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PAPER – 1 : FINANCIAL REPORTING
Question No.1 is compulsory. Candidates are required to answer any four questions from the
remaining five questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.
Question 1
(a) Prepare the Consolidated Balance Sheet as on 31 st March, 2018 of a group of companies
comprising Usha Limited, Nisha Limited and Sandhya Limited. Their summarized balance
sheets on that date are given below: Amounts ` in lakh
Usha Ltd. Nisha Ltd. Sandhya Ltd.
Equity and Liabilities
Shareholder's Equity
Share capital (` 10 per share) 300 200 160
Reserves 90 50 40
Retained earnings 80 25 30
Current Liabilities
Trade Payables 235 115 90
Bills Payable
Usha Ltd. - 35 -
Sandhya Ltd. 15 - -
720 425 320
Assets
Non-Current Assets
Tangible assets 160 180 150
Investment:
16 lakh shares in Nisha Ltd. 170 - -
12 lakh shares in Sandhya Ltd. - 140 -
Current Assets
Cash in hand and at Bank 114 20 20
Bills Receivable 36 - 15
Trade Receivables 130 50 110
Inventories 110 35 25
720 425 320
© The Institute of Chartered Accountants of India

2 FINAL (NEW) EXAMINATION: NOVEMBER, 2018
The following additional information is available:

(i) Usha Ltd. holds 80% shares in Nisha Ltd. and Nisha Ltd. holds 75% shares in
Sandhya Ltd. Their holdings were acquired on 30th September, 2017.
(ii) The business activities of all the companies are not seasonal in nature and therefore,
it can be assumed that profits are earned evenly throughout the year.
(iii) On 1st April, 2017, the following balances stood in the books of Nisha Limited and
Sandhya Limited.
` in lakh
Nisha Limited Sandhya Limited
Reserves 40 30
Retained earnings 10 15
(iv) ` 5 Lakh included in the inventory figure of Nisha Limited, is inventory which has been
purchased from Sandhya Limited at cost plus 25%.
(v) The parent company has adopted an accounting policy to measure Non-controlling
interest at fair value (quoted market price) applying Ind AS 103. Assume market
prices of Nisha Limited and Sandhya Limited are the same as respective face values.
(vi) The capital profit preferably is to be adjusted against cost of control.
Note: Analysis of profits and notes to accounts must be a part of your answer. (16 Marks)
(b) Sun Limited has entered into a binding agreement with Moon Limited to buy a custom-
made machine for ` 4,00,000. At the end of 2017-18, before delivery of the machine, Sun
Limited had to change its method of production. The new method will not require the
machine ordered which is to be scrapped after delivery. The expected scrap value is nil.
Given that the asset is yet to be delivered, should any liability be recognized for the
potential loss? If so, give reasons for the same, the amount of liability as well as the
accounting entry. (4 Marks)
Answer
(a) Consolidated Balance Sheet of the Group as on 31 st March, 2018
Particulars Note No. (` in lakh)
ASSETS
Non-current assets
Property, plant and equipment 1 490
Current assets
(a) Inventories 2 169
(b) Financial assets

PAPER – 1 : FINANCIAL REPORTING 3
Trade receivables 3 290

Bills receivable 4 1
(c) Cash and cash equivalents 5 154
Total assets 1,104
EQUITY & LIABILITIES
Equity attributable to owners of the parent
Share capital 300
Other Equity
Reserves (W.N.5) 97
Retained Earnings (W.N.5) 89.9
Capital Reserve (W.N.3) 94
Non-controlling interests (W.N.4) 83.10
Total equity 664
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 440
Total liabilities 440
Total equity and liabilities 1,104
Notes to Accounts (` in lakh)
1. Property Plant & Equipment
Parent 160
Nisha Ltd. 180
Sandhya Ltd. 150 490
2. Inventories
Parent 110
Nisha Ltd. (35-1) 34
Sandhya Ltd. 25 169
3. Trade Receivables
Parent 130
Nisha Ltd. 50
Sandhya Ltd. 110 290

4. Bills Receivable
Parent (36-35) 1
Sandhya Ltd. (15-15) - 1
5. Cash & Cash equivalents
Parent 114
Nisha Ltd. 20
Sandhya Ltd. 20 154
6. Trade Payables
Parent 235
Nisha Ltd. 115
Sandhya Ltd. 90 440
Working Notes:
1. Analysis of Reserves and Surplus (` in lakh)
Nisha Ltd. Sandhya Ltd.
Reserves as on 31.3.2017 40 30
Increase during the year 2017-2018 10 10
Increase for the half year till 30.9.2017 5 5
Balance as on 30.9.2017 (A) 45 35
Total balance as on 31.3.2018 50 40
Post-acquisition balance 5 5

Retained Earnings as on 31.3.2017 10 15
Increase during the year 2017-2018 15 15
Increase for the half year till 30.9.2017 7.5 7.5
Balance as on 30.9.2017 (B) 17.5 22.5
Total balance as on 31.3.2018 25 30
Post-acquisition balance 7.5 7.5
Less: Unealised gain on inventories
(5 x 25%) - (1)
Post-acquisition balance for CFS 7.5 6.5
Total balance on the acquisition date
ie.30.9.2017 (A+B) 62.5 57.5

2. Calculation of Effective Interest of Parent company ie. Usha Ltd. in Sandhya Ltd.
Acquisition by Usha Ltd. in Nisha Ltd. = 80%
Acquisition by Nisha Ltd. in Sandhya Ltd. = 75%
Acquisition by Group in Sandhya Ltd. (80% x 75%) = 60%
Non-controlling Interest = 40%
3. Calculation of Goodwill / Capital Reserve on the acquisition date
Investment or consideration 170 (140 × 80%)112
Add: NCI at Fair value
(200 x 20%) 40
(160 x 40%) 64
210 176
Less: Identifiable net assets (Share
capital + Increase in the Reserves and
Surplus till acquisition date) (200+62.5)(262.5) (160+57.5)(217.5)
Capital Reserve 52.5 41.5
Total Capital Reserve (52.5 + 41.5) 94
4. Calculation of Non Controlling Interest
At Fair Value (See Note 3) 40 64
Add: Post Acquisition Reserves (See (5× 20%) 1 (5 × 40%) 2
Note 1)
Add: Post Acquisition Retained Earnings (7.5 × 20%) 1.5 (6.5 × 40%) 2.6
(See Note 1)
Less: NCI share of investment in
Sandhya Ltd.* (140x20%) (28)*
14.5 68.6
Total (14.5 + 68.6) 83.1
*Note: The Non-controlling interest in Nisha Ltd. will take its proportion in Sandhya
Ltd. So they have to bear their proportion in the investment made by Nisha Ltd. (as
a whole) in Sandhya Ltd.

5. Calculation of Consolidated Other Equity

Reserves Retained Earnings
Usha Ltd. 90 80
Add: Share in Nisha Ltd. (5 x 80%) 4 (7.5 × 80%) 6
Add: Share in Sandhya Ltd. (5 ×60%) 3 (6.5 ×60%) 3.9
97 89.9
Note: In the above solution, it is assumed date the sale of goods by Sandhya Ltd.
is done after acquisition of shares by Nisha Ltd. Alternatively, one may assume that
the sale has either been done before acquisition of shares by Nisha Ltd. in Sandhya
Ltd. or sale has been throughout the year. Accordingly, there treatment for
unrealized gain may vary.
(b) As per Ind AS 37, Executory contracts are contracts under which
❖ neither party has performed any of its obligations; or
❖ both parties have partially performed their obligations to an equal extent.
The contract entered by Sun Ltd. is an executory contract, since the delivery has not yet
taken place.
Ind AS 37 is applied to executory contracts only if they are onerous.
Ind AS 37 defines an onerous contract as a contract in which the unavoidable costs of
meeting the obligations under the contract exceed the economic benefits expected to be
received under it.
As per the facts given in the question, Sun Ltd. will not require the machine ordered.
However, since it is a binding agreement, the entity cannot exit / cancel the agreement.
Further, Sun Ltd. has to scrap the machine after delivery at nil scrap value.
These circumstances do indicate that the agreement/contract is an onerous contract.
Therefore, a provision should be made for the onerous element of ` 4,00,000 ie the full
cost of the machine.
` `
Onerous Contract Provision Expense A/c Dr. 4,00,000
To Provision for Onerous Contract Liability A/c 4,00,000
(Being asset to be received due to binding agreement
recognized)
Profit and Loss Account (Loss due to onerous contract) Dr. 4,00,000
To Onerous Contract Provision Expense A/c 4,00,000
(Being loss due to onerous contract recognized and
asset derecognsied)

Question 2
(a) XYZ Limited has three cash-generating units - X, Y and Z, the carrying amounts of which
as on 31st March, 2018 are as follows:
Cash Generating Units Carrying Amount (` in lakh) Remaining useful life in
years
X 800 20
Y 1000 10
Z 1200 20
XYZ Limited also has corporate assets having a remaining useful life of 20 years as given
below:
Corporate Carrying amount Remarks
Assets (` in lakh)
AU 800 The carrying amount of AU can be allocated
on a reasonable basis to the individual cash
generating units.
BU 400 The carrying amount of BU cannot be
allocated on a reasonable basis to the
individual cash-generating units.
Recoverable amounts as on 31st March, 2018 are as follows:
Cash-generating units Recoverable amount (` in lakh)
X 1000
Y 1200
Z 1400
XYZ Limited 3900
Calculate the impairment loss if any of XYZ Ltd. Ignore decimals. (10 Marks)
(b) How will you recognize and present the grants received from the Government in the
following cases as per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value of land
` 12 lakh and acquired value by Government is ` 8 Iakhs).
(ii) B Ltd. received an amount of loan for setting up a plant at concessional rate of interest
from the Government.
(iii) D Ltd. received an amount of ` 25 lakh for immediate start-up of a business without
any condition.

(iv) S Ltd. received ` 10 lakh for purchase of machinery costing ` 80 lakh. Useful life of
machinery is 10 years. Depreciation on this machinery is to be charged on straight
line basis.
(v) Government gives a grant of ` 25 lakh to U Limited for research and development of
medicine for breast cancer, even though similar medicines are available in the market
but are expensive. The company is to ensure by developing a manufacturing process
over a period of two years so that the cost comes down at least to 50%. (5 Marks)
(c) Deluxe bike manufactured by Zed Limited is sold with an extended warranty of 2 years for
` 87,300 while an identical Deluxe bike without the extended warranty is sold in the market
for ` 80,000 and equivalent warranty is given in the market for ` 10,000. How should Zed
Limited recognize and measure revenue in the books on the sale of the bikes and
warranty? (5 Marks)
Answer
(a) (i) Allocation of corporate assets to CGU
The carrying amount of AU is allocated to the carrying amount of each individual cash-
generating unit. A weighted allocation basis is used because the estimated remaining
useful life of Y’s cash-generating unit is 10 years, whereas the estimated remaining
useful lives of X and Z’s cash-generating units are 20 years.
(` in lakh)
Particulars X Y Z Total
(a) Carrying amount 800 1000 1,200 3,000
(b) Useful life 20 years 10 years 20 years
(c) Weight based on 2 1 2
useful life
(d) Carrying amount 1,600 1,000 2,400 5,000
(after assigning
weight) (a x c)
(e) Pro-rata allocation 32% 20% 48% 100%
of AU (1,600/5,000) (1,000/5,000) (2,400/5,000)
(f) Allocation of 256 160 384 800
carrying amount of
AU (32: 20: 48)
(g) Carrying amount 1,056 1,160 1,584 3,800
(after allocation of
AU) (a+f)

(ii) Calculation of impairment loss

Step 1: Impairment losses for individual cash-generating units and its
allocation
(a) Impairment loss of each cash-generating units
(` in lakh)
Particulars X Y Z
Carrying amount (after allocation of AU) 1,056 1,160 1,584
Recoverable amount 1,000 1,200 1,400
Impairment loss 56 Nil 184
(b) Allocation of the impairment loss (after rounding off)
(` in lakh)
Allocation to X Z
AU 14 (56x256/1,056) 45 (184x384/1,584)
Other assets in cash-
generating units 42 (56x800/1056) 139 (184x1,200/ 1,584)
Impairment loss 56 184
Step 2: Impairment loss for the larger cash-generating unit, i.e., XYZ Ltd. as a
whole
(` in lakh)
Particular s X Y Z AU BU XYZ Ltd.
Carrying amount 800 1,000 1,200 800 400 4,200
Impairment loss (Step I) (42) - (139) (59)* - (240)
Carrying amount (after Step I) 758 1,000 1,061 741 400 3,960
Recoverable amount 3,900
Impairment loss for the ‘larger’ cash-gener ating unit 60
*` 14 lakh + ` 45 lakh = ` 59 lakh.

(b) (i) The land and government grant should be recognized by A Ltd. at fair value of
` 12,00,000 and this government grant should be presented in the books as
deferred income. (Refer footnote 1)
1 As per the amendment made by MCA in Ind AS 20 on 21 st September, 2018, alternatively if the company
is following the policy of recognising non-monetary grants at nominal value, the company will not
recognise any government grant. Land will be shown in the financial statements at ` 1.

(ii) As per para 10A of Ind AS 20 ‘Accounting for Governm ent Grants and Disclosure of
Government Assistance’, loan at concessional rates of interest is to be measured at
fair value and recognised as per Ind AS 109. Value of concession is the difference
between the initial carrying value of the loan determined in accordance with
Ind AS 109, and the proceeds received. The benefit is accounted for as Government
grant.
(iii) ` 25 lakh has been received by D Ltd. for immediate start-up of business. Since this
grant is given to provide immediate financial support to an entity, it should be
recognised in the Statement of Profit and Loss immediately with disclosure to ensure
that its effect is clearly understood, as per para 21 of Ind AS 20.
(iv) ` 10 lakh should be recognized by S Ltd. as deferred income and will be transferred
to profit and loss over the useful life of the asset. In this case, ` 1,00,000
[` 10 lakh / 10 years] should be credited to profit and loss each year over period of
10 years. (Refer footnote 2)
(v) As per para 12 of Ind AS 20, the entire grant of ` 25 lakh should be recognized
immediately as deferred income and charged to profit and loss over a period of two
years based on the related costs for which the grants are intended to compensate
provided that there is reasonable assurance that U Ltd. will comply with the conditions
attached to the grant.
(c) Zed Ltd. has sold two products viz Deluxe bike and the extended warranty. Revenue
earned on sale of each product should be recognised separately.
Calculation of Revenue attributable to both the components:
Total fair value of Deluxe bike and extended warranty (80,000+10,000) ` 90,000
Less: Sale price of the Deluxe bike with extended warranty (` 87,300)
Discount ` 2,700
Discount and revenue attributable to each component of the transaction:
Proportionate discount attributable to sale of Deluxe bike ` 2,400
(2,700 x 80,000 / 90,000)
Revenue from sale of Deluxe bike (80,000 – 2,400) ` 77,600
Proportionate discount attributable to extended warranty ` 300
(2,700 x 10,000 / 90,000)
2 As per the amendment made by MCA in Ind AS 20 on 21 st September, 2018, alternatively, if the
company is following the policy of recognising non-monetary grants at nominal value, the company will
not recognise any government grant. The machinery will be recognised at
` 70 lakh (` 80 lakh - ` 10 lakh). Reduced depreciation will be charged to the Statement of Profit or
Loss.

Revenue from extended warranty (10,000 - 300) ` 9,700

Revenue in respect of sale of Deluxe bike of ` 77,600 should be recognised immediately
and revenue from warranty of ` 9,700 should be recognised over the period of warranty ie.
2 years.
Question 3
(a) On 1st April, 2017 Good Time Limited purchased some land for ` 1.5 crore (including legal
cost of ` 10 lakhs) for the purpose of constructing a new factory. Construction work
commenced on 1st May, 2017. Good Time Limited incurred the following costs in relation
to its construction.
`
Preparation and levelling of the land 4,40,000
Purchase of materials for the construction 92,00,000
Employment costs of the construction workers (per month) 1,45,000
Overhead costs incurred directly on the construction of the factory (per
1,25,000
month)
Ongoing overhead costs allocated to the construction project (using the
75,000
company's normal overhead allocation model) per month
Costs of relocating employees to work at new factory 3,25,000
Costs of the opening ceremony on 1st January, 2018 2,50,000
Income received during the temporary use of the factory premises as a
60,000
store during the construction period.
The construction of the factory was completed on 31 st December, 2017 and production
began on 1st February, 2018. The overall useful life of the factory building was estimated
at 40 years from the date of completion. However, it is estimated that the roof will need to
be replaced 20 years after the date of completion and that the cost of replacing the roof at
current prices would be 25% of the total cost of the building.
At the end of the 40 years period, Good Time Limited has a legally enforceable obligation to
demolish the factory and restore the site to its original condition. The company estimates that
the cost of demolition in 40 year's time (based on price prevailing at that time) will be
` 3 crore. The annual risk adjusted discount rate which is appropriate to this project is 8%.
The present value of ` 1 payable in 40 years time at an annual discount rate of 8% is 0.046.
The construction of the factory was partly financed. by a loan of ` 1.4 crore taken out on
1st April, 2017. The loan was at an annual rate of interest of 9%. During the period
1st April, 2017 to 30th September, 2017 (when the loan proceeds had been fully utilized to
finance the construction), Good Time Limited received investment income of ` 1,25,000
on the temporary investment of the proceeds.

You are required to compute the cost of the factory and the carrying amount of the factory
in the Balance Sheet of Good Time Limited as at 31 st March, 2018. (8 Marks)
(b) Golden Era Limited grants 200 shares to each of its 400 employees on 1 st January, 2016.
The employee should remain in service during the vesting period so as to be eligible. The
shares will vest at the end of the
1st year - If the company's earnings increase by 12%.
2nd year - If the company's earnings increase by more than 20% over the two year period.
3rd year - If the company's earnings increase by more than 20% over the three year period.
The fair value per share (non-market related) at the grant date is ` 61. In 2016, earnings
increased by 10% and 22 employees left the company. The company expects that
earnings will continue at a similar rate in 2017 and expect that the shares will vest at the
end of the year 2017. The company also expects that additional 18 employees will leave
the organization in the year 2017 and that 360 employees will receive their shares at the
end of the year 2017. At the end of 2017 company's earnings increased by 18% (over the
2 years period). Therefore, the shares did not vest. Only 16 employees left the
organization during 2017.
The company believes that additional 14 employees will leave in 2020 and earnings will
further increase so that the performance target will be achieved in 2018. At the end of the
year 2018, only 9 employees have left the organization. Assume that the company's
earnings increased to desired level and the performance target has been met.
You are required to determine the expense as per Ind AS for each year (assumed as
financial year) and pass appropriate journal entries. (8 Marks)
(c) NAV Limited granted a loan of ` 120 lakh to OLD Limited for 5 years @ 10% p.a. which is
Treasury bond yield of equivalent maturity. But the incremental borrowing rate of
OLD Limited is 12%. In this case, the loan is granted to OLD Limited at below market rate
of interest. Ind AS 109 requires that a financial asset or financial liability is to be measured
at fair value at the initial recognition. Should the transaction price be treated as fair value?
If not, find out the fair value. What is the accounting treatment of the difference between
the transaction price and the fair value on initial recognition in the book of NAV Ltd.?
Present value factors at 12%:
Year 1 2 3 4 5
PVF 0.892 0.797 0.712 0.636 0.567
(4 Marks)
Answer
(a) Computation of the cost of the factory
`
Purchase of land 1,50,00,000

Preparation and levelling 4,40,000

Materials 92,00,000
Employment costs of construction workers (1,45,000 x 8 months) 11,60,000
Direct overhead costs (1,25,000 x 8 months) 10,00,000
Allocated overhead costs Nil
Income from use of a factory as a store Nil
Relocation costs Nil
Cost of the opening ceremony Nil
Finance costs 9,45,000
Investment income on temporary investment of the loan proceeds (1,25,000)
Demolition cost recognised as a provision (3,00,00,000 x 0.046) 13,80,000
Total 2,90,00,000
Computation of carrying amount of the factory as at 31 st March, 2018 `
Land (Non- Factory
depreciable (Depreciable
asset) asset)
Cost of the asset (Total cost 1,50,00,000 1,40,00,000
2,90,00,000)
Less: Depreciation
On Land Nil
On Factory
Depreciation on roof component
(1,40,00,000 × 25% × 1/20 x 3/12) 43,750
Depreciation on remaining factory
(1,40,00,000 × 75% × 1/40 × 3/12) 65,625 (1,09,375)
Carrying amount of depreciable asset ie
factory 1,50,00,000 1,38,90,625
Total cost 2,88,90,625
Note:
1. Interest cost has been capitalised based on nine month period. This is because,
purchase of land would trigger off capitalisation.
2. All of the net finance cost of ` 8,20,000 (` 9,45,000 - ` 1,25,000) has been allocated
to the depreciable asset i.e Factory. Alternatively, it can be allocated proportionately
between land and factory.

(b) Since the earnings of the entity is non-market related, hence it will not be considered in
fair value calculation of the shares given. However, the same will be considered while
calculating number of shares to be vested.
Calculation of yearly expenses to be charged:
2016 2017 2018
(a) Total employees 400 400 400
(b) Employees left (Actual) (22) (38)* (47)**
(c) Employees expected to leave in the
next year (18) (14) -
(d) Year end – No of employees (a-b-c) 360 348 353
(e) Shares per employee 200 200 200
(f) Fair value of a share at the grant date 61 61 61
Conditional increase in earnings 12% 20% 20%
Actual increase in earnings 10% 18% 20%
(g) Vesting period 1/2 2/3 3/3
(h) Expenses (Refer Working Notes) 21,96,000 6,34,400 14,76,200
*22 + 16 = 38
** 22 +16 + 9 = 47
Journal Entries
31st March, 2016 ` `
Employee benefits expenses A/c Dr. 5,49,000
To Share based payment reserve (equity) A/c 5,49,000
(Equity settled shared based payment based on conditional
vesting period)
Profit and Loss A/c Dr. 5,49,000
To Employee benefits expenses A/c 5,49,000
(Employee benefits expenses transferred to Profit and Loss A/c)
31st March, 2017
Employee benefits expenses Dr. 18,05,600
To Share based payment reserve (equity) 18,05,600
expected vesting period)


31st March, 2018
31st March, 2019
Share based payment reserve (equity) (353 x 200 x 61) Dr. 43,06,600
To Share Capital 43,06,600
(Share capital Issued)
Working Notes:
1. Expense for 2016 (Jan to Dec) = No. of employees x Shares per employee x Fair
value of share x Proportionate vesting period
= 360 x 200 x 61 X 1/2
= 21,96,000
Expense recognized in the financial year 2015-2016= 21,96,000 x 3/12 = 5,49,000
2. Expense for 2017 (Jan to Dec) = No of employees x Shares per employee x Fair value
of share x Proportionate vesting period) – Expense recognized in year 2016
= [(348 x 200 x 61) x 2/3] – 21,96,000
= 6,34,400

Expense recognized in the financial year 2016-2017= (21,96,000 x 9/12) + (6,34,400

x 3/12) = 16,47,000 + 1,58,600 = 18,05,600
3. Expense for 2018 (Jan to Dec) = (No of employees x Shares per employee x Fair
value of share x Proportionate vesting period) – Expense recognized in year 2016
and 2017
= [(353 x 200 x 61) x 3/3] – (21,96,000 + 6,34,400)
= 14,76,200
Expense recognized in the financial year 2017-2018= (6,34,400 x 9/12) + (14,76,200
x 3/12) = 4,75,800 + 3,69,050 = 8,44,850
4. Expense recognized in the financial year 2018-2019=(14,76,200x9/12)= 11,07,150
(c) Since the loan is granted to OLD Ltd at 10% i.e below market rate of 12%. It will be
considered as loan given at off market terms. Hence the Fair value of the transaction will
be lower from its transaction price & not the transaction price.
Calculation of fair value
Year Future cash flow Discounting factor Present value
(in lakh) @ 12% (in lakh)
1 12 0.892 10.704
2 12 0.797 9.564
3 12 0.712 8.544
4 12 0.636 7.632
5 120+12=132 0.567 74.844
111.288
The fair value of the transaction be ` 111.288 lakh.
Since fair value is based on level 1 input or valuation technique that uses only data from
observable markets, difference between fair value and transaction price will be recognized
in Profit and Loss as fair value loss i.e ` 120 lakh– ` 111.288 lakh= ` 8.712 lakh.
Note: One may also calculate the above fair value by the way of annuity on interest
amount rather than separate calculation.
Question 4
(a) A machine was acquired by ABC Ltd. 15 years ago at a cost of ` 20 crore. Its accumulated
depreciation as at 31st March, 2018 was ` 16.60 crore. Depreciation estimated for the
financial year 2018-19 is ` 1 crore. Estimated Net Selling Price of the machine as on
31st March, 2018 was ` 1.20 crore, which is expected to decline by 20 per cent by the end
of the next financial year.

Its value in use has been computed at ` 1.40 crore as on 1st April, 2018, which is expected
to decrease by 30 per cent by the end of the financial year. Assuming that other conditions
of relevant Accounting Standard for applicability of the impairment are satisfied:
(i) What should be the carrying amount of this machine as at 31 st March, 2019?
(ii) How much will be the amount of write off (impairment loss) for the financial year ended
31st March, 2019?
(iii) If the machine had been revalued ten years ago and the current revaluation reserves
against this plant were to be ` 48 lakh, how would you answer to questions (i) and (ii)
above?
(iv) If the value in use was zero and the company was required to incur a cost of ` 8 lakh
to dispose of the plant, what would be your response to questions (i) and (ii) above?
(5 Marks)
(b) An asset is sold in 2 different active markets at different prices. An entity enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date.
In Market A:
The price that would be received is ` 78, transaction costs in that market are ` 9 and the
costs to transport the asset to that market are ` 6.
In Market B:
The price that would be received is ` 75, transaction costs in that market are ` 3 and the
costs to transport the asset to that market are ` 6.
You are required to calculate:
(i) The fair value of the asset, if market A is the principal market, and
(ii) The fair value of the asset, if none of the markets is principal market. (5 Marks)
(c) Future Limited undertakes a contract for construction of a Bridge on 01.04.2017. The
contract was to be completed in two years. The following details are given below:
Contract Price ` 1250 Lakh
Cost incurred up to 31.03.2018 ` 780 Lakh
The company estimated that a further cost of ` 520 lakh would be incurred for completing
the project.
What amount should be charged to revenue for the financial year 2017-18 as per the
provisions of Ind AS 11 "Construction Contracts"?
Show the extracts of Profit and Loss account in the books of Future Limited . (5 Marks)

(d) Navya Limited manufacturer of ceramic tiles has shown a net profit of ` 15,00,000 for the
first quarter of 2018-2019. Following adjustments were made while computing the net
profit:
(i) Bad debts of ` 1,64,000 incurred during the quarter. 75% of the bad debts have been
deferred for the next three quarters (25% for each quarter).
(ii) Sales promotion expenses of ` 5,00,000 incurred in the first quarter and 90%
expenses deferred to the next three quarters (30% for each quarter) on the basis that
the sales in these quarters will be high in comparison to first quarter.
(iii) Additional depreciation of ` 3,50,000 resulting from the change in the method of
depreciation has been taken into consideration.
(iv) Extra-ordinary loss of ` 1,36,000 incurred during the quarter has been fully
recognized in this quarter.
Discuss the treatment required under Ind AS 34 and ascertain the correct net profit to be
shown in the Interim Financial report of first quarter to be presented to the Board of
Directors. (5 Marks)
Answer
(a) As per the requirement of the question, the following solution has been drawn on the basis
of AS 28
(` in crore)
(i) Carrying amount of plant (before impairment) as on 31 st March, 2019 2.40
Carrying amount of plant (after impairment) as on 31 st March, 2019 0.98
(ii) Amount of impairment loss for the financial year ended 31 st March,
2019 (2.4 Cr.- 0.98 Cr) 1.42
(iii) If the plant had been revalued ten years ago
Debit to revaluation reserve 0.48
Amount charged to profit and loss (1.42 - 0.48) 0.94
(iv) If Value in use was zero
Value in use (a) Nil
Net selling price (b) (0.08)
Recoverable amount [higher of (a) and (b)] Nil
Carrying amount (closing book value) Nil
Amount of write off (impairment loss) (` 2.4 Cr – Nil) 2.4
Entire book value of plant will be written off and charged to profit and
loss account.

Working Notes:
(1) Calculation of Closing Book Value, as at 31st March, 2019
` in crore
Opening book value as on 1.4.2018 (`20 crore -16.60 crore) 3.40
Less: Depreciation for financial year 2018–2019 (1.00)
Closing book value as on 31.3.2019 (before impairment) 2.40
(2) Calculation of Estimated Net Selling Price on 31st March, 2019
` in crore
Estimated net selling price as on 1.4.2018 1.20
Less: Estimated decrease during the year (20% of ` 1.20 Cr.) (0.24)
Estimated net selling price as on 31.3.2019 0.96
(3) Calculation of Estimated Value in Use of Plant on 31 st March, 2019
` in crore
Estimated value in use as on 1.4.2018 1.40
Less: Estimated decrease during the year (30% of `1.40 Cr.) (0.42)
Estimated value in use as on 31.3.2019 0.98
(4) Recoverable amount as on 31.3.2019 is equal to higher of Net selling price and
value in use
` in crore
Net selling price 0.96
Value in use 0.98
Recoverable amount 0.98
Impairment Loss [Carrying amount – Recoverable amount ie. (2.40 1.42
Cr. – 0.98 Cr)]
Revised carrying amount on 31.3.2019 is equal to Recoverable 0.98 Cr.
amount (after impairment)
Note: Since question requires computation of Impairment Loss on 31.3.2019, hence

impairment probability on 31.3.2018 has been ignored. However, since there is
impairment probability at the beginning of the year as well, one may calculate the
carrying amount at the beginning of the year after impairment and then calculate the
impairment possibilities at the end of the year. Accordingly the solution will be as follows:

` in crore
Carrying amount before impairment on 1.4.2018 (20 - 16.60) 3.40
Recoverable amount ie. higher of NSP (1.20 cr) and Value in use (1.40 cr) 1.40
Impairment loss 2.00
Revised carrying amount after impairment as on 1.4.2018 1.40
Less: Depreciation for 2018-2019 (as given in the question) (1.00)
Carrying amount as on 31.3.2019 0.40
Recoverable amount as on 31.3.2019 (Refer W.N. 2, 3 and 4 above) 0.98
Impairment Loss as on 31.3.2019 (since carrying amount is less than
recoverable amount) NIL
(b) (i) If Market A is the principal market
If Market A is the principal market for the asset (i.e., the market with the greatest
volume and level of activity for the asset), the fair value of the asset would be
measured using the price that would be received in that market, after taking into
account transport costs.
Fair Value of the asset will be
`
Price receivable 78
Less: Transportation cost (6)
Fair value of the asset 72
(ii) If neither of the market is the principal market
If neither of the market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market. The most
advantageous market is the market that maximises the amount that would be received
to sell the asset, after taking into account transaction costs and transport costs (i.e.,
the net amount that would be received in the respective markets).
Determination of most advantageous market:
` `
Market A Market B
Price receivable 78 75
Less: Transaction cost (9) (3)
Less: Transportation cost (6) (6)
Fair value of the asset 63 66

Since the entity would maximise the net amount that would be received for the asset
in Market B i.e. ` 66, the fair value of the asset would be measured using the price in
Market B.
Fair value of the asset will be
`
Price receivable 75
Less: Transportation cost (6)
Fair value of the asset 69
(c) Statement showing the amount to be charged to Revenue as per Ind AS 11
` in lakh
Cost of construction incurred upto 31.03.2018 780
Add: Estimated future cost 520
Total estimated cost of construction 1,300
Degree of completion (780/1,300 x 100) 60%
` in lakh
Revenue recognized (1,250 x 60%) 750
Total foreseeable loss (1,300 – 1,250) 50
Less: Expense for the current year (780 – 750) (30)
Loss to be provided for 20
Profit and Loss Account (Extract)
` in lakh ` in lakh
To Construction Costs 780 By Contract Price 750
To Provision for loss 20 By Net loss 50
800 800
(d) As per Ind AS 34, Interim Financial Reporting, the quarterly net profit should be adjusted
and restated as follows:
(i) Bad debts of ` 1,64,000 have been incurred during current quarter. Out of this, the
company has deferred 75% i.e. ` 1,23,000 to the next 3 quarters. This treatment is
not correct as the expenses incurred during an interim reporting period should be
recognised in the same period unless conditions mentioned in Ind AS 34 are fulfilled.
Accordingly, ` 1,23,000 should be deducted from the net profit of the current quarter
` 15,00,000.

