,000 Average collection period = 2 months \ Average Investment in receivables in the

proposed credit policy 3,22,500 2 12

19,35,000 =´=



49

(4) ` Additional Investment in receivables

÷øö

çèæ ´

=12

18 90,000 - 3,22,500

= 3,22,500–1,35,000 = ` 1,87,500 (5) Contribution from additional sales = (21 – 14) 22,500 = ` 1,57,500 (6) Return on additional investments in

receivables 100 1,87,5001,57,500 ´=

= 84% Advise: Since the expected rate of return on additional investment in receivables (84%) is more than the required rate of return (40%), the proposed increase in credit period from one month to two months should be accepted and implemented in the next year.

Question 3 The management of MNP Company Ltd. is planning to expand its business and consults you to prepare an estimated working capital statement. The records of the company reveal the following annual information:

` Sales –Domestic at one month’s credit 24,00,000 Export at three month’s credit (sales price 10% below domestic price) 10,80,000 Materials used (suppliers extend two months credit) 9,00,000 Lag in payment of wages – ½ month 7,20,000 Lag in payment of manufacturing expenses (cash) – 1 month 10,80,000 Lag in payment of Adm. Expenses – 1 month 2,40,000 Sales promotion expenses payable quarterly in advance 1,50,000 Income tax payable in four instalments of which one falls in the next financial year 2,25,000 Rate of gross profit is 20%. Ignore work-in-progress and depreciation. The company keeps one month’s stock of raw materials and finished goods (each) and believes in keeping ` 2,50,000 available to it including the overdraft limit of ` 75,000 not yet utilized by the company. The management is also of the opinion to make 12% margin for contingencies on computed figure. You are required to prepare the estimated working capital statement for the next year. (16 Marks)



50

Answer Preparation of Statement of Working Capital Requirement for MNP Company Ltd.

Estimated Working Capital Statement

(A) Current Assets in terms of Cash Costs `

Debtors: Domestic Sales 19,20,000 121

´ 1,60,000

Export Sales 9,60,000

123

´ 2,40,000

Prepaid Sales promotion expenses 37,500

Stock of Raw materials 9,00,000 121

´ 75,000

Stock of finished goods 28,80,000

121

´ 2,40,000

Cash at Bank and in Hand 1,75,000 Total Current Assets 9,27,500

(B) Current Liabilities in terms of Cash Costs ` Creditors for:

Material 9,00,000 122

´ 1,50,000

Wages 7,20,000

241

´ 30,000

Manufacturing expenses 10,80,000

121

´ 90,000

Administrative expenses 2,40,000

121

´ 20,000

Income Tax Payable 56,250 Total Current Liabilities 3,46,250

(C) ` Net Current Assets (A – B) 5,81,250 Add: 12% margin for contingencies 69,750 Required Working Capital 6,51,000



51

Working Notes: Cash cost of sales is calculated as under: ` ` Domestic Sales 24,00,000 Less: Gross profit @ 20% 4,80,000 19,20,000 Export Sales 10,80,000

10,80,000 100 12,00,000@10%90

´=` 1,20,000 9,60,000

28,80,000

Question 4 The summarized Balance Sheets of XYZ Limited as at 31st March, 2010 and 2011 are given below:

Liabilities 2010 2011 Assets 2010 2011 (`) (`) (`) (`) Preference share capital

4,00,000 2,00,000 Plant and Machinery

7,00,000 8,20,000

Equity share capital 4,00,000 6,60,000 Long term investment

3,20,000 4,00,000

Share premium A/c 40,000 30,000 Goodwill - 30,000 Capital redemption reserve

- 1,00,000 Current Assets 9,10,000 11,41,000

General reserve 2,00,000 1,20,000 Short term investment (less than 2 months)

50,000 84,000

P & L A/c 1,30,000 1,75,000 Cash and Bank 1,00,000 80,000 Current liabilities 6,40,000 9,00,000 Preliminary

expenses 40,000 20,000

Proposed dividend 1,60,000 2,10,000 Provision for tax 1,50,000 1,80,000 21,20,000 25,75,000 21,20,000 25,75,000 Additional information: During the year 2011 the company: (i) Preference share capital was redeemed at a premium of 10% partly out of proceeds

issue of 10,000 equity shares of ` 10 each issued at 10% premium and partly out of profits otherwise available for dividends.



52

(ii) The company purchased plant and machinery for ` 95,000. It also acquired another company stock ` 25,000 and plant and machinery ` 1,05,000 and paid ` 1,60,000 in Equity share capital for the acquisition.

(iii) Foreign exchange loss of ` 1,600 represents loss in value of short-term investment. (iv) The company paid tax of ` 1,40,000. You are required to prepare cash flow statement. (16 Marks)

Answer Preparation of Statement of Cash Flow for XYZ Limited

Cash flow statement as per AS 3 for the year ending 31st March, 2011

(a) Cash flow from Operating Activities ` ` Profit before tax (2,75,000 + 1,70,000) 4,45,000 Add: Depreciation on machinery 80,000 Foreign exchange loss 1,600 Preliminary expenses written off 20,000 Cash flow before working capital adjustment 5,46,600 Add: Stock obtained on acquire 25,000 Increase in Current Liabilities 2,60,000 Less: Increase in current assets (2,31,000) Cash flow before tax paid 6,00,600 Less: Tax paid (1,40,000) Cash flow from operating activities 4,60,600 (b) Cash flow from Investing Activities Purchase of Machinery (95,000) Purchase of investment (80,000) (1,75,000) (c) Cash flow from Financing Activities Issue of shares at premium 1,10,000 Payment of dividend (1,60,000) Redemption of preference shares at premium (2,20,000) (2,70,000) Net increase/decrease in cash and cash equivalent

(a+b+c) 15,600

Cash and cash equivalent at the beginning of the year 1,50,000 Cash and cash equivalent at the end of the year 1,65,600



53

Working Notes: 1. Plant and Machinery Account

` ` To balance b/d 7,00,000 By depreciation 80,000 To bank 95,000 To acquired from other 1,05,000 By balance c/f 8,20,000 9,00,000 9,00,000

2. Provision for Tax Account

` ` To bank 1,40,000 By balance b/d 1,50,000 To balance c/f 1,80,000 By P & L 1,70,000 3,20,000 3,20,000

3. Profit for the year 2011

` P&L Account (1,75,000-1,30,000) 45,000 Transfer to general reserve (1,20,000+1,00,000 for redemption-opening 2,00,000)

20,000

Proposed dividend 2,10,000 Net Profit 2,75,000

4. Cash and Cash Equivalent Opening balance + short term investment =1,00,000 + 50,000 = ` 1,50,000 Closing balance = Closing cash + short term investment + foreign exchange loss

= 80,000+84,000+1,600=` 1,65,600 Question 5 (a) You are given the following information of the cost department of a manufacturing

company:

` Stores: Opening Balance 12,60,000 Purchases 67,20,000



54

Transfer from work-in-progress 33,60,000 Issue to work-in-progress 67,20,000 Issue to repairs and maintenance 8,40,000 Shortage found in stock taking 2,52,000 Work-in-progress: Opening Balance 25,20,000 Direct wages applied 25,20,000 Overhead applied 90,08,000 Closing Balance 15,20,000

Finished products: Entire output is sold at a profit of 12% on actual cost from work-in-progress. Other information:

` Wages incurred 29,40,000 Overhead incurred 95,50,000 Income from Investment 4,00,000 Loss on sale of fixed assets 8,40,000

Shortage in stock taking is treated as normal loss. You are require to prepare:

(i) Stores control account; (ii) Work-in-progress control account; (iii) Costing Profit and Loss account; (iv) Profit and Loss account and (v) Reconciliation statement

(b) What is debt securitization? Explain the basic debt securitization process. (12 + 4 = 16 Marks)

Answer (a) Stores Leger Control Account

Dr. Cr. ` ` To Balance b/d 12,60,000 By Work-in-progress control A/c 67,20,000



55

To General ledger adjustment A/C

67,20,000 By Overhead control A/c 8,40,000

To Work-in progress Control A/c

33,60,000 By Overhead control A/c (Shortage)