(ii) Deferment of sales promotion expenses of ` 4,50,000 is not correct. It should be

charged in the quarter in which the expenses have been incurred. Hence, it should
be charged in the first quarter only.
(iii) Recognising additional depreciation of ` 3,50,000 in the same quarter is correct and
is in tune with Ind AS 34.
(iv) The treatment of extra-ordinary loss of ` 1,36,000 being recognised in the same
quarter is correct.
Thus considering the above, the correct net profits to be shown in Interim Financial Report
of the third quarter shall be ` 15,00,000 - ` 1,23,000 - ` 4,50,000 = ` 9,27,000.
Question 5
(a) Veer Limited issues convertible bonds of ` 75,00,000 on 1st April, 2018. The bonds have
a life of five years and a face value of ` 20 each, and they offer interest payable at the end
of each financial year at a rate of 4.5 per cent annum. The bonds are issued at their face
value and each bond can be converted into one ordinary share in Veer Ltd at any time in
the next five years. Companies of a similar risk profile have recently issued debt at 6 per
cent per annum with similar terms but without the option for conversion.
You are required to:
(i) Provide the appropriate accounting entries for initial recognition as per the relevant
Ind AS in the books of the company.
(ii) Calculate the stream of interest expenses across the five years of the life of the bonds.
(iii) Provide the accounting entries if the holders of the bonds elect to convert the bonds
to ordinary shares at the end of the fourth year. (8 Marks)
(b) New Era Development Limited has been preparing Value Added Statement for the past six
years. The department of HRD (Human Resource Development) of the Company has
suggested introducing a value added incentive scheme to motivate the employees for
better performance. Under the scheme it is proposed that the best index performance
favorable to employee i.e. Employee Costs to Added value, for the last six years, will be
used as the target index for future calculations of the bonus to be paid.
After the target index is determined, any actual improvement in the index will be rewarded.
The employer and the employee will be sharing any such improvement in the ratio of 3:5.
The bonus is to be given at the end of the year, after the profit for the year is determined.
The following information is available for the last six years.
Summarized Value Added Statement for six years
` in lakh
Particulars for 31st March 2012 2013 2014 2015 2016 2017
Sales 240 280 380 460 520 600

Less: Bought in Goods and Services (105) (128) (200) (250) (280) (320)
Added Value 135 152 180 210 240 280
Employees cost 60 66 74 84 98 112
Dividend 8 10 15 20 24 30
Taxes 15 18 20 21 25 26
Depreciation 21 26 31 36 44 56
Debenture Interest 4 4 4 4 4 4
Retained earning 27 28 36 45 45 52
Added Value 135 152 180 210 240 280
Summarized Profit & Loss account for the year ended 31st March, 2018
Particulars ` in lakh
Income
Sales less returns 680
Dividend and interest 24
Miscellaneous income 26
Total Income (A) 730
Expenditure
Production and Operating Expenses:
Cost of Material 250
Wages and Salaries 89
Other Manufacturing expenses 70 409
Administrative Expenses :
Administrative staff salary 31
Executive Director's salary 4
Administration expenses 29 64
Selling and Distribution expenses :
Selling and distribution salaries 20
Selling expenses 6 26
Financial expenses :
Debenture interest 4
Depreciation 76 80
Total expenditure (B) 579

Profit before taxation (A-B) 151

Provision for Taxation (47)
Profit after taxation 104
From the above information, prepare value added statement for the year 31 st March, 2018
and determine the amount of bonus payable to employees, if any. (8 Marks)
(c) Baby Limited manufactures consumable goods for infants like bath soap, cream, powder,
oil etc. As part of its CSR policy, it has decided that for every pack of these goods sold,
` 0.75 will go towards the "Swachh Bharat Foundation" which will qualify as a CSR spend
as per Schedule VII. Consequently, at the year end, the company sold 40,000 such packs
and a total of ` 30,000 was recognized as CSR expenditure. However, this amount was
not paid to the Foundation at the end of the financial year. Will the amount of ` 30,000
qualify to be CSR expenditure? (4 Marks)
Answer
(a) Present value of bonds at the market rate of debt
Present value of principal to be received in 5 years discounted at 6%
(75,00,000 x 0.747) = 56,02,500
Present value of interest stream discounted at 6% for 5 years
(3,37,500 x4.212) = 14,21,550
Total present value = 70,24,050
Equity component = 4,75,950
Total face value of convertible bonds = 75,00,000
(i) Journal Entries
Dr. Cr.
Amount Amount
(`) (`)
1st April, 2018
Cash Dr. 75,00,000
To Convertible bonds (liability) 70,24,050
To Convertible bonds (equity component) 4,75,950
(Being entry to record the convertible bonds and the
recognition of the liability and equity components)
31st March, 2019
Interest expense Dr. 4,21,443

To Cash 3,37,500
To Convertible bonds (liability) 83,943
(Being entry to record the interest expense)
(ii) The stream of interest expense is summarised below, where interest for a given year
is calculated by multiplying the present value of the liability at the beginning of the
period by the market rate of interest, this is being 6 per cent.
Date Payment Interest expense Increase in Total bond
at 6% (e of bond liability (e of
previous year x liability previous
6%) (c-b) year +d)
(a) (b) (c) (d) (e)
1 April, 2018
st 70,24,050
31st March, 2019 3,37,500 4,21,443 83,943 71,07,993
31st March, 2020 3,37,500 4,26,480 88,980 71,96,973
31st March, 2021 3,37,500 4,31,818 94,318 72,91,291
31st March, 2022 3,37,500 4,37,477 99,977 73,91,268
31st March, 2023 3,37,500 4,46,232* 1,08,732 75,00,000
* Difference is due to rounding off.
(iii) If the holders of the bond elect to convert the bonds to ordinary shares at the end of
the fourth year (after receiving their interest payments), the entries in the fourth year
would be:
Dr. Cr.
(`) (`)
31st March, 2022
Interest expense A/c Dr. 4,37,477
To Cash A/c 3,37,500
To Convertible bonds (liability) A/c 99,977
(Being entry to record interest expense for the period)
31st March, 2022
Convertible bonds (liability) A/c Dr. 73,91,268
Convertible bonds (equity component) A/c Dr. 4,75,950
To Ordinary share capital A/c 78,67,218
(Being entry to record the conversion of bonds into
ordinary shares of Veer Limited).

(b) 1. Calculation of Target index

(` in lakh)
Year ended 31st 2012 2013 2014 2015 2016 2017
March
Employees costs 60 66 74 84 98 112
Value added 135 152 180 210 240 280
Percentage of 44.44% 43.42% 41.11% 40% 40.83% 40%
‘Employee costs’ to
‘Value added’
Target index percentage is taken as highest of the above from the employee’s
viewpoint i.e. 44.44%.
2. Value Added Statement for the year 2017-2018
(` in lakh) (` in lakh)
Sales 680
Less: Cost of bought in goods & services
Materials consumed 250
Other manufacturing expenses 70
Administrative expenses 29
Selling expenses 6 (355)
325
Add: Dividend and interest 24
Miscellaneous income 26
Value Added 375
3. Employee costs for 2017-2018
(` in lakh)
Wages and salaries 89
Administrative staff salary 31
Executive Director’s salary 4
Selling and distribution salaries 20
144

Note: In the above solution, it is assumed that the Executive Director is in whole time
employment of the company. Hence his cost has not been considered while
calculating value added. Alternatively, it may be assumed that Executive Director is
not an employee of the company. In such a situation, his salary will be included in
‘Cost of bought in goods & services’. Accordingly, the value added will be ` 357 lakh
and employees cost would be ` 140 lakh.
4. Calculation of target employee cost = Target Index Percentage x Value added
= 44.44% x ` 375 lakh= ` 166.65 lakh
5. Calculation of savings
Target employee cost = ` 166.65 lakh
Less: Actual Cost = (` 144 lakh)
Saving = ` 22.65 lakh
6. Calculation of Bonus payable for the year 2017-2018:
5/8 of savings is Bonus Payable = `22.65 lakh x 5/8 = ` 14.16 lakh.
(c) Baby Ltd. has earmarked 75 paise per pack to spend as CSR activities. However, only by
earmarking the amount from such sale for CSR expenditure, the company cannot show it
as CSR expenditure. To qualify the amount as CSR expenditure, it has to be spent.
Hence, ` 30,000 will not be automatically considered as CSR expenditure till the time it is
spent on CSR activities i.e it is deposited to ‘Swachh Bharat Foundation’.
Question 6
(a) PB Limited purchased a plastic bottle manufacturing plant for ` 24 lakh on 1st April, 2015.
The useful life of the plant is 8 years. On 30th September, 2017, PB Limited temporarily
stops using the manufacturing plant because demand has declined. However, the plant is
maintained in a workable condition and it will be used in future when demand picks up.
The accountant of PB Limited decided to treat the plant as held for sale until the demand
picks up and accordingly measures the plant at lower of carrying amount and fair value
less cost to sell. The accountant has also stopped charging depreciation for rest of the
period considering the plant as held for sale. The fair value less cost to sell on
30th September, 2017 and 31 st March, 2018 was ` 13.5 lakh and ` 12 lakh respectively.
The accountant has made the following working:
Carrying amount on initial classification as held for sale ` `
Purchase price of Plant 24,00,000
Less: Accumulated Depreciation [(` 24,00,000/8)x2.5 years] 7,50,000 16,50,000
Fair value less cost to sell as on 31st March, 2017 12,00,000
The value lower of the above two 12,00,000

Balance Sheet extracts as on 31 st March, 2018

Particulars `
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 12,00,000
Required:
Analyze whether the above accounting treatment is in compliance with the Ind AS. If not,
advise the correct treatment showing necessary workings. (8 Marks)
(b) Growth Limited on 1 st April, 2015 issued 50,000, 7% convertible debentures of face value
of ` 100 per debenture at par. The debentures are redeemable at a premium of 10% on
31st March, 2020 or these may be converted into ordinary shares at the option of the
holder. The interest rate for equivalent debentures without conversion rights would have
been 10%. The date of transition to Ind AS is 1st April, 2017.
Suggest how Growth Limited should account for this compound financial instrument on the
date of transition. Also discuss Ind AS on 'Financial Instrument' presentation in the above
context.
The present value of ` 1 receivable at the end of each year based on discount rates of 7%
and 10% can be taken as:
End of Year 1 2 3 4 5
7% 0.94 0.87 0.82 0.76 0.71
10% 0.91 0.83 0.75 0.68 0.62
(8 Marks)
(c) Sun Shine India Limited has a capital base of ` 150 Lakh and has earned profits to the
tune of ` 17 lakh. The Return on Investment (ROI) of the particular industry to which the
company belongs is 14%. If the services of a particular executive are acquired by the
company, it is expected that the profit will increase by ` 3 lakh over and above the target
profit.
Determine the amount of maximum bid price for that particular executive and the maximum
salary that could be offered to him. (4 Marks)
OR
Moon Ltd. acquires 75% of Star Limited on 1 st April, 2017 for consideration transferred
` 60 lakh. Moon Limited intends to recognize the Non-Controlling Interest (NCI) at
proportionate share of fair value of identifiable assets. With the assistance of a suitably
qualified valuation professional, Moon Limited measures the identifiable net assets of Star

Limited at ` 90 lakh. Moon Limited performs a review and determines that the business
combination did not include any transactions that should be accounted for separately from
the business combination.
State whether the procedures followed by Moon Limited and the resulting measurements
are appropriate or not. Also calculate the bargain purchase gain in the process. (4 Marks)
Answer
(a) As per Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’, an
entity shall classify a non-current asset as held for sale if its carrying amount will be
recovered principally through a sale transaction rather than through continuing use.
For asset to be classified as held for sale, it must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such
assets and its sale must be highly probable. In such a situation, an asset cannot be
classified as a non-current asset held for sale, if the entity intends to sell it in a distant
future.
For the sale to be highly probable, the appropriate level of management must be committed
to a plan to sell the asset, and an active programme to locate a buyer and complete the
plan must have been initiated. Further, the asset must be actively marketed for sale at a
price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of
classification and actions required to complete the plan should indicate that it is unlikely
that significant changes to the plan will be made or that the plan will be withdrawn.
Further Ind AS 105 also states that an entity shall not classify as held for sale a non-current
asset that is to be abandoned. This is because its carrying amount will be recovered
principally through continuing use.
An entity shall not account for a non-current asset that has been temporarily taken out of
use as if it had been abandoned.
In addition to Ind AS 105, Ind AS 16 states that depreciation does not cease when the
asset becomes idle or is retired from active use unless the asset is fully depreciated.
The Accountant of PB Ltd. has treated the plant as held for sale and measured it at the fair
value less cost to sell. Also, the depreciation has not been charged thereon since the date
of classification as held for sale which is not correct and not in accordance with Ind AS 105
and Ind AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as
held for sale because its carrying amount will be principally recovered through continuous
use. PB Ltd. shall not stop charging depreciation or treat the plant as held for sale because
its carrying amount will be recovered principally through continuing use to the end of their
economic life.

The working of the same for presenting in the balance sheet will be as follows:
Calculation of carrying amount as on 31stMarch, 2018 `
Purchase Price of Plant 24,00,000
Less: Accumulated depreciation (24,00,000/ 8 years) x 3 years (9,00,000)
Carrying amount before impairment 15,00,000
Less: Impairment loss (Refer Working Note) (3,00,000)
Revised carrying amount after impairment 12,00,000
Balance Sheet extracts as on 31 stMarch 2018

Assets `
Non-Current Assets
Property, Plant and Equipment 12,00,000
Working Note:
Fair value less cost to sell of the Plant = ` 12,00,000
Value in Use (not given) or = Nil (since plant has temporarily not been used
for manufacturing due to decline in demand)
Recoverable amount = higher of above i.e. ` 12,00,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ` 15,00,000 - ` 12,00,000
= ` 3,00,000.
(b) Since the liability is outstanding on the date of Ind AS transition, Growth Ltd. is required to
split the convertible debentures into debt and equity portion on the date of transition.
Accordingly, first the liability component will be measured discounting the contractually
determined stream of future cash flows (interest and principal) to present value by using
the discount rate of 10% p.a. (being the market interest rate for similar debentures with no
conversion option).
Calculation of Equity & Liability component on initial recognition
(`)
Present Interest payments for 5 years on debentures by applying 13,26,500
annuity factor [(50,000 x 7% x 100) x 3.79]
PV of principal repayment (including premium) (50,000x110x0.62) 34,10,000
Total liability component 47,36,500
Total equity component (Balancing figure) 2,63,500
Total proceeds from issue of Debentures 50,00,000

Thus, on the date of transition, the amount of ` 50,00,000 being the amount of debentures
will split as under:
Debt ` 47,36,500
Equity ` 2,63,500
(c) EITHER
Capital Base = ` 1,50,00,000
Actual Profit = ` 17,00,000
Target Profit @ 14% = ` 21,00,000
Expected Profit on employing the particular executive

= ` 21,00,000 + ` 3,00,000 = ` 24,00,000
Additional Profit = Expected Profit – Actual Profit
= ` 24,00,000 – ` 17,00,000 = ` 7,00,000
Additional Pr ofit 7,00,000
Maximum bid price = = ×100 = ` 50,00,000
Rate of Re turn on Investment 14%
Maximum salary that can be offered = 14% of ` 50,00,000 i.e., ` 7,00,000
Maximum salary can be offered to that particular executive upto the amount of additional
profit i.e., ` 7,00,000.
OR
(c) The amount of Star Ltd.’s identifiable net assets exceeds the fair value of the consideration
transferred plus the fair value of the NCI in Star Ltd.’s, resulting in an initial indication of a
gain on a bargain purchase. Accordingly, Moon Ltd. reviews the procedures it used to
identify and measure the identifiable net assets acquired, to measure the fair value of both
the NCI and the consideration transferred, and to identify transactions that were not part
of the business combination.
Following that review, Moon Ltd. can conclude that the procedures followed and the
resulting measurements were appropriate. (`)
Identifiable net assets 90,00,000
Less: Consideration transferred (60,00,000)
NCI (90,00,000 x 25%) (22,50,000)
Gain on bargain purchase 7,50,000

PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT
Question No.1 is compulsory.
Candidates are required to answer any four out of the remaining five questions.
Working notes should form part of the respective answers.
Question 1
(a) Tangent Ltd. is considering calling ` 3 crores of 30 years, ` 1,000 bond issued 5 years
ago with a coupon interest rate of 14 per cent. The bonds have a call price of ` 1,150
and had initially collected proceeds of ` 2.91 crores since a discount of ` 30 per bond
was offered. The initial floating cost was ` 3,90,000. The Company intends to sell ` 3
crores of 12 per cent coupon rate, 25 years bonds to raise funds for retiring the old
bonds. It proposes to sell the new bonds at their par value of ` 1,000. The estimated
floatation cost is ` 4,25,000. The company is paying 40% tax and its after tax cost of
debt is 8 per cent. As the new bonds must first be sold and then their proceeds to be
used to retire the old bonds, the company expects a two months period of overlapping
interest during which interest must be paid on both the old and the new bonds. You are
required to evaluate the bond retiring decision. [PVIFA 8%, 25 = 10.675] (8 Marks)
(b) A dealer in foreign exchange has the following position in Swiss Francs on 31 st January,
2018:
(Swiss Francs)
Balance in the Nostro A/c Credit 1,00,000
Opening Position Overbought 50,000
Purchased a bill on Zurich 70,000
Sold forward TT 49,000
Forward purchase contract cancelled 41,000
Remitted by TT 75,000
Draft on Zurich cancelled 40,000
Examine what steps would the dealer take, if he is required to maintain a credit balance
of Swiss Francs 30,000 in the Nostro A/c and keep as overbought position on Swiss
Francs 10,000? (8 Marks)
(c) Explain Angel Investors. (4 Marks)

Answer
(a) NPV for bond refunding
`
PV of annual cash flow savings (W.N. 2)
(3,49,600  PVIFA 8%,25) i.e. 10.675 37,31,980
Less: Initial investment (W.N. 1) 31,15,000
NPV 6,16,980
Recommendation: Refunding of bonds is recommended as NPV is positive.
Working Notes:
(1) Initial investment:
(a) Call premium
Before tax (1,150 – 1,000)  30,000 45,00,000
Less tax @ 40% 18,00,000
After tax cost of call prem. 27,00,000
(b) Floatation cost 4,25,000
(c) Overlapping interest
Before tax (0.14  2/12  3 crores) 7,00,000
Less tax @ 40% 2,80,000 4,20,000
(d) Tax saving on unamortised discount on old bond (25/30  9,00,000  0.4)
(3,00,000)
(e) Tax savings from unamortised floatation
Cost of old bond 25/30  3,90,000  0.4 (1,30,000)
31,15,000
(2) Annual cash flow savings:
(a) Old bond
(i) Interest cost (0.14  3 crores) 42,00,000
Less tax @ 40% 16,80,000 25,20,000
(ii) Tax savings from amortisation of discount (9,00,000/30  0.4) (12,000)
(iii) Tax savings from amortisation of floatation cost
(3,90,000/30  0.4) (5,200)
Annual after tax cost payment under old Bond (A) 25,02,800

PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 3
(b) New bond

(i) Interest cost before tax (0.12  3 crores) 36,00,000
Less tax @ 40% 14,40,000
After tax interest 21,60,000
(ii) Tax savings from amortisation of floatation cost
(0.4  4,25,000/25) (6,800)
Annual after tax payment under new Bond (B) 21,53,200
Annual Cash Flow Saving (A) – (B) 3,49,600
(b) Exchange Position:
Particulars Purchase Sw. Fcs. Sale Sw. Fcs.
Opening Balance Overbought 50,000
Bill on Zurich 70,000
Forward Sales – TT 49,000
Cancellation of Forward Contract 41,000
TT Sales 75,000
Draft on Zurich cancelled 40,000 —
1,60,000 1,65,000
Closing Balance Oversold 5,000 —
1,65,000 1,65,000
Cash Position (Nostro A/c)
Credit Debit
Opening balance credit 1,00,000 —
TT sales — 75,000
1,00,000 75,000
Closing balance (credit) — 25,000
1,00,000 1,00,000
The Bank has to buy spot TT Sw. Fcs. 5,000 to increase the balance in Nostro account to
Sw. Fcs. 30,000.
This would bring down the oversold position on Sw. Fcs. as Nil.
Since the bank requires an overbought position of Sw. Fcs. 10,000, it has to buy forward
Sw. Fcs. 10,000.

(c) Angel investors invest in small startups or entrepreneurs. Often, angel investors are
entrepreneur's family and friends. The capital angel investors provide may be a one-time
investment to help the business propel or an ongoing injection of money to support and
carry the company through its difficult early stages.
Angel investors provide more favorable terms compared to other lenders, since they
usually invest in the entrepreneur starting the business rather than the viability of the
business. Angel investors are focused on helping startups take their first steps, rather
than the possible profit they may get from the business. Essentially, angel investors are
the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed
investors or business angels. These are affluent individuals who inject capital for startups
in exchange for ownership equity or convertible debt. Some angel investors invest
through crowdfunding platforms online or build angel investor networks to pool in capital.
Angel investors typically use their own money, unlike venture capitalists who take care of
pooled money from many other investors and place them in a strategically managed
fund.
Though angel investors usually represent individuals, the entity that actually provides the
fund may be a limited liability company, a business, a trust or an investment fund, among
many other kinds of vehicles.
Angel investors who seed startups that fail during their early stages lose their
investments completely. This is why professional angel investors look for opportunities
for a defined exit strategy, acquisitions or initial public offerings (IPOs).
Question 2
(a) Shares of Volga Ltd. are being quoted at a price-earning ratio of 8 times. The company
retains 50% of its Earnings Per Share. The Company's EPS is ` 10.
You are required to determine:
(1) the cost of equity to the company if the market expects a growth rate of 15% p.a.
(2) the indicative market price with the same cost of capital and if the anticipated
growth rate is 16% p.a.
(3) the market price per share if the company's cost of capital is 20% p.a. and the
anticipated growth rate is 18% p.a. (8 Marks)
(b) Mr. Kapoor owns a portfolio with the following characteristics:
Security X Security Y Risk Free Security
Factor 1 sensitivity 0.75 1.50 0
Factor 2 sensitivity 0.60 1.10 0
Expected Return 15% 20% 10%

It is assumed that security returns are generated by a two factor model.

(i) If Mr. Kapoor has ` 1,00,000 to invest and sells short ` 50,000 of security Y and
purchases ` 1,50,000 of security X, what is the sensitivity of Mr. Kapoor's portfolio to
the two factors?
(ii) If Mr. Kapoor borrows ` 1,00,000 at the risk free rate and invests the amount he
borrows along with the original amount of ` 1,00,000 in security X and Y in the same
proportion as described in part (i), what is the sensitivity of the portfolio to the two
factors?
(iii) What is the expected return premium of factor 2? (8 Marks)
(c) Discuss about the Primary Participants in the process of Securitization. (4 Marks)
Answer
(a) (1) Cost of Capital
Retained earnings (50%) ` 5 per share
Dividend (50%) ` 5 per share
EPS (100%) ` 10 per share (given)
P/E Ratio 8 times (given)
Market price ` 10  8 = ` 80 per share
Cost of equity capital
 Div  ` 5
= 100 + Growth % = x 100  100 +15% = 21.25%
 Pr ice  ` 80
 Dividend 
(2) Market Price =  
 Cost of Ca pital(% ) - Growth Rate(% ) 
`5
= = ` 95.24 per share
(21.25-16)%
`5
(3) Market Price = = ` 250 per share
(20 -18)%
Alternatively, if candidates have assumed the given figure of EPS as of last year then
answer will be as follows:
(1) Cost of Capital
Retained earnings (50%) ` 5 per share
Dividend (50%) ` 5 per share
EPS (100%) ` 10 per share (given)

P/E Ratio 8 times (given)

Market price ` 10  8 = ` 80 per share
Cost of equity capital
` 5(1.15)
=  
Div
100 + Growth % = x100 +15% = 22.19%
 Pr ice  ` 80
 Dividend 
(2) Market Price =  
 Cost of Ca pital(% ) - Growth Rate(% ) 
` 5.75
= = ` 92.89 per share
(22.19-16)%
` 5(1.18)
(3) Market Price = = ` 295 per share
(20-18)%
(b) (i) Mr. Kapoor’s position in the two securities is +1.50 in security X and -0.5 in security
Y. Hence the portfolio sensitivities to the two factors:-
b prop. 1 =1.50 x 0.75 + (-0.50 x 1.50) = 0.375
b prop. 2 = 1.50 x 0.60 + (-0.50 x 1.10) = 0.35
(ii) Mr. Kapoor’s current position:
Security X ` 3,00,000 / ` 1,00,000 = 3
Security Y -` 1,00,000 / ` 1,00,000 = -1
Risk free asset -` 100000 / ` 100000 = -1
b prop. 1 = 3.0 x 0.75 + (-1 x 1.50) + (- 1 x 0) = 0.75
b prop. 2 = 3.0 x 0.60 + (-1 x 1.10) + (-1 x 0) = 0.70
(iii) Expected Return = Risk Free Rate of Return + Risk Premium
Let λ1 and λ2 are the Value Factor 1 and Factor 2 respectively.
Accordingly
15 = 10 + 0.75 λ1 + 0.60 λ2
20 = 10 + 1.50 λ1 + 1.10 λ2
On solving equation, the value of λ1 and λ2 comes 6.67 and 0 respectively.
Accordingly, the expected risk premium for the factor 2 shall be Zero and whatever
be the risk the same shall be on account of factor 1.

Alternatively, the risk premium of Securities X & Y can be calculated as follows:

Security X
Total Return = 15%
Risk Free Return = 10%
Risk Premium = 5%
Security Y
Total Return = 20%
Risk Free Return = 10%
Risk Premium = 10%
(c) Primary Participants are main parties to the process of securitization. The primary
participants in the process of securitization are as follows:
(i) Originator: It is the initiator of deal or can be termed as securitizer. It is an entity
which sells the assets lying in its books and receives the funds generated through
the sale of such assets. The originator transfers both legal as well as beneficial
interest to the Special Purpose Vehicle.
(ii) Special Purpose Vehicle: Also, called SPV, it is created for the purpose of
executing the deal. Since issuer originator transfers all rights in assets to SPV, it
holds the legal title of these assets. It is created especially for the purpose of
securitization only and normally could be in form of a company, a firm, a society or a
trust.
The main objective of creating SPV is to remove the asset from the Balance Sheet
of Originator. Since, SPV makes an upfront payment to the originator, it holds the
key position in the overall process of securitization. Further, it also issues the
securities (called Asset Based Securities or Mortgage Based Securities) to the
investors.
(iii) The Investors: Investors are the buyers of securitized papers which may be an
individual, an institutional investor such as mutual funds, provident funds, insurance
companies, Financial Institutions etc.
Since, they acquire a participating share in the total pool of assets/receivable, they
receive their money back in the form of interest and principal as per the agreed
terms.
Question 3
(a) A mutual fund having 300 units has shown its NAV of ` 8.75 and ` 9.45 at the beginning
and at the end of the year respectively. The Mutual fund has given two options to the
investors:

(i) Get dividend of ` 0.75 per unit and capital gain of ` 0.60 per unit, or
(ii) These distributions are to be reinvested at an average NAV of ` 8.65 per unit.
What difference would it make in terms of returns available and which option is
preferable by the investors? (8 Marks)
(b) The equity share of SSC Ltd. is quoted at ` 310. A three month call option is available at
a premium of ` 8 per share and a three month put option is available at a premium of ` 7
per share.
Ascertain the net payoffs to the option holder of a call option and a put option,
considering that:
(i) the strike price in both cases is ` 320; and
(ii) the share price on the exercise day is ` 300, 310, 320, 330 and 340.
Also indicate the price range at which the call and the put options may be gainfully
exercised. (8 Marks)
(c) How different stakeholders view the financial risk? (4 Marks)
Answer
(a) Option 1: When Dividend and Capital Gain are paid:
Calculation of monthly return on the mutual funds:
(NAVt - NAVt -1 )  It G t
r
NAVt -1
Or, r =
` 9.45  ` 8.75    ` 0.75  ` 0.60 
8.75
0.70 + 1.35
= = 23.43%
8.75
Option 2: When Dividend and Capital Gain are reinvested:
If all dividends and capital gain are reinvested into additional units at ` 8.65 per unit the
position would be.
Total amount reinvested = ` 1.35  300 = ` 405
` 405
Additional units added = = 46.82 units or 47 units
8.65
Value of units at the end = 346.82 units x ` 9.45 = ` 3277.45
Or = 347 units x ` 9.45 = ` 3279.15
Price paid for 300 units as at the beginning = (300  ` 8.75) = ` 2,625

Return = (` 3277.45 – ` 2625)/ `2625 = 24.86%

` 3279.15 - `2625 ` 654.15
Or Return = = = 24.92%
` 2625 ` 2625
From the above, it can be said that reinvestment option is better.

(b) Net payoff for the holder of the call option
(`)
Share price on exercise day 300 310 320 330 340
Option exercise No No No Yes Yes
Outflow (Strike price) Nil Nil Nil 320 320
Out flow (premium) 8 8 8 8 8
Total Outflow 8 8 8 328 328
Less inflow (Sales proceeds) - - - 330 340
Net payoff -8 -8 -8 2 12
Net payoff for the holder of the put option
Share price on exercise day 300 310 320 330 340
Option exercise Yes Yes No No No
Inflow (strike price) 320 320 Nil Nil Nil
Less outflow (purchase price) 300 310 - - -
Less outflow (premium) 7 7 7 7 7
Net Payoff 13 3 -7 -7 -7
The Call Option can be exercised gainfully for any price above ` 328 and Put Option for
any Price below ` 313.
(c) The financial risk can be viewed by different stakeholders as follows:
(i) From shareholder’s and lender’s point of view: Major stakeholders of a business
are equity shareholders and they view financial gearing i.e. ratio of debt in capital
structure of company as risk since in the event of winding up of a company they will
be least be given priority.
Even for a lender, existing gearing is also a risk since company having high gearing
faces more risk in default of payment of interest and principal repayment.
(ii) From Company’s point of view: From company’s point of view if a company
borrows excessively or lend to someone who defaults, then it can be forced to go
into liquidation.

(iii) From Government’s point of view: From Government’s point of view, the financial
risk can be viewed as failure of any bank (like Lehman Brothers) or down grading
of any financial institution leading to spread of distrust among society at large. Even
this risk also includes willful defaulters. This can also be extended to sovereign
debt crisis.
Question 4
(a) TK Ltd. and SK Ltd. are both in the same industry. The former is in negotiation for
acquisition of the latter. Information about the two companies as per their latest financial
statements are given below:
TK Ltd. SK Ltd.
` 10 Equity shares outstanding 24 Lakhs 12 Lakhs
Debt:
10% Debentures (` Lakhs) 1160 -
12.5% Institutional Loan (` Lakhs) - 480
Earnings before interest, depreciation and tax
800.00 230.00
(EBIDAT) (` Lakhs)
Market Price/Share (` ) 220.00 110.00
TK Ltd. plans to offer a price for SK Ltd. business, as a whole, which will be 7 times of
EBIDAT as reduced by outstanding debt and to be discharged by own shares at market
price.
SK Ltd. is planning to seek one share in TK Ltd. for every 2 shares in SK Ltd. based on
the market price. Tax rate for the two companies may be assumed as 30%.
Calculate and show the following under both alternatives -TK Ltd.'s offer and SK Ltd.' s
plan :
(i) Net consideration payable.
(ii) No. of shares to be issued by TK Ltd.
(iii) EPS of TK Ltd. after acquisition.
(iv) Expected market price per share of TK Ltd. after acquisition.
(v) State briefly the advantages to TK Ltd. from the acquisition.
Calculations may be rounded off to two decimals points. (12 Marks)
(b) An Indian company obtains the following quotes ( ` /$)
Spot: 35.90/36.10
3 - Months forward rate: 36.00/36.25
6 - Months forward rate: 36.10/36.40

The company needs $ funds for six months. Determine whether the company should
borrow in $ or ` Interest rates are :
3 - Months interest rate : ` : 12%, $ : 6%
6 - Months interest rate : ` : 11.50%, $ : 5.5%
Also determine what should be the rate of interest after 3-months to make the company
indifferent between 3-months borrowing and 6-months borrowing in the case of:
(i) Rupee borrowing
(ii) Dollar borrowing
Note: For the purpose of calculation you can take the units of dollar and rupee as 100
each. (8 Marks)
Answer
(a) As per TK Ltd.’s Offer
` in lakhs
(i) Net Consideration Payable
7 times EBIDAT, i.e. 7 x ` 230 lakh 1610
Less: Debt 480
1130
(ii) No. of shares to be issued by TK Ltd
` 1130 lakh/` 220 (rounded off) (Nos.) 5,13,600
(iii) EPS of TK Ltd after acquisition
Total EBIDT (` 800 lakh + ` 230 lakh) 1030.00
Less: Interest (` 116 lakh + ` 60 lakh) 176.00
854.00
Less: 30% Tax 256.20
Total earnings (NPAT) 597.80
Total No. of shares outstanding 29,13,600
(24 lakh + 5,13,600)
EPS (` 597.80 lakh/ 29,13,600) ` 20.52
(iv) Expected Market Price:
` in lakhs
Pre-acquisition P/E multiple:
EBIDAT 800.00

10
Less: Interest ( 1160 X ) 116.00
100
684.00
Less: 30% Tax 205.20
478.80
No. of shares (lakhs) 24
EPS ` 19.95
Hence, PE multiple (220/19.95) 11.03
Expected market price after acquisition (` 20.52 x 11.03) ` 226.34
As per SK Ltd.’s Offer
` in lakhs
(i) Net consideration payable
12 lakhs shares x ` 110 1320
(ii) No. of shares to be issued by TK Ltd
` 1320 lakhs ÷ ` 220 6 lakh
(iii) EPS of T Ltd after Acquisition
NPAT (as per earlier calculations) 597.80
Total no. of shares outstanding (24 lakhs + 6 lakhs) 30 lakh
Earning Per Share (EPS) ` 597.8/30 lakh ` 19.93
(iv) Expected Market Price (` 19.93 x 11) 219.23
(v) Advantages of Acquisition to TK Ltd.
Since the two companies are in the same industry, the following advantages could
accrue:
- Synergy, cost reduction and operating efficiency.
- Better market share.
- Avoidance of competition
(b) (i) If company borrows in $ then outflow would be as follows:
Let company borrows $ 100 $ 100.00
Add: Interest for 6 months @ 5.5% $ 2.75
Amount Repayable after 6 months $ 102.75
Applicable 6 month forward rate 36.40

Amount of Cash outflow in Indian Rupees ` 3,740.10

If company borrows equivalent amount in Indian Rupee, then outflow would be as
follows:
Equivalent ` amount ` 36.10 x 100 ` 3,610.00
Add: Interest @11.50% ` 207.58
` 3817.58
Since cash outflow is more in ` borrowing then borrowing should be made in $.
(ii) (a) Let ‘ir’ be the interest rate of ` borrowing make indifferent between 3 months
borrowings and 6 months borrowing then
(1 + 0.03) (1 + ir) = (1 + 0.0575)
ir = 2.67% or 10.68% (on annualized basis)
(b) Let ‘id’ be the interest rate of $ borrowing after 3 months to make indifference
between 3 months borrowings and 6 months borrowings. Then,
(1 + 0.015) (1 + id) = (1 + 0.0275)
id = 1.232% or 4.93% (on annualized basis)
Question 5
(a) Following details are available for X Ltd.
Income Statement for the year ended 31 st March, 2018
Particulars Amount
Sales 40,000
Gross Profit 12,000
Administrative Expenses 6,000
Profit Before tax 6,000
Tax @ 30% 1,800
Profit After Tax 4,200
Balance sheet as on 31 st March, 2018
Particulars Amount
Fixed Assets 10,000
Current Assets 6,000
Total Assets 16,000
Equity Share Capital 15,000

Sundry Creditors 1,000

Total Liabilities 16,000
The Company is contemplating for new sales strategy as follows :
(i) Sales to grow at 30% per year for next four years.
(ii) Assets turnover ratio, net profit ratio and tax rate will remain the same.
(iii) Depreciation will be 15% of value of net fixed assets at the beginning of the year.
(iv) Required rate of return for the company is 15%
Evaluate the viability of new strategy. (12 Marks)
(b) A dealer quotes 'All-in-cost' for a generic swap at 6% against six month LIBOR flat. If the
notional principal amount of swap is ` 8,00,000:
(i) Calculate semi-annual fixed payment.
(ii) Find the first floating rate payment for (i) above if the six month period from the
effective date of swap to the settlement date comprises 181 days and that the
corresponding LIBOR was 5% on the effective date of swap.
(iii) In (ii) above, if the settlement is on 'Net' basis, how much the fixed rate payer would
pay to the floating rate payer? Generic swap is based on 30/360 days basis.
(4 Marks)
(c) Explain the concept of Riba in Islamic Finance. (4 Marks)
Answer
(a)
Projected Balance Sheet
Year 1 Year 2 Year 3 Year 4 Year 5
Fixed Assets (25% of 13,000 16,900 21,970 28,561.00 28,561.00
Sales)
Current Assets (15% of 7,800 10,140 13,182 17,136.60 17,136.60
Sales)
Total Assets 20,800 27,040 35,152 45,697.60 45,697.60
Equity (37.5% of sales) 19,500 25,350 32,955 42,841.50 42,841.50
Sundry Creditors (2.5% of 1,300 1,690 2,197 2,856.10 2,856.10
Sales)
Total Liabilities 20,800 27,040 35,152 45,697.60 45,697.60