2,52,000

By Balance c/d 35,28,000 1,13,40,000 1,13,40,000

W.I.P Control A/c

Dr. Cr. ` ` To Balance b/d 25,20,000 By Stores ledger control A/c 33,60,000 To Stores ledger control A/c 67,20,000 By Costing P&L A/c (Cost of

Sales) (Balancing figure) 1,58,88,000

To Direct wages Control A/c 25,20,000 To Overhead control A/c 90,08,000 BY Balance c/d 15,20,000

2,07,68,000 2,07,68,000

Costing Profit and Loss A/c

Dr. Cr. ` ` ` To W.I.P Control A/c 1,58,88,000 By General Ledger

Adj. A/c Cost of sales Add 12%Profit

To General ledger Adj. A/c (Profit)

19,06,560 1,58,88,000

19,06,560

1,77,94,560 1,77,94,560 1,77,94,560

Financial Profit and Loss A/c

Dr. Cr. ` ` ` `

To opening stock : Stores

12,60,000 By Sales 1,77,94,560

W.I.P 25,20,000 37,80,000 By Income from investment

4,00,000

To Purchases 67,20,000 By Closing stock:

To Wages 29,40,000 Stores 35,28,000 W.I.P 15,20,000 50,48,000



56

To Overhead 95,50,000 By loss 5,87,440 To Loss on sale of fixed assets

8,40,000

2,38,30,000 2,38,30,000

Reconciliation Statement

Dr. Cr. ` ` Profit as per Cost Accounts 19,06,560 Add: Income from investments 4,00,000 23,06,560 Less : Loss on sale of fixed assets 8,40,000 Under absorption of overheads (working note) 20,54,000 28,94,000 Loss as per Financial Accounts 5,87,440

Working Notes: Overhead Control Account

Dr. Cr. ` ` To General Ledger Adj. A/c 9550000 By W.I.P control A/c 90,08,000 To stores Ledger Control A/c 252000 By balance c/d (under

absorption of overheads)

20,54,000

To stores ledger control A/c 8,40,000 To wages control A/c Indirect wages (` 29,40,000-25,20,000)

4,20,000

1,10,62,000 1,10,62,000

(b) Debt Securitisation and its Basic Process: It is a method of recyling of funds. It is especially beneficial to financial intermediaries to support the lending volumes. Assets generating steady cash flows are packaged together and against this asset pool, market securities can be issued e.g., housing finance, auto loans, and credit card receivable. Process of Debt securitization (i) The Origination Function: A borrower seeks a loan from finance company, bank,

etc., the credit worthiness of borrower is evaluated and contract is entered into with repayment schedule structured over the life of the loan.



57

(ii) The Pooling Function: Similar loans or receivables are clubbed together to create an underlying pool of assets. The pool is transferred in favour of special purpose vehicle (SPV), which acts as a trustee for investors.

(iii) The Securitization Function: SPV will structure and issue securities on the basis of assets pool. The securities carry a coupon and expected maturity, which can be asset based/mortgage based. These are generally sold to investors through merchant bankers. Investors are pension funds, mutual funds and insurance funds.

The process of securitization is without resource i.e. investors bear the credit risk or risk of default. Credit enhancement facilities like insurance, letter of credit and guarantees are provided.

Question 6 (a) The management of Z Company Ltd. wants to raise its funds from market to meet out the

financial demands of its long-term projects. The company has various combination of proposals to raise its funds. You are given the following proposals of the company:

(i) Proposals % of Equity % of Debts % of Preference shares P 100 - - Q 50 50 - R 50 - 50

(ii) Cost of debt – 10% Cost of preference shares – 10% (iii) Tax rate – 50% (iv) Equity shares of the face value of ` 10 each will be issued at a premium of ` 10 per

share. (v) Total investment to be raised ` 40,00,000. (vi) Expected earnings before interest and tax ` 18,00,000.

From the above proposals the management wants to take advice from you for appropriate plan after computing the following: · Earnings per share · Financial break-even-point · Compute the EBIT range among the plans for indifference. Also indicate if any of the

plans dominate. (b) Distinguish between cost units and cost centres. (12 + 4 = 16 Marks)



58

Answer (a) (i) Computation of Earnings per Share (EPS)

Plans P Q R ` ` ` Earnings before interest & tax (EBIT) 18,00,000 18,00,000 18,00,000 Less: Interest charges - 2,00,000 - Earnings before tax (EBT) 18,00,000 16,00,000 18,00,000 Less : Tax @ 50% 9,00,000 8,00,000 9,00,000 Earnings after tax (EAT) 9,00,000 8,00,000 9,00,000 Less : Preference share dividend - - 2,00,000 Earnings available for equity shareholders 9,00,000 8,00,000 7,00,000 No. of shares 2,00,000 1,00,000 1,00,000 E.P.S (Rs.) 4.5 8 7

(ii) Computation of Financial Break-even Points

Proposal ‘P’ = 0

Proposal ‘Q’ = ` 2,00,000 (Interest charges)

Proposal ‘R’ = Earnings required for payment of preference share dividend i.e. ` 2,00,000 ¸ 0.5 (Tax Rate) = ` 4,00,000

(iii) Computation of Indifference Point between the Proposals

The indifference point

=--

1

1

E)T1)(1EBIT(

2

2

E)T1)(1EBIT( --

Where,

EBIT = Earnings before interest and tax

1 1 = Fixed Charges (Interest) under Proposal ‘P’

1 2 = Fixed charges (Interest) under Proposal ‘Q’

T = Tax Rate

E1 = Number of Equity shares in Proposal P

E2 = Number of Equity shares in Proposal Q



59

Combination of Proposals

(A) Indifference point where EBIT of proposal “P” and proposal ‘Q’ is equal

000,00,2

)5.1)(0EBIT( -- = 000,00,1

)5.01)(000,00,2EBIT( --

.5 EBIT (1,00,000) = (.5 EBIT -1,00,000) 2,00,000

.5 EBIT = EBIT – 2,00,000

EBIT = ` 4,00,000

(b) Indifference point where EBIT of proposal ‘P’ and Proposal ‘R’ is equal:

1E

)T1)(1EBIT( -- = 2E

)T1)(12EBIT -- - Preference share dividend

000,00,2

)5.1)(0EBIT( -- = 000,00,1

000,00,2)5.1)(0EBIT( ---

000,00,2

EBIT5. = 000,00,1

000,00,2EBIT5. -

.25 EBIT = 0.5 EBIT -2,00,000

EBIT = 2,00,000 ¸ 0.25

= ` 8,00,000

(c) Indifference point where EBIT of proposal ‘Q’ and proposal ‘R’ are equal

000,00,1

)5.01)(000,00,2EBIT( -- = 000,00,1

000,00,2)5.01)(0EBIT( ---

.5 EBIT -1,00,000 = .5 EBIT – 2,00,000

There is no indifference point between proposal ‘Q’ and proposal ‘R’

Analysis: It can be seen that Financial proposal ‘Q’ dominates proposal ‘R’, since the financial break-even-point of the former is only ` 2,00,000 but in case of latter, it is ` 4,00,000.

(b) Cost units: It is a unit of product, service or time (or combination of these) in relation to which costs may be ascertained or express. A batch which consists of a group of identical items and maintain its identity through one or more stages of production may also be considered as a cost unit. Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.



60

Cost centre: It is defined as a location, person or an stress of equipment (or group of these) for which cost may be ascertained and used for the purpose of cost control. Cost centres are of two types, viz., personal and impersonal. A personal cost centre consists of a person or group of persons and an impersonal cost centre consists of a location or an item of equipment (or group of these).

Question 7 Answer any four of the following: (a) How do you deal with the following in cost account?