Projected Cash Flows:-

Sales 52,000 67,600 87,880.00 1,14,244.00 1,14,244.00
PBT (15% of sales) 7,800 10,140 13,182.00 17,136.60 17,136.60
PAT (10.5% of sales) 5,460 7,098 9,227.40 11,995.62 11,995.62
Depreciation 1,500 1,950 2,535.00 3,295.50 4,284.15
Addition to Fixed 4,500 5,850 7,605.00 9,886.50 4,284.15
Assets
Increase in Net Current 1,500 1,950 2,535.00 3,295.50 -
Assets
Operating cash flow 960 1,248 1,622.40 2,109.12 11,995.62
Projected Cash Flows:-
Present value of Projected Cash Flows:-
Cash Flows PVF at 15% PV
960 0.870 835.20
1248 0.756 943.49
1622.40 0.658 1067.54
2109.12 0.572 1206.42
4,052.65
Residual Value = 11,995.62/0.15 = 79,970.80
Present value of Residual value = 79,970.80 x PVF (15%, 4)
= 79,970.80 x 0.572 = 45,743.30
Total shareholders’ value = 45743.30 + 4052.65 = 49795.95
Pre-strategy value = 4200 / 0.15 = 28,000
 Value of strategy = 49795.95 – 28,000 = 21795.95
Conclusion: The strategy is financially viable.
(b) (i) Semi-annual fixed payment
= (N) (AIC) (Period)
Where N = Notional Principal amount = `8,00,000
AIC = All-in-cost = 6% = 0.06

 180 
= 8,00,000 × 0.06  
 360 
= 8,00,000 × 0.06 (0.5)
= `24,000
(ii) Floating Rate Payment
 dt 
= N (LIBOR)  
 360 
181
= 8,00,000 × 0.05 ×
360
= `20,111 or ` 20,120
(iii) Net Amount
= (i) – (ii)
= `24,000 – `20,111 = `3889
Or = `24,000 – `20,120 = `3880
(c) In Islamic Finance, the meaning of Riba is interest or usury. In Islamic Finance money is
considered as medium of exchange, store of value or unit of measurement only, hence
Riba is considered haram i.e. unfair reward to the provider of capital for little or no effort
or risk undertaken. Due to this reason, Islamic finance models are based on risks and
profit/loss sharing contract.
Riba is equated with wrongful appropriation of property belonging to others and hence
Muslims are asked to accept principal only and forego principal even, if borrower is
unable to repay the same.
In this backdrop in Islamic banking a link must be established between money and profit
as an alternative to interest. This is in sharp contrast of conventional banking which is
simply based on lender borrower’s relationship.
Since, interest is not allowed in Islamic Finance, depositors are rewarded by a share in
the profit from the underlying business (after deduction of management fees) in which the
funds of depositors have been channeled.
Thus, it can be said that money has no intrinsic value i.e. time value of money.
The relationship between depositor and banker can be viewed as:
(a) Agent and Principal or
(b) Depositor and Custodian
(c) Investor and Entrepreneur

(d) Fellow joint partners

Thus, Islamic finance products are based on profit sharing.
Question 6
(a) The following data are available for three bonds A, B and C. These bonds are used by a
bond portfolio manager to fund an outflow scheduled in 6 years. Current yield is 9%. All
bonds have face value of ` 100 each and will be redeemed at par. Interest is payable
annually.
Bond Maturity (Years) Coupon rate
A 10 10%
B 8 11%
C 5 9%
(i) Calculate the duration of each bond.
(ii) The bond portfolio manager has been asked to keep 45% of the portfolio money in
Bond A. Calculate the percentage amount to be invested in bonds B and C that
need to be purchased to immunise the portfolio.
(iii) After the portfolio has been formulated, an interest rate change occurs, increasing
the yield to 11%. The new duration of these bonds are: Bond A = 7.15 Years, Bond
B = 6.03 Years and Bond C = 4.27 years.
Is the portfolio still immunized? Why or why not?
(iv) Determine the new percentage of B and C bonds that are needed to immunize the
portfolio. Bond A remaining at 45% of the portfolio.
Present values be used as follows :
Present Values t1 t2 t3 t4 t5
PVIF 0.09,t 0.917 0.842 0.772 0.708 0.650
Present Values t6 t7 t8 T9 t10

PVIF 0.09,t 0.596 0.547 0.502 0.460 0.4224
(12 Marks)
(b) On 19th January, Bank A entered into forward contract with a customer for a forward sale
of US $ 7,000, delivery 20th March at ` 46.67. On the same day, it covered its position
by buying forward from the market due 19 th March, at the rate of ` 46.655. On 19th
February, the customer approaches the bank and requests for early delivery of US $.
Rates prevailing in the interbank markets on that date are as under:
Spot (`/$) 46.5725/5800

March 46.3550/3650
Interest on outflow of funds is 16% and on inflow of funds is 12%. Flat charges for early
delivery are ` 100.
What is the amount that would be recovered from the customer on the transaction?
Note: Calculation should be made on months basis than on days basis. (8 Marks)
Answer
(a) (i) Calculation of Bond Duration
Bond A
Year Cash flow P.V. @ 9% Proportion of Proportion of
bond value bond value x
time (years)
1 10 0.917 9.17 0.086 0.086
2 10 0.842 8.42 0.079 0.158
3 10 0.772 7.72 0.073 0.219
4 10 0.708 7.08 0.067 0.268
5 10 0.650 6.50 0.061 0.305
6 10 0.596 5.96 0.056 0.336
7 10 0.547 5.47 0.051 0.357
8 10 0.502 5.02 0.047 0.376
9 10 0.460 4.60 0.043 0.387
10 110 0.4224 46.46 0.437 4.370
106.40 1.000 6.862
Duration of the bond is 6.862 years or 6.86 year
Bond B
Year Cash flow P.V. @ 9% Proportion of Proportion of bond
bond value value x time (years)
1 11 0.917 10.087 0.091 0.091
2 11 0.842 9.262 0.083 0.166
3 11 0.772 8.492 0.076 0.228
4 11 0.708 7.788 0.070 0.280
5 11 0.650 7.150 0.064 0.320
6 11 0.596 6.556 0.059 0.354

7 11 0.547 6.017 0.054 0.378

8 111 0.502 55.772 0.502 4.016
111.224 1.000 5.833
Duration of the bond B is 5.833 years or 5.84 years
Bond C
Year Cash P.V. @ 9% Proportion of Proportion of bond
flow bond value value x time (years)
1 9 0.917 8.253 0.082 0.082
2 9 0.842 7.578 0.076 0.152
3 9 0.772 6.948 0.069 0.207
4 9 0.708 6.372 0.064 0.256
5 109 0.650 70.850 0.709 3.545
100.00 1.000 4.242
Duration of the bond C is 4.242 years or 4.24 years
(ii) Amount of Investment required in Bond B and C
Period required to be immunized 6.000 Year
Less: Period covered from Bond A 3.087 Year
To be immunized from B and C 2.913 Year
Let proportion of investment in Bond B and C is b and c respectively then
b + c = 0.55 (1)
5.883b + 4.242c = 2.913 (2)
On solving these equations, the value of b and c comes 0.3534 or 0.3621 and
0.1966 or 0.1879 respectively and accordingly, the % of investment of B and C is
35.34% or 36.21% and 19.66 % or 18.79% respectively.
(iii) With revised yield the Revised Duration of Bond stands
0.45 x 7.15 + 0.36 x 6.03 + 0.19 x 4.27 = 6.20 year
No portfolio is not immunized as the duration of the portfolio has been increased
from 6 years to 6.20 years.
(iv) New percentage of B and C bonds that are needed to immunize the portfolio.
Period required to be immunized 6.0000 Year
Less: Period covered from Bond A 3.2175 Year
To be immunized from B and C 2.7825 Year

Let proportion of investment in Bond B and C is b and c respectively, then

b + c = 0.55
6.03b + 4.27c = 2.7825
b = 0.2466
On solving these equations, the value of b and c comes 0.2466 and 0.3034
respectively and accordingly, the % of investment of B and C is 24.66% or 25% and
30.34 % or 30.00% respectively.
(b) The bank would sell US $ to its customer at the agreed rate under the contract. However,
it would recover loss from the customer for early delivery.
On 19th February bank would buy US$ 7000 from market and shall sell to customer.
Further, Bank would enter into one month forward contract to sell the US $ acquired
under the cover deal.
(i) Swap Difference
Bank sells at ` 46.3550
Bank buys at ` 46.5800
Swap loss per US $ 0.225
Swap loss for US $ 7000 ` 1,575
(ii) Interest on Outlay of Funds
On 19th February, Bank sell to customer ` 46.67
It buys from spot Market ` 46.58
Inflow of funds per US $ ` 0.09
Inflow of funds for US $ 7000 is ` 630
Interest on ` 630 at 12% for one month ` 6.30
(c) Charges for early delivery
Swap loss ` 1,575.00
Flat charges ` 100.00
Less: Interest on outflow of funds ` 6.30
` 1,668.70
Total amount to be recovered from the customer
Amount as per Forward Contract ` 46.67 x 7000 ` 3,26,690.00
Add: Charges for early delivery ` 1,668.70
` 3,28,358.70

PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS
Question No. 1 is compulsory
Answer any four from the rest
Question 1
(a) You are the Auditor of Power Supply Corporation Limited, a Government Company for the
year ended on 31st March 2018. The turnover of the Company for the period was ` 12,000
crores from sale of power. During your audit, you found that the Company had procured
Spares for Transmitters for ` 850 crores from abroad through a Corporation by name
Procurement and Supply India Limited which is also owned and controlled by Government
of India. The Financial Statements of the Power Supply Corporation Limited, prepared in
compliance with Ind AS for the year ended on 31/03/2018 did not contain any additional
disclosure regarding the procurement of spares as referred to above. To your query as to
whether any disclosure regarding Related Party Transaction would be required, the
Management of the Corporation replied that no such disclosure would be necessary for
transactions between State Controlled Enterprises.
Analyse this issue in finalizing the Audit Report.
(b) Amudhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 31/03/2018.
The Audit Report for that year was signed by the Auditors on 04/05/2018. The Annual
General Meeting was decided to be held during the month of August 2018. On 06/05/2018,
the Company had received a communication from the Central Government that an amount
of ` 5800 crore kept pending on account of incentives pertaining to Financial Year
2017-18 had been approved and the amount would be paid to the Company before the end
of May 2018. To a query to Chief Financial officer of the Company by the Board, it was
informed that this amount had not been recognised in the Audited Financial Statements in
view of the same not being released before the close of the Financial Year and due to
uncertainty of receipt. Now, having received the amount, the Board of Directors wished to
include this amount in the Financial Statements of the Company for the Financial Year
ended on 31/03/2018. On 08/05/2018, the Board amended the accounts, approved the
same and requested the Auditor to consider this event and issue a fresh Audit Report on
the Financial Statements for the year ended on 31/03/2018. Analyse the issues involved
and give your views as to whether or not the Auditors could accede to the request of the
Board of Directors.
(c) M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into
continuous financial losses as well as reduction in Sales due to stiff competition and
frequent break down of its own aircrafts. The Financial Statements for the Year ended on
31/03/2018 are to be now finalized. The Management is quite uncertain as to its ability to
continue in near future and has informed the Auditors that having seized of this matter, it
had constituted a committee to study this aspect and to give suggestions for recovery, if
any, from this bad situation. Till the study is completed, according to the Management, the

PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 53
issue involves uncertainty as to its ability to continue its business and it informs the Auditor
that the fact of uncertainty clamping on the "Going Concern" would suitably be disclosed
in notes to accounts. State the reporting requirement if any, in the Independent Auditor's
Report in respect of this matter.
(d) There are certain circumstances in which Emphasis of Matter in Auditor's Report is
mandated to be included. Explain this statement in the light of mandatory requirements of
matters that are to be emphasised in Auditor's Report when the Audit Report is on F inancial
Statements prepared in accordance with Special Purpose Framework. (5 x 4 = 20 Marks)
Answer
(a) Related Party Disclosures :As per Ind AS 24, “Related Party Disclosures”, a reporting
entity is exempt from the disclosure requirements in relation to related party transactions
and outstanding balances, including commitments, with (i) a government that has control
or joint control of, or significant influence over, the reporting entity; and (ii) another entity
that is a related party because the same government has control or joint control of, or
significant influence over, both the reporting entity and the other entity.
If a reporting entity applies the above exemption, it shall disclose the following about the
transactions and related outstanding balances referred to:
(1) the name of the government and the nature of its relationship with the reporting entity
(i.e. control, joint control or significant influence);
(2) the following information in sufficient detail to enable users of the entity’s financi al
statements to understand the effect of related party transactions on its financial
statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a
qualitative or quantitative indication of their extent.
Further, as per SA 550 Related Parties, in forming an opinion on the financial statements
in accordance with SA 700, the auditor shall evaluate whether the identified related party
relationships and transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework.
In the instant case, Power Supply Corporation Limited, a Government Company has
procured spares for transmitters for rupees 850 crore from abroad through a corporation
namely Procurement and Supply India Limited which is also owned and controlled by
Government of India. Even after applying the exemption of Ind AS 24, Power Supply
Corporation Limited has to disclose the matters specified above (i.e.name of Government,
natures of its relationship with reporting entity, the nature and amount of transaction etc.).
Contention of Management of Corporation regarding no requirement of disclosure for
transactions between State Controlled Enterprise in not tenable.

(b) Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but
Before the Date the Financial Statements are Issued: As per SA 560, “Subsequent
Events”, the auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, when, after the date of
the auditor’s report but before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall
(i) Discuss the matter with management and, where appropriate, those charged with
governance.
(ii) Determine whether the financial statements need amendment and, if so,
(iii) Inquire how management intends to address the matter in the financial statements.
If management amends the financial statements, the auditor shall carry out the audit
procedures necessary in the circumstances on the amendment. Further, the auditor shall
extend the audit procedures and provide a new auditor’s report on the amended financial
statements. However, the new auditor’s report shall not be dated earlier than the date of
approval of the amended financial statements.
In the instant case, XYZ Company Ltd. received an amount of rupees 5800 crore on
account of incentives pertaining to year 2017-18 in the month of May 2018 i.e. after
finalisation of financial statements and signing of audit report. Board of Directors of XYZ
Ltd. amended the accounts, approved the same and requested the Amudhan & Co.
(auditor) to consider this event and issue a fresh audit report on the financial statements
for the year ended on 31.03.2018.
After applying the conditions given in SA 560, Amudhan & Co. can issue new audit report
subject to date of audit report which should not be earlier than the date of approval of the
amended financial statements.
(c) Reporting requirements in case of Uncertainty clamping on the Going Concern: As
per SA 570 “Going Concern”, if the auditor concludes that management’s use of the going
concern basis of accounting is appropriate in the circumstances but a material uncertainty
exists, the auditor shall determine whether the financial statements : (i)adequately disclose
the principal events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern and management’s plans to deal with these events or
conditions; and (ii) disclose clearly that there is a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a going
concern and, therefore, that it may be unable to realize its assets and discharge its
liabilities in the normal course of business.
If adequate disclosure about the material uncertainty is made in the financial statements,
the auditor shall express an unmodified opinion and the auditor’s report shall include a
separate section under the heading “Material Uncertainty Related to Going Concern” to:

(i) Draw attention to the note in the financial statements that discloses the matters set
out above; and
(ii) State that these events or conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity’s ability to continue as a going concern and
that the auditor’s opinion is not modified in respect of the matter.
In the instant case, M/s Aircraft Ltd. is running into continuous financial losses as well as
reduction in sales due to stiff competition and frequent break down of its own aircrafts and
management of Aircraft Ltd. is uncertain as of its ability to continue in near future.
Therefore, a committee has been constituted to study this aspect and till the time study is
completed management accordingly decided to suitable disclose this aspect in notes to
accounts. Therefore, the auditor should disclose about the material uncertainty and
express an unmodified opinion and in his audit report shall include a separate section
under the heading “Material Uncertainty Related to Going Concern” to draw attention to
the note in the financial statements that discloses the matters set out above; and state that
these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.
(d) Circumstances in which Emphasis of Matter Paragraph in Auditor’s Repo rt is
mandated in case of Financial Statements prepared in accordance with a Special
Purpose Framework: As per SA 706, “Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report” and/or SA 800, “Special Considerations—
Audits of Financial Statements Prepared in Accordance with Special Purpose
Frameworks”, the auditor’s report on special purpose financial statements shall include an
Emphasis of Matter paragraph alerting users of the auditor’s report that the financial
statements are prepared in accordance with a special purpose frame work and that, as a
result, the financial statements may not be suitable for another purpose. The auditor shall
include this paragraph under an appropriate heading.
The special purpose financial statements may be used for purposes other than those for
which they were intended. For example, a regulator may require certain entities to place
the special purpose financial statements on public record. To avoid misunderstandings,
the auditor alerts users of the auditor’s report that the financial statements are prepared in
accordance with a special purpose frame work and, therefore, may not be suitable for
another purpose.
Restriction on Distribution or Use: In addition to the alert required above, the auditor
may consider it appropriate to indicate that he auditor’s report is intended solely for the
specific users. Depending on the law or regulation of the particular jurisdiction, this may
be achieved by restricting the distribution or use of the auditor’s report. In these
circumstances, the emphasis of matter paragraph given above maybe expanded to include
these other matters, and the heading may be modified accordingly.

Question 2
(a) Mr. X, a Chartered Accountant in Practice filed his income tax return for the Assessment
Year 2018-19 under section 44ADA of the Income Tax Act, 1961, declaring his income on
presumptive basis. In a disciplinary proceeding against him for an alleged misuse of funds
of his clients, it was asked that he should submit his books of accounts for the financial
year ended on 31/03/2018. Mr. X refused to submit books of accounts on the ground that
he had not maintained any books and even for income tax purposes, he submitted his
Return of Income on a presumptive basis. Is he right in putting such a defence? Analyse
the issues in the light of Professional Code, if any.
(b) While doing Tax Audit, under section 44AB of the. Income Tax Act, 1961, of the accounts
of Glue Private Limited for the Assessment Year 2018-19, it was found that during the
Financial Year 2017-18, Glue Private Limited had received 9,000 shares, the market value
of which was ` 90,000 on the date of transfer, at a price of ` 45,000 from Stick Private
Limited. The Management of Glue Private Limited maintained that the transaction was as
per the terms of negotiations and there would be no cause for the Auditor to bring this
matter in his Tax Audit Report - Comment.
(c) During the financial year ended on 31/03/2018, LM Private Limited had borrowed from a
Nationalized Bank, a term loan of ` 120 lakhs consisting of ` 100 lakhs for purchase of a
machinery for the new plant and ` 20 lakhs for erection expenses. As on the date of
31st March, 2018, the total of capital and free reserves of the Company was ` 50 lakhs and
turnover for the year 2017-18 was ` 750 lakhs. The Bank paid ` 100 lakhs to the vendor
of the Company for the supply of machinery on 31/12/2017. The machinery had reached
the yard of the Company. On 28/02/2018, the Company had drawn the balance of loan viz.
` 20 lakhs to the credit of its current account maintained with the Bank and utilized the full
amount for renovating its administrative office building. The machinery had been kept as
capital stock under construction. Comment as to reporting issues, if any, that the Auditor
should be concerned with for the financial year ended on 31/03/2018, in this respect.
(d) State what may be the evaluative or review procedures that the Statutory Auditor may do
before concluding as to relevance and reasonableness of Auditor's Expert work for using
it for his audit purposes. (5 x 4 = 20 Marks)
Answer
(a) Maintenance of Books of Account: As per the Council General Guidelines 2008, under
Chapter 5 on maintenance of books of accounts, it is specified that if a chartered
accountant in practice or the firm of Chartered Accountants of which he is a partner fails
to maintain and keep in respect of his/its professional practice, proper books of account
including the Cash Book and Ledger, he is deemed to be guilty of professional misconduct.
Accordingly, it does not matter that as per section 44ADA of the Income Tax Act Mr. X
declared his income on presumptive basis. Here, it may be noted that though 44ADA of
the Income Tax Act exempt the requirement of books and accounts but as per Council

General Guidelines a chartered accountant in practice is required to maintain and keep

proper books of accounts including cash book and ledger. Hence, Mr. X is guilty of
professional misconduct.
(b) Reporting for Receipt of Shares, the Aggregate Fair Market Value of Which Exceeds
` 50,000: In this case, Glue Private Ltd. is a company, other than a company in which the
public are substantially interested. During the previous year 2017-18, the company
received property, being shares, for rupees 45000 as consideration, the fair market value
of which is ` 90,000.
A tax auditor has to furnish the details of shares received during the previous year, under
clause 28 of Form 3CD, in case, the assessee has received any property, being share of
a company not being a company in which public are substantially interested, without
consideration or for inadequate consideration as referred to in section 56(2) of the Income
Tax Act, 1961.
Section 56(2) provides that where a firm or a company not being a company in which the
public are substantially interested, receives, in any previous year any property being
shares of a company not being a company in which the public is substantially interested,
(i) without consideration, the aggregate fair market value of which exceeds ` 50,000,
the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property
by an amount exceeding ` 50,000, the aggregate fair market value of such property
as exceeds such consideration,
shall be chargeable to income-tax under the head “Income from other sources”.
As per the facts of the case, provisions and explanations given above, the income
generated by Glue Private Ltd., is rupees 45,000 i.e. in excess of fair market value of
shares received (i.e. ` 90,000), is lesser than rupees 50,000 as per section 56(2) of the
Income Tax Act, 1961. Therefore, the tax auditor of Glue Private Ltd. is not required to
furnish the details of such shares received under clause 28 of Form 3CD. The contention
of the management of the company, for not reporting such receipt of shares, is in order.
(c) Applicability of CARO , 2016 and Utilisation of Term Loan: CARO ,2016 specifically
exempts a private limited company, not being a subsidiary company of a public company,
having a paid up capital , reserves & surplus not more than rupees one c rore as on balance
sheet date and which does not have total borrowing exceeding rupees one crore from any
bank or financial institution at any point of time during the year and which does not have a
total revenue as disclosed in Schedule III to the companies Act 2013 exceeding Rd 10
crore during the financial year as per financial statements.
In the case of LM Pvt. Ltd, it has paid up capital of rupees 50 lacs which is below the
specified limit of rupees 1 crore and turnover is rupees 7.5 crore which is also less than
specified rupees 10 crore. However, there is total borrowing of rupees 1.20 crore which is
more than rupees 1 crore and exceeding the specified limits of rupees 1 crore. Hence
CARO, 2016 will be applicable to LM Pvt. Ltd.

As per clause (ix) of Para 3 of CARO, 2016, an auditor need to state in his report that
whether the term loans were applied for the purpose for which the loans were obtained. If
not, the details together with delays or default and subsequent rectification, if any, as may
be applicable, be reported.
The auditor should examine the terms and conditions subject to which the company has
obtained the term loans. The auditor may also examine the proposal for grant of loan
made to the bank. As mentioned above, normally, the end use of the funds raised by term
loans is mentioned in the sanction letter or documents containing the terms and conditions
of the loan. The auditor should ascertain the purpose for which term loans were sanctioned.
The auditor should also compare the purpose for which term loans were sanctioned with
the actual utilization of the loans. The auditor should obtain sufficient appropriate audit
evidence regarding the utilization of the amounts raised. If the auditor finds that the funds
have not been utilized for the purpose for which they were obtained, the auditor’s report
should state the fact.
In the present case, the term loan obtained by LM Private Ltd. amounting rupees 20 lakh
have not been utilized for erection expenses instead its utilized for renovating its
administrative office building. Further, assuming that erection work has not been done and
machinery is not being installed, disclosure of the same as Capital Stock under
construction is in order.
Here, the auditor should report the fact in his report that pending utilization of the term loan
for erection expenses, the funds were temporarily used for the purpose other than the
purpose for which the loan was sanctioned as per clause (ix) of Para 3 of CARO, 2016.
(d) Evaluating the Adequacy of the Auditor’s Expert’s Work: As per SA 620 Using the
work of an Auditor’s Expert, the auditor shall evaluate the adequacy of the auditor’s
expert’s work for the auditor’s purposes, including the relevance and reasonableness of
that expert’s findings or conclusions, and their consistency with other audit evidence, etc.
Specific procedure to evaluate the adequacy of the auditor’s expert’s work are –
• Enquiries of the auditor’s expert.
• Reviewing the auditor’s expert’s working papers and reports
• Corroborative procedure such as-
(a) Observing the auditor’s expert’s work
(b) Examining the published data, such as statistical reports from reputed source
(c) Confirming the relevant matters with third parties
(d) Performing detailed analytical procedure to see whether principles of materiality
aspects considered
(e) Re performing calculations

• Discussions with another expert with relevant expertise when, for example, the
findings or the conclusion of the auditor’s expert are not consistent with other audit
evidence.
• Discussing the expert’s report with the management.
Question 3
(a) During the opening ceremony of a new branch office of CA. Young, his friend CA. Old
introduced to CA. Young, his friend and client Mr. Rich, the owner of an Export House
whose accounts had been audited by CA. Old for more than 15 Years. After few days, Mr.
Rich approached CA. Young and offered a certification work which hitherto had been done
by CA. Old. CA. Young undertook the work for a fee which was not less than fee charged
by CA. Old in earlier period. Comment whether CA. Young had done any professional
misconduct.
(b) The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in
material consumption. As an Auditor entrusted with investigating the causes for this poor
state, what may be the areas of your focus in this respect.
(c) ABC Limited is in the practice of maintaining consistent dividend payment over a minimum
of 14%. The Financial year 2017-18 was so very bad for the Company that it was not
possible for the Company to maintain the payment of consistent dividend as above. The
Management, being hopeful of recovery of its performance in next year, felt that the
depreciation of the year to the extent of 75% alone be charged to the Statement of Profit
and Loss and the remaining 25% be kept in a separate account code in the Balance Sheet-
'Debit Balances Adjustable against Revenue account'. The Management was of the view
that it would be in fair practice of accounting if the depreciation for asset is charged before
the expiry of the lifes of assets and the amount parked in asset code as above would
unfailingly be adjusted to Revenue before the close of next financial year anyway. Analyse
the issues involved and state how the Auditor should decide on this matter.
(d) H Limited is an Investment Company preparing its Financial Statements in accordance with
Ind AS. The Company obtains funds from various investors and commits its performance
for fair return and capital appreciation to its investors. During the year under audit, it had
been observed that the Company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in
S3 Ltd. of the respective share capitals of the Investee Companies. When checking the
investment schedule of the Company, an issue cropped as to whether there would arise
any need to consolidate accounts of any such investee companies with those of H Limited
in accordance with section 129(3) of the Companies Act, 2013 which contains no exclusion
from consolidation. Analyse the issues involved and give your views. (4 x 5 = 20 Marks)
Answer
(a) Acceptance of original professional work by a member emanating from the client
Introduced to him by another member: As per Clause (6) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be

deemed to be guilty of misconduct if he solicits clients or professional work either directly

or indirectly by a circular, advertisement, personal communication or interview or by any
other means.
Further, some forms of the soliciting work which the Council has prohibited include that a
member should not accept the original professional work emanating from a client
introduced to him by another member. If any professional work of such client comes to him
directly, it should be his duty to ask the client that he should come through the other
member dealing generally with his original work.
In the given case, CA Old introduced his friend CA. Young to his friend and client Mr. Rich,
the owner of an Export House whose accounts has been audited by CA. Old for more than
15 years. After a few day Mr. Rich approached CA. Young and offered a certification work
which hitherto had been done by CA. Old. Fees charged by CA. Young is also not less
than fee charged by CA. Old.
In view of above decision CA Young should ask the client to come through CA Old.
However, CA Young undertook the work without informing CA. Old. Thus, CA. Young is
held guilty under Clause (6) of Part I of the First Schedule to the Chartered Accountants
Act,1949.
(b) Decreasing Operating Efficiency in Material Consumption: It is the input-output ratio.
In the case of public spending, efficiency is achieved when the output is maximized at the
minimum of inputs, or input is minimized for any given quantity and quality of output.
• The auditor should make an analytical procedure to compare the material
consumption with output for the current year as well as previous years.
• The internal control system should be studied.
• The auditor should have discussions/ inquiry with different personnel of the company
including production personnel.
• The production process, scheduling, machine usage, material mix should be studied.
• A reconciliation of variation as to various causes – Price, quantity efficiency are to be
analyzed.
• The budget, standard coasting and other MIS reports should be called for and studied.
• Internal audit report should be thoroughly studied and whether any pilferage, fraud
etc. were noticed. These are to be looked into.
• The key material should be picked up for detailed study of their ordering, receipts,
issue, normal loss yield percentage etc.
(c) Provision of Depreciation :Section 123(1) of the Companies Act, 2013 provides that
dividend cannot be declared or paid by a company for any financial year except out of
profits of the company for that year arrived at after providing for depreciation in accordance
with the provisions of Section 123(2), or out of the profits or the company for any previous

financial year or years arrived at after providing for depreciation in the manner
aforementioned and remaining undistributed, or out of both. Further, it is the duty of auditor
to check whether the depreciation was provided according to provision of AS 10 / IND AS
16/Schedule II to the Act.
In the instant case, ABC Limited is in the practice of maintaining consistent dividend
payment over a minimum of 14%. Due to bad financial condition, company has not provided
for dividend for the year 2017-18. In addition to this management has also taken decision
to charge 75% of the depreciation in the statement of Profit and Loss whereas 25% of the
depreciation amount kept in a separate account code in the Balance Sheet – ‘Debit
Balances Adjustable against Revenue Account’.
Contention of management that it would be in fair practice of accounting where the
depreciation of asset is charged before the expiry of the life of assets and the amount
parked in asset code would unfailingly be adjusted to revenue before the close of next
financial year is not tenable.
The practice of the company in not charging the depreciation and accumulating 25% of it
in a debit balance for being written of in the next year is not an acceptable accounting
treatment. If dividend is declared in such situation, it would mean payment out of capital.
Therefore, the auditor of the company should ensure the compliance of provisions of
section 123 and Schedule II. In case the management does not comply with the provisions
and does not charge the 100% depreciation the auditor of the company shall suggest the
management for the same and if management refuses, the auditor should qualify his report
accordingly.
(d) Consolidated Financial Statements: According to Section 129(3) of the Companies Act,
2013, where a company has one or more subsidiaries, including associate company and
joint venture, it shall, in addition to its own financial statements prepare a consolidated
financial statement of the company and of all the subsidiaries in the same form and manner
as that of its own.
Further, as per Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of Schedule
III to the Act and the applicable accounting standards. However, a company which is not
required to prepare consolidated financial statements under the Accounting Standards, it
shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act.
However, an investment entity need not present consolidated financial statements if it is
required, in accordance with Ind AS 110‘Consolidated Financial Statements’, to measure
all of its subsidiaries at fair value through profit or loss. A parent shall determine whether
it is an investment entity.
(An investment entity is an entity that(a) obtains funds from one or more investors for the
purpose of providing those investor(s) with investment management services; (b) commits
to its investor(s) that its business purpose is to invest funds solely for returns from capital

appreciation, investment income, or both; and (c ) measures and evaluates the

performance of substantially all of its investments on a fair value basis.)
In the given case, H Limited is an investment company preparing its financial statements
in accordance with Ind AS and the company had invested 25% in SI Ltd., 50% in S2 Ltd.
and 60% in S3 Ltd. of the respective share capitals of the investee companies. In view of
provisions discussed in Ind AS 110, the Company is not required to prepare consolidated
financial statements however, for the compliance of Companies (Accounts) Rules, 2014, it
shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act.
Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as
prescribed by law and if they give some exemption it should be followed. If out of exemption
some subsidiaries are not consolidated then list should be disclosed in notes to accounts
with reason.
Question 4
(a) D, a Chartered Accountant in practice was appointed by Realty Limited to represent its
cases before GST Authorities under a duly executed power of representation. In the course
of proceedings he submitted certain statements-written as well as oral-which later found
to be false and materially misleading. Comment this in the light of Professional Code.
(b) In audit of DEF Limited, the Auditor had made use of certain analytical procedures with
regard to certain key data in the Statement of Profit and Loss. The results obtained showed
inconsistencies with other relevant information. State the course of action that the Auditor
should take to ensure that the risk of material misstatement would be contained to a low
level fixed as per materiality level.
(c) You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the
year 2017-18. In the course of your audit, you observed that the commission paid to agents
constituted a major expense in operating expenses of the Company. Enumerate the audit
concerns that address to the assertions required for the Auditor to ensure the continued
existence of internal control as well as fairness of the amounts in accounting of commission
paid to agents.
(d) “The audit cycle consists of Planning, Execution and Completion. The automation in
processing of business transactions has considerations to be weighed by Auditor at every
phase of this cycle." Enumerate the focal points of such considerations when auditing in
automated environment.
(e) Sunlight Limited is a public sector undertaking engaged in production of electricity from
solar power. It had commissioned a new project near Goa with a new technology for a cost
of ` 5,750 crore. The project had seen delay in commencement and cost overrun. State
the matters that a Comprehensive Audit by C&AG may cover in reporting on the
performance and efficiency of this project. (4 x 5 = 20 Marks)

Answer
(a) Submitting Information as Authorized Representative: As per Clause (5) of Part I of
Second Schedule to the Chartered Accountant Act, 1949, if a member in practice fails to
disclose a material fact known to him which is not disclosed in a financial statement, but
disclosure of which is necessary to make the financial statement not misleading, where he
is concerned with that financial statement in a professional capacity, he will be held guilty
under Clause (5). As per Clause (6) of Part I of Second Schedule if he fails to report a
material misstatement known to him to appear in a financial statement with which he is
concerned in a professional capacity, he will be held guilty under Clause (6).
In given case, the Chartered Accountant had submitted the statements before the GST
authorities. These statements are based on the data provided by the management of the
company. Although the statements prepared were based on incorrect facts and misleading,
the Chartered Accountant had only submitted them acting on the instructions of his client
as his authorized representative.
Hence Mr. D would not be held liable for professional misconduct.
(b) Investigating Results of Analytical Procedures: As per SA 520, “Analytical Procedures”,
if analytical procedures performed in accordance with this SA identify fluctuations or
relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount, the auditor shall investigate such differences by:
(i) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
(ii) Performing other audit procedures as necessary in the circumstances.
Audit evidence relevant to management’s responses may be obtained by evaluating those
responses taking into account the auditor’s understanding of the entity and its environment,
and with other audit evidence obtained during the course of the audit.
The need to perform other audit procedures may arise when, for example, management is
unable to provide an explanation, or the explanation, together with the audit evidence
obtained relevant to management’s response, is not considered adequate.
(c) Commission: The commission is the consideration payable for getting the insurance
business. The term ‘commission’ is used for the payment of consideration to get Direct
business. Commission received on amount of premium paid to a re-insurer is termed
‘Commission on reinsurance accepted’ and is reduced from the amount of commission
expenditure. The internal control with regard to commission is aimed at ensuring that
commission is paid in accordance with the rules and regulations of the company and in
accordance with the agreement with the agent, commission is paid to the agent who
brought the business and the legal compliances, for example, tax deduction at sources,
GST on reverse charge mechanism and provisions of the Insurance Act, 1938 have been
complied with.

Role of Auditor: The auditor should, inter alia, do the following for verification of
commission:
• Ensure that commission is not paid in excess of the limits specified by IRDAI
• Ensure that commission is paid as per rates with the agent and rates filed with IRDAI
• Ensure that commission is paid to the agent/broker who has solicited the business
• Ensure that the agent is not blacklisted by IRDAI and is not terminated for fraud etc.
• Vouch disbursement entries with reference to the disbursement vouchers with copies
of commission bills and commission statements.
• Check whether the vouchers are authorized by the officers-in–charge as per rules in
force and income tax is deducted at source, as applicable.
• Test check correctness of amounts of commission allowed.
• Scrutinize agents’ ledger and the balances, examine accounts having debit balances,
if any, and obtain information on the same. Necessary rectification of accounts and
other remedial actions have to be considered.
• Check whether commission outgo for the period under audit been duly accounted.
(d) Consideration of Automated Environment at Each Phase of Audit Cycle: In a controls-
based audit, the audit approach can be classified into three broad phases comprising of
planning, execution, and completion. In this approach, the considerations of automated
environment will be relevant at every phase as given below:
• during risk assessment, the auditor should consider risk arising from the use of IT
systems at the company;
• when obtaining an understanding of the business process and performing
walkthroughs the use of IT systems and applications should be considered;
• while assessing the entity level controls the aspects related to IT governance need to
be understood and reviewed;
• pervasive controls including segregation of duties, general IT controls and
applications should be considered and reviewed;
• during testing phase, the results of general IT controls would impact the nature, timing
and extent of testing;
• when testing of reports and information produced by the entity (IPE) generated
through IT systems and applications;
• at completion stage, evaluation of control deficiencies may require using data
analytics and CAATs.

(e) Matters covered in Reporting in case of Comprehensive Audit are: To facilitate a

proper consideration, the reports of the C&AG on the audit of PSUs are presented to the
Parliament in several parts consisting of results of comprehensive appraisals of selected
undertakings conducted by the Audit Board etc. Some of the issues examined in
comprehensive audit are:
(i) How does the overall capital cost of the project compare with the approved planned
costs? Were there any substantial increases and, if so, what are these and whether
there is evidence of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has there been
under-utilization of installed capacity or shortfall in performance and, if so, what has
caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inadequacies?
What has been the effect on the gestation period and capital cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw
materials consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory
resulting in redundancy in stores and spares?
(vii) Does the enterprise have research and development programmes ? What has been
the performance in adopting new processes, technologies, improving profits and in
reducing costs through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(xi) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
Question 5
(a) XYZ Associates, a Chartered Accountants Firm is having a relationship with a multi -
national accounting firm in India. The ICAI required that all firms having networking
relationship with any other entity need to furnish information online within the stipul ated
time. XYZ Associates failed to respond. Comment on this with reference to Professional
misconduct, if any.
(b) Internal auditor makes an appraisal of organization structure to ensure that it is in harmony
with the objectives of the entity, besides checking of financial transactions and operational
activities of the entity- Elaborate.
(c) Give a check list of audit for checking the transactions of dematerialized securities in the
conduct of audit of Financial Statements of a Member of a Stock Exchange.
(d) List few documents that require mandatory review by Audit Committee.

(e) In the use of standardized Internal Control Questionnaire (ICQ), certain basic assumptions
about elements of a good internal control system are taken into account. List down few
such assumptions. (4 x 5 = 20 Marks)
Answer
(a) Failed to Supply Information Called For: As per Clause (2) of Part III of the First
Schedule to the Chartered Accountants Act, 1949, a member, whether in practice or not,
will be deemed to be guilty of professional misconduct if he does not supply the information
called for, or does not comply with the requirements asked for, by the Institute, Council or
any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee,
Quality Review Board or the Appellate authority.
Thus, in the given case, Mr. XYZ Associates, a chartered accountant firm is failed to furnish
the information of its relationship with multi-national accounting firm in India. The ICAI
required this information to be submitted online within the stipulated time. XYZ Associates
failed to respond and submit the required information. Therefore, XYZ Associates is held
guilty of professional misconduct as per Clause (2) of Part III of the First Schedule to the
Chartered Accountants Act, 1949.
(b) Review of the Organisation Structure - The internal auditor should conduct an appraisal
of the organisation structure to ascertain whether it is in harmony with the objectives of the
enterprise and whether the assignment of responsibilities is in consonance therewith. For
this purpose:
➢ He should review the manner in which the activities of the enterprise are grouped for
managerial control. It is also important to review whether responsibility and authority
are in harmony with the grouping pattern.
➢ The internal auditor should examine the organization chart to find out whether the
structure is simple and economical and that no function enjoys an undue dominance
over the others.
➢ He should particularly see that the responsibilities of managerial staff at headquarters
do not overlap with those of chief executives at operating units. He should examine
whether there is a satisfactory balance between authority and responsibility of
important executives.
➢ The internal auditor should examine the reasonableness of the span of control of each
executive (the number of sub-ordinates that an executive controls). He should
examine whether there is a unity of command i.e., whether each person reports only
to one superior.
➢ Where dual responsibilities cannot be avoided, the primary one should be specified
and the specific responsibility to each senior fixed. This must be made known to all
concerned.
➢ Finally, he should evaluate the process of managerial development in the enterprise.
This is a vital aspect in a fast growing enterprise.

(c) Dematerialized Securities:

(i) On account of compulsory dematerialization of most of the securities listed on the
Exchange, all stock brokers are required to maintain two accounts with their
Depository Participants (DP) for handling the receipt and delivery of securities in
demat. One account is ‘Beneficiary Account’ wherein the demat securities belonging
to the members’ for their own account are held and the other is ‘Pool Account’ wherein
the demat securities of the clients are temporarily lodged for transfer to/from the
Clients / Clearing House in the Pay-in/Pay-out.
(ii) In case of sale of securities by clients, the clients transfer the same in the demat form
to the member’s Pool Account to the Clearing House on the Pay-in day. In case of
purchase of securities by the Client, the Clearing House transfers the securities to
the Pool Accounts of the members and the members then transfer the same to the
accounts of individual clients.
(iii) The members are required to maintain a proper record of all shares received and
delivered from their Pool Account as well as preserve acknowledged copy of the
delivery instructions given to their DP’s for transferring the securities from the Pool
Account to the Clients’ account after the Pay-out.
(iv) The auditor should verify whether the securities received by the member in the Pool
Account are regularly transferred to the buying clients’ Demat Accounts within 24
hours of declaration of Pay-out of the relevant settlement of the Exchange. It may be
noted that Sometimes, the clients instruct the brokers to retain the shares in the Pool
Account either because they have not opened a demat account or because they
intend to sell the shares they have bought earlier, in the subsequent settlement and
thereby avoid transaction charges.
(v) The auditor should check that the shares lying in the Pool Account have not been
utilized by the member to meet his own pay-in obligations or used for meeting auction
obligations. If the auditor discovers something like this then, he should further enquire
into the matter. Such instances might indicate the breach of fiduciary trust by the
member of the stock exchange.
(vi) Depending upon the nature of the business carried on by the member, the auditor
may apply such procedural tests as he considers necessary on major items of income
and expense such as, commission, sub-brokerage, underwriting income, interest and
dividends, advisory fees, interest, amounts payable towards transac tions charges
and other charges to the Exchange or Clearing House and other income and
expenses.
(vii) The auditor should apply analytical procedures on the financial statements of the
member. The auditor should compare current operating results with those of the prior
period to ascertain that the variations are logical in the circumstances such as volume
of business at the stock-exchanges, the brokerage concern’s share of the market,

changed business conditions such as volume of new securities issued, changes in

the character of the business of the brokerage concern, and trend prices of securities.
A discussion of this comparative data with the officials of the member may highlight
areas where added audit emphasis may be directed.
(d) The Audit Committee shall mandatorily review the following information as per
LODR Regulations:
(i) Management discussion and analysis of financial condition and results of operations;
(ii) Statement of significant related party transactions (as defined by the Audit
Committee), submitted by management;
(iii) Management letters / letters of internal control weaknesses issued by the statutory
auditors;
(iv) Internal audit reports relating to internal control weaknesses;
(v) The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee; and
(vi) Statement of deviations: (a) quarterly statement of deviations including report of
monitoring agency if applicable and (b) annual statement of funds utilized for
purposes other than those stated in the offer document/ prospectus/ notice.
(e) Basic Assumption about Elements of Good Control in Standardized Internal Control
Questionnaire: In the use of standardized internal control questionnaire, certain basic
assumptions about elements of good control are taken into account. These are -
(i) Certain procedures in general used by most business concerns are essential in
achieving reliable internal control. This is a time-tested assumption. Deposit into bank
of the entire receipts of a day or daily balancing of the cash book and ledgers or
periodic reconciliation with the control accounts are examples of widely used
practices which are considered good internal control practices. Besides, basic
operations giving rise to these practices exist in all businesses irrespective of their
nature.
(ii) Organisations are such that permit an extensive division of duties and responsibilities.
The larger the organisation, the greater is the scope of such division.
(iii) Employees concerned with accounting function are not assigned any custodial
function.
(iv) No single person is thrust with the responsibility of completing a transaction all by
himself.
(v) There should always be evidence to identify the person who has done the work
whether involving authorisation, implementation or checking.

(vi) The work performed by each one is expected to come under review of another in the
usual course of routine.
(vii) There is proper documentation and recording of the transactions.
Question 6
(a) The identified risks are assessed by Auditor as to its significance on account of its likely
impact, by way of material misstatement appearing in financial statements or by affecting
internal control system. What may be the points of indication that may direct the Auditor to
judge that the risks identified may be significant?
(b) What are the liabilities of a Chartered Accountant under Income Tax Act, 1961 for
furnishing an incorrect statement in any report or certificate required to be submitted by
him under the Act?
(c) A Review Report of an Auditor is negative in form in expression of conclusion- Explain.
(d) You are the Concurrent Auditor of a Branch of Nationalized Bank which deals in foreign
exchange transactions. Give focus areas of your checking in this respect.
(e) What are the objectives of Peer Review?
OR
What are the inherent limitations of Peer Review? (4 x 5 = 20 Marks)
Answer
(a) Points of Indication that may direct the Auditor to Judge that the Risks Identified
may be Significant: As per SA 315“Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”, as part of the risk
assessment the auditor shall determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall exclude
the effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider at
least the following:
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting, or other
developments like changes in regulatory environment, etc., and, therefore, requires
specific attention;
(iii) The complexity of transactions;
(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related to the
risk, especially those measurements involving a wide range of measurement
uncertainty; and

(vi) Whether the risk involves significant transactions that are outside the normal course
of business for the entity, or that otherwise appear to be unusual.
When the auditor has determined that a significant risk exists, the auditor shall obtain an
understanding of the entity’s controls, including control activities, relevant to that risk.
(b) Liability of an Auditor under Income Tax Act: Liabilities of a Chartered Accountant
under the Income Tax Act of 1961 for furnishing an incorrect statement in any report or
certificate required to be submitted by him under the Act are as below:
Under Section 278: “If a person abets or induces in any manner another person to make
and deliver an account or a statement or declaration relating to any income [or any fringe
benefits] chargeable to tax which is false and which he either knows to be false or does
not believe to be true or to commit an offence under sub-section (1) of section 276C, he
shall be punishable,-
Section 278 of the Income Tax Act, 1961:
(i) in a case where the amount of tax, penalty or interest which would have been evaded,
if the declaration, account or statement had been accepted as true, or which is willfully
attempted to be evaded, exceeds [twenty five] hundred thousand rupees, with
rigorous imprisonment for a term which shall not be less than six months but which
may extend to seven years and with fine;
(ii) in any other case, with rigorous imprisonment for a term which shall not be less than
three months but which may extend to [two] yeas and with fine
Under Rule 12A of the Income Tax Rules: Under this rule a Chartered Accountant who
as an authorised representative has prepared the return filed by the assessee, has to
furnish to the Assessing Officer, the particulars of accounts, statements and other
documents supplied to him by the assessee for the preparation of the return.
Where the Chartered Accountant has conducted an examination of such records, he has
also to submit a report on the scope and results of such examination. The report to be
submitted will be a statement within the meaning of Section 277 of the Income Tax Act.
Thus, if this report contains any information which is false and which the Chartered
Accountant either knows or believes to be false or untrue, he would be liable to rigorous
imprisonment which may extend to seven years and to a fine.
Under Section 271J of the Income Tax Act: As per new section inserted by the Finance
Act, 2017 if an accountant or a merchant banker or a registered valuer, furnishes incorrect
information in a report or certificate under any provisions of the Act or the rules made there
under, the Assessing Officer or the Commissioner (Appeals) may direct him to pay a sum
of ten thousand rupees for each such report or certificate by way of penalty. [ section 271J]
(c) Negative Review Report in expression of conclusion: According to Standards on
Review Engagement (SREs) review report is a limited assurance engagement. The
practitioner provides a written report containing a conclusion that conveys the assurance

obtained about the subject matter information. SAs, SREs and SAEs establish basic
elements for assurance reports. In addition, the practitioner considers other reporting
responsibilities, including communicating with those charged with.
In a reasonable assurance engagement, the practitioner expresses the conclusion in the
positive form, this form of expression conveys “reasonable assurance”. However, in a
limited assurance engagement, the practitioner expresses the conclusion in the negative
form, for example, “based on our work described in this report, nothing has come to our
attention that causes us to believe that internal control is not effective, in all material
respects, based on XYZ criteria”. This form of expression conveys a level of “limi ted
assurance” that is proportional to the level of the practitioner’s evidence-gathering
procedures given the characteristics of the subject matter and other engagement
circumstances described in the assurance report.
The format of Review report in SRE in conclusion caption of the report provides as follows-
"nothing has come to our attention that causes to believe that these financial statements
do not give a true and fair view of (Or presents fairly in all material respects) the financial
position of the company and of its financial performance and cash flows for the period then
ended in accordance with the Accounting standards referred to in Companies Act 2013
and other accounting principles generally accepted in India" .
Thus, in view of above it is clear that in a review report instead of positive form, the negative
form of expression is being used. Also it is to be noted that the Review report contains
caption -conclusion and not opinion.
(d) Focus Areas in case of Foreign Exchange Transactions:
• Check foreign bills negotiated under letters of credit.
• Check FCNR and other non-resident accounts whether the debits and credits are
permissible under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Examine extension and cancellation of forward contracts for purchase and sale of
foreign currency. Ensure that they are duly authorised and necessary charges have
been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within the
limit as prescribed by the bank.
• Ensure that the overbought/oversold position maintained in different currencies is
reasonable considering the foreign exchange operations.
• Ensure adherence to the guidelines issued by RBI/HO of the bank about dealing room
operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/ balances.

(e) Objectives of Peer Review: The main objective of Peer Review is to ensure that in
carrying out the assurance service assignments, the members of the Institute-
(1) comply with Technical, Professional and Ethical Standards as applicable including
other regulatory requirements thereto and
(2) have in place proper systems including documentation thereof, to amply demonstrate
the quality of the assurance services.
Thus, the primary objective of peer review is not to find out deficiencies but to improve the
quality of services rendered by members of the profession. The Statement of Peer Review
also makes it clear that the peer review, "does not seek to redefine the scope and authority
of the Technical Standards specified by the Council but seeks to enforce them within the
parameters prescribed by the Technical Standards".
The peer review is directed towards maintenance as well as enhancement of quality of
assurance services and to provide guidance to members to improve their performance and
adherence to various statutory and other regulatory requirements. Such an objective of the
peer review process makes it amply clear that the reviewer is not going to sit on the
judgment of the practice unit while rendering assurance services but to evaluate the
procedure followed by the practice unit in rendering such a service. Accordingly, where a
practice unit is not following technical standards, the reviewers are expected to recommend
measures to improve the procedures. To elaborate further, the key objective of peer review
exercise is not to identify isolated cases of engagement failure, but to identify weaknesses
that are pervasive and chronic in nature. The conclusion, therefore, is that the peer review
seeks to identify and address patterns of non-compliance with quality control standards.
OR
Inherent Limitations of Peer Review: The reviewer conducts the review in accordance
with the Statement on Peer Review. The review would not necessarily disclose all
weaknesses in compliance of technical standards and maintenance of quality of assurance
services since it would be based on selective tests. As there are inherent limitations in the
effectiveness of any system of quality control which happens to be subject-matter of
review, departure from the system may occur and may not be detected.

PAPER – 5: STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
Answer any four questions from the remaining five questions.
No statistical or other table will be provided with this question paper.
Question 1
JK Ltd., is following Life Cycle Costing. Its four products P4 , P3 , P2 and P1 are in the market
respectively in Introduction, Growth, Maturity and Decline stages (phases). The Management
wants to analyse the marketing challenges faced by the products to take strategical measures
to stabilise the products in the market. For this purpose, the Board directed the Secretary to get
a product-wise report from the marketing chief of each product. The chiefs were asked to give
one characteristic possessed by the product because of which the product is being classified in
the respective stage and two strategical measures to be taken to overcome the market
challenges faced at that stage (phase). The Secretary received the report from all the chiefs
and handed them over to the computer operator to get it printed in a tabulated form. But the
operator, without understanding the significance of the products, phases, characteristics and
strategies, mixed all the twelve items [(1 + 2) × 4] and got it printed as a list as given below:
(i) Over capacity in the industry.
(ii) The company can continue to offer the product to our loyal customers at a reduced price.
(iii) Few competitors produce basic version of our product.
(iv) Product features may be improved or enhanced to differentiate our product from that of
the competitors.
(v) Attracting customers by raising awareness about our product through promotion activities.
(vi) High volume of business and increase in competition.
(vii) Use the present product as replacement product for launching another new product
successfully in the market.
(viii) Value-based pricing strategies may be considered.
(ix) Profits start declining and at times become negative.
(x) Maintain control over product quality to assure customer satisfaction.
(xi) Strengthening or expanding channel and supply chain relationships.
(xii) Prices may have to be reduced to attract the price-sensitive customers.
The items are required to be TABULATED as in the format given below:

Required
(i) Complete the table given below by entering the twelve items under appropriate category
columns. You need not rewrite the items. Write the serial numbers of the items only in
columns (3) and (4).
Products Phases (Stages) Characteristics Strategies
(1) (2) (3) (4)
P4 Introduction
P3 Growth
P2 Maturity
P1 Decline
(4 + 8 = 12 Marks)
(ii) LIST down the importance (any four) of Product Life Cycle Costing. (4 Marks)
(iii) STATE the benefits (any four) of Product Life Cycle Costing. (4 Marks)
Answer
(i) Statement Showing Product Life Cycle Characteristics and Strategies
Products Phases (Stages) Characteristics Strategies
(1) (2) (3) (4)
P4 Introduction (iii) (v), (xi)
P3 Growth (vi) (x), (viii)
P2 Maturity (i) (iv), (xii)
P1 Decline (ix) (ii), (vii)
(ii) Importance of Product Life Cycle (PLC) Costing
 As a Planning tool, it characterizes the marketing challenges in each stage and poses
major alternative strategies, i.e. application of Kaizen.
 As a Control tool, the PLC concept allows the company to measure product
performance against similar products launched in the past.
 As a Forecasting tool, it is very important because sales histories exhibit diverse
patterns and the stages vary in duration.
 It leads to appropriate strategy formulation depending on the stages of the product
life cycle.
(iii) Benefits of Product Life Cycle Costing
The benefits of product life cycle costing are summarized as follows:

PAPER – 5: STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 3
 The product life cycle costing results in earlier actions to generate revenue or to lower
costs than otherwise might be considered. There are a number of factors that need
to the managed in order to maximize return on a product.
 Better decisions should follow from a more accurate and realistic assessment of
revenues and costs, at least within a particular life cycle stage.
 Product life cycle thinking can promote long-term rewarding in contrast to short-term
profitability rewarding.
 It provides an overall framework for considering total incremental costs over the entire
life span of a product, which in turn facilitates analysis of parts of the whole where
cost effectiveness might be improved.
 It is an approach used to provide a long-term picture of product line profitability,
feedback on the effectiveness of life cycle planning and cost data to clarify the
economic impact of alternatives chosen in the design, engineering phase etc.
 It is also considered as a way to enhance the control of manufacturing costs. The
thrust of product life cycle costing is on the distribution of costs among categories
changes over the life of the product, as does the potential profitability of a product.
Hence it is important to track and measure costs during each stage of a product’s life
cycle.
 Product life cycle costing traces research and design and development costs etc.,
incurred to individual products over their entire life cycles, so that the total magnitude
of these costs for each individual product can be reported and compared with product
revenues generated in later periods.
Question 2
Zen Ltd., forms a Committee consisting of its Production, Marketing and Finance Directors to
prepare a budget for the next year. The Committee submits a draft budget as detailed below:
`
Selling price per unit 50
Direct material cost per unit `9
Direct labour cost per unit `9
Variable overhead (3 hrs. @ ` 2) `6 24
Contribution per unit 26
Budgeted Sales Quantity 25,000 units
Budgeted Contribution (25,000 × `26) 6,50,000
Budgeted Fixed Cost 5,00,000
Budgeted Profit 1,50,000

The Management is not happy with the budgeted profit as it is almost equal to the previous
year's profit. Therefore, it asks the Committee to prepare a budget to earn at least a profit of
` 3,00,000. To achieve the target profit, the Committee reports back with the following
suggestions:
The unit selling price should be raised to ` 55.
The sales volume should be increased by 5,000 units.
To attain the above said increase in sales, the company should spend ` 40,000 for advertising.
The production time per unit should be reduced.
To win the acceptance of the workers in this regard the hourly rate should be increased by
` 3 per unit besides an annual group bonus of ` 30,000.
There is no change in the amount and rates of other expenses. The company has sufficient
production capacity.
As the implementation of the above proposal needs the acceptance of the work force to increase
the speed of work and to reduce the production time per unit, the Board wants to know the
extent of reduction in per unit production time.
Required
(i) CALCULATE the target production time per unit and the time to be reduced per unit.
(14 Marks)
(ii) IDENTIFY the other problems that may arise in production due to decrease in unit
production time and also suggest the remedial measures to be taken. (4 Marks)
(iii) STATE the most suitable situation for the adoption of Target Costing. (2 Marks)
Answer
(i) Target Production Time per unit and Time to be Reduced per unit
Alternative.1 Alternative.2 Alternative.3
Target Production Time per unit Target Production Time per unit Target Production Time per unit
(`12 + `2 × hrs.) × 30,000 units (`3 + `3 + `2) × hrs. × 30,000 [(`9 + `3)/ 3 + `2] × hrs. × 30,000 units
= `5,10,000 units = ` 5,10,000 = `5,10,000
Hrs. = 2.50 Hrs. = 2.125 Hrs. = 2.833
Time to be reduced per unit Time to be reduced per unit Time to be reduced per unit
= 3 hrs.– 2.50 hrs. = 3 hrs. – 2.125 hrs. = 3 hrs. – 2.83 hrs.
= 0.50 hrs. = 0. 875 hrs. = 0. 17 hrs.
Verification Verification Verification
Labour Rate per unit Labour Rate per unit Labour Rate per unit
= `12 = `6 × 2.125 hrs. = `4 × 2.83 hrs.
= `12.75 = `11.32

Workings
Statement Showing Target Cost (Direct Labour and Variable Overhead)
Particulars Amount (`)
Target Sales (` 55 × 30,000 Units) 16,50,000
Less: Target Profit 3,00,000
Less: Direct Material Cost (` 9 × 30,000 Units) 2,70,000
Less: Budgeted Fixed Costs 5,00,000
Less: Proposed Advertising 40,000
Less: Proposed Annual Group Bonus 30,000
Target Cost (Variable Overhead and Direct Labour) for 30,000 units 5,10,000
(ii) Problem
The target-costing method is applicable particularly for repetitive manufacturing. It should
however be recognised that some products often bear a high degree of repetition and that
there often are considerable repetitions where reduction targets could come into play as a
framework for improving design. Working under pressure to finish new design assignments
in a short time may take development resources away from efforts to optimise or re-
engineer production processes. If approaching product design as an activity to be
optimised independently there is a risk that target costing may not succeed to satisfactorily
addressing overall performance, so in short decrease in unit production time may lead to
unwanted pressure on design and its implementation stage.
Remedial Measures
As a remedial action organisation should retain strong control over the design teams
headed by a good team leader. This person must have an exceptional knowledge of the
design process, good interpersonal skills, and a commitment to staying within both time
and cost budgets for a design project. If the time is too short even an organisation may
reject a project for the time being. Later, it can be tried out with new cost reduction methods
or less expensive materials to achieve target cost and control overall production activities.
(iii) Target costing is most useful in situations where the majority of product costs are locked
in during the product design phase. This is the case for most manufactured products, but
few services. In the services area, such as consulting, the bulk of all activities can be
reconfigured for cost reduction during the “production” phase, which is when services are
being provided directly to the customer. In the services environment, the “design team” is
still present but is more commonly concerned with streamlining the activities conducted by
the employees providing the service, which can continue to be enhanced at any time, not
just when the initial services process is being laid out.

Question 3
Fast Cook Ltd., is a pressure cooker manufacturing company doing business through
wholesalers and retailers. The company is following Activity Based Costing system. Average
cost per cooker is ` 600 and the listed price is ` 1,000. But cookers are sold at a discount of
25% on listed price on orders for above 200 units and at a discount of 20% on orders for 200
units or less. The company wants to analyse the profitability of two of its wholesale customers
A and B and two of its retail customers X and Y on the basis of the business with them during
last year. This is to explore the opportunities to increase the profitability from the customers.
The relevant data pertaining to the last year are given below:
Customer A B X Y
No. of purchase orders 50 65 230 270
No. of cookers purchased per order 500 300 40 30
No. of visits to customers place 10 15 25 22
No. of ordinary deliveries 45 50 175 200
No. of speed deliveries 5 15 50 65
The activity, cost driver and the rate are as follows:
Activity Cost Driver Cost per unit of Driver (` )
Order processing No. of purchase orders 1,300
Visiting customers No. of customers visited 7,400
Ordinary delivery No. of ordinary deliveries 2,000
Speed delivery No. of speed deliveries 6,000
Required
(i) EVALUATE the customer profitability by calculating the profit per cooker from each
customer. (12 Marks)
(ii) RECOMMEND steps to be taken to improve profitability from less profitable customers.
(4 Marks)
(iii) LIST down the service organisations for which customer profitability analysis is useful.
(2 Marks)
(iv) EXPLAIN the specific benefits of customer profitability analysis. (2 Marks)
Answer

(i) Statement Showing Profit per Customer per unit

Sr. Particulars A (`) B (`) X (`) Y (`) Total (`)
No.
1 Net Sale Proceeds 1,87,50,000 1,46,25,000 73,60,000 64,80,000 4,72,15,000
(Refer Table 1)
2 Cost of Sales 1,50,00,000 1,17,00,000 55,20,000 48,60,000 3,70,80,000
(Refer Table 1)
Assignable Marketing and
Administration Cost
(Refer Table 2)
3a Order Processing Cost 65,000 84,500 2,99,000 3,51,000 7,99,500
3b Customer Visit Cost 74,000 1,11,000 1,85,000 1,62,800 5,32,800
3 Total Assignable 1,39,000 1,95,500 4,84,000 5,13,800 13,32,300
Marketing and
Administration Cost
(Step 3a + 3b)
Distribution Cost
(Refer Table 2)
4a Ordinary Delivery Cost 90,000 1,00,000 3,50,000 4,00,000 9,40,000
4b Speed Delivery Cost 30,000 90,000 3,00,000 3,90,000 8,10,000
4 Total Assignable 1,20,000 1,90,000 6,50,000 7,90,000 17,50,000
Distribution Cost
(Step 4a + 4b)
5 Total Cost (Step 2+3+4) 1,52,59,000 1,20,85,500 66,54,000 61,63,800 401,62,300
6 Net Profit 34,91,000 25,39,500 7,06,000 3,16,200 70,52,700
(Step 1 - Step 5)
7 Profit per Cooker per 139.64 130.23 76.74 39.04 114.12
Customer
(Step 6 / Step 3 of table 1)
Table 1: Customer Sales Analysis - Net Sale Proceeds and Cost of Sales
Sr. Particulars A B X Y Total
No.
1 No. of Purchase Orders 50 65 230 270 615
2 No. of Cookers Purchased per order 500 300 40 30 870
Total Cookers Sold in the year 25,000 19,500 9,200 8,100 61,800
3 (Step 1 × 2)
4 Listed Price per unit (`) 1,000 1,000 1,000 1,000
5 Discount as per Policy (refer note 1) 25% 25% 20% 20%
6 Net Sale Price per unit (Step 4 × (1- 750 750 800 800
discount rate per Step 5) (`)

7 Net Sale Proceeds 1,87,50,000 1,46,25,000 73,60,000 64,80,000 4,72,15,000

(Step 3 × Step 6) (`)
8 Cost of Sales 1,50,00,000 1,17,00,000 55,20,000 48,60,000 3,70,80,000
(Cost per Cooker `600 × Step 3) (`)
Note 1
Fast Cook Ltd. has a policy of providing discount of 25% on listed price on orders above 200 units
and 20% on orders less than 200 units. Each order of customers A and B is for more than 200 units
while each order of X & Y is for less than 200 units. Therefore, A and B get a discount of 25% and
X and Y get a discount of 20% on the listed price per order.
Table 2: Activity Based Costing Technique
(to allocate assignable marketing, administrative and distribution cost)
Particulars Cost per A B X Y Total
Driver unit (`) (`) (`) (`) (`) (`)
Order processing cost 1,300 65,000 84,500 2,99,000 3,51,000 7,99,500
(# of orders per
customer × cost per
order)
Customer visit cost 7,400 74,000 1,11,000 1,85,000 1,62,800 5,32,800
(# of visits × cost per
visit)
Ordinary delivery cost 2,000 90,000 1,00,000 3,50,000 4,00,000 9,40,000
(# of ordinary
deliveries × cost per
delivery)
Speed delivery cost 6,000 30,000 90,000 3,00,000 3,90,000 8,10,000
(# of speed deliveries
× cost per delivery)
Evaluation of the Customer Profitability

From the above calculations, it can be concluded that the average profit per cooker sold is
`114.12. Sales to all the concerned customers are profitable. However, it can be observed
that, sales to customers A and B, who are wholesale buyers, yield above average profit
per cooker `139.64 and `130.23 respectively. While sales to customers X and Y, who are
retail buyers, yield below average profit per cooker `76.74 and `39.04 respectively.
Therefore, it can be concluded that sales to wholesale buyers are more profitable than
sales to retail buyers. In terms of units of cookers sold, sales to A and B account for nearly
72% of the sales (Customer A 25,000 units, Customer B 19,500 units from total sales of
61,800 units). Therefore, Fast Cook Ltd. seems to have a profitable business. However,
analysis to improve the profitability from sales to retail customers like customers X and Y,
would enable Fast Cook to improve its overall bottom-line.

(ii) Recommendation
Steps to improve customer profitability of retail customers X and Y. Referring to Table 1, a
major portion of the assignable marketing, administration and distribution cost can be
traced to customers X and Y. Breaking this down into various cost heads:
(a) Order Processing Costs: A total 615 purchase orders relating to sale of 61,800
cookers have been raised by the four customers. Customer X has raised 37% of the
orders to buy 9,200 (15%) cookers, Customer Y has raised 44% of the orders to buy
(13%) of the cookers, while the balance 19% to buy 72% of the cookers have been
raised by Customers A and B. Therefore, the retail customers X and Y are raising
proportionally far more purchase orders as compared to wholesale customers. To
process these orders, Fast Cook has to incur order processing charges on a higher
scale. While the nature of sale to retail customers may entail sales in much smaller
lots as compared to wholesale customers, Fast Cook Ltd. may require retail
customers to place a threshold of minimum order quantity to be ordered in each
purchase order. Fewer orders with larger quantity will reduce resources that would
be needed for order processing, which will contribute towards lowering the processing
cost for Fast Cook Ltd.
(b) Customer Visit Costs: These are marketing costs incurred by the company towards
to provide support by understanding customer’s needs and sorting operational issues.
A total 72 visits relating to the four customers show that majority of visits have been
made to customers X (25 visits) and Y (22 visits). However, sales to these customers
account only for 28% of the cookers sold (Customer X 9,200 units Customer Y 8,100
of a total of 61,800 units sold). These retail customers are in need of a lot of hand-
holding from the company. Fast Cook Ltd. needs to understand the reasons for so
many visits to these two customers. Despite having so many visits, the sales are not
as much as the wholesale customers. Therefore, Fast Cook has to analyze why so
many visits are required to be made? This may indicate any improvements that can
be made to business operations that can provide the required level of customer
support, without so many customer visits. If this can be understood and implemented,
resources required for customer visits would reduce, thereby reducing these costs.
(c) Ordinary Deliveries: Out of a total of 470 deliveries to the four customers, Customer
X has 175 deliveries and Customer Y has 200 deliveries. Again, as explained above
in point (a), retail customer orders lesser quantity as compared to wholesale
customers. Therefore, the number of deliveries will be more. However, if Fast Cook
Ltd. requires customers to order a minimum quantity each time, this can reduce the
number of deliveries. This would reduce the resources required for making deliveries,
thereby reducing the costs as well.
(d) Speed Deliveries: These are rush orders placed by customers to meet their urgent
and immediate requirements. Since demand is required to be met in a short time
span, Fast Cook may have to employ faster means of delivery. In the given problem,

the cost of speed delivery is thrice the cost of an ordinary delivery. Out of a total of
135 deliveries, Customer X has 50 and Customer Y has 65 speed deliveries. At the
same time, they account for only 28% of cooker sales. Fast Cook Ltd. can require
these customers to place of minimum order amount as part of their regular orders.
This could reduce the need for speed deliveries. It could also make speed deliveries
chargeable, if the number of such orders exceed a certain threshold say 10 orders in
a year. This will enable Fast Cook Ltd. to recover some portion of the costs that it
incurs to make these deliveries.
(iii) List of service organizations using customer profitability analysis:
(a) Financial institutions like Banks and Insurance Companies.
(b) Hospitality services like Hotels, Travel Agents, and Tour Operators.
(c) Professional services like Audit and Accounting Firms, Law Firms, Consultancy Firms
like IT Consultancy, Management Consultancy.
(d) Hospitals and Healthcare providers.
(e) Logistics and Freight Companies that transport goods to various destinations.
(iv) Benefits of Customer Profitability Analysis:
(a) It helps the supplier to identify which customers are eroding overall profitability and
which customers are contributing to it.
(b) It can help to provide a basis for constructive dialogue between buyer and seller to
improve margins.
Question 4
(a) Cool Air Ltd., manufactures and sells 25,000 table fans annually. One of the components
required for fans is purchased from an outside supplier at a price of ` 190 per unit. Annually
it is purchasing 25,000 components for its usage. The Production Manager is of the opinion
that if all the components are produced at own plant, it is possible to maintain better quality
in the finished product. Further, he proposed that the in-house production of the component
with other items will provide more flexibility to increase the annual production by another
5,000 units. He estimates the cost of making the component as follows:
` per unit
Direct materials 80
Direct labour 75
Factory overhead (70% variable) 40
Total Cost 195
The proposal of the Production Manager was referred to the Marketing Manager for his
remarks. He pointed out that to market the additional units, the overall unit price should be

reduced by 5% and additionally ` 1,00,000 p.m. should be incurred for advertising. Present
selling price and contribution per fan are ` 2,500 and ` 600 respectively. No other increase
or decrease in all other expenses as a result of this proposal will arise.
Since the making cost of the component is more than the buying cost, the Management
asks you to:
(i) ANALYSE the make or buy decision on unit basis and total basis. (8 Marks)
(ii) RECOMMEND the most profitable alternative. (2 Marks)
(b) The Board of Directors meeting of T.K. Motors Ltd., a car manufacturing company is to be
scheduled to be held in another ten days. One of the items, as per agenda, to be discussed
in the meeting is the present budgeting system of the company. Your organisation is at
present, using budgets for control which are prepared mostly on traditional basis. The CEO
of your company wants to propose to the Board to use Beyond Budgeting instead of
traditional budgeting in the company on experimental basis. Therefore, you, the
Management Accountant has been asked by your CEO to explore the possibilities of
introducing Beyond Budgeting (BB) system in the company. Specifically, you are required
to PREPARE notes to your CEO to be used for his presentation at the meeting on:
(i) the major limitations of traditional budgets.
(ii) the advantages available in Beyond Budgeting.
(iii) the nature of Beyond Budgeting.
(iv) the benefits that can be enjoyed from Beyond Budgeting.
(v) the suitability of Beyond Budgeting to the company. (10 Marks)
Answer
(a) (i) Cool Air Ltd. purchases 25,000 units of components to manufacture 25,000 fans
annually. The external purchase price per component is `190 per unit. It has the
option of manufacturing these components in house. The cost structure of
manufacturing these components would be as below:
Cost Structure Cost per component unit (`)
Direct Materials 80
Direct Labor 75
Variable Factory Overhead (70% of `40) 28
Total 183
Analysis
If Cool Air Ltd. decides to manufacture the components in-house, the following would
be the financial impact:

(a) Production Capacity will increase from 25,000 fans to 30,000 fans.
(b) Variable Cost of Production of fan would be `1,710 [(2,500 - 600) -190] per unit.
(c) Fixed Factory Overhead of `12 per component would be incurred irrespective
of whether component is produced or not. Therefore, this cost is not considered.
(d) Increase in advertising expense would be `100,000 per month or `12,00,000
annually.
(e) Overall selling price would reduce from the current rate of `2,500 per fan to
`2,375 (95% of `2,500) per fan.
(f) Current contribution considering a procurement price of `190 per component
unit, is `600 per fan. As calculated above, if produced in house, the variable
cost would be `183 per component unit. This would result in an increase in
contribution by `7 per fan (procurement price of `190 per component unit less
variable cost of `183 per component unit). In addition, there is an impact of `125
on account of reduction in selling price. Therefore, the contribution if component
produced in house would be `482 per fan (`600+`7-`125).
To summarize the above figures:
Particulars Procurement 25,000 Produce 30,000

Components Components
Per Fan Total Per Fan Total
` ` ` `
Selling price per fan 2,500 6,25,00,000 2,375 7,12,50,000
Contribution per fan 600 1,50,00,000 482 1,44,60,000
Therefore, incremental loss by switching to in house production (on a total basis)
would be `17,40,000 (incremental loss `5,40,000 – additional advertising expenses
`12,00,000). On a per unit basis, it would result in a loss of `58 per fan.
(ii) Recommendation
As explained above, if production increases from 25,000 fans to 30,000 fans, it would
not be profitable to make these components in house. Overall profit decreased by
`17,40,000. However, Company may prefer to make component, even though it could
be financially beneficial to buy from outside supplier. Sometimes qualitative factors
become very important and can override some financial benefit. This can be coupled
with uncertainty about the supplier’s ability or intention to maintain the price, quality,
delivery dates of the components etc.
Alternatively, the company may continue with the sale of 25,000 units without any
price reduction and advertising expenses. The component required for the 25,000

fans may be produced internally at a cost of `183 per unit. In this situation, the
contribution shall be increased by `1,75,000 (`7 × 25,000 units).
So, Cool Air Ltd. may recommend about the most profitable alternative after due and
careful consideration of the facts illustrated above.
(b) (i) Limitations of Traditional Budgets
 Time-consuming and costly to put together.
 Constrain responsiveness and flexibility.
 Often a barrier to change.
 Rarely strategically focused and are often contradictory.
 Add little value, especially given the time required to prepare.
 Concentrate on cost reduction and not on value creation.
 Developed and updated too infrequently, usually annually.
 Are based on unsupported assumptions and guesswork.
 Reinforce departmental barriers rather than encourage knowledge sharing.
 Make people feel undervalued.
(ii) Advantages of Beyond Budgeting (BB)
BB identifies its two main advantages.
 It is a more adaptive process than traditional budgeting.
 It is a decentralised process, unlike traditional budgeting where leaders plan and
control organisations centrally.
(iii) Nature of 'Beyond Budgeting'
 Budgeting is evolving, rather than becoming obsolete- it depends on trust and
transparency.
 Shift from the top-down, centralised process to a more participative, bottom-up
exercise in many firms.
 It highlights the level of improvement that can be achieved even with relatively
simple modifications and a great deal of trust.
 Budgeting has changed, the change has been neither dramatic nor radical.
Instead, incremental improvements, with traditional budgets being
supplemented by new tools and techniques.
 Forecasting in fact is more important.