(i) Packing Expenses (ii) Fringe benefits

(b) Explain the following ratios: (i) Operating ratio (ii) Price earnings ratio

(c) Enumerate the causes of labour turnover. (d) Write short note on William J. Baumal Vs. Miller-Orr cash management model. (e) Discuss the process of estimating profit/loss on incomplete contracts. (4 х 4 = 16 Marks)

Answer (a) Packing expenses: Cost of primary packing necessary for protecting the product or for

convenient handling, should become a part of the prime cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling overhead. Fringe benefits: These are the additional payments or facilities provided to the workers apart from their salary and direct cost-allowances like house rent and city compensatory allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by means of a supplementary wage or labour rate; otherwise these may be collected as part of production overheads.

(b) (i) Concept of Operating Ratio

Operating ratio= salesNet

expenses operating sold goods of Cost + 100´

This is the test of the operational efficiency with which the business is being carried; the operating ratio should be low enough to leave a portion of sales to give a fair return to the investors.



61

(ii) Concept of Price-Earning ratio

Price Earning Ratio = share per Earning

shareequity per priceMarket

This ratio indicates the number of times the earnings per share is covered by its market price. It indicates the expectation of equity investors about the earnings of the firm.

(c) Causes of Labour Turnover : The main causes of labour turnover in an organisation/industry can be broadly classified under the following three heads : (a) Personal Causes;

(b) Unavoidable Causes; and

(c) Avoidable Causes. Personal causes are those which induce or compel workers to leave their jobs; such causes include the following : (i) Change of jobs for betterment.

(ii) Premature retirement due to ill health or old age.

(iii) Domestic problems and family responsibilities.

(iv) Discontent over the jobs and working environment. Unavoidable causes are those under which it becomes obligatory on the part of management to ask one or more of their employees to leave the organisation; such causes are summed up as listed below: (i) Seasonal nature of the business;

(ii) Shortage of raw material, power, slack market for the product etc.;

(iii) Change in the plant location;

(iv) Disability, making a worker unfit for work;

(v) Disciplinary measures;

(vi) Marriage (generally in the case of women). Avoidable causes are those which require the attention of management on a continuous basis so as to keep the labour turnover ratio as low as possible. The main causes under this case are indicated below : (i) Dissatisfaction with job, remuneration, hours of work, working conditions, etc., (ii) Strained relationship with management, supervisors or fellow workers;



62

(iii) Lack of training facilities and promotional avenues; (iv) Lack of recreational and medical facilities; (v) Low wages and allowances.

(d) William J Baumal vs Miller- Orr Cash Management Model: According to William J Baumal’s Economic order quantity model optimum cash level is that level of cash where the carrying costs and transactions costs are the minimum. The carrying costs refer to the cost of holding cash, namely, the interest foregone on marketable securities. The transaction costs refer to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs. The optimim cash balance according to this model will be that point where these two costs are equal. The formula for determining optimum cash balance is :

C = S

PU 2 ´ ,

Where, C = Optimum cash balance U = Annual (monthly) cash disbursements P = Fixed cost per transaction S = Opportunity cost of one rupee p.a. (or p.m)

Miller-Orr cash management model is a net cash flow stochastic model. This model is designed to determine the time and size of transfers between an investment account and cash account. In this model control limits are set for cash balances. These limits may consist of h as upper limit, z as the return point, and zero as the lower limit. When the cash balances reach the upper limit, the transfer of cash equal to h-z is invested in marketable securities account. When it touches the lower limit, a transfer from marketable securities account to cash account is made. During the period when cash balance stays between (h,z) and (z, o ) i.e high and low limits no transactions between cash and marketable securities account is made. The high and low limits of cash balance are set up on the basis of fixed cost associated with the securities transactions, the opportunity cost of holding cash and the degree of likely fluctuations in cash balances. These limits satisfy the demands for cash at the lowest possible total costs.

(e) Process of Estimating Profit/Loss on Incomplete Contracts: To determine the profit to be taken to Profit and Loss Account, in the case of incomplete contracts, the following process is followed: (i) Completion of contract is less than 25 per cent: In this case no profit should be

taken to profit and loss account.



63

(ii) Completion of contract is upto 25 per cent or more than 25 per cent but less than 50 per cent: In this case one-third of the notional profit, reduced in the ratio of cash received to work certified, should be transferred to the Profit and Loss Account. Mathematically:

received Workreceived Cash×Profit Notional×

31

(iii) Completion of contract is upto 50 per cent or more than 50 per cent but less than 90 per cent: In this case, two-third of the notional profit, reduced by proportion of cash received to work certified, is transferred to the Profit and Loss Account. Mathematically :

received Workreceived Cash×Profit Notional×

32

(iv) Completion of contract is upto 90 per cent or more than 90 per cent i.e. it is nearing completion: In this case the profit to be taken to Profit and Loss Account is determined by determining the estimated Profit and using any one of the following formulas :

(a) Estimated Profit × priceContract

certified Work

(b) Estimated Profit × priceContract

certified Work ×certified Workreceived Cash

OR

Estimated Profit × priceContract

received Cash

(c) Estimated Profit × cost total Estimateddate to workofCost

(d) Estimated Profit × cost total Estimateddate to workofCost ×

certified Workreceived Cash

(e) Notional Profit × priceContract

certified Work


PAPER – 4 : TAXATION Question No.1 is compulsory.

Attempt any five questions from the remaining six questions. Wherever required, suitable assumptions may be made by the candidate and stated clearly in

the answer. Working notes should form part of the answer. All questions relate to the assessment year 2011-12, unless stated otherwise in the question.

Question 1

(a) On 21-3-2010, Mr. Janak gifted to his wife Mrs. Thilagam 200 listed shares, which had been bought by him on 19-4-2009 at ` 2,000 per share. On 1-6-2010, bonus shares were allotted in the ratio of 1:1. All these shares were sold by Mrs. Thilagam as under:

Date of sale

Manner of sale No. of shares

Net sales value (`)

21.5.2010 Sold in recognized stock exchange, STT paid 100 2,20,000 21.7.2010 Private sale to an outsider All bonus

shares 1,25,000

28.2.2011 Private sale to her friend Mrs. Hema (Market value on this date was ` 2,10,000)

100 1,70,000

Briefly state the income-tax consequences in respect of the sale of the shares by Mrs. Thilagam, showing clearly the person in whose hands the same is chargeable, the quantum and the head of income in respect of the above transactions. Detailed computation of total income is NOT required.

Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and the same may be adopted for computing the capital gains.

Cost inflation index for the FY 2010-11 is 711 and for the FY 2009-10 is 632. (5 marks)

(b) Nathan Aviation Ltd. is running two industrial undertakings, one in a SEZ (Unit S) and another in a normal area (Unit N). The brief summarized details for the year ended 31.3.2011 are as under:

The Suggested Answers for Paper 4: Taxation are based on the provisions of law as amended by the Finance Act, 2010 and applicable for A.Y. 2011-12 (in the case of Income-tax), which is the assessment year relevant for May, 2011 examination.


PAPER – 4 : TAXATION

65

(` in lacs) S N Domestic turnover 10 100 Export turnover 120 Nil Gross profit 20 10 Less: Expenses and depreciation 7 6 Profits derived from the unit 13 4

The brought forward business loss pertaining to Unit N is ` 2 lacs. Briefly compute the business income of the assessee. (5 Marks)

(c) Pareesh & Co., is a partnership firm engaged in the business of recruitment and supply of labourers. The firm, which had rendered taxable services to the tune of ` 20.2 lacs in the financial year 2009-10, furnishes the following details pertaining to the half year ended on 30.9.2010 :

(` ) (i) Amounts collected from companies for pre-recruitment screening 2,50,000 (ii) Amounts collected from companies for recruitment of Permanent staff 3,00,000 Temporary staff 4,00,000 (iii) Advances received from prospective employers for conducting campus

interviews in colleges 1,00,000

Wherever applicable, service tax has been charged separately and received from clients. Compute the value of taxable services rendered and the service tax payable by the assessee for the relevant half year. (5 Marks)

(d) The following are details of purchases, sales, etc. effected by Vasudha & Co., a registered dealer, for the year ended 31.3.2011 :