(iv) Benefits of the 'Beyond Budgeting' Model

 Beyond budgeting helps managers to work in coordination to beat the
competition. Internal rivalry between managers is reduced as target shifts to
competitors.
 Helps in motivating individuals by defining clear responsibilities and challenges.
 It eliminates some behavioural issues by making rewards team-based.
 Proper delegation of authority to operational managers who are close to the
concerned action and can react quickly.
 Operational managers do not restrict themselves to budget limits and focus on
achieving key ratios.
 It establishes customer-orientated teams.
 It creates information systems which provide fast and open information
throughout the organization
(v) Suitability of Beyond Budgeting to the Company
Since T.K. Motors Ltd. is a car manufacturing company and presently adopting
Traditional Costing system. Moreover, Automobile industry goes through rapid
changes in its business environment. So, the company can definitely use Beyond
Budgeting to improve the control system and beat the competition. Beyond Budgeting
lies an agile, holistic approach based on self-organisation. This will also help the
managers to work in close coordination with each other with motivation which in turn
will beat the competition.
Question 5
(a) Sun Chemicals Co., is engaged in manufacturing many chemical products. It is using many
chemicals some of which are fast moving, some are slow moving and few are in non-
moving category. The company has a stock of 10 units of one non-moving toxic chemical.
Its book value is ` 2,400, realizable value is ` 3,500 and replacement cost is ` 4,200.
One of the customers of the company asks to supply 10 units of a product which needs all
the 10 units of the non-moving chemical as an input. The other costs associated with the
production of the product are:
Allocated overhead expenses ` 16 per unit
Out of pocket expenses ` 50 per unit
Labour cost ` 40 per hour. For each unit two hours are required.
Other material cost ` 80 per unit.
The labour force required for the production of the product will be deployed from among
the permanent employees of the company. This temporary deployment will not lead to any
loss of contribution.

Required
(i) RECOMMEND the minimum unit price to be charged to the customer without any loss
to the company. (4 Marks)
(ii) ANALYSE with reasons for the inclusion or exclusion of each of the cost associated
with the production of the product. (4 Marks)
(iii) ADVICE a pricing policy to be followed by Sun Chemical in perfect competition.
(2 Marks)
(b) Apple Ltd., is following three variances method to analyse and understand production
overhead variances. The three variances for a particular year were reported as given
below:
`
Production overhead expenditure variance 94,000 A
Production overhead volume variance 1,00,000 F
Production overhead efficiency variance 48,000 F
The other particulars furnished from the records of the company are :
Standard machine hours for the year 11,500
Closing balance in the Production Overhead Control Account ` 18,00,000
Fixed overhead rate per hour ` 125
Variable overhead rate per hour `80
Required
COMPUTE the following by considering the additional information also :
(i) Actual machine hours
(ii) Budgeted machine hours
(iii) Total Fixed Production Overhead amount
(iv) Applied Production Overhead amount (10 Marks)
Additional Information
 Expenditure variance was computed totally for fixed and variable overheads.
 Volume variance is applicable to fixed overhead only.
 Efficiency variance is applicable only to variable overhead and fixed overhead
efficiency variance was already included in volume variance.

Answer
(a) (i) Sun Chemicals has the opportunity to utilize 10 units of non-moving chemical as input
to produce 10 units of a product demanded by one of its customers. The minimum
unit price to be charged to the customer would be–
Cost Component Cost per unit of product
(`)
Cost of Material 350
(Realizable value = `3,500 / 10 units of chemical)
Out of Pocket Expenses 50
Other Material Cost 80
Minimum Unit Price that can be charged 480
Therefore, the minimum unit price that can be charged to the customer, without
incurring any loss is `480 per unit of product. As explained below in point (ii),
allocated overhead expenses and labor cost are sunk costs that have been ignored
while calculating the minimum unit price to be charged.
(ii) Analysis
(a) Cost of Material: Relevant and hence included at realizable value. Sun
Chemicals has 10 units of non-moving chemical input that has a book value of
`2,400, realizable value of `3,500 and replacement cost of `4,200. Realizable
value of `3,500 would be the salvage value of the chemical had it been sold by
Sun Chemical instead of using it to meet the current order. This represents an
opportunity cost for the company and hence included while pricing the product.
Book value would represent the cost at which the inventory has been recorded
in the books, a sunk cost that has been ignored. Replacement cost of `4,200
would be the current market price to procure 10 units of the input chemical. This
would be relevant only when the inventory has to be replenished after use. This
chemical is from the non-moving category, that means that it is not used
regularly in production process and hence need not be replenished after use.
Therefore, replacement cost is also ignored for pricing.
(b) Labour Cost: Not relevant and hence excluded from pricing. It is given in the
problem that this order would be met by permanent employees of the company.
Permanent employee cost is a fixed cost that Sun Chemicals would incur
irrespective of whether this order is produced or not. No additional labour is
being employed to meet this order. Therefore, this cost is a sunk cost, excluded
from pricing.
(c) Allocated Overhead Expenses: These expenses have been incurred at another
Cost Centre, typical example would be office and administration costs. Such

costs are fixed in nature that would be incurred irrespective of whether this order
is produced or not. Therefore, this cost is a sunk cost, excluded from pricing.
(d) Out of Pocket Expenses: These are expenses that are incurred to meet the
production requirement of this order. These are additional variable expenses,
that need to be included in pricing.
(e) Other Material Costs: These are expenses that are incurred to meet the
production requirement of this order. These are additional variable expenses,
that need to be included in pricing.
(iii) Advice on Pricing Policy
Under perfect competition conditions, Sun Chemical can have no pricing policy of its
own, here sellers are price takers. It cannot increase its price beyond the current
market price. The company can only decide on the quantity to sell and continue to
produce as long as the marginal cost is recovered. When marginal cost exceeds the
selling price, the company starts incurring a loss.
Since Sun Chemical cannot control the selling price individually in the market, it can
adopt the going rate pricing method. Here it can keep its selling price at the average
level charged by the industry. This would yield a fair return to the company. An
average selling price would help the company attract a fair market share in
competitive conditions.
(b) (i) Calculation of Actual Machine Hours
Efficiency Variance = `48,000 (F) given
= Standard Variable Overhead Rate per Hour ×
(Standard Hours – Actual Hours)
`48,000(F) = `80 × (11,500 hrs. – Actual Hours)
Actual Hours = 10,900 hrs.
(ii) Budgeted Machine Hours
Volume Variance = `1,00,000 (F)
= Standard Fixed Overhead Rate per Hour ×
(Standard Hours – Budgeted Hours)
`1,00,000 (F) = `125 × (11, 500 hrs. – Budgeted Hours)
Budgeted Hours = 10,700 hrs.
(iii) Total Fixed Production Overhead*
Fixed Production Overhead = Standard Fixed Overhead Rate per Hour ×
Budgeted Hours

= `125 × 10, 700 hrs.

= `13,37,500
* Assumed Budgeted
(iv) Applied Manufacturing Overhead
= Standard Overhead Rate per Hour × Standard
Hours
= `205 × 11, 500 hrs.
= `23,57,500
ALTERNATIVE (iii) & (iv)
(iii) Total Fixed Production Overhead
Expenditure Variance = Fixed Production Overhead (Budgeted) +
Budgeted Variable Overheads for Actual Hours –
Actual Overheads
`94,000 (A) = Fixed Production Overhead + 10,900 hrs. × `80 –
`18,00,000
Fixed Production Overhead = `8,34,000
(iv) Applied Manufacturing Overhead
= Actual Overhead Incurred + Total Variance
= `18,00,000 + `54,000
= `18,54,000
Working Notes
Total Variance = Expenditure Variance + Efficiency Variance +
Volume Variance
= `94,000 (A) + `48,000 (F) + `1,00,000 (F)
= `54,000 (F)
Question 6
(a) Usha Products Co. operates a Pulp Division that manufactures Wood Pulp for use in
production of various paper goods. The following informations are available:
`
Selling Price 210
Less: Variable Expenses 126
Contribution 84

Less: Fixed Expenses (Based on a capacity of 1,00,000 kgs per year) 54

Net Income 30
Usha Products has just acquired a small company that manufacturers paper cartons. This
company will be treated as a division of Usha with full profit responsibility. The newly
formed Carton Division is currently purchasing 10,000 kgs of pulp per year from supplier
at a cost of ` 210 per kg. less a 10% quantity discount. Usha's President is anxious that
the Carton Division begins purchasing its pulp from the Pulp Division if an acceptable
transfer price can be worked out.
Required
(Answer any 2 items from situations I, II and III below)
Situation I
If the Pulp Division is in a position to sell all of its pulp to outside customers at the normal
price of ` 210 per kg, will the Managers of the Carton and Pulp Division agree to transfer
10,000 kgs of pulp next year at a determined price? EXPLAIN with reasons. (5 Marks)
Situation II
Assuming that the Pulp Division is currently, selling only 60,000 kgs of pulp each year to
outside customers at the stated price of ` 210 per kg, will the Managers agree to a mutually
acceptable transfer price for 10,000 kgs of pulp in next year? EXPLAIN with reasons.
(5 Marks)
Situation III
If the outside supplier of the Carton Division reduces its price to ` 177 per kg, will the Pulp
Division meet this price? EXPLAIN. If the Pulp Division does not meet the price of
` 177 per kg, what will be the effects on profits of the company as a whole? (5 Marks)
(b) A Company manufactures a single product, which requires three components. The
company purchases one of the components from three supplier. DJ Ltd., PJ Ltd. and ZJ
Ltd. The following informations are available:
DJ Ltd. PJ Ltd. ZJ Ltd.
Price quoted by supplier (per hundred units) ` 240 ` 234 ` 260
% of Defective of total receipts 3% 5% 2%
If the defectives are not detected they are utilized in production causing a damage of
` 200 per 100 units of the component. Total requirements is 12,000 units of the
components.
The company intends to introduce a system of inspection for the components on receipt.
The inspection cost is estimated at ` 26 per 100 units of the components. Such as

inspection will be able to detect only 90% of the defective components received. No
payment will be made for components found to be defective in inspection.
Required
(i) ADVICE whether inspection at the point of receipt is justified. (8 Marks)
(ii) Which of the three supplier should be asked to supply? (2 Marks)
Answer
(a) Situation I
The lowest acceptable transfer price from the perspective of the selling division is given by
the following formula:
Variable cost Total contribution margin on lost sales
Transfer price  +
per unit Number of units transferred
The Pulp Division has no idle capacity, so transfers from the Pulp Division to the Carton
Division would cut directly into normal sales of pulp to outsiders. Since the costs are the
same whether the pulp is transferred internally or sold to outsiders, the only relevant cost
is the lost revenue of `210 per kg from the pulp that could be sold to outsiders. This is
confirmed below:
Transfer Price  ` 126 + (` 210 - ` 126) × 10,000= ` 210

10,000
Therefore, the Pulp Division will refuse to transfer at a price less than `210 per kg.
The Carton Division can buy pulp from an outside supplier for `210 per kg, less a 10%
quantity discount of `21, or `189 per kg. Therefore, the Division would be unwilling to pay
more than `189 per kg.
Transfer Price ≤ Cost of Buying from Outside Supplier = `189
The requirements of the two divisions are incompatible. The Carton Division won’t pay
more than `189 and the Pulp Division will not accept less than `210. Thus, there can be
no mutually agreeable transfer price and no transfer will take place.
Situation II
The Pulp Division has idle capacity, so transfers from the Pulp Division to the Carton
Division do not cut into normal sales of pulp to outsiders. In this case, the minimum price
as far as the Carton Division is concerned is the variable cost per kg of `126. This is
confirmed in the following calculation:
`0
Transfer price ` 126 + = ` 126
10, 000

The Carton Division can buy pulp from an outside supplier for `189 per kg and would be
unwilling to pay more than that for pulp in an internal transfer. If the managers understand
their own businesses and are cooperative, they should agree to a transfer and should settle
on a transfer price within the range:
` 126  Transfer price  ` 189
Situation III
Yes, `177 is a bona fide outside price. Even though `177 is less than the Pulp Division’s
`180 “full cost” per unit, it is within the range and therefore will provide some contribution
to the Pulp Division.
If the Pulp Division does not meet the `177 price, it will lose `5,10,000 in potential profits.
Price per kg `177
Less: Variable Costs `126
Contribution margin per kg `51
10,000 kgs × `51 per kg = R`5,10,000 potential increased profits.
This ` 5,10,000 in potential profits applies to the Pulp Division and to the company as a
whole.

For situation III also considered that “the Pulp Division is currently selling only 60,000
kgs of pulp each year to outside customers”.
(b) (i) A. Statement Showing Effective Cost before Inspection

Particulars DJ Ltd. PJ Ltd. ZJ Ltd.
Units Supplies (No.s) 12,000 12,000 12,000
Defectives Expected (No.s ) 360 600 240
Costs:
Purchase of Components 28,800 28,080 31,200
Add: Production Damage on 720 1,200 480
Defective Components (@ `200 per
100 components)
Total 29,520 29,280 31,680
Good Components (Nos.) 11,640 11,400 11,760
Cost per 100 Good Components 253.61 256.84 269.39

B. Statement Showing Effective Cost after Inspection
Particulars DJ Ltd. PJ Ltd. ZJ Ltd.

Units Supplies (No.s) 12,000 12,000 12,000
Defects Not Expected (No.s ) 36 60 24
Defectives Expected (No.s ) 324 540 216
Components Paid For 11,676 11,460 11,784
Costs:
Purchase of Components 28,022.40 26,816.40 30,638.40
Add: Inspection Cost 3,120.00 3,120.00 3,120.00
Add: Production Damage on 72.00 120.00 48.00
Defective Components (@ `200 per
100 components)
Total 31,214.40 30,056.40 33,806.40
Good Components (Nos.) 11,640 11,400 11,760
Cost per 100 Good Components 268.16 263.65 287.47
ADVICE Whether Inspection at the Point of Receipt is Justified
On comparing the cost under situation, A and B shown above, we find that it will not
be economical to install a system of inspection.
Further we also need to consider that presently many organizations are undergoing
Just in Time (JIT) implementation. JIT aims to find a way of working and managing to
eliminate wastes in a process. Achievement of this is ensured through eliminating the
need to perform incoming inspection. Inspection does not reduce the number of
defects, it does not help in improving quality. In general inspection, does not add
value to the product. It simply serves as a means of identifying defects the supplier
has failed to recognize subsequent to the manufacturing of the product.
As a matter of fact, organizations implementing JIT are seeking eventually to
eliminate the need for performing incoming inspection activities through a
combination of reducing the supplier base, selection through qualification and vendor
development. Vendor development and its proper management seeks to assist the
supplier who maintains an interest in striving to provide 100% defect-free materials
and parts.
So, to decision whether inspection at the point of receipt is justified or not will also
depend on Qualitative factors as well.

(ii) On comparing the buying cost of components under different situations, as analysed
and advised above, if company decides not to install a system of inspection, supplier
DJ would be cheaper otherwise supplier PJ would be cheaper and company may
choose supplier accordingly.

This question can also be solved by assuming receipt of good components as
requirement i.e. 12,000 units.

PAPER- 4 – CORPORATE AND ECONOMIC LAWS
Question No. 1 is compulsory.
Answer any four from the rest
Question 1
(a) The Board of Directors of M/s. Diya Steels and Aluminium Limited, a listed Company
having a paid up equity share capital of ` 15 crore and preference share capital of
` 1 crore and 1100 small shareholders holding equity shares, seeks your advice on the
following:
(i) Is it mandatory for the Company to appoint a Director to represent Small
Shareholders?
(ii) If the Company decides to appoint such a Director, the procedure to be followed by
the Company for such appointment and the tenure for which such appointment can
be made.
(iii) Whether such a Director be considered as an Independent Director?
(iv) When does a person appointed as a small shareholders Director vacate his office?
Advise suitably in the light of the provisions of the Companies Act, 2013 and the rules
framed thereunder. (8 Marks)
(b) Primex Securities (P) Ltd. is a Company involved in stock broking and is registered with
SEBI. The said broking Company failed to:
- Redress the grievances of the investors within the stipulated time.
- Segregate securities or money of clients and used the same for self use or for any
other clients.
The Securities and Exchange Board of India issued an Order against the said
Company for committing the above offences. The Managing Director of the Company
seeks your advice and the following under the provisions of the Securities Contract
(Regulation) Act, 1956.
(i) What is the penalty for the above offences?
(ii) Whether the offence committed by the stock broking company is compoundable? If
so, by whom?
(iii) Whether this offence can be compounded after institution of proceedings against
the stock broking Company? (6 Marks)
(c) (i) An Appellate Tribunal consisting of two members was formed to hear the appeal
preferred by Mr. Hari, being aggrieved by an Order made by the Adjudicating
Authority under the Prevention of Money Laundering Act, 2002. Two members of
the Bench differ in their opinion on a particular point referred in the appeal.

Explain the next course of action to be followed by the Bench members under the
said Act. (2 Marks)
(ii) Mr. Narayan willfully gives false information, refuses to give evidence and to sign
statement made by him in the course of proceedings under the provisions of
Prevention of Money Laundering Act, 2002. Explain the penal provisions and mode
of recovery of fine or penalty enumerated under the said Act. (4 Marks)
Answer
(a) (i) According to section 151 of the Companies Act, 2013, a listed company may have
one director elected by such small shareholders in such manner and with such
terms and conditions as may be prescribed.
So, it is not mandatory for the company to appoint a director to represent small
shareholders.
(ii) Procedure for appointment: The Board of Directors of M/s Diya Steels and
Aluminium Limited is advised that:
The Companies (Appointment and Qualification of directors) Rules, 2014 provides
for the procedure for appointment of Small shareholders’ director according to
which:
(1) A listed company, may upon notice of not less than
(a) one thousand small shareholders; or
(b) one- tenth of the total number of such shareholders,
whichever is lower, have a small shareholders’ director elected by the small
shareholders.
However, a listed company may opt to have a director representing small
shareholders suomotu and in such a case the provisions of sub-rule (2), given
below, shall not apply for appointment of such director.
(2) The small shareholders intending to propose a person as a candidate for the
post of small shareholders’ director shall leave a notice of their intention with
the company at least fourteen days before the meeting under their signature
specifying the name, address, shares held and folio number of the person
whose name is being proposed for the post of director and of the small
shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the
company, the details of shares held and folio number need not be specified in
the notice.

PAPER – 4 : CORPORATE AND ECONOMIC LAWS 3
(3) The notice shall be accompanied by a statement signed by the person whose
name is being proposed for the post of small shareholders’ director stating-
(a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Ac t; and
(c) his consent to act as a director of the company.
Tenure: A small shareholders’ director shall not, for a period of three years from the
date on which he ceases to hold office as a small shareholders’ director in a
company, be appointed in or be associated with such company in any other
capacity, either directly or indirectly.
(iii) Small shareholder director as Independent Director: Such director shall be
considered as an independent director subject to, his being eligible under sub-
section (6) of section 149 and his giving a declaration of his independence in
accordance with sub-section (7) of section 149 of the Act.
(iv) Vacation of office by small shareholder director: A person appointed as small
shareholders’ director shall vacate the office if -
(a) the director incurs any of the disqualifications specified in section 164;
(b) the office of the director becomes vacant in pursuance of section 167;
(c) the director ceases to meet the criteria of independence as provided in sub-
section (6) of section 149.
(b) The Managing Director of Primex Securities (P) Ltd. is advised that:
(i) (a) Broking company fails to redress the grievances of the investors within the
stipulated time [Section 23C of the Securities Contract (Regulation) Act, 1956]:
Fine of at least INR 1,00,000 but may extend to INR 1,00,000 per day during
which such failure continues, subject to a maximum of INR 1 crore.
(b) Broking company fails to segregate securities or money of client and used the
same for self-use or for any other clients [Section 23D of the Securities
Contract (Regulation) Act, 1956: Penalty of at least INR 1,00,000 but it may
extend to INR 1 crore.
(ii) Composition of certain offences (Section 23N): Any offence punishable under this
Act, not being an offence punishable 'with imprisonment' only, or 'with imprisonment
and also with fine' may either before or after the institution of any proceeding, be
compounded by SAT or a court before which such proceedings are pending.
Hence, the offence committed by the stock broking company is compoundable by SAT
or a Court.
(iii) Yes, this offence can be compounded after institution of proceedings against the stock
broking company but only by SAT or a Court before which such proceedings are pending.

(c) (i) Decision to be by majority [Section 38 of the Prevention of Money Laundering

Act, 2002]
If the Members of a Bench consisting of two Members differ in opinion on any point,
they shall state the point or points on which they differ, and make a reference to the
Chairman who shall either hear the point or points himself or refer the case for
hearing on such point or points by third Member of the Appellate Tribunal and such
point or points shall be decided according to the opinion of the majority of the
Members of the Appellate Tribunal who have heard the case, including those who
first heard it.
In the instant case, the above procedure has to be followed by the Bench members.
(ii) Punishment for false information or failure to give information, etc. [Section
63 of the Prevention of Money Laundering Act, 2002]
1. Any person willfully and maliciously giving false information and so causing an
arrest or a search to be made under this Act shall on conviction be liable for
imprisonment for a term which may extend to two years or with fine which may
extend to fifty thousand rupees or both.
2. If any person,-
(a) refuses to give evidence and
(b) refuses to sign statement made by him in the course of proceedings
he shall pay, by way of penalty, a sum which shall not be less than 500 rupees
but which may extend to 10,000 rupees for each such default or failure.
Mode of Recovery of fine or penalty [Section 69]
Where any fine or penalty imposed on any person under section 13 or section 63 is
not paid within six months from the day of imposition of fine or penalty, the Director
or any other officer authorised by him in this behalf may proceed to recover the
amount from the said person in the same manner as prescribed in Schedule II of the
Income-tax Act, 1961 for the recovery of arrears and he or any officer authorised by
him in this behalf shall have all the powers of the Tax Recovery Officer mentioned in
the said Schedule for the said purpose.
Question 2
(a) (i) The shareholders of Kumar Ltd. passed a special resolution that the affairs of the
Company ought to be investigated. The Company submitted the special resolution
to the Central Government. Examine, explaining the relevant provision of the
Companies Act, 2013, whether the power of the Central Government to order an
investigation is mandatory or discretionary?

(ii) Enumerate the procedures to be followed by the Serious Fraud Investigation Office
to arrest a person who has been found guilty of an offence committed under Section
447 of the Companies Act, 2013. (7 Marks)
(b) An investigation was ordered by the Central Government under Section 216 of the
Companies Act, 2016, against PKR Limited for determining the true membership of the
Company. In connection with this investigation, it appears to the Tribunal that there is
good reason to find out the relevant facts about 9% Redeemable Cumulative Preference
Shares (RCPS) issued by the Company on 15.10.2017 and the Tribunal is of the opinion
that unless restriction is imposed on further issue of such shares, the purpose cannot be
solved. Accordingly, the Tribunal, by an Order dated 15.08.2018, directed the Company
that the further issue of RCPS shall be subject to restrictions for a period of four years.
Despite the Order of the Tribunal as above, PKR Limited proceeded with further issue of
RCPS on 20.08.2018 in order to fund the working capital requirements for its expansion
project.
Referring to the provisions of the Companies Act, 2013, examine the following:
(i) Can the Tribunal restrict further issue of RCPS? If yes, then to what period?
(ii) What are the penal provisions in case of contravention to the above Order? (5 Marks)
(c) What are the powers of the Central Government under the Companies Act, 2013
regarding appeal against acquittal? (2 Marks)
(d) An Association registered under the Foreign Contribution (Regulation) Act, 2010 (the Act)
received donation from a club registered in Singapore. The Association proposes:
(i) To transfer 10% of the donation to "Home for Aged Society", an unregistered person
and 15% to "Welfare Club" a registered person under the Act,
(ii) To invest portion of the donation in Chits promising high returns.
In the light of provisions of the Foreign Contribution (Regulation) Act, 2010 decide
whether the Association can carryout the above proposals and if so state the procedures
to be followed under the said Act? (6 Marks)
Answer
(a) (i) Investigation in the opinion of Central Government [Section 210(1) of the
Companies Act, 2013]: Where the Central Government is of the opinion, that it is
necessary to investigate into the affairs of a company,—
(a) on the receipt of a report of the Registrar or inspector under section 208;
(b) on intimation of a special resolution passed by a company that the affairs of
the company ought to be investigated; or
(c) in public interest,
it may order an investigation into the affairs of the company.

Hence, the power of the Central Government to order an investigation is

discretionary.
(ii) As per section 212(6) of the Companies Act, 2013, offences covered under section
447 of this Act shall be cognizable as well as non-bailable. So, the person found
guilty for commission of an offence under the said section, shall be liable to be
arrested, by SFIO.
The Central Government by general or special order authorize the Director,
Additional Director or Assistant Director of SFIO in this behalf, on the basis of
material in his possession reason to believe (the reason for such belief to be
recorded in writing) that any person has been guilty of any offence punishable under
sections referred to in sub-section (6) i.e. Section 447,to arrest such person and
shall, as soon as may be, inform him of the grounds for such arrest. [Section
212(8)].
Immediately after arrest, they shall forward a copy of the order, along with the
material in his possession, to the SFIO in a sealed envelope, in such manner as
may be prescribed and the SFIO shall keep such order and material for such period
as may be prescribed. [Sub section (9)] and present the person so arrested before
the Judicial Magistrate or a Metropolitan Magistrate having jurisdiction within
twenty-four hours. The period twenty four hours shall exclude the time necessary for
the journey from the place of arrest to the Magistrate’s court. [Sub section (10)]. An
Interim report is submitted, if so directed, to the Central Government, till the
completion of the investigation. [Sub section (11)&(12)].
(b) Imposition of Restrictions upon Securities (Section 222 of the Companies Act, 2013)
(i) Tribunal may by order put restrictions upon securities [sub -section (1)]: Where
it appears to the Tribunal, in connection with any investigation under section 216 or
on a complaint made by any person in this behalf, that there is good reason to find
out the relevant facts about any securities issued or to be issued by a company and
the Tribunal is of the opinion that such facts cannot be found out unless certain
restrictions, as it may deem fit, are imposed, the Tribunal may, by order, direct that
the securities shall be subject to such restrictions as it may deem fit for such period
not exceeding three years as may be specified in the order.
In the instant case, the Tribunal can restrict the further issue of RCPS for such
period not exceeding three years.
(ii) Punishment in case of contravention to an order: Where securities in any
company are issued or transferred or acted upon in contravention of an order of the
Tribunal under sub-section (1), the company shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not

be less than twenty-five thousand rupees but which may extend to five lakh rupees,
or with both.
(c) Power of the Central Government regarding Appeal against Acquittal [Section 444
of the Companies Act, 2013]
The Central Government may, in any case arising under this Act, direct -
• any company prosecutor or
• authorise any other person either by name or by virtue of his office,
to present an appeal from an order of acquittal passed by any court, other than a High
Court, and an appeal presented by such prosecutor or other person shall be deemed to
have been validly presented to the appellate court.
(d) (i) According to Section 7 of the Foreign Contribution (Regulation) Act, 2010, a person
who is registered and granted a certificate and receives any foreign contribution,
shall not transfer such foreign contribution to any other person unless such other
person is also registered and had been granted the certificate or obtained the prior
permission under this Act.
However, that such person may transfer, with the prior approval of the Central
Government, a part of such foreign contribution to any other person who has not
been granted a certificate or obtained permission to an extent not exceeding ten per
cent of the total value thereof and for this purpose, make an application to the
Central Government in prescribed Form. [Read with Rule 24 of FCRR, 2011]
In the instant case, the association can transfer 10% of the donation to “Home for
Aged Society” an unregistered person after making an application to the Central
Government in prescribed form and can also transfer 15% to “Welfare Club” a
registered person under the Act.
(ii) According to proviso to Section 8 of the FCRA, 2010 any foreign contribution shall
not be used for speculative business.
Speculative activities have been defined in Rule 4 of FCRR, 2011 as under:-
(a) any activity or investment that has an element of risk of appreciation or
depreciation of the original investment, linked to market forces, including
investment in mutual funds or in shares;
(b) participation in any scheme that promises high returns like investment in chits
or land or similar assets not directly linked to the declared aims and objectives
of the organization or association.
In the instant case, the association cannot invest portion of the donation in Chits
promising high returns.