Purchase of raw materials within State, 1000 units, inclusive of VAT levy at 6%

5,30,000

Inter-State purchases of raw materials, inclusive of CST at 2% 2,04,000 Import of raw materials, inclusive of customs duty of ` 35,000 4,35,000 Capital goods purchased on 1.5.2010, inclusive of VAT levy at 10% (input credit to be spread over 2 financial years)

3,30,000



66

Other manufacturing expenses 1,50,000 Sale of taxable goods within State, inclusive of VAT leyy at 4% 7,28,000 Sale of goods within State, exempt from levy of VAT (Goods were manufactured from the Inter-State purchase of raw materials)

1,20,000

Closing stock as on 31.3.2011 was 100 units of raw materials purchased within the State

Input credit is allowed only on raw materials used in manufacture of the taxable goods. Compute the VAT liability of the dealer for the year ended 31.3.2011. (5 Marks)

Answer (a) Where an asset has been transferred by an individual to his spouse otherwise than for

adequate consideration, the income arising from the sale of the said asset by the spouse will be clubbed in the hands of the individual. Where there is any accretion to the asset transferred, income arising to the transferee from such accretion will not be clubbed. Hence, the profit from sale of bonus shares allotted to Mrs. Thilagam will be chargeable to tax in the hands of Mrs. Thilagam. Therefore, the capital gains arising from the sale of the original shares has to be included in the hands of Mr. Janak, and the capital gains arising from the sale of bonus shares would be taxable in the hands of Mrs. Thilagam. Where an asset received by way of gift has been sold, the period of holding of the previous owner should be considered for determining whether the capital gain is long term or short term. The cost to the previous owner has to be taken as the cost of acquisition.

Income/loss to be clubbed in the hands of Mr. Janak Long-term capital gains/loss

Particulars ` (i) 100 shares sold on 21.5.2010 in a recognized stock exchange, STT paid.

Long-term capital gains on sale of such shares is exempt under section 10(38)

Nil

(ii) Shares sold to a friend on 28.2.2011 Sale consideration 1,70,000 Less: Indexed cost of acquisition of 100 shares (` 2,000 x 100 x 711/632) 2,25,000 Long term capital loss to be included in the hands of Mr. Janak (55,000)



67

Income taxable in the hands of Mrs. Thilagam Short-term capital gains (on sale of 100 bonus shares)

Particulars ` Sale consideration 1,25,000 Less: Cost of acquisition of bonus shares Nil Short-term capital gains 1,25,000

Taxability in the hands of Mrs. Hema under the head “Income from other sources” Mrs. Hema has received shares from her friend, Mrs. Thilagam, for inadequate consideration. Even though shares fall within the definition of “property” under section 56(2)(vii), the provisions of section 56(2)(vii) would not be attracted in the hands of Mrs. Hema, since the difference between the fair market value of shares and actual sale consideration does not exceed Rs.50,000.

(b) Computation of business income of Nathan Aviation Ltd. Particulars ` in lacs

Total profit dervied from Units S & N (Rs.13 lacs + Rs.4 lacs) 17 Less: Exemption under section 10AA [See Working Note below] 12 5 Less: Brought forward business loss 2 3 Working Note

Computation of exemption under section 10AA in respect of Unit S located in a SEZ

` in lacs

Domestic turnover of Unit S 10 Export turnover of Unit S 120 Total turnover of Unit S 130 Profit derived from Unit S 13 Exemption under section 10AA

Profit of Unit S x SUnit of turnover TotalSunit of turnover Export = 13 х

130120 =

12



68

Note – 100% of the profit derived from export of articles or things or from services is eligible for deduction under section 10AA, assuming that F.Y.2010-11 falls within the first five year period commencing from the year of manufacture or production of articles or things or provision of services by the Unit in SEZ.

(c) Computation of value of taxable services and service tax payable by M/s Pareesh & Co.:-

Particulars Taxable services (`)

Service tax (`)

Amounts collected from companies for pre-recruitment screening

2,50,000 25,750

Amounts collected from companies for recruitment of permanent staff

3,00,000 30,900

Amounts collected from companies for recruitment of temporary staff (It is also a taxable service)

4,00,000 41,200

Advances received from prospective employers for conducting campus interview in colleges (Note – 1)

1,00,000

10,300 Total 10,50,000 1,08,150

Notes: 1. Since the question specifically provides that wherever applicable, service tax has

been charged separately, advance has also been taken as exclusive of service tax. However, it may be noted that in actual practice, advance for a taxable service is generally inclusive of service tax and accordingly service tax is computed by making back calculations. In such a case, the amount of service tax and the value of taxable service in relation to the advance received for conducting campus interview would be ` 9,338 and ` 90,662 respectively. Therefore, the total service tax payable and total value of taxable service would be ` 1,07,188 and ` 10,40,662 respectively.

2. Since the value of taxable services rendered in the preceding year is more than ` 10 lakh (i.e. ` 20.2 lakh), the assessee is not a small service provider. Hence, it is not eligible for the exemption available to the small service provider.

(d) Computation of VAT liability of Vasudha & Co. for the year ended 31.3.2011:- Particulars Amount

(`) Input tax credit: Intra-State purchases of 1000 units of raw materials [Refer Note 1] 30,000



69

Inter-State purchases of raw materials [Refer Note 2] - Import of raw materials [Refer Note 3] Purchase of Capital Goods [Refer Note 4] 15,000 Other manufacturing expenses [Refer Note 5] Total input tax credit available (A): 45,000 Output VAT payable: Sale of taxable goods within State [(7,28,000 x 4)/104] 28,000 Sale of exempted goods within State [Refer Note 6] Total VAT payable (B) 28,000 Net VAT liability (VAT credit to be carried forward) [(B) - (A)] (17000) Notes:-

1. VAT paid on intra-State purchases is eligible for input tax credit úûù

êëé ´

1066000,30,5 .

2. CST paid on intra-State purchases is not eligible for input tax credit. 3. Customs duty is not eligible for input tax credit. 4. VAT paid on purchase of capital goods is eligible for input tax credit. However, the

same has to be spread over a period of two years úûù

êëé

´´2110

10000,30,3 .

5. No input tax credit can be availed on expenses incurred on manufacturing. 6. No VAT will be payable on sale of goods exempted from levy of VAT. Further, since

these goods are manufactured from the inter-State purchases of raw materials (non-vattable inputs), input tax credit is not affected.

7. VAT system allows credit in respect of purchases made during a period to be set-off against the taxable sales during that period, irrespective of when the supplies/inputs purchased are utilized/sold. Therefore, input tax credit in respect of closing stock of raw materials need not be reduced from total input tax credit available.

Note: The statement in the question, “Input credit is allowed only on raw materials used in manufacture of the taxable goods”, implies that the same is not allowable in respect of sale of goods within the State which are exempt from levy of VAT.

Question 2 (a) (i) Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant

practising in Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara is a non-resident. The consultancy is related to a project in India with possible Ceylonese collaboration. Is this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since the services were used in India? (4 Marks)



70

(ii) Mr. Praveen Kumar has furnished the following particulars relating to payments made towards scientific research for the year ended 31.3.2011 :

(` in lacs)

(i) Payments made to K Research Ltd. 20 (ii) Payment made to LMN College 15 (iii) Payment made to OPQ College 10 Note: K Research Ltd. and LMN College are approved research

institutions and these payments are to be used for the purposes of scientific research.

(iv) Payment made to National Laboratory 8 (v) Machinery purchased for in-house scientific research 25 (vi) Salaries to research staff engaged in in-house scientific research 12

Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while arriving at the business income of the assessee. (4 Marks)

(b) During the year ended 31.3.2010, Kohli & Co., running a coaching centre, has collected a sum of ` 10.2 lacs as service tax. ` 70,000 was met through Cenvat credit and the balance was paid by cheques on various dates. The details pertaining to the quarter ended 30.6.2010 are as under:


Value of free coaching rendered 20,000 Coaching fees collected from students (Service tax collected separately)

14,50,000

Advance received from a college for coaching their students, on 30.6.2010. However, no coaching was conducted and the money was returned on 12.4.2011

3,00,000

Determine the service tax liability for the quarter and indicate the date by which the service tax has to be remitted by the assessee. (4 Marks)

(c) Which variant of VAT is most widely used in the world and why? Are some services also included in the VAT net by such countries? (4 Marks)

Answer (a) (i) A non-resident is chargeable to tax in respect of income received outside India only if

such income accrues or arises or is deemed to accrue or arise to him in India.



71

The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by way of fees for technical services, which includes any consideration for rendering of any managerial, technical or consultancy services. Therefore, payment to a management consultant relating to project financing is covered within the scope of “fees for technical services”. The Explanation below section 9(2) has been substituted to clarify that income by way of, inter alia, fees for technical services, from services utilized in India would be deemed to accrue or arise in India in case of a non-resident and be included in his total income, whether or not such services were rendered in India. In the instant case, since the services were utilized in India, the payment received by Mr. Kulasekhara, a non-resident, in Colombo is chargeable to tax in his hands in India, as it is deemed to accrue or arise in India.

(ii) Computation of deduction allowable under section 35

Particulars

Amount (` in lacs)

Section % of weighted deduction

Amount of deduction (` in lacs)

Payment for scientific research K Research Ltd. [See Note 3] 20 35(1)(ii) 175% 35.00 LMN College 15 35(1)(ii) 175% 26.25 OPQ College [See Note 1] 10 - Nil Nil National Laboratory 8 35(2AA) 175% 14.00 In-house research [See Note 2] Capital expenditure 25 35(1)(iv)

r.w. 35(2) 100% 25.00

Revenue expenditure 12 35(1)(i) 100% 12.00 Deduction allowable under section 35 112.25

Notes :- 1. Payment to OPQ College

Since the note in the question below item (iii) clearly mentions that only K Research Ltd. and LMN College (mentioned in item (i) and (ii), respectively) are approved research institutions, it is a logical conclusion that OPQ College mentioned in item (iii) is not an approved research institution. Therefore, payment to OPQ College would not qualify for deduction under section 35.

2. Deduction for in-house research and development Only company assessees are entitled to weighted deduction@200% under



72

section 35(2AB) in respect of in-house research and development. However, in this case, the assessee is an individual. Therefore, he would be entitled to deduction@100% of the revenue expenditure incurred under section 35(1)(i) and 100% of the capital expenditure incurred under section 35(1)(iv) read with section 35(2), assuming that such expenditure is laid out or expended on scientific research related to his business.

3. Payment to K Research Ltd. (Alternative Answer) Any sum paid to a company registered in India which has as its main object scientific research, as is approved by the prescribed authority, qualifies for a weighted deduction of 125% under section 35(1)(iia). Therefore, it is also possible to take a view that payment of ` 20 lakhs to K Research Ltd. qualifies for a weighted deduction of 125% under section 35(1)(iia) since K Research Ltd. is a company. The weighted deduction under section 35(1)(iia) would be ` 25 lacs (i.e., 125% of ` 20 lacs), in which case, the total deduction under section 35 would be ` 102.25 lacs.

(b) Computation of service tax liability of Kohli & Co. for the quarter ended 30.06.2010:-

Particulars Amount of service tax

(`) Free coaching rendered Nil

Coaching fees collected from students úûù

êëé ´

1003.10000,50,14

1,49,350

Advance received from a college for coaching their students 28,015 Total service tax liability for the quarter ended 30.06.2010 1,77,365

Notes: 1. Free coaching is not exigible to service tax 2. Coaching fees collected from students will be liable to service tax @ 10.3%. 3. Advance receipt is chargeable to service tax. It is immaterial that no coaching was

conducted and the money was returned on 12.4.2011. Advance would be chargeable to service tax in the quarter ended 30.06.2010. Advance has been

assumed to be inclusive of service tax úûù

êëé ´

3.1103.10000,00,3

During the preceding financial year, the service tax liability met by the assessee, inclusive of CENVAT credit availed was more than ` 10 lakh. Hence, during the



73

current financial year, for all quarters, payment of service tax will have to be made electronically. Therefore, the last date for making the payment of service tax by Kohli & Co. (non-corporate assessee) for the quarter ended 30.06.2010 is 6th July, 2010.

(c) Among the three variants of VAT, the consumption variant is widely used. Several countries of Europe and other countries have adopted this variant. The reasons for preference of this variant are: Firstly, it does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive). Secondly, the consumption variant is convenient from the point of administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. In practice, therefore, most countries use the consumption variant. Also, most VAT countries include many services in the tax base. Since the business gets set-off for the tax on services, it does not cause any cascading effect.

Question 3 (a) Mr. Vidyasagar, a resident individual aged 64, is a partner in Oscar Musicals & Co., a

partnership firm. He also runs a wholesale business in medical products. The following details are made available for the year ended 31.3.2011 :

` ` (i) Interest on capital received from Oscar Musicals & Co.,

at 15% 1,50,000

(ii) Interest from bank on fixed deposit (Net of TDS ` 1,500)

13,500

(iii) Income-tax refund received relating to assessment year 2009-10 including interest of ` 2,300

34,500

(iv) Net profit from wholesale business 5,60,000 Amounts debited include the following: Depreciation as per books 34,000 Motor car expenses 40,000 Municipal taxes for the shop

(For two half years; payment for one half year made on 12.6.2011 and for the other, on 14.11.2011)

7,000

Salary to manager for whom single cash 21,000



74

payment was made for (v) The WDV of the assets (as on 1.4.2010) used in above

wholesale business is as under:

Computers 1,20,000 Motor car (20% used for personal use) 3,20,000 (vi) LIP paid for major son 60,000 PPF of his wife 70,000 Long-term infrastructure bonds (Approved) 30,000 Compute the total income of the assessee for the assessment year 2011-12. The computation should show the proper heads of income. Also compute the WDV of the different blocks of assets as on 31.3.2011. (8 Marks)

(b) (i) Where any transaction of taxable service is entered into with an associated enterprise, receipt of service tax is not material for levy of service tax. Explain with reasons, whether you agree or disagree with this statement. (2 Marks)

(ii) Briefly discuss about the adjustment of excess amount of service tax paid in case of renting of immovable property service, owing to property tax payment. (2 Marks)

(c) M/s. Staruss & Co., a registered dealer under the local VAT law, having stock of goods purchased from outside the State, wishes to opt for the Composition Scheme. Advise him whether the same is possible. Will the VAT chain be broken if the dealer opts for the said scheme? (4 Marks)

Answer (a) Computation of total income of Mr. Vidyasagar for the A.Y.2011-12

Particulars ` ` Profits and gains of business or profession Income from own business Net profit as per books 5,60,000 Add: Depreciation as per books 34,000 Disallowance of municipal taxes paid for the second half-year under section 43B, since the same was paid after the due date of filing of return (` 7,000/2)

3,500

Disallowance under section 40A(3) in respect of salary paid in cash since the same exceeds ` 20,000

21,000

20% of car expenses for personal use 8,000 66,500 6,26,500 Less: Depreciation allowable (Note 1) 1,10,400 5,16,100



75

Income from firm Interest on capital from partnership firm (Note 2) 1,20,000 6,36,100 Income from other sources Interest on bank fixed deposit (Gross) 15,000 Interest on income-tax refund 2,300 17,300 Gross total income 6,53,400 Less: Deductions under Chapter VIA (Note 3) 1,20,000 Total Income 5,33,400 Notes: (1) Depreciation allowable under the Income-tax Rules, 1962

Opening WDV

Rate Depreciation Closing WDV

Block 1 Computers 1,20,000 60% 72,000 48,000 Block 2 Motor Car 3,20,000 15% 48,000 Less: 20% disallowance for personal

use

9,600

38,400

2,81,600 1,10,400

(2) Only to the extent the interest is allowed as deduction in the hands of the firm, the same is includible as business income in the hands of the partner. Maximum interest allowable as deduction in the hands of the firm is 12% p.a. It is assumed that the partnership deed provides for the same and hence is allowable to this extent in the hands of the firm. Therefore, interest @12% p.a. amounting to ` 1,20,000 would be treated as the business income of Mr. Vidyasagar.