Question 3
(a) MNC Private Ltd. is a Company in which there are six shareholders. Mr. Srinath, who is a
director and also the legal representative of a deceased shareholder holding less than
one tenth of the share capital the Company made a petition to the Tribunal for relief
against oppression and mismanagement. Examine under the provisions of the
Companies Act, 2013 whether the petition made by Mr. Srinath valid and maintainable?
(3 Marks)
(b) In the light of the provisions of the Companies Act, 2013 explain whether the following
Companies can be considered as a ‘Foreign Company':
(i) A Company which has no place of business established in India, yet, is doing online
business through telemarketing in India.
(ii) A Company which is incorporated outside India employs agents in India but has no
place of business in India.
(iii) A Company incorporated outside India having shareholders who are all Indian
citizens. (8 Marks)
(c) Aggrieved by the Order of Securities Appellate Tribunal (SAT), MNO Ltd. decided to
prefer an appeal with the Supreme Court. Identify the provisions governing further appeal
on the Order by the Company under the provision of Securities Contracts (Regulation)
Act, 1956. Also state whether any question of fact arising out of the Order of SAT can be
challenged in the appeal? (3 Marks)
(d) Bharat Computer Hardware Ltd. received an advance -payment for export of high-tech
hardware to a business concern in Singapore by entering into an export agreement to
supply the hardware within six months from the date of receipt of advance payment. The
shipment of hardware was made after 9 months and the documents covering the
shipment were routed through an authorized dealer through whom the advance payment
was received.
Examine whether Bharat Computer Hardware Ltd. has discharged its obligation in
accordance with the provisions of the Foreign Exchange Management Act, 1999?
Is it possible to receive advance payment where the export agreement provides for
shipment of goods within 15 months from the date of receipt of advance payment? Also
identify the maximum rate of interest payable on the advance payment under the said
Act. (6 Marks)
Answer
(a) 1. According to section 244 of the Companies Act, 2013, in the case of a company
having share capital, the following member(s) have the right to apply to the Tribunal
under section 241:
(a) Not less than 100 members of the company or not less than one-tenth of the

total number of members, whichever is less; or

(b) Any member or members holding not less than one-tenth of the issued share
capital of the company provided the applicant(s) have paid all the calls and
other sums due on the shares.
2. Legal heir of the deceased shareholder with minority status is entitled to file the
petition.
In the given case, there are six shareholders. As per the condition (a) above, 10% of 6
i.e. 1 (round off 0.6) satisfies the condition. Therefore, in the light of the provisions of the
Act, a single member (even the legal representative of a deceased shareholder) can
present a petition to the Tribunal, regardless of the fact that he holds less than one-tenth
of the company’s share capital.
Thus, the petition made by Mr. Srinath is valid and maintainable.
(b) Foreign Company [Section 2(42) of the Companies Act, 2013]: “Foreign company”
means any company or body corporate incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner.
According to Rule 2 (c) of the Companies (Registration of Foreign Companies) Rules,
2014, “electronic mode” means carrying out electronically based, whether main server
is installed in India or not, including, but not limited to -
(a) business to business and business to consumer transactions, data interchange and
other digital supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or
subscriptions in securities, in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services,
database services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and
information research; and
(e) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document
management, voice or data transmission or otherwise.
In the light of the said provisions of the Companies Act, 2013, as enumerated above:
(i) *A company which has no place of business in India but is doing online business
through telemarketing in India, will be considered as a ‘Foreign Company’.
(ii) A company incorporated outside India which has a place of business in India
whether by itself or through an agent, physically or through electronic mode, will be

considered as foreign company. Thus, a company incorporated outside India which

does not have a place of business in India, will not be considered a ‘Foreign
Company’
(iii) A company incorporated outside India having shareholders who are all Indian
citizens shall be a ‘Foreign Company’
(*It is presumed that the company in question is incorporated outside India, so that
provisions of section 2(42) of the Companies Act, 2013 can be applied on it.)
(c) According to section 22F of the Securities Contracts (Regulation) Act, 1956, any person
aggrieved by any decision or order of the Securities Appellate Tribunal (SAT) may file an
appeal to the Supreme Court within 60 days from the date of communication of the
decision or order of the Securities Appellate Tribunal to him on any question of law
arising out of such order. However, the Supreme Court may, if it is satisfied that the
appellant was prevented by sufficient cause from filing the appeal within the said period,
allow it to be filed within a further period not exceeding 60 days.
From the perusal of the section, it is evident that any question of fact arising out of the
Order of SAT cannot be challenged in the appeal.
(d) According to the Foreign Exchange Management (Export of Goods and Services)
Regulations, 2015,
Advance payment against exports:
(1) Where an exporter receives advance payment (with or without interest), from a
buyer / third party named in the export declaration made by the exporter, outside
India, the exporter shall be under an obligation to ensure that –
(i) the shipment of goods is made within one year from the date of receipt of
advance payment;
(ii) the rate of interest, if any, payable on the advance payment does not exceed
the rate of interest London Inter-Bank Offered Rate (LIBOR) + 100 basis points
and
(iii) the documents covering the shipment are routed through the authorised dealer
through whom the advance payment is received;
Provided that in the event of the exporter's inability to make the shipment, partly or
fully, within one year from the date of receipt of advance payment, no remittance
towards refund of unutilized portion of advance payment or towards payment of
interest, shall be made after the expiry of the period of one year, without the prior
approval of the Reserve Bank.
(2) Notwithstanding anything contained in clause (i) of sub-regulation (1), an exporter
may receive advance payment where the export agreement itself duly provides for
shipment of goods extending beyond the period of one year from the date of receipt

of advance payment.
In the light of the provisions as enumerated above,
(i) Since Bharat Computer Hardware Ltd. has exported the hardware within 9 months
of the date of receipt of advance payment, it has discharged its obligations within
the provisions of the Foreign Exchange Management Act, 1999.
(ii) Yes, it is possible to receive advance payment where the export agreement
provides for shipment of goods extending beyond the period of one year (here in
question 15 months) from the date of receipt of advance payment.
(iii) The maximum rate of interest, if any, payable on the advance payment should not
exceed the rate of interest London Inter-Bank Offered Rate (LIBOR) + 100 basis
points.
Question 4
(a) Mr. Gopi is the Managing Director of LGB Limited. The Company wants to vacate the
post of Managing Director on March 31, 2018 and appoint Mr. Lakshmikant in place of
Mr. Gopi due to hands on experience and better track records. The tenure of
appointment of Mr. Gopi is upto 30th June, 2022 with the condition that he will get
compensation in case of early vacation of his office due to the Company's requirements.
Mr. Gopi was drawing following remuneration during the last five financial years:
Financial Year Remuneration (` in Lakhs)
2013-14 30
2014-15 35
2015-16 40
2016-17 45
2017-18 50
Mr. Gopi approaches you to know the amount of compensation he will be eligible to get
from LGB Limited, as per the provisions' of the Companies Act, 2013. Advise.
What will be your answer if a person is only an ordinary director but neither the Managing
Director nor a whole time director nor a manager of the Company? (8 Marks)
(b) Mr. Ravi failed to pay the penalty imposed by the Adjudicating Officer for an offence
committed under Securities and Exchange Board of India Act, 1992. After the penalty has
become due, Mr. Ravi, otherwise than for adequate consideration, transferred his
residential property to his sister and the fixed deposits with Banks in favour of his minor
son. The minor son has become major and deposits continue to be held by his son.
With reference to the provisions of SEBI Act, 1992 discuss,

(i) Whether the residential property and fixed deposits with Banks can be attached by
the Recovery Officer for the purpose of recovering the penalty?
(ii) Whether the Recovery Officer can seek assistance of local district administration for
attaching the property? (6 Marks)
(c) A Bank issued a notice pursuant to Section 13 of the SARFAESI Act, 2002 to a Company
to discharge its loan which has already become time barred under the Limitation Act,
1963. The Company did not settle the loan beyond the prescribed notice period. The
Bank took recourse under Section 13(4) of the SARFAESI Act, 2002 to take possession
of the building to enforce its security interest. Discuss whether the Bank will succeed in
its attempt. State whether the provision of SARFAESI Act, 2002 can over ride any other
law? (2 Marks)
(d) As on March 31, 2018, the audited balance sheet of M/s. Sharp Industries Limited,
revealed total assets of ` 1 crore. M/s. Sharp Industries Limited, in the capacity of a
Corporate Debtor, filed an application on July 1, 2018 with the Adjudicating Authority for
initiating a fast track corporate insolvency resolution process. Explain under the
provisions of Insolvency and Bankruptcy Code, 2016 the following:
(i) Whether the application made by M/s. Sharp Industries Ltd. for initiating a fast track
corporate insolvency resolution process is admissible?
(ii) The time period including the extension of time period, if any, within which the fast
track corporate insolvency resolution process shall be completed? (4 Marks)
Answer
(a) Section 202 of the Companies Act, 2013 provides the provisions for compensation for
loss of office of managing or whole-time director or manager as under:
(i) A company may make payment to a managing or whole-time director or manager,
but not to any other director, by way of compensation for loss of office, or as
consideration for retirement from office or in connection with such loss or
retirement.
(ii) The compensation payable to such managing director or whole-time director or
manager shall not exceed the remuneration he would have earned if he would have
been in office for the remainder of his term or three years, whichever is shorter,
calculated on the basis of the average remuneration earned by him during a period
of three years immediately preceding the date on which he ceased to hold such
office, or where he held the office of less than three years, then for such shorter
period.
In the light of the provisions as stated above, the following will be taken into
consideration while calculating the amount of compensation to be paid to Mr. Gopi:
1. Average remuneration earned by Mr. Gopi during a period of 3 years (i.e.
2015-16, 2016-17 and 2017-18) immediately preceding the date on which he

ceased to hold office: [(40+45+50)/3] = Rs. 45 Lakhs.

2. Remainder time period left to be served in office has Mr. Gopi not been
removed, 1st April, 2018 to 30th June, 2022, 4 years.
Thus, Mr. Gopi will be paid compensation for Maximum 3 years.
Amount of Compensation: The maximum amount of compensation that Mr. Gopi
will be eligible to get from LGB Limited is Rs.45 lakhs for 3 years = Rs. 135 lakhs.
In case of an ordinary director: Further, if a person is only an ordinary director but
neither the Managing Director nor a whole time director nor a manager of the
company, he shall not be eligible to get compensation for loss of office, or as
consideration for retirement from office or in connection with such loss or
retirement.
(b) As per requirement of section 28A of the Securities and Exchange Board of India Act,
1992, if a person fails to pay the penalty imposed by the adjudicating officer, the
Recovery Officer may draw up under his signature a statement in the specified form
specifying the amount due from the person and shall proceed to recover from such
person the amount specified in the certificate by modes specified in the said section.
As per the explanation, the person's movable or immovable property or monies held in
bank accounts shall include any property or monies held in bank accounts which has
been transferred directly or indirectly on or after the date when the amount specified in
certificate had become due, by the person to his spouse or minor child or son's wife or
son's minor child, otherwise than for adequate consideration, and which is held by, or
stands in the name of, any of the persons aforesaid; and so far as the movable or
immovable property or monies held in bank accounts so transferred to his minor child or
his son's minor child is concerned, it shall, even after the date of attainment o f majority
by such minor child or son's minor child, as the case may be, continue to be included in
the person's movable or immovable property or monies held in bank accounts for
recovering any amount due from the person under this Act.
Further, Section 28A states that the Recovery Officer shall be empowered to seek the
assistance of the local district administration while exercising his powers.
In the light of the provisions enumerated above and facts of the question,
(i) The residential property shall not be attached by the Recovery Officer for the
purpose of recovering the penalty, as it has been transferred by Mr. Ravi to his
sister and said transfer has not been covered in the section.
The Fixed deposits with Bank that have transferred by Mr. Ravi in favour his minor
son can be attached by the Recovery Officer for the purpose of recovering the
penalty. Further, these Fixed deposits can even after the date of attainment of
majority by such minor son, continue to be included in Mr. Ravi’s monies held in
bank accounts for recovering any amount due from him under this Act.

(ii) Yes, the Recovery Officer can seek assistance of local district administration for
attaching the property.
(c) According to section 36 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002, no secured creditor shall be entitled to take
all or any of the measures under section 13(4), unless his claim in respect of the financial
asset is made within the period of limitation prescribed under the Limitation Act, 1963.
Thus, the Bank will not succeed in its attempt to take possession of the building to
enforce its security interest, as the loan has already become time barred under the
Limitation Act, 1963.
According to section 35, the provisions of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the time being in force or
any instrument having effect by virtue of any such law. Thus, provision of SARFAESI Act,
2002 can override any other law.
(d) Application by corporate debtor: An application for fast track insolvency resolution can
be made by any corporate debtor falling under any of the below mentioned category:-
(a) a corporate debtor with assets and income below a level as may be notified by the
Central Government; or
(b) a corporate debtor with such class of creditors or such amount of debt as may be
notified by the Central Government; or
(c) such other category of corporate persons as may be notified by the Central
Government.
Time period for completion of fast track corporate insolvency resolution process
The fast track corporate insolvency resolution process shall be completed within a period
of 90 days from the insolvency commencement date.
Extension: The aggrieved may make an application to the Adjudicating Authority if it is
satisfied that the fast track corporate insolvency resolution process cannot be completed
within a period of 90 days, it may, by order; extend the duration of such process to a
further period which shall not be exceeding 45 days.
In the light of the provisions above and the fact of the question:
(i) The application made by M/s Sharp Industries for initiating fast track corporate
insolvency resolution process is admissible if it falls within the purview of the
mentioned categories of corporate debtor.
(ii) The fast track corporate insolvency resolution process shall be completed within
135 days (90+45) from the insolvency commencement date.
[Note: Students can also write their answer on the basis of the press release dated 16th
June, 2017. Its states the categories of corporate debtors that can apply for fast track
corporate insolvency resolution process specifying class of an unlisted company with

total assets as reported in the financial statement of immediately preceding financial year
not exceeding one crore may apply for Fast Track Insolvency Process.
Question 5
(a) VGP Ltd. is a listed public Company with a paid up capital of ` 100 crores as on
31st March, 2018. Mrs. Jasmine, who was one of the promoters of PDS Ltd. (a Joint
Venture Company of VGP Ltd.), was appointed as Woman Director on the Board of VGP
Ltd. VGP Ltd. has the following proposals :
(1) To remove Mr. Z, an Independent Director who was re-appointed for a second term.
(2) To appoint Mr. N, a nominee Director in the Board as an Independent Director.
(3) To appoint Mrs. Jasmine as 'an Independent-cum-Woman Director.
With reference to the relevant provisions of the Companies Act, 2013, examine:
(i) The validity the above proposals and the appointment of Woman Director already
made.
(ii) Whether Mr. N, can be appointed as an Independent Director of PDS Ltd.?
(iii) Is an Independent Director entitled for stock option? (8 Marks)
(b) Rajshree Producer Co. Ltd. was incorporated on 1 st April, 2010. Its paid up capital ` 10
Lakhs consists of 1 Lakh equity shares of ` 10 each held by 100 individuals. There are 6
directors on its Board. Referring to the provisions of the Companies Act, 1956, answer
the following:
(i) What is the quorum for the Annual General Meeting?
(ii) What is the quorum for the Board Meeting?
(iii) The Board of Directors wants to co-opt one expert in the field of agronomics, as
Director on its Board. Whether it is permissible?
(iv) Is it obligatory for this Company to conduct internal audit of its accounts for
Financial Year 2017 -18? (6 Marks)
(c) XY Ltd. filed a petition under Insolvency and Bankruptcy Code, 2016 with NCLT against
DF Ltd. (Corporate Debtor) and the petition was admitted. There were only three financial
creditors including XY Ltd. During the Corporate Insolvency Resolution process, the
Corporate Debtor settled the claims of all the 3 financial creditors. Whether such
settlement agreement could be termed as a valid resolution plan? Also discuss whether a
financial creditor in respect of whom there is no default can file an application before
Adjudicating Authority (NCLT) for initiating corporate insolvency resolution process.
Discuss. (6 Marks)

Answer
(a) As per the stated facts, VGP Ltd., a listed public company with a paid up capital of 100
crore appointed Mrs. Jasmine (Promoter of PDS Ltd., a joint venture of VGP Ltd.) as
woman director on the Board of VGP Ltd. VGP Ltd. made the following proposals:
(1) Removal of Mr. Z, an Independent Director(ID) who was re-appointed for a second
term.
(2) Appointment of Mr. N, a nominee director in the Board as an Independent Director.
(3) Appointment of Mrs. Jasmine as an Independent- cum-woman Director
Following are the answers in the light of the above given facts under the Companies Act,
2013-
(i) With respect to this part of the question, Proposal no. (1) will be valid only on the
compliance of the proviso given under section 169(1). According to the said proviso
an independent director re-appointed for second term under section 149(10) shall
be removed by the company only by passing a special resolution and after giving
him a reasonable opportunity of being heard.
W.r.t. proposal nos. (2), it will be invalid as per section 149(6). As per the stated
section, in relation to a company, an independent director means a director other
than a managing director or a whole-time director or a nominee director.
W.r.t. proposal nos. (3), it will be valid as per requirement of section 149(6) read
with Rule 3 of the Companies (Appointment and Qualification of Directors) Rules,
2014. Person so appointed as ID, is or was not a promoter of the company or its
holding, subsidiary or associate company. Since here, Mrs. Jasmine is a promoter
of PDS Ltd. which is joint venture co. of VGP Ltd. So, out of the purview of the
above disqualification and is in compliance with Rule 3, so she is eligible to be
appointed as Independent –cum- Woman director in VGP Ltd.
Alternate Answer:
As per Section 2 (6) of the Act, associate company includes a joint venture
company, therefore Mrs. Jasmine, a promoter of an associate company cannot be
appointed as independent director.
(ii) As per Notification G.S.R. 839(E) dated 5th July, 2017, an unlisted public company
which is a joint venture, a wholly owned subsidiary or a dormant company will not
be required to appoint Independent Directors. So, Mr. N cannot be appointed as an
Independent Director of PDS Ltd.
(iii) As per section 149(9), notwithstanding anything contained in any other provision of
this Act, but subject to the provisions of sections 197 and 198, an independent
director shall not be entitled to any stock option.

(b) (i) Quorum for Annual general meetings [Section 581ZA]

Quorum: Unless the articles of association of the producer company provide for a
larger number, 1/4th of the total number of members of the producer company shall
be the quorum for its annual general meeting. In this case the company has got
100 members. Hence, the quorum is 25.
(ii) Meetings of Board and quorum [Section 581V]
The quorum for a meeting of the Board shall be one-third of the total strength of
directors, subject to a minimum of three. Here there are 6 directors on its Board.
Therefore quorum will be 1/3 rd of 6 directors which comes to 2, but minimum
required is 3 and therefore the quorum will be 3 directors for a Board meeting.
(iii) Appointment of Co-opted or expert directors or additional director [Section
581P]
The section empowers the Board of Directors of the Producer Company to co-opt
one or more expert as a director, but not exceeding one fifth of the total number of
directors. As there are six directors in the given case, co-opting one expert on the
Board will be in order.
(iv) Internal audit [Section 581ZF]
Yes, as per above provision, every producer company shall have internal audit of its
accounts carried out, at such interval and in such manner as may be specified in
articles, by a chartered accountant as defined in clause (b) of sub-section (1) of
Section 2 of the Institute of Chartered Accountants Act, 1949.Therefore its
obligatory for Rajshree Producer Co. Ltd. to conduct internal audit of its accounts
for financial year 2017-18 as per above stated provision.
(c) As per section 7 of the Insolvency and Bankruptcy Code, 2016, a financial creditor either
by itself or jointly with other financial creditors, may file an application for initiating
corporate insolvency resolution process against a corporate debtor before the
Adjudicating Authority when a default has occurred.
As per the facts given, the Adjudicating Authority admitted the petition. During the
Corporate Insolvency Resolution Process (CIRP), the DF (Corporate debtor) settled the
claims of all the 3 financial creditors.
However, as per the Code, during the insolvency resolution process, the IRP/RP was
appointed to collate the claims in a collective mechanism to propose a time bound
solution to resolve the situation of insolvency and prepare the resolution plan as agreed
to by the debtors and creditors and submit the same to Committee of Creditors for its
approval.
Since in the give case, debtor itself settled the claims without following the said
procedure. Therefore, such a settlement agreement cannot be termed as valid resolution
plan.

As per requirement of the Code, the process of insolvency is triggered by occurrence of

default. Default means non-payment of debt when whole or any part or instalment of the
amount of debt has become due and payable and is not repaid by the debtor or the
corporate debtor, as the case may be. [Section 3(12)].So a financial creditor in respect of
whom there is no default, cannot file an application for initiating insolvency resolution
process.
Question 6
(a) The Articles of Association of a listed company provides for fixed payment of sitting fee
for each meeting of Directors subject to maximum of ` 30,000. In view of the increased
responsibilities of Independent Directors of listed Companies, the Company proposes to
increase the sitting fee to ` 45,000 per meeting. Advise the Company about the
requirement under the Companies Act, 2013 to give effect to the proposal.
OR
ABC Limited is an unlisted public Company having a paid up equity share capital of ` 20
Crores and a turnover of ` 150 Crores as on 31st March, 2018. The total number of
Directors on the Board is 13.
Referring to the provisions of the Companies Act, 2013 answer the following:
(i) The minimum number of Independent Directors that the Company should appoint.
(ii) How many Independent Directors are to be appointed in case ABC Limited is a
listed Company? (4 Marks)
(b) Ronnie Coleman Ltd., a foreign Company failed to deliver some documents to the
Registrar of Companies as required under Section 380 of the Companies Act, 2013.
State the provisions of penalty prescribed under the Act, which can be levied on Ronnie
Coleman Ltd. for its failure to deliver the documents.
(c) Aggrieved by an Order of NCLT dated 05.05.2018, passed without the consent of the
parties, Madhruk Ltd. decided to file an appeal before NCLAT. Meanwhile, the employees
and officers of the Company went on a strike from 10.05.2018 demanding higher pay and
allowances and as a result of which, the operational and management activities were
badly affected. The strike was called-off on 15.06.2018. Thereafter, the appeal was filed
on 25.06.2018 before NCLAT with a prayer for condoning the delay in filing the appeal. A
single judicial member of NCLT started the hearing. With reference to the provisions of
the Companies Act, 2013, examine the following:
(i) Whether the appeal is admissible?
(ii) Maximum period allowed for condonation
(iii) Is the appeal transferable to a Bench consisting of two members? (8 Marks)
(d) The Management of Gangotri Ltd. was taken by LBV Bank Ltd. (secured creditor)
complying the provisions of SARFAESI Act, 2002 and appointed two Directors. The

Board of Directors of Gangotri Ltd., duly authorized by its Articles, appointed two
Alternate Directors and the majority of the Directors made a declaration required for
voluntary liquidation proceedings. A special resolution requiring the Company to be
liquidated voluntarily by appointing an insolvency professional to act as the Liquidator
was passed at the general meeting of the Company. The Board of Directors and the
Shareholders passed the resolutions without the approval/consent of Directors appointed
by LBV Bank Ltd. Discuss the validity of the above resolutions under SARFAESI Act,
2002. Does an unsecured Creditor have recourse to this Act?
(e) Examine the validity of the following statements with reference to The Arbitration and
Conciliation Act, 1996:
(i) Every Court would be a Judicial Authority but every Judicial Authority would not be
a Court.
(ii) The disputes submitted to arbitration must be arbitrable. (3 Marks)
Answer
(a) Section 197(5) of the Companies Act, 2013 provides that a director may receive
remuneration by way of fee for attending the Board/Committee meetings or for any other
purpose as may be decided by the Board, provided that the amount of such fees shall not
exceed the amount as may be prescribed. The Companies (Appointment and
Remuneration of Managerial personnel) Rules, 2014 prescribes that the amount of sitting
fees payable to a director for attending meetings of the Board or committees thereof may
be such as may be decided by the Board of directors or the Remuneration Committee
thereof which shall not exceed the sum of rupees 1 lakh per meeting of the Board or
committee thereof. Further, the Board may decide different sitting fee payable to
independent and non-independent directors other than whole-time directors.
From the above, it is clear that fee to independent directors can be increased from
Rs. 30,000 to Rs. 45,000 per meeting by passing a resolution in the Board Meeting and
altering the Articles of Association by passing Special Resolution.
Or
According to Section 149(4) of the Companies Act, 2013, every listed public company
shall have at least one-third of the total number of directors as independent directors.
Any fraction contained in such one-third numbers shall be rounded off as one
According to the Rule 4 of the Companies (Appointment and Qualification of Directors)
Rules, 2014, the following class or classes of companies shall have at least 2 directors
as independent directors:
(1) the Public Companies having paid up share capital of 10 crore rupees or
more; or
(2) the Public Companies having turnover of 100 crore rupees or more; or

(3) the Public Companies which have, in aggregate, outstanding loans,

debentures and deposits, exceeding 50 crore rupees.
(i) As the paid up share capital of ABC Limited is Rs. 20 Crore and turnover is Rs. 150
crore, the company shall have at least 2 directors as independent directors.
(ii) In case ABC Limited is a listed company, it shall have at least 5 directors as
independent director (1/3 rd of the total number of directors: 1/3 rd of 13 is 4.33
rounded off as 5).
(b) The Companies Act, 2013 lays down the governing provisions for foreign companies in
Chapter XXII which is comprised of sections 379 to 393. The penalties for non filing or for
contravention of any provision for this chapter including for non filing of documents with
the Registrar as required by section 380 and other sections in this chapter are laid down
in section 392 of the Act which provides that if a foreign company contravenes the
provisions of this Chapter, the foreign company shall be punishable with a fine which
shall not be less than ` 1,00,000 but which may extend to ` 3,00,000 and in the case of
a continuing offence, with an additional fine which may extend to ` 50,000 for every day
after the first during which the contravention continues and every officer of the foreign
company who is in default shall be punishable with imprisonment for a term which may
extend to six months or with fine which shall not be less than ` 25,000 but which may
extend to ` 5,00,000, or with both.
(c) Appeal from Orders of Tribunal [Section 421 of the Companies Act, 2013]
(1) Appeal to AT: Any person aggrieved by an order of the Tribunal may prefer an
appeal to the Appellate Tribunal (AT).
(2) When order made by consent of parties: No appeal shall lie to the Appellate
Tribunal from an order made by the Tribunal with the consent of parties.
(3) Period for filing of appeal: Every appeal under sub-section (1) (i.e. appeal to AT
against order of Tribunal) shall be filed within a period of 45 days from the date on
which a copy of the order of the Tribunal is made available to the person aggrieved
and shall be in such form, and accompanied by such fees, as may be prescribed.
However, the Appellate Tribunal may entertain an appeal after the expiry of the said
period of forty-five days from the date aforesaid, but within a further period not
exceeding 45, if it is satisfied that the appellant was prevented by sufficient cause
from filing the appeal within that period.
In the instant case,
(i) The appeal is admissible as the order of NCLT was passed without the consent of
the parties.
(ii) The maximum period allowed for condonation is 45 days if the AT is satisfied that
the appellant was prevented by sufficient cause from filing the appeal within that

period. In the instant case, the appeal filed on 25.06.2018 before NCLAT is tenable.
(iii) As per second proviso to section 419(3) if at any stage of the hearing of any such
case or matter, it appears to the Member that the case or matter is of such a nature
that it ought to be heard by a Bench consisting of two Members, the case or matter
may be transferred by the President, or, as the case may be, referred to him for
transfer, to such Bench as the President may deem fit.
(d) Management of borrower taken by the secured creditor (Section 15 of the
SARFAESI Act, 2002): Where the management of the business of a borrower, being a
company is taken over by the secured creditor then, notwithstanding anything contained
in the said Act or in the memorandum or articles of association of such borrower -
(a) it shall not be lawful for the shareholders of such company or any other person to
nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall be
given effect to unless approved by the secured creditor;
Accordingly, in the given situation in the question, appointment of alternate directors by
the BoD of Gangotri Ltd. though authorised by its Articles, is not valid, and the special
resolution so passed by majority for voluntary liquidation passed at general meeting shall
not be given effect due to lack of consent of LBV Bank Ltd.
An unsecured creditor doesn't have recourse to this Act.
(e) (i) Judicial authority - The term judicial authority is not defined in Act. The Supreme
Court in SBP v. Patel Engineering observed "A judicial authority as such is not
defined in the Act. It would certainly include the court as defined in Section 2(e) of
the Act and would also, include other courts and may even include a special tribunal
like the Consumer Forum." Therefore, it is a concept wider than courts as ordinarily
understood and would include special tribunals and quasi-judicial authorities. The
functions performed would include reference to arbitration. Every court would be a
judicial authority, but every judicial authority would not be a court.
(ii) Arbitrability: The disputes submitted/ proposed to be submitted to arbitration must
be arbitrable. In other words the law must permit arbitration in that matter. There are
certain disputes that the law retains exclusively for the court, and the same cannot
be submitted for arbitration. The rationale is that given the nature of disputes, the
courts are the only appropriate forum for adjudicating the matter.
For example, criminal offences, matrimonial disputes, guardianship matters,
testamentary matters, mortgage suit for sale of a mortgaged property, etc. cannot
be arbitrated.

PAPER – 8: INDIRECT TAX LAWS
Question No. 1 is compulsory
Question 1
(a) M/s Jonty India Ltd. a manufacturer of heavy machines registered at Jaipur (Rajasthan)
supplied one machine to M/s. Dhanuka Ltd. of Udaipur (Rajasthan) on 05-02-2018 under
an invoice of the same date. Using the information given below, compute the value of the
machine and the GST payable (CGST & SGST or IGST as the case may be) in cash for
the month of February, 2018 by M/s Jonty India Ltd. with appropriate working notes.
Assume Rate of CGST, SGST and IGST on the machine to be 9%, 9% and 18%
respectively.
Sl. No. Particulars Amount in `
(i) The Basic price of the machine (exclusive of taxes and 28,50,000
discount).
(ii) Trade discount is allowed at 3% on the basic price and is
85,500
shown in the invoice.
(iii) Secondary packing (in iron sheets) charges for safe
30,000
transportation of the machine on the request of buyer.
(iv) Design and engineering charges of the machine 90,000
(v) Tax levied by Municipal Authority on the sale of the machine. 25,000
(vi) Subsidy received by the supplier from the State Government
80,000
to encourage manufacture of the machine.
(vii) Pre-delivery inspection charges paid to an independent
agency in terms of the agreement for supply. The amount 22,000
was paid by M/s. Dhanuka Ltd.
(viii) Interest amount paid by M/s. Dhanuka Ltd. for delay in
12,000
payment for the machine.
Inward Supplies
(i) IGST paid on food items for consumption by employees
8,000
working in the factory.
(ii) SGST and CGST (` 15,000 each) paid on Electrical
30,000
transformer used in the manufacturing process.
The Suggested Answers for Paper 8: Indirect Tax Laws are based on the position of
GST law as amended by the significant notifications/circulars issued till 30th April, 2018
and customs law as amended by the Finance Act, 2017 and notifications/circulars
issued up to 30.04.2018 which were relevant for November, 2018 examinations.

Note:
(i) M/s Jonty India Ltd. has no input tax credit balance at the beginning of February,
2018. All the other conditions necessary for availing the eligible input tax credit have
been fulfilled.
(ii) There are no other transactions of supplies during the month of February, 2018.
(iii) M/s Jonty India Ltd. and M/s. Dhanuka Ltd. are not related persons. (10 Marks)
(b) Chiku Traders is a registered supplier of plastic goods. On 10 th April, 2018, Chiku Traders
received an order from Neelu Traders for supply of a consignment of plastic goods. Chiku
Traders gets the consignment ready by 15 th April, 2018. The invoice for the consignment
was issued the next day, 15 th April, 2018. Neelu Traders collects the consignment from the
godown of Chiku Traders on 25 th April, 2018 and hands over the cheque towards payment
on the same date. The said payment is entered in the books of accounts of Chiku Traders
on 26th April, 2018 and amount is credited in their bank account on 27 th April, 2018.
Determine the time of supply of the plastic goods supplied by Chiku Traders to Neelu
Traders as per the provisions o f CGST Act, 2017. (5 Marks)
(c) Jolly overseas Ltd. of Hyderabad has imported a machine from U.K (England) through the
sea route by a vessel. The details of the import transaction are as follows:
Sl. Particulars Amount in U.K. (£)
No.
(i) Cost of the machine at the factory of the exporter 20,000
(ii) Transport charges from the factory of exporter to the port for 600
shipment
(iii) Handling charges paid for loading the machine on the ship at 500
the port of exportation
(iv) License fee relating to the imported goods payable by the 900
importer as a condition of sale
(v) Actual Freight charges from the port of export to the port of -
import are not ascertainable
(vi) Actual insurance charges paid 200
(vii) Landing charges paid at the place of importation are not
-
ascertainable
(i) Handling charges associated with the delivery of the imported ` 15,000
goods at the place of importation

PAPER – 8: INDIRECT TAX L AWS 3
1 Bill of entry: Dated 21.01.2018

Exchange rate on that day:-
(a) Notified by CBEC 1 UK £ = ` 101
(b) prescribed by RBI 1 UK £ = ` 100
2 Entry inward: Dated 26.01.2018
Exchange rate on that day:-
(a) Notified by CBEC 1 UK £ = ` 102
(b) prescribed by RBI 1 UK £ = ` 103
Compute the assessable value of the machine (in rupees) for the purpose of levy of
Customs Duty. (5 Marks)
Answer
(a) Computation of value of machine sold by M/s. Jonty India Ltd.
Particulars `
Basic price of machine 28,50,000
Add: Secondary packing [Note 1(i)] 30,000
Design and engineering charges [Note 1(ii)] 90,000
Tax levied by Municipal Authority [Note 1(iii)] 25,000
Pre-delivery inspection charges paid by M/s. Dhanuka Ltd. [Note 22,000
1(iv)]
Interest for delay in payment [` 12,000 x 100/118] [Note 1(v)] – 10,169
(rounded off)
Less: 3% Trade discount on basic price of machinery = ` 28,50,000 × (85,500)
3% [Note 2]
Taxable value of supply 29,41,669
Computation of net GST payable (in cash) by M/s. Jonty India Ltd. for the
month of February, 2018
Particulars CGST @ SGST @
9% (`) 9% (`)
Tax on value of ` 29,41,669 (rounded off) 2,64,750 2,64,750
Less: Input tax credit [ITC] of tax paid on electrical 15,000 15,000
transformer used in the manufacturing process [Note 3]
Net GST payable 2,49,750 2,49,750

Notes:
(1) As per section 15(2) of the CGST Act, 2017-
(i) All incidental expenses, including packing, charged by the supplier to the
recipient of a supply are includible in the value of supply.
(ii) Any amount charged for anything done by the supplier in respect of the supply
of goods at the time of, or before delivery of goods is includible in the value of
supply.
(iii) Any taxes levied under any law for the time being in force other than
CGST/SGST/UTGST/IGST, if charged separately by the supplier are includible
in the value of supply.
(iv) Any amount that the supplier is liable to pay in relation to such supply, but which
has been incurred by the recipient of the supply and not included in the price
actually paid or payable for the goods and/or services is includible in the value
of supply.
(v) Interest for the delayed payment of any consideration for any supply is includible
in the value of supply. Further, it is assumed that such interest is inclusive of
tax and that the same has been received by M/s. Jonty India Ltd. in the month
of February itself. Therefore, the time of supply of such interest will be in
February, 2018 and the same will be considered while paying the tax liability of
that month.
(vi) Subsidies directly linked to the price excluding subsidies provided by the Central
Government and State Governments are includible in the value of supply. Since
in the given case, subsidy is received from State Government, the same has not
been included in the value of supply presuming it to be directly linked to the
price.*
(2) Trade discount has been shown in the invoice and hence, the same is excluded from
the value of supply in terms of section 15(3) of the CGST Act, 2017.
(3) ITC on food or beverages is specifically disallowed unless the same is used for
making outward taxable supply of the same category or as an element of the taxable
composite or mixed supply1 [Section 17(5)]. Further, since transformers are used in
the course or furtherance of business, ITC thereon is available in terms of section
16(1).
Note*In the above answer, it has been assumed that the basic price of the machine has been
arrived at after adjusting the subsidy and that the basic price is the price charged from the customer .
1It
has been assumed that the food items are provided free of cost to the employees in the course of
employment.