(3) Deduction under Chapter VI-A

Particulars ` ` Under section 80C LIP for major son 60,000 PPF paid in wife’s name 70,000 1,30,000 As per section 80CCE, deduction is restricted to 1,00,000 Under section 80CCF Approved Infrastructure bonds (` 30,000 but restricted to



76

` 20,000, being the maximum deduction allowable u/s 80CCF)

20,000

Total deduction 1,20,000 (b) (i) Yes, I agree with the statement. Section 68 casts the liability to pay service tax

upon the person liable to pay service tax. This liability is not contingent upon the service provider realizing or charging the service tax rate at the prevailing rate. The statutory liability does not get extinguished if the service provider fails to realize or charge service tax from the service receiver. It may be noted that in case of transactions of taxable services involving any associated enterprise service tax is liable to be paid even if the value of taxable service has not been received. This is so because in such a case any payment received towards the value of taxable service includes any amount credited or debited to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax. Thus, service tax would be payable on such credits as well.

(ii) In case of renting of immovable property service, a deduction of property taxes paid in respect of the immovable property is allowed from the gross amount charged for renting of the said immovable property vide Notification No.27/2007 ST dated 22.05.2007. However, where any amount in excess of the amount required to be paid towards service tax liability has been paid on account of non-availment of such deduction, such excess amount may be adjusted against the service tax liability within one year from the date of payment of such property tax. The details of such adjustment have to be intimated to the Superintendent of Central Excise having jurisdiction over the service provider within a period of 15 days from the date of such adjustment.

(c) As per the principles laid down in the White Paper, a dealer desirous of availing the benefits of VAT Composition Scheme should not have stock of the goods purchased from outside the State. Therefore, if the dealer wishes to avail the benefit of the scheme, he must ensure that he does not possess stock of such goods as on the date of exercise of option. Advice is to be tendered on above lines. The selling dealer will not be able to pass on the benefit of the input credit when he opts for the Composition Scheme. A purchasing dealer buying goods from a dealer operating under the Composition Scheme will not get any tax credit for the goods purchased. Hence, as soon as any dealer opts for the Composition Scheme, the VAT chain is broken.

Question 4 (a) The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating

to the year ended 31.3.2011 :



77

` Income from salaries 2,20,000 Loss from house property 1,90,000 Loss from cloth business 2,40,000 Income from speculation business 30,000 Loss from specified business covered by section 35AD 20,000 Long-term capital gains from sale of urban land 2,50,000 Long-term capital loss from sale of listed shares in recognized stock exchange (STT paid)

1,10,000

Loss from card games 32,000 Income from betting 45,000 Life Insurance Premium paid 1,20,000 Compute the total income and show the items eligible for carry forward. (8 Marks)

(b) State the provisions which enable the Central Government to make rules for administering service tax. For what purposes are such rules made? Name any four such rules issued by the Central Government so far. (4 Marks)

(c) What is meant by input tax credit in the context of VAT provisions? How does input tax credit help in achieving the essence of VAT? (4 Marks)

Answer (a) Computation of total income of Mr. Srivatsan for the A.Y.2011-12

Particulars ` ` Salaries Income from salaries 2,20,000 Less: Loss from house property 1,90,000 30,000 Profits and gains of business or profession Income from speculation business 30,000 Less: Loss from cloth business set off 30,000 Nil Capital gains Long-term capital gains from sale of urban land 2,50,000 Less: Loss from cloth business set off 2,10,000 40,000



78

Income from other sources Income from betting 45,000 Gross total income 1,15,000 Less: Deduction under section 80C (life insurance premium paid) 30,000 Total income 85,000 Losses to be carried forward ` (1) Loss from cloth business (2,40,000-30,000-2,10,000) Nil (2) Loss from specified business covered by section 35AD 20,000

Notes (i) Long-term capital gains from sale of listed shares in a recognized stock exchange is

exempt under section 10(38). Loss from an exempt source cannot be set off against profits from a taxable source. Therefore, long-term capital loss on sale of listed shares cannot be set-off against long-term capital gains from sale of urban land.

(ii) Loss from specified business covered by section 35AD can be set-off only against profits and gains of any other specified business. Therefore, such loss cannot be set off against any other income. The unabsorbed loss has to be carried forward for set-off against profits and gains of any specified business in the following year.

(iii) Business loss cannot be set off against salary income. However, the balance business loss of ` 2,10,000 (` 2,40,000 – ` 30,000 set-off against income from speculation business) can be set-off against long-term capital gains of ` 2,50,000 from sale of urban land. Consequently, the taxable long-term capital gains would be ` 40,000.

(iv) Loss from card games can neither be set off against any other income, nor can it be carried forward.

(v) For providing deduction under Chapter VIA, gross total income has to be reduced by the amount of long-term capital gains and casual income. Therefore, the deduction under section 80C in respect of life insurance premium paid has to be restricted to ` 30,000 [i.e., Gross Total Income of ` 1,15,000 – ` 40,000 (LTCG) – ` 45,000 (Casual income)].

(vi) Income from betting is chargeable at a flat rate of 30% under section 115BB and no expenditure or allowance can be allowed as deduction from such income, nor can any loss be set-off against such income.

(b) Section 94 of Chapter V and section 96-I of Chapter VA of the Finance Act, 1994 grant powers to Central Government to make rules for carrying out the provisions of these



79

Chapters. Rules should be read with the statutory provisions contained in the Act. Rules can never override the Act and cannot be in conflict with the same. So far, the Central Government has issued the following rules for administering service tax – (a) Service Tax Rules, 1994 (b) Service Tax (Advance Ruling) Rules, 2003 (c) CENVAT Credit Rules, 2004 (d) Export of Service Rules, 2005 (e) Service Tax (Registration of Special Category of Persons) Rules, 2005 (f) Service Tax (Determination of Value) Rules, 2006 (g) Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (h) Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (i) Service Tax (Publication of Names) Rules, 2008 (j) Service Tax (Provisional Attachment of Property) Rules, 2008 and (k) Dispute Resolution Scheme Rules, 2008. Note: Any four rules may be mentioned.

(c) The tax paid by a registered dealer at the earlier point is called input tax. This amount is adjusted/rebated against the tax payable by the purchasing dealer on his sales. This credit availability is called input tax credit (ITC). It can also be referred to as tax credit on a sale within the State or in the course of intra-State trade or commerce. The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. Thus, input tax credit in relation to any period can be set off by the registered dealer against the amount of his output tax.

Question 5 (a) Mr. Rakesh purchased a house property on 14th April, 1979 for ` 1,05,000. He entered

into an agreement with Mr. B for the sale of house on 15th September, 1982 and received an advance of ` 25,000. However, since Mr. B did not remit the balance amount, Mr. Rakesh forfeited the advance. Later on, he gifted the house property to his friend Mr. A on 15th June, 1986. Following renovations were carried out by Mr. Rakesh and Mr. A to the house property:

Amount (`) By Mr. Rakesh during FY 1979-80 10,000 By Mr. Rakesh during FY 1983-84 50,000 By Mr. A during FY 1993-94 1,90,000



80

The fair market value of the property as on 1.4.1981 is ` 1,50,000. Mr. A entered into an agreement with Mr. C for sale of the house on 1st June, 1995 and received an advance of ` 80,000. The said amount was forfeited by Mr. A, since Mr. C could not fulfil the terms of the agreement. Finally, the house was sold by Mr. A to Mr. Sanjay on 2nd January, 2011 for a consideration of ` 12,00,000. Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2011-12. Cost inflation indices are as under:

Financial Year Cost inflation index 1981-82 100 1983-84 116 1986-87 140 1993-94 244 2010-11 711

(8 Marks) (b) Briefly explain the provisions relating to advance payment of service tax. (4 Marks) (c) What are the major deficiencies of VAT system in India ? (4 Marks)

Answer (a) Computation of capital gains chargeable to tax in the hands of Mr. A


Sale consideration 12,00,000 Less: Indexed cost of acquisition (Note 1) 3,55,500 8,44,500 Less: Indexed cost of improvement (Note 2) 8,60,114 Long term capital loss (15,614) Note 1 Indexed cost of acquisition is determined as under: Cost to the previous owner i.e. Mr. Rakesh is ` 1,05,000 Fair Market Value on 1st April, 1981 is ` 1,50,000 Cost to the previous owner or FMV on 1st April, 1981, whichever is more, is to be taken as cost of acquisition of Mr. A

1,50,000



81

Less: Advance money forfeited by Mr. A (as per section 51) (Note : Advance forfeited by Mr. Rakesh, the previous owner, should, however, not be deducted)

80,000 Cost of acquisition 70,000 Indexed cost of acquisition (70,000 × 711/140) 3,55,500 140 is the Cost Inflation Index for F.Y. 1986-87, being the first year in which property is held by Mr. A and 711 is the Cost Inflation Index for F.Y. 2010-11, being the year in which the property is sold.