Consequently, subsidy received from State Government has not been reduced from the basic price
of the machine while arriving at the taxable value of supply.
However, it is also possible to assume that the subsidy has yet not been adjusted in the basic price
and that the price which will be charged from the customer is ` 27,70,000 ( ` 28,50,000 – ` 80,000)
i.e., after excluding subsidy. In that case, the value of supply will be ` 28,61,669.
(b) A registered person (excluding composition supplier) has to pay GST on the outward
supply of goods at the time of supply as specified in section 12(2)(a) of the CGST Act,
2017, i.e. date of issue of invoice or the last date on which invoice ought to have b een
issued in terms of section 31(1).
As per section 31, the invoice in case of supply of goods needs to be issued either before
or at the time of removal/delivery of goods.
In this case, the invoice is issued before the removal of the goods and is thus, within the
time limit prescribed under section 31(1). Therefore, time of supply is the date of issue of
invoice, which is 16 th April, 2018*.
* Note: In the question, the date of issue of invoice to be read as 16 th April,2018. It can also be
answered by taking date of invoice as given in question, i.e. 15 th April, 2018. In that case, the time
of supply will be 15th April, 2018.
(c) Computation of assessable value of machine
Particulars Amount
(UK £)
Cost of the machine at the factory of the exporter 20,000
Add: Licence fee relating to the imported goods payable by the 900
importer as a condition of sale [Note 1(i)]
Add: Cost of transport, loading, unloading and handling charges 4,400
associated with the delivery of the imported goods to the place
of importation [20% of £22,000] [Note 1(ii)]
Insurance charges [Taken at actuals] 200
CIF value 25,500
Add: Landing charges paid at the place of importation and handling Nil
charges associated with the delivery of the imported goods at
the place of importation [Note 1(iii)]
Assessable value 25,500
Assessable value in Indian rupees @ ` 101/ per £ [Note 2] 25,75,500
Notes:
(1) As per rule 10 of the Customs Valuation (Determination of Value of Imported Goods)
Rules, 2007-

(i) Licence fees related to the imported goods payable as a condition of the sale of
the goods being valued is includible in the assessable value
(ii) The cost of transport, loading, unloading and handling charges associated with
the delivery of the imported goods to the place of importation are includible in
the assessable value.
Where such cost is not ascertainable, it shall be 20% of the free on board (FOB)
value of the goods.
FOB value will be sum total of cost of machine, transport charges from factory
to port of exportation, handling charges at the port of exportation and licence fee
paid as a condition of sale of imported goods, which will be £ 22,000 [£ 20,000
+ £ 600 + £ 500+ £ 900]
(iii) Only charges incurred for delivery of goods “to” the place of importation are
includible in the transaction value. The loading, unloading and handling charges
associated with the delivery of the imported goods at the place of importation
are not to be added to the CIF value of the goods.
(2) As per section 14 of the Customs Act, 1962, the rate of exchange notified by the
CBEC on the date of presentation of bill of entry is to be considered for the purpose
of conversion of assessable value into Indian currency.
Question 2
(a) PQR Company Ltd., a registered supplier of Bengaluru (Karnataka), is a manufacturer of
goods. The company provides the following information pertaining to GST paid on input
supplies during the month of April, 2018:
Sl. No. Items GST paid in (` )
(i) Life Insurance premium paid by the company on the life of 1,50,000
factory employees as per the policy of the company
(ii) Raw materials purchased for which invoice is missing but 38,000
delivery challan is available.
(iii) Raw materials purchased which are used for zero rated 50,000
outward supply.
(iv) Works contractor's service used for repair of factory building 30,000
which is debited in the profit and loss account of company.
(v) Company purchased the capital goods for ` 4,00,000 and
claimed depreciation of ` 44,800 (@ 10%) on the full amount 48,000
of ` 4,48,000 under Income Tax Act, 1961.
Other Information:-
(i) In the month of September, 2017, PQR Company Ltd. availed input tax credit of
` 2,40,000 on purchase of raw material which was directly sent to job worker's

premises under a challan on 25-09-2017. The said raw material has not been received
back from the Job worker up to 30-04-2018.
(ii) All the above input supplies except (ii) above have been used in the manufacture of
taxable goods.
Compute the amount of net Input Tax Credit available for the month of April, 2018 with
necessary explanations for your conclusion for each item. You may assume that all the
other conditions necessary for availing the eligible input tax credits have been fulfilled.
(7 Marks)
(b) Mr. Mahendra Sharma, an interior decorator registered at Ahmedabad (Gujarat), provided
service to one of his clients XYZ Company Ltd., registered at Pune (Maharashtra). The
provision of service was completed on 10-08-2018 and payment received was entered in
the books of Mr. Mahendra Sharma on 11-08-2018.
With effect from 16/08/2018, applicable GST rate was increased from 5% to 12%. However
payment for the service received was credited in his bank account on 17/08/2018 and
invoice for the same was raised on 23-08-2018.
Mr. Mahendra Sharma claimed that he is liable to pay IGST @ 5%. But the department
took the view that he is liable to pay IGST @12%.
Examine the correctness of Mr. Mahendra Sharma's contention and determine the time of
supply and applicable rate of tax as per the statutory provisions.
Would your answer undergo any change in the above case if the payment was credited to
the bank account on 14-08-2018 instead of 17-08-2018?
Note: You may assume that all days are working days. (5 Marks)
(c) M/s Heeralal and Sons registered in Karnataka has opted to avail the benefit of composition
scheme. It has furnished the following details for the tax period ended on 30-06-2018.
S. No. Items `
(i) Taxable turnover of goods within the state 15,00,000
(ii) Exempted turnover of goods within the state 17,00,000
Total Turnover 32,00,000
Using the above information, calculate total GST (No need for bifurcation between CGST
and SGST) to be paid by the firm for the tax period ended on 30-06-2018 in following
independent situations:
(i) M/s Heeralal and Sons is a Manufacturer
(ii) M/s Heeralal and Sons is a Trader
(3 Marks)

Answer either (d) or (e) only. Both need not be answered.

(d) Who can suspend/cancel the warehouse licence and on what grounds? What is the effect
of suspension or cancellation on the warehouse and the goods in the warehouse? Explain
in brief with reference to provisions relating to cancellation of licence of Warehouse under
section 58B of the Customs Act, 1962. (5 Marks)
OR
(e) With regard to the powers of the Customs officers to draw samples under section 144 of
the Customs Act, 1962, indicate
I. The purposes for which samples can be drawn;
II. When can the samples be drawn;
IlI. The provisions for disposal of the samples after the purpose is over. (5 Marks)
Answer
(a) Computation of Input Tax Credit (ITC) available with PQR Ltd. for the
month of April, 2018
Particulars `
Life Insurance premium paid by the company on the life of factory Nil
employees [Note 1]
Raw materials purchased [Note 2] Nil
Raw materials used for zero rated outward supply [Note 3] 50,000
Work contractor’s service [Note 4] 30,000
Capital goods purchased wherein the depreciation is claimed on the tax Nil
component [Note 5]
Total ITC available 80,000
Notes:
(1) ITC on life insurance service is available only when the same is notified by the
Government as being obligatory for an employer to provide to its employees under
any law for the time being in force. In the absence of any information, it is assumed
that such services have not been notified in the instant case and thus, the ITC thereon
is blocked [Section 17(5) of the CGST Act, 2017].
(2) ITC cannot be taken since invoice is missing and delivery challan is not a valid
document to avail ITC [Section 16 of the CGST Act, 2017]
(3) ITC can be availed for making zero-rated supplies, notwithstanding that such supply
may be an exempt supply – [Section 16 of the IGST Act, 2017]
(4) ITC is blocked on works contract services when supplied for construction of an
immovable property. However, “construction” includes only that repairs which are

capitalized along with the said immovable property. In this case, since repairs of
building is debited to P & L Account, the same does not amount to ‘construction’ and
hence ITC thereon is available - [Section 17(5) of the CGST Act, 2017].
(5) ITC is not available when depreciation has been claimed on the tax component of the
cost of capital goods under the Income-tax Act - [Section 16(3) of the CGST Act,
2017]
(6) The principal is entitled to take ITC of inputs sent for job work even if the said inputs
are directly sent to job worker. However, where said inputs are not received back by
the principal within a period of 1 year of the date of receipt of inputs by the job worker,
it shall be deemed that such inputs had been supplied by the principal to the job
worker on the day when the said inputs were received by the job worker – [Section
19 of the CGST Act, 2017].
Hence, the ITC taken by PQR Company Ltd. in September, 2017 is valid and since 1
year period has yet not lapsed in April, 2018, there will be no tax liability on such
inputs.
(b) As per section 14 of the CGST Act, 2017, in case of change in rate of tax, date of receipt
of payment is earlier of:
(i) date of entering payment in the books of account of the supplier (11.08.2018)
or
(ii) date on which the payment is credited to his bank account (17.08.2018).
However, if the payment is credited in the bank account after 4 working days from the date
of change in the rate of tax, the date of receipt of payment will be the date of credit in the
bank account.
In the given case, since the payment has been credited in the bank within 4 working da ys
from the date of change in the rate of tax, the date of receipt of payment will be 11.08.2018
[i.e., earlier of 11.08.2018 or 17.08.2018].
Section 14 further provides that where goods and/or services have been supplied before
the change in rate of tax (10.08.2018) and the payment has been received before the
change in rate of tax (11.08.2018), but the invoice for the same is issued after the change
in rate of tax (23.08.2018), the time of supply shall be the date of receipt of payment.
Therefore, in the given case, the time of supply will be 11.08.2018 and the applicable rate
of tax will be rate prevalent at the time of supply, i.e. IGST @ 5%.
Therefore, the contention of Mahendra Sharma is correct.
Further, if the date on which the payment is credited to bank account of supplier is
14.08.2018, the date of receipt of payment will continue to be 11.08.2018 [i.e., earlier of
11.08.2018 or 14.08.2018] since the payment is credited in the bank account before

change in rate of tax. Consequently, with other things remaining the same, the time of
supply and the applicable rate of tax will remain the same.
(c) Computation of amount payable under composition scheme
(i) If M/s Heeralal and Sons is a manufacturer:
Tax is to be paid @ 1% (CGST+ SGST) of the turnover in the State as under:
1% of ` 32,00,000 [` 15,00,000 + 17,00,000]
= ` 32,000
(ii) If M/s Heeralal and Sons is a trader:
Tax is to be paid @ 1% (CGST+ SGST) of the turnover of taxable supplies of goods
in the State as under:
1% of ` 15,00,000
= ` 15,000
(d) Section 58B of the Customs Act, 1962 provides that Principal Commissioner of Customs
or Commissioner of Customs may cancel the warehousing licence, after giving the licensee
a reasonable opportunity of being heard, if the licensee contravenes any of the provisions
of the Customs law or breaches any of the conditions of the licence.
Further, the Principal Commissioner/ Commissioner of Customs may suspend operation of
the warehouse during the pendency of an enquiry for cancellation of the licence.
During the period of suspension, no goods shall be deposited in such warehouse.
However, the warehousing provisions shall continue to apply to the goods already
deposited in the warehouse.
Where the licence is cancelled, the goods warehoused shall, within 7 days of the date of
service the order of such cancellation on the licensee or within such extended period as
may be allowed, be removed from such warehouse to another warehouse or be cleared for
home consumption or export.
However, the warehousing provisions shall continue to apply to the goods already
deposited in the warehouse till they are removed to another warehouse or cleared for home
consumption or for export, during such period.
(e) (I) The samples can be drawn for examination or testing, or for ascertaining the value
thereof, or for any other purposes of Customs Act.
(II) The samples can be taken on the entry or clearance of any goods or at any time while
such goods are being passed through the customs area.
(III) After the purpose for which a sample was taken is over, such sample shall, if
practicable, be restored to the owner, but if the owner fails to take delivery of the
sample within 3 months of the date on which the sample was taken, it may be

disposed of in such manner as the Principal Comm issioner of Customs or

Commissioner of Customs may direct.
Question 3
(a) Pari Ltd. of Jodhpur (Rajasthan) is a registered manufacturer of cosmetic products. Pari Ltd.
has furnished following details for the month of April, 2018:
S. No. Particulars `
(A) Receipts
Details of Sales
(i)Sales in Rajasthan 8,75,000
(ii) Sales in States other than Rajasthan 3,75,000
(iii) Export under bond 6,25,000
(B) Payments
(1) Raw materials
(i) Purchased from registered suppliers located in Rajasthan 1,06,250
(ii) Purchased from unregistered suppliers located in Rajasthan 37,500
(iii) Purchased from Punjab from registered supplier 1,00,000
(iv) Integrated tax paid on Import from USA 22,732
(2) Consumables purchased from registered suppliers located in 1,56,250
Rajasthan including high speed diesel (Excise and Vat paid) worth
` 31,250 for running the machinery in the factory
(3) Monthly rent for the factory building to the owner in Rajasthan 1,00,000
(4) Salary paid to employees on rolls 6,25,000
(5) Premium paid on life insurance policies taken for specified 2,00,000
employees. Life insurance policies for specified employees have
been taken by Pari Ltd. to fulfill a statutory obligation in this regard.
The Government has notified such life insurance service under
section 17(5)(b)(iii)(A). The life insurance service provider is
registered in Rajasthan.
All the above amounts are exclusive of all kinds of taxes, wherever applicable. However,
the applicable taxes have also been paid by Pari Ltd.
The balance of Input Tax Credit (ITC) with Pari Ltd. as on 1 st April, 2018 is
CGST ` 20,000
SGST ` 15,000
IGST ` 15,000
Assume CGST, SGST and lGST rates to be 9%, 9% and 18% respectively, wherever
applicable.

Assume that all the other necessary conditions to avail the eligible input tax credit have been
complied with by Pari Ltd., wherever applicable.
Compute eligible input tax credit and net GST payable (CGST and SGST or IGST as the
case may be) by Pari Ltd. for the month of April, 2018. (10 Marks)
(b) On 25th August, 2017, M/s Agarwal & Agarwal Ltd., a registered supplier of textile products
located in Bengaluru (Karnataka) purchased one machine for ` 12,39,000 including IGST,
from one supplier of Maharashtra who issued invoice on the same date. M/s Agarwal &
Agarwal Ltd. put the machinery to use on the same day and availed input tax credit for the
eligible amount.
M/s Agarwal & Agarwal Ltd. sold this machine after using the machine in the process of
manufacture of taxable goods for ` 7,50,000 excluding lGST, to Mr. Suresh Kumar of
Andhra Pradesh on 20 th August 2018.
During purchase as well as sale of the machinery, the lGST rate applicable was 18%.
Is M/s Agarwal & Agarwal Ltd., required to pay GST? If yes, calculate the amount of tax
payable under GST Laws at the time of sale of the machine. Also briefly state the relevant
statutory provisions.
Note: Assume that there was no change in legal position after August, 2017. (5 Marks)
(c) The Settlement Commission settled a case relating to recovery of drawback. The Customs
department contends that the recovery of duty drawback does not involve levy, assessment
and collection of customs duty as envisaged under section 127A (b) of the Customs Act,
1962. Therefore Settlement Commission does not have jurisdiction to settle the case.
Discuss with the help of the decided case law, if any, whether the Settlement Commission
have jurisdiction to settle cases relating to the recovery of drawback erroneously paid by
the Revenue? (5 Marks)
Answer
(a) Computation of eligible input tax credit available with Pari Ltd. in the
month of April, 2018
S. Particulars Eligible input tax credit
No. CGST SGST IGST
` ` `
1. Raw Material:
Purchased from local registered suppliers
9,562.50 9,562.50
[Note 1(i)] (` 1,06,250 x 9%)
Purchased from local unregistered
Nil Nil
suppliers [Note 1(ii)]

Purchased from Punjab from registered

supplier [Note 1(i)] 18,000
(` 1,00,000 x 18%)
Raw material imported from USA [Note
22,732
1(iii)]
2. Consumables
11,250 11,250
[Note 2] [(1,56,250-31,250) x 9%]
3. Monthly rent for the factory building to the
9,000 9,000
owner in Rajasthan [Note 3]
4. Salary paid to employees on rolls [Note 4] Nil Nil Nil
5. Premium paid on life insurance policies
taken for specified employees 18,000 18,000 -
[Note 5] (` 2,00,000x 9%)
Total 47,812.50 47,812.50 40,732
Add: Opening balance of ITC on
20,000 15,000 15,000
01.04.2018
Eligible ITC [Note 7] 67,812.50 62,812.50 55,732
Computation of net GST payable for the month of April, 2018

Particulars CGST SGST IGST
` ` `
Intra-State sales 78,750 78,750
Inter-State sales 67,500
Exports under bond [Note 6] Nil Nil Nil
Total output tax liability 78,750 78,750 67,500
Less: Eligible ITC 67,812.50 62,812.50 55,732
Net GST payable 10,937.50 15,937.50 11,768
Notes:
1. (i) Credit of input tax (CGST & SGST/ IGST) paid on raw materials used in the
course or furtherance of business is available in terms of section 16 of the CGST
Act.
(ii) All intra-State procurements made by a registered person from an unregistered
supplier have been exempted from GST . Therefore, since no GST is paid on
such raw material purchased, there does not arise any question of input tax
credit (ITC) on such raw material.

(iii) IGST paid on imported goods qualifies as input tax in terms of section 2(62) of
CGST Act, 2017. Therefore, credit of IGST paid on imported raw materials used
in the course or furtherance of business is available in terms of section 16 of the
CGST Act.
2. ITC on consumables, being inputs used in the course or furtherance of business, is
available. However, since levy of GST on high speed diesel has been deferred till a
date to be notified by Government, there cannot be any ITC of the same.
3. ITC on monthly rent is available as the said service is used in the course or
furtherance of business.
4. Services by employees to employer in the course of or in relation to his employment
is not a supply in terms of section 7 read with Schedule III to the CGST Act.
Therefore, since no GST is paid on such services, there cannot be any ITC on such
services.
5. ITC on life insurance service is available if the same is notified by the Government
under section 17(5)(b)(iii)(A) of the CGST Act as being obligatory for an employer to
provide to its employees under any law for the time being in force.
6. Export of goods is a zero rated supply in terms of section 16 of the IGST Act. A zero
rated supply under bond is made without payment of IGST .
7. Since export of goods is a zero rated supply, there will be no apportionment of ITC
and full credit will be available.
(b) As per section 18 of the CGST Act, 2017, if capital goods/ plant and machinery on which
input tax credit (ITC) has been taken are supplied outward by a registered person, he must
pay an amount that is higher of the following:
(a) ITC taken on such goods reduced by 5% per quarter of a year or part thereof from
the date of issue of invoice for such goods or
(b) tax on transaction value.
Accordingly, the amount payable on supply of machinery by M/s Agarwal & Agarwal Ltd.
shall be computed as follows:
Particulars `
ITC taken on the machinery (` 12,39,000 × 18/118) 1,89,000
Less: Input tax credit to be reversed @ 5% per quarter for the period
of use of machine
(i) For the year 2017-18 = (` 1,89,000 × 5%) × 3 quarters 28,350
(ii) For the year 2018-19 = (` 1,89,000 × 5%) × 2 quarters 18,900
Amount required to be paid (A) ** 1,41,750
Duty leviable on transaction value (` 7,50,000 × 18%) (B) 1,35,000

Amount payable towards disposal of machine is higher of (A) and (B) 1,41,750
Thus, M/s Agarwal & Agarwal Ltd. is required to pay GST amounting to ` 1,41,750 at
the time of sale of machinery.
** In the above solution, amount payable towards disposal of machine has been computed on the
basis of provisions of section 18(6) of the CGST Act, 2017 read with rule 40(2) of the CGST Rules,
2017 [wherein ITC to be reversed for the period of use of capital goods/machine has been computed
@ 5% for every quarter or part thereof from the date of the issue of invoice].
However, the said amount can also be computed in accordance with the provisions of section 18(6)
of the CGST Act, 2017 read with rule 44(6) of the CGST Rules, 2017 [wherein ITC involved in the
remaining useful life (in months) of the capital goods/machine will be reversed on pro-rata basis,
taking the useful life as 5 years].
(c) This issue has been addressed by the High Court in a case of Union of India v. Cus.& C.
Ex. Settlement Commission 2010 (258) ELT 476 (Bom.). The High Court held that the duty
drawback or claim for duty drawback is nothing but a claim for refund of duty as per the
statutory scheme framed by the Government of India or in exercise of statutory powers
under the provisions of the Act.
Thus, the High Court held that the Settlement Commission has jurisdiction to deal with the
question relating to the recovery of drawback erroneously paid by the Revenue.
In view of the above mentioned ruling, it can be inferred that the Settlement Commission
has jurisdiction to settle cases relating to the recovery of drawback erroneously paid by
the Revenue.
Question 4
(a) Happy Ltd. located at Alwar (Rajasthan), exclusively manufactures and sells the product
"Shine & Shine", which is exempt from GST. Happy Ltd. sells "Shine & Shine" only within
Rajasthan. The turnover of Happy Ltd. in the previous year was ` 60 lakhs. Happy Ltd.
purchased additional machinery (Capital Goods) for manufacturing "Shine & Shine" on 1 st
April, 2018. The invoice for supply of machinery also was issued on 1 st April, 2018. The
purchase price of the machinery was ` 25 lakh exclusive of CGST and SGST @ 12% (6%
+ 6%). On 1st December, 2018 exemption available on the product "Shine & Shine" was
withdrawn by the Central Government and CGST and SGST @18% (9% + 9%) was
imposed thereon. The turnover of Happy Ltd. on 30 th September, 2018 was ` 45 lakh.
Examine the issue and provide the answers (with supporting explanatory note for each
answer) to the following:
(i) Does Happy Ltd. have to register under CGST Act, 2017?
(ii) Can Happy Ltd. take Credit of tax paid on the machinery purchased? If yes, what is
the amount of Input Tax Credit (ITC) that can be availed? (5 Marks)

(b) Divy Trader obtained permission for provisional assessment and supplied three
consignments of furniture on 28 th April, 2018. The tax payment on provisional basis was
made in respect of all the three consignments on 20 th May, 2018.
Consequent to the final assessment order passed by the Assistant Commissioner on
21st June, 2018, a tax of ` 1,20,000 and ` 1,50,000 became refundable on 1 st and 3rd
consignments, whereas a tax of ` 1,20,000 became due on 2 nd consignment. Divy Trader
applies for the refund of the tax on 1 st and 3rd consignments on 12th July, 2018 and pays
the tax due on 2nd consignment on the same day. Tax was actually refunded to it of 1 st
consignment on 8th September, 2018, whereas of 3 rd consignment on 18th September,
2018. Customers of Divy Trader who purchased the consignments have not taken Input
Tax Credit (ITC).
Determine the interest payable and receivable, if any, under CGST Act, 2017 by Divy
Trader. (5 Marks)
(c) Rule 112 of the CGST Rules lays down that the appellant shall not be allowed to produce
before the Appellate authority (AA) or the Tribunal any evidence, whether oral or
documentary, other than the evidence produced by him during the course of the
proceedings before the adjudicating authority or, as the case may be, the AA.
What are the exceptional circumstances specified in the rule where the production of
additional evidence will be allowed? Can AA or the Tribunal direct production of a ny
document or examination of any witness? (5 Marks)
(d) Payal Company, a unit located in Agri Export Zone has made exports of machineries worth
US $ 30 lakh per annum (on an average) during the last three years and in the current
year. It wants to export certain goods for export promotion on free of cost basis, which are
worth ` 25 lakh. 1 US $ = ` 50. Examine whether Payal Company can export, export
promotion goods on free of cost basis as proposed. (5 Marks)
Answer
(a) (i) As per section 22 of the CGST Act, 2017, a supplier is liable to be registered under
GST in the State/ UT from where he makes the taxable supply if his aggregate
turnover in a financial year(FY) exceeds ` 20 lakh in such State/UT (` 10 lakh in a
Special Category State other than Jammu and Kashmir). The term ‘aggregate
turnover’ includes exempt turnover also.
However, a person exclusively engaged in making exempt supplies is not liable to
registration in terms of section 23(1) of CGST Act, 2017.
In view of combined reading of above provisions, although the ‘aggregate turnover’
of Happy Ltd. exceeds the applicable threshold limit of ` 20 lakh on 30.09.2018 [` 45
lakh], it was not required to be registered till 30.11.2018 as it supplied only exempted
goods till that day. Therefore, Happy Ltd. needs to register within 30 days from

01.12.2018 (the date on which its supplies became taxable) as its turnover had
already exceeded the threshold limit of ` 20 lakh on 01.12.2018.
(ii) As per section 17 of the CGST Act, the input tax credit (ITC) on capital goods used
or intended to be used exclusively for effecting exempt supplies is disallowed.
However, where an exempt supply by a registered person becomes a taxable
supply, such person gets entitled to take proportionate ITC on such capital goods in
terms of section 18(1)(d) of CGST Act, 2017. Thus, a non-registered person cannot
take ITC on capital goods under this provision.
Further, a person who has applied for registration within thirty days from the date on
which he becomes liable to registration and has been granted such registration is also
not entitled to take ITC on capital goods held with him on the day immediately
preceding the date from which he becomes liable to pay tax in terms of section
18(1)(a) of CGST Act, 2017.
In the given case, Happy Ltd. is not registered at the time when its exempt supply
becomes taxable. Thus, the company cannot take proportionate ITC on capital goods
as mentioned above. Further, the company will also not be entitled for credit on capital
goods held with it when it applies for registration in the prescribed manner.
(b) Where tax becomes due consequent to order of final assessment, interest is payable @
18% p.a., from the first day after the due date of payment of tax in respect of the goods
supplied under provisional assessment till the date of actual payment, whether such
amount is paid before/after the issuance of order for final assessment.
In the given case, due date for payment of tax on goods cleared on 28.04.2018 under
provisional assessment is 20.05.2018.
Thus, interest payable in respect of 2nd consignment
= ` 1,20,000 × 18% × 53 [21.05.2018 – 12.07.2018]/365
= ` 3,136 (rounded off)
Further, section 56 of CGST Act, 2017 provides that where tax becomes refundable
consequent to the order of final assessment, interest is receivable @ 6% p.a. from the date
immediately after the expiry of 60 days from the date of receipt of refund application till the
date of refund of such tax.
In the given case, since refund of tax of 1st consignment has been paid on 08.09.2018
which is within 60 days from the date of receipt of application of refund (12.07.2018),
interest is not receivable on tax refunded in respect of 1 st consignment.
However, interest receivable in respect of 3rd consignment is as follows:
60 days from the date of receiving the refund application expire on 10.09.2018.
= ` 1,50,000 × 6% × 8 [11.09.2018-18.09.2018]/365
= `197 (rounded off).

(c) Exceptional circumstances specified in rule 112 of the CGST Rules, 2017 where the
production of additional evidence will be allowed are as follows:
(a) where the adjudicating authority/appellate authority (AA) has refused to admit
evidence which ought to have been admitted.
(b) where the appellant was prevented by sufficient cause from producing the evidence
which he was called upon to produce by the adjudicating authority/AA.
(c) where the appellant was prevented by sufficient cause from producing before the
adjudicating authority/AA any evidence which is relevant to any ground of appeal; or
(d) where adjudicating authority/AA has made the order appealed against without giving
sufficient opportunity to the appellant to adduce evidence relevant to any ground of
appeal.
Yes, the AA or the Tribunal can direct the produc tion of any document or examination of
any witness to enable it to dispose of the appeal.
(d) Status holders are entitled to export freely exportable items on free of cost basis for export
promotion subject to an annual limit of ` 1 crore or 2% of average annual export realization
during preceding 3 licensing years, whichever is lower.
All exporters of goods having an import-export code (IEC) number shall be eligible for
recognition as a status holder. Payal Company, upon achieving export performance of US
$ 12 million [` 30 lakh x 4] during current and previous 3 financial years, is eligible for
status recognition as One Star Export House.
Being a unit in Agri Export Zone, exports of Payal Company is eligible for grant of double
weightage for calculation of export performance for grant of status of One Star Export
House. However, the same is not relevant for Payal Company as it is already eligible for
grant of One Star Export House on the basis of its export performance without taking the
benefit of double weightage.
Therefore, being a Status Holder, Payal Company is entitled to export freely exportable
items on free of cost basis for export promotion as under:
(i) ` 1 crore
or
(ii) 2% of ` 1500 lakh [US $ 30 lakh 2 x ` 50] which is ` 30 lakh
whichever is lower.
Thus, Payal Company can export goods worth ` 25 lakh for export promotion on free of
cost basis.
2In the above answer, average annual export realization of US $ 30 lakh per annum during preceding 4 years
has been assumed to be the average annual export realization during preceding 3 licensing years.

Question 5
(a) Mr. Sanjay of New Delhi made a request for a Motor cab to "Super ride" for travelling from
New Delhi to Gurgaon (Haryana). After Mr. Sanjay pays the cab charges using his debit
card, he gets details of the driver Mr. Jorawar Singh and the cab's registration number.
"Super ride" is a mobile application owned and managed by D.T. Ltd. located in India.
The application "Super ride" facilitates a potential customer to connect with the persons
providing cab service under the brand name of "Super ride".
D.T. Ltd. claims that cab service is provided by Mr. Jorawar Singh and hence, he is liable
to pay GST under the provisions of Goods and Service tax laws.
With reference to the provisions of IGST Act, 2017, determine who is liable to pay GST in
this case?
Would your answer be different, if D.T. Ltd. is located in New York (USA)? Also briefly
state the statutory provisions involved. (5 Marks)
(b) Mr. Anant Kumar Gupta self-assessed his tax liability as ` 90,000 for the month of April
2018 but failed to make the payment.
Subsequently the Department initiated penal proceedings against Mr. Anant Kumar Gupta
for recovery of penalty under section 73 of CGST Act, 2017 for failure to pay GST and
issued show cause notice on 10-08-2018 which was received by Mr. Anant Kumar Gupta
on 14-08-2018.
Mr. Anant Kumar Gupta deposited the tax along with interest on 25/08/2018 and informed
the department on the same day.
Department is contending that he is liable to pay a penalty of ` 45,000 (i.e. 50% of 90000).
Examine the correctness of the stand taken by the Department with reference to the
provisions of the CGST Act, 2017, explain the relevant provisions in brief. (5 Marks)
(c) Miss Nitya has following balances in her Electronic Cash Ledger as on 28/02/2018 as per
GST portal.
Major Heads Minor Heads Amount (` )
Tax 40,000
CGST Interest 1,000
Penalty 800
Tax 80,000
SGST Interest 400
Penalty 1,200
Fee 2,000

IGST Tax 45,000

Interest 200
Penalty Nil
Her tax liability for the month of February, 2018 for CGST and SGST was ` 75,000 each.
She failed to pay the tax and contacted you as legal advisor on 12/04/2018 to advise her
as to how much amount of tax or interest she is required to pay, if any, by utilizing the
available balance to the maximum extent possible as per GST Laws. She wants to pay the
tax on 20-04-2018.
Other Information:-
(i) Date of collection of GST was 18 th February, 2018.
(ii) No other transaction after this up to 20 th April 2018.
(iii) Ignore penalty for this transaction.
(iv) No other balance is available.
You are required to advise her with reference to legal provisions with brief notes on the
legal provisions applicable. (5 Marks)
(d) In an order issued to SC Ltd., the adjudicating authority has confirmed a duty demand of
` 50 lakhs and imposed a penalty of equal amount under section 114A of the Customs Act,
1962, plus a penalty of ` 1 lakh under section 117 of the Customs Act, 1962. Their appeal
to Commissioner (Appeals), challenging the duty demand and imposition of penalty after
payment of required pre-deposit was dismissed. Now, they wish to file an appeal before
CESTAT.
Indicate the amount they paid when they filed appeal before the Commissioner (Appeals)
and they are required to pay towards pre deposit for filing the appeal under section 129E
of the Customs Act, 1962 before the Customs, Excise, and Service Tax Appellate Tribunal:
(a) if they dispute their liability to pay duty and penalties;
(b) if they accept the duty liability but dispute the imposition of penalties.
Briefly explain the legal provisions relating to pre-deposit for appeals before first appellate
authority and CESTAT. (5 Marks)
Answer
(a) Section 5 of IGST Act, 2017 provides that tax on inter-State supplies of specified services
notified by Government shall be paid by the electronic commerce operator (ECO) located
in taxable territory if such services are supplied through it. Services by way of
transportation of passengers by a motor cab supplied through ECO is one of the notified
service.

Electronic commerce operator means any person who owns, operates or manages
digital or electronic facility or platform for supply of goods or services or both, including
digital products over digital or electronic network.
Since DT Ltd. owns and manages a mobile application to facilitate supply of passenger
transportation service in motor cabs over a digital network, it is an ECO. Thus, DT Ltd.,
an ECO located in India is liable to pay GST in the given case.
However, where an ECO does not have a physical presence in the taxable territory, person
representing ECO is liable to pay tax. Further, where ECO has neither the physical
presence nor any representative in the taxable territory, person appointed by the ECO for
the purpose of paying the tax is liable to pay tax.
Accordingly, if D.T. Ltd. is located in New York (USA), any person representing DT Ltd. for
any purpose in India is liable to pay tax.
Further, if D.T. Ltd. also does not have a representative in India, it shall appoint a person
in India for the purpose of paying tax and such person shall be liable to pay tax.
(b) Due date for payment of tax for the month of April, 2018 is 20.05.2018.
As per section 73 of the CGST Act, 2017, where self-assessed tax is not paid within 30
days from due date of payment of such tax, penalty equivalent to 10% of tax or ` 10,000,
whichever is higher, is payable. Thus, option to pay tax within 30 days of issuance of SCN
to avoid penalty, is not available in case of self-assessed tax.
Since in the given case, Mr. Anant Kumar Gupta has not paid the self-assessed tax within
30 days of due date [i.e. 20.05.2018], penalty equivalent to:
(i) 10% of tax, viz., ` 9,000 (10% of ` 90,000) or
(ii) ` 10,000,
whichever is higher, is payable by him. Thus, penalty payable is ` 10,000.
Hence, the stand taken by the Department that penalty will be levied on Mr. Anant Kumar
Gupta is correct, but the amount of penalty ` 45,000 is not correct.
(c) Due date for payment of tax collected on 18.02.2018 is 20.03.2018. Interest @ 18% p.a.
is payable for the period for which the tax remains unpaid in terms of section 50 of CGST
Act, 2017. In the given case, since Miss Nitya wants to pay the tax on 20.04.2018, interest
payable on the amount of CGST and SGST each is as follows:
Rs 75,000 × 18% × 31/365 = ` 1,147 (rounded off)
Amount entered under any Minor head (Tax, Interest, Penalty, etc.) and Major Head
(CGST, IGST, SGST/UTGST) of the Electronic Cash Ledger can be utilized only for that
liability. Cross-utilization among Major and Minor heads are not possible.