Note 2 Indexed cost of Improvement is determined as under: Expenditure incurred before 1st April, 1981 should not be considered NIL Expenditure incurred on or after 1st April, 1981 During 1983-84 Indexed cost of Improvement [50,000 × 711/116] 3,06,466 During 1993-94 Indexed cost of Improvement [1,90,000 × 711/244] 5,53,648 Total indexed cost of improvement 8,60,114

(b) Service tax law provides the assessee a facility to make advance payment of service tax on his own volition and adjust the amount so paid against the service tax which he is liable to pay for the subsequent period. Such facility is available when the assessee: (i) intimates the details of the amount of service tax paid in advance, to the

Jurisdictional Superintendent of Central Excise within a period of 15 days from the date of such payment, and

(ii) indicates the details of the advance payment made, and its adjustment, if any in the subsequent return to be filed under section 70.

(c) The major deficiencies of VAT system in India are as under: (1) There is lack of uniformity in the rates of VAT in different States. Distortion occurs

on account of different rates of VAT, composition scheme, exemptions, difference in classification of goods, etc.

(2) Central Sales Tax is not integrated with the State VAT. Therefore, it is difficult to put the purchases from other States at par with the purchases within the State. Consequently, the advantage of neutrality is confined only for purchases within the State.



82

(3) For complying with the VAT provisions, the accounting cost has increased which may not be commensurate with the benefits to traders and small firms.

(4) VAT is paid at various stages and not at last stage. This has increased the requirement of working capital and the interest burden on the same.

(5) VAT, being a consumption tax, tends to be regressive since the proportion of income spent on consumption is large for the poor than the rich.

(6) As a result of introduction of VAT, the administrative cost to the States has increased on account of number of dealers going up significantly.

Note: Any four points may be mentioned.

Question 6 (a) Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1.1.2011. The following

particulars are available to you:

` (i) WDV of land as on 1.4.2010 5,00,000 (ii) WDV of machinery as on 1.4.2010 3,30,000 (iii) Patents acquired on 1.6.2010 3,00,000 (iv) Building acquired on 12.3.2009 for which deduction was allowed

under section 35AD. 7,00,000

(v) Above building was revalued as on the date of conversion into LLP as 12,00,000 (vi) Unabsorbed business loss as on 1.4.2010 (A.Y. 2007-08) 9,00,000 Though the conversion into LLP took place on 1.1.2011, there was disruption of business and the assets were put into use by the LLP only from 1st March, 2011 onwards. The company earned profits of ` 8 lacs prior to computation of depreciation. Assuming that the necessary conditions laid down in section 47(xiiib) of the Income-tax Act, 1961 have been complied with, explain the tax treatment of the above in the hands of the LLP. (8 Marks) Note – “WDV of land as on 1.4.2010” may be read as “Cost of land”.

(b) Nigamanth Cargo Handlers Pvt. Ltd. is a cargo handling agency, in existence since 2003. For the quarter ended 31.3.2011, total collections for handling cargo (excluding service tax) was ` 32,00,000. The same included the following receipts also:

` (i) Handling of cargo containing life saving drugs 2,00,000 (ii) Handling of export cargo 3,00,000



83

(iii) Handling of cargo for storage in cold storage 1,00,000 (iv) Towards providing service of packing together with transportation of

cargo 4,00,000

Ascertain the quantum of taxable cargo handling services for the quarter ended 31.3.2011. Wherever applicable, service tax was charged separately and received in full.

(4 Marks) (c) How can a Chartered Accountant help a client in the handling of VAT audit called for by

the Department and in conducting external audit of VAT records? (4 Marks) Answer (a) Tax treatment of depreciation and unabsorbed business loss of a private company

on its conversion into a LLP The LLP would be allowed to carry forward and set-off the business loss and unabsorbed depreciation of the predecessor company [Section 72A(6A)]. 1. Depreciation

The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place. Such depreciation shall be apportioned between the predecessor company and the successor LLP in the ratio of the number of days for which the assets were used by them [Section 32(1)] Therefore, depreciation has to be first calculated as if the conversion had not taken place and then apportioned between the company and the LLP in the ratio of the number of days for which the assets were used by them.

` ` Block I Machinery 3,30,000 15% 49,500 Block II Patents 3,00,000 25% 75,000 1,24,500

Allocation of depreciation Depreciation on machinery and patents have to be apportioned between the company and the LLP in the ratio of the number of days for which the assets were used by them. Since patents were acquired only on 1.6.2010, it could have been used by the company for 214 days only. Therefore, the depreciation on assets has to be allocated between the company and LLP as follows –



84

Company LLP Asset Total

depreciation for the year

No. of days of usage

Depreciation No. of days of usage

Depreciation

Machinery 49,500 275 44,485 31 5,015 Patents 75,000 214 65,510 31 9,490 1,24,500 1,09,995 14,505 Therefore, depreciation to be allowed in the hands of the company is ` 1,09,995 and depreciation to be allowed in the hands of the LLP is ` 14,505.

2. Unabsorbed business loss to be carried forward by the LLP. Particulars `

Profits of the company before depreciation 8,00,000 Less: Current year depreciation 1,09,995 Business income of the company after depreciation 6,90,005 Brought forward business loss 9,00,000 Unabsorbed business loss as on 31.12.2010 to be carried forward by the LLP 2,09,995

3. Actual cost of assets to the LLP (1) The actual cost of the block of assets in case of the LLP shall be the WDV of

the block of assets as in the case of the company on the date of conversion. The WDV as on 1.1.2011 for Machinery and Patents are ` 2,85,515 and ` 2,34,490, respectively, which would be the actual cost in the case of the LLP. WDV of Machinery as on 1.1.2011 = 3,30,000 – 44,485 = ` 2,85,515 WDV of Patents as on 1.1.2011 = 3,00,000 – 65,510 = ` 2,34,490

(2) Land is not a depreciable asset. The cost of acquisition of land to the LLP would be the cost for which the company acquired it, as increased by the cost of improvement.

(3) In respect of the building, deduction had been allowed in the earlier year under section 35AD. Hence, there is no question of depreciation during the current year. The actual cost of the building to the LLP would be Nil.

(b) Quantum of taxable cargo handling services for the quarter ended 31.3.2011:-


Amount (`)

Total collections for handling cargo (excluding service tax) 32,00,000



85

Less: (i) Receipts for handling of cargo containing life saving drugs [Refer Note 1]

(ii) Receipts for handling of export cargo [Refer Note 2] 3,00,000 (iii) Receipts for handling of cargo for being stored in cold storage [Refer Note 3]

1,00,000

(iv) Receipts towards providing service of packing together with transportation of cargo [Refer Note 4]

4,00,000 Value of taxable services 28,00,000

Notes: 1. Handling of cargo containing life saving drugs is taxable service as there is no

specific exemption available for such activity. 2. The definition of cargo handling service specifically excludes handling of export

cargo. 3. Cargo handling service provided in relation to goods intended to be stored in a cold

storage is exempt from payment of service tax vide Notification No. 10/2002 ST dated 01.08.2002.

4. Service of packing together with transportation of cargo is covered by the definition of cargo handling service. Hence, the same is liable to service tax and no adjustment is needed.

(c) Handling audit by Departmental Auditors There are audit wings in VAT Departments and certain percentage of dealers are taken up for audit every year on scientific basis. Chartered Accountants can ensure proper record keeping to satisfy the Departmental auditors. The professional expertise of a Chartered Accountant will help him in effectively replying audit queries and sorting out audit objections. External audit of VAT records Under VAT system, trust has been reposed on tax payers as there will be no regular assessment of all VAT returns, but only few returns will be scrutinized. In other cases, returns filed by dealers will be accepted. Thus, a check on compliance becomes necessary. Chartered Accountants can play a very vital role in ensuring tax compliance by audit of VAT accounts.

Question 7 (a) Answer any two of the following three sub divisions:



86

(1) Specify the persons who are authorized to sign and verify under section 140, the return of income filed under section 139 of the Income-tax Act, 1961 in the case of:

(i) Political party; (ii) Local authority; (iii) Association of persons, and (iv) Limited Liability Partnership (LLP). (4 Marks)

(2) The following details have been furnished by Mrs. Hemali pertaining to the year ended 31.3.2011 : (i) Cash gift of ` 51,000 received from her friend on the occasion of her

“Shastiaptha Poorthi”, a wedding function celebrated on her husband completing 60 years of age. This was also her 25th wedding anniversary.

(ii) On the above occasion, a diamond necklace worth ` 2 lacs was presented by her sister living in Dubai.

(iii) When she celebrated her daughter's wedding on 21.2.2011, her friend assigned in Mrs. Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of the fixed deposit and the accrued interest on the said date was ` 51,000.

Compute the income, if any, assessable as income from other sources. (4 Marks) (3) During the financial year 2010-11, the following payments/expenditure were

made/incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2010 was ` 39 lacs) : (i) Interest of ` 12,000 was paid to Rehman & Co., a resident partnership firm,

without deduction of tax at source; (ii) Interest of ` 4,000 was paid as interest to Mr. R.D. Burman, a non-resident,

without deduction of tax at source; (iii) ` 3,00,000 was paid as salary to a resident individual without deduction of tax

at source; (iv) He had sold goods worth ` 5 lacs to Mr. Deva. He gave Mr. Deva a cash

discount of ` 12,000 later. Commission of ` 15,000 was paid to Mr. Vidyasagar on 2.7.2010. In none of these transactions, tax was deducted at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961. (4 Marks)

(b) State the due dates for filing of service tax returns. Will the delayed filing of service tax return result in payment of any late fee? If so, how much? (4 Marks)

(c) Briefly list out the contents of VAT invoice. (4 Marks)



87

Answer (a) (1) The following persons (mentioned in Column III below) are authorised as per section

140, to sign and verify the return of income filed under section 139.

I II III (i) Political party Chief Executive Officer of such party (whether known as

secretary or by any other designation). (ii) Local authority Principal Officer thereof. (iii) Association of

Persons Any member of the association or the principal officer thereof.

(iv) LLP Designated partner, or Any partner,

- where the designated partner is not able to sign and verify the return for any unavoidable reason;

- where there is no designated partner.

(2) (i) Any sum of money received by an individual on the occasion of the marriage of the individual is exempt. This provision is, however, not applicable to a cash gift received during a wedding function celebrated on completion of 60 years of age.

The gift of ` 51,000 received from a non-relative is, therefore, chargeable to tax under section 56(2)(vii) in the hands of Mrs. Hemali.

(ii) The provisions of section 56(2)(vii) are not attracted in respect of any sum of money or property received from a relative. Thus, the gift of diamond necklace received from her sister is not taxable under section 56(2)(vii), even though jewellery falls within the definition of “property”.

(iii) To be exempt from applicability of section 56(2)(vii), the property should be received on the occasion of the marriage of the individual, not that of the individual’s son or daughter. Therefore, this exemption provision is not attracted in this case. Any sum of money received without consideration by an individual is chargeable to tax under section 56(2)(vii), if the aggregate value exceeds ` 50,000 in a year. “Sum of money” has, however, not been defined under section 56(2)(vii). Therefore, there are two possible views in respect of the value of fixed deposit assigned in favour of Mrs. Hemali – (1) The first view is that fixed deposit does not fall within the meaning of

“sum of money” and therefore, the provisions of section 56(2)(vii) are not



88

attracted. It may be noted that fixed deposit is also not included in the definition of “property”.

(2) However, another possible view is that fixed deposit assigned in favour of Mrs. Hemali falls within the meaning of “sum of money” received.

Income assessable as “Income from other sources” If the first view is taken, the total amount chargeable to tax as “Income from other sources” would be ` 51,000, being cash gift received from a friend on her Shastiaptha Poorthi. As per the second view, the provisions of section 56(2)(vii) would be attracted in respect of the fixed deposit assigned and the “Income from other sources” of Mrs. Hemali would be ` 1,02,000 (` 51,000 + ` 51,000).

(3) Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the same to the credit of the Central Government within the stipulated time limit. The assessee is a resident individual, who was not subjected to tax audit during the immediately preceding previous year i.e., P.Y.2009-10 (as his turnover is less than ` 40 lakh in that year) and the TDS obligations have to be considered bearing this in mind. (i) The obligation to deduct tax source from interest paid to a resident arises

under section 194A in the case of an individual, only where he was subject to tax audit under section 44AB in the immediately preceding previous year, i.e., P.Y.2009-10. From the data given, it is clear that he was not subject to tax audit under section 44AB in the P.Y.2009-10. Hence, disallowance under section 40(a)(ia) is not attracted in this case.

(ii) In the case of interest paid to a non-resident, there is obligation to deduct tax at source under section 195, hence non-deduction of tax at source will attract disallowance under section 40(a)(i).

(iii) Disallowance under section 40(a)(ia) is not attracted for failure to deduct tax at source under section 192 from salaries.

(iv) The obligation to deduct tax at source under section 194-H from commission paid in excess of ` 5,000 w.e.f. 1.7.2010 to a resident arises in the case of an individual, only where he was subject to tax audit under section 44AB in the immediately preceding previous year. From the data given, it is clear that he was not subject to tax audit under section 44AB in the P.Y.2009-10. Hence, there is no obligation to deduct tax at source under section 194H during the P.Y. 2010-11. Therefore, disallowance under section 40(a)(ia) is not attracted in this case.



89

(b) The service tax return (in Form ST-3) should be filed on half yearly basis by the 25th of the month following the particular half-year. The due dates on this basis are as under:

Half year Due date

1st April to 30th September 25th October

1st October to 31st March 25th April In case the due date of filing of return falls on a public holiday, the assessee can file the return on the immediately succeeding working day. Yes, late fee will be levied for delay in furnishing of the service tax return. The prescribed late fee is given hereunder: S. No. Period of delay Late fee

Particulars ` (a) 15 days from the date prescribed for

submission of the return 500

(b) Beyond 15 days but not later than 30 days from the date prescribed for submission of the return.

1,000

(c) Beyond 30 days from the date prescribed for submission of the return

An amount of ` 1,000 plus ` 100 for every day from the 31st day till the date of furnishing the said return.

However, the total late fee for delayed submission should not exceed ` 2,000. (c) VAT legislations of all the States provide for the tax invoice. Generally, the various

legislations provide that the tax invoice should have the following contents:

(i) the words tax invoice in a prominent place; (ii) name and address of the selling dealer; (iii) registration number of the selling dealer; (iv) name and address of the purchasing dealer; (v) registration number of the purchasing dealer (may not be required under all VAT

legislations); (vi) pre-printed or self-generated serial numbers; (vii) date of issue; (viii) description, quantity and value of goods sold; (ix) rate and amount of tax charged in respect of taxable goods; (x) signature of the selling dealer or his regular employee duly authorized by him for

such purposes.


SUGGESTED ANSWERS BY ICAI FOR CA IPCC MAY 2011...

Documents

Transcript of SUGGESTED ANSWERS BY ICAI FOR CA IPCC MAY 2011...