Thus, Miss Nitya is liable to pay the following amount of tax and interest as under:
CGST SGST
Tax Interest Tax Interest
Tax Liability 75,000 1,147 75,000 1,147
Balances in Electronic cash ledger 40,000 1,000 80,000 400
Amount payable in cash 35,000 147 Nil 747
(d) The appellant has to deposit (i) 7.5% of the duty, in case where duty or duty and penalty
are in dispute, or (ii) 7.5% of the penalty, where such penalty is in dispute, while filing
an appeal before Commissioner (Appeals).
While filing appeal before CESTAT against the order passed by Commissioner (Appeals),
the appellant has to deposit another (i) 10% of the duty, in case where duty or duty and
penalty are in dispute, or (ii) 10% of the penalty, where such penalty is in dispute.
Further, where penalty alone is in dispute and penalties have been imposed under
different provisions of the Customs Act, pre-deposit would be calculated based on the
aggregate of all penalties imposed in the order sought to be appealed against.
The amount of pre-deposit shall not exceed ` 10 crores.
In view of the aforementioned provisions, pre-deposit amounts would be as follows:
(a) If SC Ltd. dispute their liability to pay duty and penalties, before Commissioner
(Appeals)
= 7.5% of duty = 7.5% of ` 50 lakh =` 3,75,000
(b) If SC Ltd. accept the duty liability but dispute the imposition of penalties, before
Commissioner (Appeals)
= 7.5% of penalties = 7.5% of ` 51 lakh (` 50 lakh + ` 1 lakh) = ` 3,82,500
(a) If SC Ltd. dispute their liability to pay duty and penalties, before CESTAT
= 10% of duty = 10% of ` 50 lakh = ` 5,00,000
(b) If SC Ltd. accept the duty liability but dispute the imposition of penalties, before
CESTAT
= 10% of penalties = 10% of ` 51 lakh (` 50 lakh + ` 1 lakh) = ` 5,10,000
Question 6
(a) Briefly explain the procedure to be followed by the Authority for Advance Ruling on receipt
of the application for Advance Ruling under section 98 of CGST Act, 2017. (5 Marks)
(b) What are the duties of National Anti-profiteering Authority enumerated in the CGST Act?
(5 Marks)

(c) Explain the difference between Audit by Tax Authorities under section 65 and Special Audit
under section 66 of the CGST Act, 2017. (5 Marks)
(d) In January, 2018, Rock & Rock India Ltd. imported a consignment from U.S.A (by sea).
The value of consignment was ` 7,50,000 and total duty payable was ` 1,50,000.
Company filed bill of entry for home consumption but before inspection and clearance for
home consumption it found that the goods were damaged.
On filing a representation to the Customs Department, proper officer refused the claim for
abatement because goods were already unloaded. The proper officer is in agreement with
the claim that the value of goods has come down to only ` 1,50,000.
Examine the issue with reference to the relevant statutory provisions and calculate the
amount of total duty payable:
Would your answer be different in the above case if the goods get deteriorated after
unloading and examination but before clearance for home consumption, and value comes
down to ` 7,00,000 ? (5 Marks)
Answer
(a) The procedure to be followed by the Authority for Advance Ruling (AAR) on receipt of the
application for advance ruling under section 98 of the CGST Act, 2017 is as under:-
1. Upon receipt of an application, the AAR shall send a copy of application to the officer
in whose jurisdiction the applicant falls and call for all relevant records.
2. The AAR may then examine the application along with the records and may also hear
the applicant. Thereafter he will pass an order either admitting or rejecting the
application.
3. Application for advance ruling will not be admitted in cases where the question raised
in the application is already pending or decided in any proceedings in the case of an
applicant under any of the provisions of this Act.
4. If the application is rejected, it should be by way of a speaking order giving the
reasons for rejection and only after giving an opportunity of being heard to the
applicant.
5. If the application is admitted, the AAR shall pronounce its ruling on the question
specified in the application. Before giving its ruling, it shall examine the application
and any further material furnished by the applicant or by the concerned departmental
officer.
6. Before giving the ruling, AAR must hear the applicant or his authorized representative
as well as the jurisdictional officers of CGST/SGST.
7. If there is a difference of opinion between the two members of AAR, they shall refer
the point or points on which they differ to the Appellate Authority for hearing the issue

8. The Authority shall pronounce its advance ruling in writing within 90 days from the
date of receipt of application.
9. A copy of the advance ruling duly signed by members and certified in prescribed
manner shall be sent to the applicant, the concerned officer and the jurisdictional
officer.
(b) The duties of National Anti-profiteering Authority are as under:-
(i) to determine whether the reduction in tax rate or the benefit of input tax credit has
been passed on by the seller to the buyer (collectively referred to as ‘benefit’) by
reducing the prices
(ii) to identify the taxpayer who has not passed on the benefit
(iii) to order
(a) reduction in prices
(b) return to the recipient, an amount equivalent to the amount not passed on by
way of commensurate reduction in prices along with interest at the rate of 18%
from the date of collection of the higher amount till the date of the return of such
amount.
If the eligible person does not claim return of the amount or is not identifiable,
the amount not retuned would be recovered and deposited in the Consumer
Welfare Fund.
(c) imposition of penalty
(d) cancellation of registration
(iv) to furnish a performance report to the GST Council by the 10th of the month
suc ceeding each quarter
(c) Audit by Tax authorities under section 65 of the CGST Act, 2017:-
1 The Commissioner or any officer authorized by him can undertake audit of any
registered person for such period, at such frequency and in such manner as may be
prescribed.
2 The audit shall be completed within a period of 3 months from the date of conduct of
audit. However, the Commissioner can extend this period by a further period upto
maximum 6 months.
Special Audit under section 66 of the CGST Act, 2017:-
1 The registered person can be directed to get his records including books of account
examined and audited by a chartered accountant or a cost accountant during any
stage of scrutiny, inquiry, investigation or any other proceedings; depending upon the
complexity of the case. Any officer not below the rank of Assistant Commissioner may
order special audit, with the prior approval of the Commissioner, if he is of the opinion

that the value has not been correctly declared or the credit availed is not within the
normal limits.
2 Audit is to be completed within 90 days. However, the Assistant Commissioner can
extend this period by a further period of 90 days.
(d) The abatement of duty is allowed where it is shown to the satisfaction of the
Assistant/Deputy Commissioner of Customs that, inter alia, any imported goods, other than
warehoused goods, had been damaged at any time after the unloading thereof in India but
before their examination, on account of any accident not due to any wilful act, negligence
or default of the importer.
Thus, in view of the above mentioned provisions, the stand taken by the proper officer of
refusing the claim for abatement is not valid in law.
The duty to be charged on the damaged goods shall be reduced in proportion to the
reduction in the value of goods on account of damage.
Thus, in the given case, the amount of total duty payable
= [` 1,50,000/` 7,50,000] x ` 1,50,000
= ` 30,000
The abatement of duty is allowed where it is shown to the satisfaction of the
Assistant/Deputy Commissioner of Customs that, inter alia,warehoused goods had been
damaged at any time before clearance for home consumption on account of any accident
not due to any willful act, negligence or default of the owner, his employee or agent.
Since in this case, imported goods have deteriorated before clearance for home
consumption, abatement of duty will not be allowed and full duty will have to be paid.

PAPER – 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION
All questions relate to Assessment Year 2018-19, unless stated otherwise in the question.
Question 1
(a) M/s. Hind Udyog, a manufacturing partnership firm, consisting of three partners namely
X, Y and Z, provides following information relating to the year ending on 31.03.2018:
Net profit of ` 28.75 lakhs, as per profit and loss account, was arrived at after
debiting/crediting the following items:
(i) The firm had provided an amount of ` 2 lakhs being sum estimated as payable to
workers based on agreement to be entered with the workers union towards
periodical wage revision once in three years. The provision is based on a fair
estimation on wage and reasonable certainty of revision once in three years.
(ii) Sale proceeds of import entitlements amounting to ` 1 lakh have been credited to
profit and loss account, which the firm claims as capital receipt not chargeable to
income tax.
(iii) Goods and Service Tax demand paid includes an amount of ` 5,300 charged as
penalty for delayed filing of returns and ` 12,750 towards interest for delay in
deposit of tax.
(iv) A free air ticket was provided by a supplier for reaching a certain volume of
purchase during the F.Y. 2017-18. The same is not credited in profit & loss account
because it was encashed by the firm for ` 2 lakhs in April 2018.
(v) Interest amounting ` 20,000 paid to X as a Karta of HUF @ 18% per annum.
(vi) The firm had taken on lease an old building for the purpose of locating its business.
Due to old age of building, it was demolished and a new building put up, which was
used by the firm from September, 2017. The cost of new building ` 10 lakh was
written off as revenue expenditure. The lessor permitted the firm to have an
extension of the lease by another 20 years.
(vii) Loss incurred in transactions of purchase and sale of shares (without delivery) of
various companies ` 3 lakhs.
The Suggested Answers for Paper 7: Direct Tax Laws and International Taxation are based on the
provisions of direct tax laws as amended by the Finance Act, 2017. The relevant assessment year
is A.Y.2018-19.

(viii) A scheduled bank sanctioned and disbursed a term loan in the financial year
2014-15 for a sum of ` 50 lakhs. Interest of ` 8 lakhs was in arrears. The bank has
converted the arrear of interest into a new loan repayable in 10 equal instalments.
During the year, the company has paid 2 instalments and the amount so paid has
been reduced from Funded Interest in the Balance Sheet.
The firm furnishes following additional information relating to it:
(1) Provision for audit fees ` 2.5 lakhs was made in the books for the year ended on
31.03.2017 without deducting tax at source. Such fees was paid to the auditors in
September, 2017 after deducting tax under section 194J and the tax so deducted
was deposited on 7th October, 2017.
(2) The firm had made an investment of ` 23 lakhs and ` 12 lakhs on the construction
of two warehouses (excluding the cost of land), in rural areas for the purpose of
storage of agricultural produce and edible oil respectively. These were made
available for use from 15.09.2017. The profits from setting of these warehouses
(before claiming deduction under section 35AD and 32) for the A.Y. 2018-19 is
` 15 lakhs and ` 5 lakhs respectively.
(3) In July, 2017 firm received a dividend of ` 11 lakhs from A Ltd. in which it holds 10%
of shares.
Compute the total income of M/s Hind Udyog for the A.Y. 2018-19 by analysing,
integrating and applying the relevant provisions of Income tax law. Explain in brief, the
reasons for the treatment of each item. (14 Marks)
(b) Red Ltd., a non-resident foreign company, had entered into a collaboration agreement,
approved by the Central Government, with Blue Ltd., an Indian company on February 21,
2003 and is in receipt of following payments during the previous year ending on
March 31, 2018:
(i) Interest on 8% debentures for ` 40 lakhs issued by Blue Ltd. on July 1, 2017 in
consideration of providing of technical know-how, manufacturing process and
designs (date of payment of interest being March 31 every year).
(ii) Service charges @2.5% of the value of plant and machinery for ` 500 Lakhs leased
out to Blue Ltd. payable each year before March 31.
(iii) Apart from the above incomes, Red Ltd. received a long term capital gain
amounting to ` 1.90 Lakhs on sale of debentures of Green Ltd., an Indian company,
subscribed in US$.
Compute the Total Income of Red Ltd. and determine its tax liability for the assessment
year 2018-19. (6 Marks)

PAPER – 7 : DIRECT TAX L AWS & INTERNATI ONAL TAXATI ON 3
Answer
(a) Computation of Total Income of M/s Hind Udyog for the A.Y.2018-19
Particulars Amount (`)
Profits and gains from business or
profession
Profits and gains from regular business
Net profit as per the profit and loss account 28,75,000
Add: Items debited but to be considered
separately or to be disallowed/
amount taxable but not credited
(i) Provision for wages payable to -
workers
[Since the provision is based on a fair
estimate of wages payable with
reasonable certainty, the provision is
allowable as deduction. ICDS X requires
a reliable estimate of the amount of
obligation and reasonable certainty for
recognition of a provision, which is
present in this case.
As the provision of ` 2 lakhs has been
debited to profit and loss account, no
adjustment is required while computing
business income]
(iii) Penalty for delayed filing of GST 5,300
returns
[Penalty imposed for delay in filing GST
return is not deductible since it is on
account of infraction of the law requiring
filing of the return within the specified
period1. Since the same has been debited
to profit and loss account, the same is
required to be added back while
computing business income]
(iii) Interest for delay in deposit of GST -
[Interest paid on delayed deposit of GST
is not penal in nature but is compensatory
in character and is an allowable deduction
1 CIT v. Ratanchand Bholanath (S.S) (1986) 160 ITR 500 (M.P.)

under section 372]

(iv) Free air ticket provided by a supplier 2,00,000
[Value of free air ticket provided by a
supplier is taxable as business income
under section 28, as the value of any
benefit, whether convertible into money
or not, arising from business is taxable
as business income.
Since the same is not credited to profit
and loss account, the same is required to
be added while computing business
income]
(v) Interest paid to X as Karta of HUF -
[Where an individual is a partner in a firm
otherwise than in a representative
capacity, the provisions of section 40(b)
shall not apply to any interest payable by
the firm to such individual on behalf of any
other person. Hence, assuming that the
provisions of section 40A(2) do not get
attracted in this case, such interest shall
be allowed as deduction in full even
though the interest rate is more than 12%
p.a.]
(vi) Cost of new building 10,00,000
[Cost of new building is not allowed as
deduction since it is capital in nature.
Since the same has been debited to profit
and loss account, it has to be added back]
(vii) Loss from trading in shares [without 3,00,000
delivery]
[Loss incurred on purchase and sale of
shares of other companies without
delivery is a speculative transaction. 15,05,300
Since the same is debited to profit and
loss account, the same is required to be
added back while computing business
income]
43,80,300
2 Supreme Court in Lachmandas Mathurdas v. CIT (2002) 254 ITR 799

Less: Items credited to profit and loss

account, but not includible in business
income/ permissible expenditure and
allowances
(ii) Sale proceeds of import entitlements -
[Sale of import entitlements gives rise to
profits or gains taxable under section
28. Since the amount has already been
credited to profit and loss account, no
further adjustment is required]
(vi) Depreciation as per Income-tax Rul es, 1,00,000
1962 on building [` 10 lakhs x 10%]
[Where any capital expenditure is incurred
by the assessee for the purposes of the
business by way of construction of any
structure or doing of any work by way of
renovation, extension or improvement to
the building which is not owned by him
but in respect of which the assessee
holds a lease, then, depreciation would be
allowed as if the said structure or work is
a building owned by the assessee.]
(viii) Payment of new loan converted from 1,60,000
arrear interest
[Conversion of unpaid interest into loan
shall not be construed as payment of
interest for the purpose section 43B. The
amount of unpaid interest converted into a
new loan will be allowable as deduction
only in the year in which such converted
loan is actually paid. Since ` 1,60,000
(` 8,00,000/10 x 2) has been paid in the
P.Y. 2017-18, the same would be allowed
as deduction]
Note: Since the question specifies that
the “net profit was arrived at after
debiting/crediting the following items”,
` 8 lakhs, being interest in arrears, has to
be added back, on the basis of the
assumption that it has been already
debited in the profit and loss account and
then reduced ` 1,60,000, being interest

deduction allowable. In such case income

will increase by ` 6,40,000
A(1) Audit fees of P.Y. 2016-17 75,000 3,35,000
[30% of ` 2,50,000, being the audit fees
disallowed in the P.Y. 2016-17 for non-
deduction of TDS in the P.Y. 2016-17
would be allowed in the year of deduction
and payment of TDS i.e., P.Y. 2017-18]
40,45,300
Profits and gains from Speculation
business
Loss from the speculation business of trading (3,00,000) -
of shares without delivery [to be carried
forward for A.Y. 2019-20 for set-off against
profits of any speculative business, assuming
the firm has filed the return of income on or
before the due date u/s 139(1)].
Profits and gains from the business of
setting up a warehouse for storage of
edible oil
Profit from setting up of warehouse (before 5,00,000
providing for depreciation under section 32)
Less: Depreciation as per Income-tax Rules,
1962 on construction of warehouse 1,20,000 3,80,000
[`12,00,000 x 10%] [Since it is not a
specified business under section 35AD]
Profit and gains from the business of
setting up a warehouse for storage of
agricultural produce
Profit from setting up of warehouse (before 15,00,000
providing deduction under section 35AD)
Less: Deduction under section 35AD [100% of
capital expenditure is allowable as
deduction, since setting up and operating a
warehousing facility for storage
agricultural produce is a specified
business, where operations are 23,00,000
commenced on or after 01.04.2009]
Loss from the specified business under section (8,00,000)
35AD to be carried forward indefinitely for set-off
against profits of the specified business,

assuming that the firm has filed the return of

income on or before the due date under section
139(1)
Profit and gains from business or 44,25,300
profession
Income from Other Sources
Dividend received from A Ltd. 1,00,000
[Dividend received from an Indian company is
exempt u/s 10(34) to the extent of ` 10 lakhs.
Balance dividend of ` 1 lakh would be
chargeable to tax u/s 115BBDA]
Gross Total income/ Total Income 45,25,300
Note - The number used in the computation are not the serial number but are the number
of each of the adjustment or of additional information given there against in the question.
(b) Computation of total income of Red Ltd., a foreign company, for A.Y.2018-19
Particulars `
Fees for technical services 40,00,000
Debentures issued by Blue Ltd. in consideration for provision of technical
know-how by Red Ltd., a foreign company, is in the nature of fee for
technical services, deemed to accrue or arise in India to Red Ltd., a foreign
company
Royalty 12,50,000
Service charges for leased out plant and machinery [` 500 lakhs x 2.5%]
[Service charges paid by Blue Ltd. for leased out plant and machinery is in
the nature of royalty, which is deemed to accrue or arise in India to Red Ltd.,
a foreign company]
Capital Gains
Long term capital gain on sale of debentures of Green Ltd. an Indian 1,90,000
company
Interest on debentures
Interest on debentures [`40 lakhs x 8% x 9/12] [ Iinterest on debentures of 2,40,000
Blue Ltd., an Indian company, is deemed to accrue or arise in India, since
the debt incurred is not used for a business outside India or for earning
income from a source outside India]
Total Income 56,80,000

Computation of tax liability of Red Ltd. for A.Y.2018-19

Particulars `
Tax@10% on royalty of `12.50 lakhs and fees for technical services of 5,25,000
` 40 lakhs
Tax @20% on long term capital gains of ` 1,90,000, assuming debentures 38,000
are listed on recognised stock exchange
Tax @40% on interest on debentures of ` 2,40,000 since debt is not
incurred by Blue Ltd. in foreign currency 96,000
6,59,000
Add: Education cess and SHEC@3% 19,770
Tax Liability 6,78,770
Note – The above answer is based on the assumption that debentures of Green Ltd. are
listed on a recognized stock exchange. However, question can also be answered on the
basis of the assumption that the debentures are not listed on recognized stock exchange.
In such case, long term capital gains on sale of debentures would be subject to tax
@10% and tax thereon shall be ` 19,000/- and total tax liability of Red Ltd. would be
` 6,59,200/-.
Question 2
(a) Anustup Chandra Flour Mills Ltd., a domestic company engaged in manufacture of wheat
flour, furnishes the following information pertaining to the year ended 31-3-2018:
(i) Net profit as per the Statement of Profit and Loss is ` 77 lakhs after considering the
items listed in (ii) to (vi) below.
(ii) The company is a member of Vishnu Foods & Co., an AOP in which the members'
shares are determinate and their shares in profit/loss are clearly known. The entire
income of the AOP is from business activities. During the year, the company has
derived share income of ` 9 lakhs from the AOP. The company has spent a sum of
` 90,000 towards earning such income.
(iii) The company has provided for income-tax (including interest under sections 234B
and 234C of ` 62,000) for ` 3 lakhs and ` 5 lakhs towards share in loss of foreign
subsidiary.
(iv) Amount debited to the Statement of Profit and Loss towards interest to a public
financial institution is ` 12 lakhs. Of this, ` 4 lakhs was paid on 12-12-2017 only.
(v) The company committed breach of building norms while extending the factory
building. The City Corporation initiated proceedings against the company and the
company settled the issue by paying compounding fee of ` 1 lakh. This amount
forms part of general expenses, which has been debited to the Statement Profit and
Loss.

(vi) In the administrative expenses, the company has debited a sum of ` 70,000
towards fee for delayed filing of statement of TDS under section 234E of the
Income-tax Act, 1961.
(vii) The company has credited revaluation surplus of ` 10 lakhs on fair valuation of
assets under Ind AS 16 and Ind AS 38 to other equity.
(viii) The company has credited ` 5 lakhs to other comprehensive income on fair
valuation of equity instruments in which the company has Investment.
During the current year, the depreciation charged as per books of account of the
company is the same as allowable under the Income-tax Act, 1961 [before considering
the provisions of section 32(2)]. The company proposes to adopt this practice
consistently in the future years.
You are required to compute the income-tax payable by the company for the assessment
year 2018-19. The company is an Indian Accounting standard compliant company.
Note: The Turnover of company for the P.Y 2015 -16 was ` 50 crore. (14 Marks)
(b) Mr. Manav, a resident, has derived certain income from a nation Q with which no DTAA
exists. In Q, any income chargeable to tax is charged at a flat rate of 18%.
Mr. Manav has derived the following income from Q:
(i) Agricultural income from lands in Q ` 14 lakhs
(ii) Share income from a partnership firm in Q ` 18 lakhs
In nation Q, agricultural income is exempt and does not form part of total income.
State with reasons, whether, Mr. Manav (assessee) can claim double taxation relief in
respect of the above two items of income and also determine the quantum of double
taxation relief available.
The "Indian rate of tax" may be taken as 20%. (6 Marks)
Answer
(a) Computation of Total Income of Anustup Chandra Flour Mills Ltd.
as per the normal provisions of the Act for A.Y. 2018-19
Particulars ` `
Net Profit as per statement of profit and loss 77,00,000
Add: Items debited but to be considered separately or to be
disallowed/ amount taxable but not credited
(ii) Expenditure on earning share income in AOP 90,000
[Share income in AOP, which pays tax at the maximum
marginal rate is exempt in the hands of the member.
Consequently, expenditure incurred on earning exempt income

is not allowable as deduction. Since the same has been

debited in the statement of profit and loss, it has to be added
back]
(iii) Provision of income-tax (including interest u/s 234B and 3,00,000
234C)
[Provision of income-tax is not allowable as deduction. Also,
any interest payable for default committed by the assessee
for discharging his statutory obligations under Income-tax
Act, 1961 which is calculated with reference to the tax on
income is not allowable as deduction.
Since the provision and interest have been debited to
statement of profit and loss, they have to be added back]3
(iii) Provision for loss of foreign subsidiary 5,00,000
[Since the loss of foreign subsidiary is not a loss incurred for
the purpose of business of the assessee, it is not allowed
while computing business income. Since the same has been
debited in the statement to profit and loss, it has to be added
back]
(iv) Interest to a public financial institution 8,00,000
[Deduction of any sum, being interest payable on any loan or
borrowing from a public financial institution shall be allowed, if
such interest has been actually paid. Since ` 4 lakhs has been
paid on 12.12.2017, the balance ` 8 lakhs debited to statement
of profit and loss has to be added back, assuming that such
sum is not paid on or before due date of filing of return of
income]
(v) Compounding fee paid for violation of building norms 1,00,000
[The amount paid for compounding an offence is inevitably a
penalty and the mere fact that it has been described as
compounding fee cannot, in any way, alter the character of the
payment which is in the nature of penalty. Hence, the same is
not allowable as revenue expenditure 4. Since the same has
been debited to statement of profit and loss, it has to be added
back]
(vi) Fee for delayed filing of statement of TDS -
[Under section 37, any expenditure incurred wholly and
exclusively for the purpose of business or profession is
3 Bharat Commerce and Industries Ltd. v. CIT [1998] 230 ITR 733 (SC)
4 Millenia Developers P Ltd. v. Deputy CIT (2010) 322 ITR 401 (Kar.)

allowed as deduction. The fee for delayed submission of the

statement of TDS is not in the nature of interest for delayed
remittance of TDS or in the nature of penalty, which are not
allowable as deduction while computing business income. 5
Hence, it is allowable as deduction.
Since the same has been debited to statement of profit and
loss, no further adjustment is required]
(vii) Revaluation surplus on fair valuation of assets under I nd -
AS 16 and 38 credited to other equity
[No treatment is required under the regular provisions of the
Income-tax Act, 1961. Since the same has not been credited to
statement of profit and loss, no adjustment is required]
(viii) Fair valuation of equity instruments -
[No treatment is required under the regular provisions of the 17,90,000
Income-tax Act, 1961. Since the same has not been credited to
statement of profit and loss, no adjustment is required]
94,90,000
Less: Items credited to statement of profit and loss, but not
includible in business income/ permissible expenditure
and allowances
(ii) Share income in AOP 9,00,000
[Where a company is a member in an AOP, the AOP would
have to pay tax at the maximum marginal rate owing to which,
company's share in the total income of AOP will not be included
in its total income and will be exempt. Since the same has been
credited to the statement of profit and loss, the same has to be
reduced while computing business income]
Total income 85,90,000
Computation of book profit under section 115JB for A.Y. 2018-19
Particulars ` `
Net profit as per the statement of profit and loss 77,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section 115JB(2):
(ii) Expenditure on earning share income in AOP 90,000
5The late fee levied u/s 234E is just like a fee payable to the ROC for delayed filing of a statutory return under the
Companies Act, 2013. Just as the latter is an allowable expenditure, the former also is.

[Expenditure related to share income in AOP has to be added

back while computing the book profit, since no income-tax is
payable by the company on share income in AOP]
(iii) Provision of income-tax (including interest under secti on 3,00,000
234B and 234C)
[Income-tax shall include, inter alia, any interest charged under
the Act, therefore, whole of the amount of provision for
income-tax including ` 62,000 towards interest payable has to
be added]
(iii) Provision for loss of foreign subsidiary 5,00,000 8,90,000
[Provision for losses of subsidiary companies has to be added
back]
85,90,000
Less: Net profit to be decreased by the following amounts as
per Explanation 1 to section 115JB(2):
(i) Share income in AOP 9,00,000
[Share income of company in AOP has to be reduced while
computing the book profit, since no income-tax is payable by
the company on share income in AOP]
Book profit computed in accordance with Explanation 1 to 76,90,000
section 115JB(2)
Add: Items credited to OCI that will not be reclassified to profit
or loss:
(vii) Revaluation surplus on fair valuation of assets ` 10 lakhs -
[Book profit not to be increased by revaluation surplus for
assets]
(viii) Income on fair valuation of equity instruments of ` 5 lakhs -
[Book profit not to be increased by income in fair values of
equity instruments]
Book Profit for levy of MAT 76,90,000
Computation of tax liability for A.Y. 2018-19
Particulars `
Minimum Alternate Tax on book profit under section 115JB = 18.5% of 14,22,650
` 76,90,000
Income-tax computed as per the normal provisions of the Act 21,47,500
[` 85,90,000 x 25% since, the turnover of the company for the P.Y.
2015-16 does not exceed ` 50 crores]

Since the income-tax liability of ` 21,47,500 is higher than the MAT

liability of ` 14,22,650, the income-tax liability would be computed as per
the normal provisions of the Income-tax Act,1961:
Income-tax computed as per the normal provisions of the Act 21,47,500
Add: Education cess and SHEC@3% 64,425
Tax Payable 22,11,925
Tax Payable (rounded off) 22,11,930
Note - The number used in the computation are not the serial number but are the number
of each of the adjustment or of additional information given there against in the question.
(b) Mr. Manav is resident in India for the P.Y.2017-18, his global income would be subject to
tax in India.
Agricultural income from lands located outside India would not be exempt from income -
tax in India under section 10(1) in the hands of a resident. The said income would be
chargeable to tax in his hands in India.
Share income from a partnership firm in County Q would not be exempt from income-tax
in India under section 10(2A) in the hands of a partner. The same would be chargeable to
tax in his hands in India.
Thus, both the above items of income are chargeable to tax in India in the hands of
Mr. Manav.
The following are the conditions to be fulfilled for claiming benefit deduction under
section 91:-
(i) Mr. Manav should be a resident in India during the relevant previous year.
(ii) The income accrues or arises to him outside India during that previous year.
(iii) Such income is not deemed to accrue or arise in India during the previous year.
(iv) Both the income given in question has been subjected to income-tax in Country Q in
his hands and he has paid tax on such income in Country Q.
(v) There is no agreement under section 90 for the relief or avoidance of double
taxation between India and Country Q, where the income has accrued or arisen.
Since all the conditions mentioned above are fulfilled, Mr. Manav is eligible for deduction
under section 91 in respect of double taxed income i.e., share income from a firm in
County Q.
However, he would not be eligible for deduction under section 91 in respect of
agricultural income from lands in Country Q since such income is exempt in Country Q
and consequently, is not a doubly taxed income.

Mr. Manav is entitled for deduction under section 91 of a sum calculated on share income
from firm in Country Q at the Indian rate of tax (20%) or the rate of tax in Country Q
(18%), whichever is lower.
Accordingly, deduction under section 91 available to Mr. Manav would be ` 3,24,000,
being 18% of ` 18,00,000.
Note - It is logical to take a view that exemption under section 10(2A) in hands of the
partner would be available only in respect of share income from an Indian firm. In this
case, since the share income is from a foreign firm, the same is taxable in India in the
hands of the partner. The above solution has been worked out on the basis of this view.
An alternate view that the share income from foreign firm is also exempt under section
10(2A) may also be possible, in which case, Mr. Manav would not be eligible for any
deduction under section 91, since there would be no double taxed income.
Question 3
(a) Eden Fabs Private Ltd. went into liquidation on 31.07.2017. The company was seized
and possessed of the following funds prior to the distribution of assets to the
shareholders:
`
Share capital (issued on 01.04.2012) 8,00,000
Reserves prior to 31.07.2017 4,00,000
Excess realization in the course of liquidation 6,00,000
Total 18,00,000
There are 8 shareholders, each of whom received ` 2,25,000 from the liquidator in full
settlement. You are required to examine the various issues and advice the shareholders
about their liability to Income tax. (6 Marks)
(b) Mani foundations, a charitable trust registered under section 12AA of the Income-tax Act,
1961, run schools for primary and secondary education. The following particulars
pertaining to the previous year 2017-18 are furnished to you by the trust:
` (in lakhs)
(i) Gross receipts from students towards tuition fees, development 200
fees, laboratory fees etc.
(ii) Voluntary contributions received from public (including 25
anonymous donation ` 5 lakhs)
(iii) Government grants 8
(iv) Donation given towards corpus to a trust registered under section 2
10(23C)

(v) Amount applied for the purpose of schools 90

(vi) Included in (v) above, a sum of 5 lakhs, being the amount applied
for the benefit of the founder of the trust.
(vii) The trust set apart ` 55 lakhs for acquiring a building to expand
its schools. But the amount was paid in December 2018 when
the sale deed was registered in its name
(viii) Excess of expenditure over income in the previous year 2016-17 25
Compute the total income of the trust for the assessment year 2018-19 in order to avail
maximum benefits within the four corners of law. (8 Marks)
(c) State with reasons, whether Netlon LLC., (Incorporated in Singapore) and Briggs Ltd., a
domestic company, are/can be deemed to be associated enterprises for the transfer
pricing regulations (Each situation is independent) of the others:
(i) Netlon LLC. has advanced a loan of ` 53 crores to Briggs Ltd. on 12-1-2018. The
total book value of assets of Briggs Ltd. is ` 100 crores. The market value of the
assets, however, is ` 150 crores. Briggs Ltd. repaid ` 10 crores before 31-3-2018.
(ii) Netlon LLC. has the power to appoint 2 of the directors of Briggs Ltd, whose total
number of directors in the Board is 4.
(iii) Total value of raw materials and consumables of Briggs Ltd. is ` 900 crores. Of this,
Netlon LLC. supplies to the tune of ` 820 crores, at prices mutually agreed upon
once in six months and depending upon the market conditions. (6 Marks)
Answer
(a) Where the assets of a company are distributed to its shareholders on its liquidation, such
distribution shall not be regarded as transfer in the hands of the company for the purpose
of section 45.
However, where the shareholder, on liquidation of a company, receives any money or
other assets from the company, he shall be chargeable to income-tax under the head
“capital gains”, in respect of the money so received or the market value of the other
assets on the date of distribution as reduced by the amount of dividend deemed under
section 2(22)(c) and the sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.
As per section 2(22)(c), dividend includes any distribution made to the shareholders of a
company on its liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation, whether
capitalized or not.
In this case, one-eighth share in the distribution made to a shareholder attributable to the
accumulated profits immediately before liquidation would be deemed dividend under
section 2(22)(c). The same is exempt under section 10(34) in the hands of the

shareholder, since the company, Eden Fabs Pvt. Ltd., is liable to dividend distribution tax
in respect of the same.
Therefore, ` 2,25,000 minus deemed dividend under section 2(22)(c) would be the full
value of consideration in the hands of each shareholder. Against this, the indexed cost of
acquisition computed by applying the relevant CII to the cost of acquisition of
` 1,00,000 of each shareholder [i.e., ` 8,00,000/8] is to be deducted to arrive at the long-
term capital gains. Since the shares are held for more than 24 months, they constitute a
long-term capital asset
Since the equity shares are not listed, securities transaction tax would not have been
paid and hence, the capital gain (long term) is not exempt under section 10(38). The
benefit of concessional rate of tax @10% without indexation benefit would also not be
available. Hence, such long term capital gain would be taxable @ 20% with indexation
benefit.
Therefore, the shareholders have to be advised that capital gains tax liability would arise
in their hands, the same should be computed in the manner given above and would be
subject to tax@20%.
(b) Computation of total income of Mani Foundations for the A.Y.2018-19
Particulars ` `
Gross receipts from students towards tuition fees, 2,00,00,000
development fees etc.
Government Grants (taxable, since only grant for the 8,00,000
purpose of corpus of a trust established by the Central
or State Government is excluded from the definition of
income)
[Note - Government Grants would be exempted based
on the assumption that Mani Foundations is set up by
the Central or State Government and the grant is
towards the corpus of the trust]
Voluntary contributions (other than anonymous
donations) [` 25 lakh – ` 5 lakh] 20,00,000
2,28,00,000
Add: Anonymous donations [to the extent not
chargeable to tax@30% under section 1,25,000
115BBC(1)(i)] [See Note below]
2,29,25,000

Less: 15% of income eligible for being set apart without

any condition6 34,38,750
1,94,86,250
Less: Amount applied for charitable purposes
- Amount applied for the purpose of schools 85,00,000
(excluding amount applied for the benefit of the
founder) = ` 90 lakh – ` 5 lakh
- Amount set apart for acquiring a building to 55,00,000
expand its schools
[The word "applied" used in section 11 means
that the income is actually applied for the
charitable purposes of the trust. The word
"applied" does not necessarily imply "spent".
Even if a certain amount is irretrievably
earmarked and allocated for charitable
purposes, the said amount can be deemed to
have been applied for charitable purposes.7 ]
- Corpus donations to a trust registered under 2,00,000
section 10(23C) [Deduction is not permissible
only in respect of corpus donations to a trust
registered u/s 12AA]
- Excess of expenditure over income in the 25,00,000 1,67,00,000
P.Y.2016-17
27,86,250
Add: Amount applied for the benefit of the founder of
the trust chargeable to tax under section 12(2) 5,00,000
read with section 13(6)
Anonymous donation taxable @30% under
section 115BBC(1)(i) [See Note below] 3,75,000
Total Income of the trust (including anonymous
donation taxable@30%) 36,61,250
Note - As per section 115BBC(1)(i), the anonymous donations in excess of the higher of
the following would be subject to tax@30%;
- ` 1.25 lakh, being 5% of the total donations received i.e., 5% of ` 25 lakh; or ` 1 lakh
6 As per the Supreme Court ruling in CIT v. Programme for Community Organisation (2001) 116 Taxman 608, 15% of
gross receipts would be eligible for accumulation under section 11(1)(a).
7 It was so held in CIT vs. Trustees of H.E.H. Nizams Charitable Trust, (1981) 131 ITR 497 (AP).

Therefore, anonymous donations of ` 3.75 lakh (` 5 lakh – ` 1.25 lakh) would be subject
to tax@30% under section 115BBC(1)(i).
Such anonymous donations which are subject to tax@30% are not eligible for the benefit
of exclusion from total income under sections 11 and 12.
[Alternate Answer] – As per the plain reading of section 13(7), it is possible to take a
view that the entire anonymous donations may not be eligible for benefit of exclusion
from total income under sections 11 and 12. If this view is taken, then ` 1.25 lakhs
should not be added to ` 228 lakhs. Accordingly, ` 34.20 lakhs, being 15% of ` 228
lakhs would be the income eligible for accumulation without any condition. The total
income of the trust (including anonymous donations) would be ` 36.80 lakhs.
(c) (i) Netlon LLC, a foreign company, has advanced loan of ` 53 crores to Briggs Ltd., a
domestic company, which amounts to 53% of book value of assets of Briggs Ltd. Sinc e
the loan advanced by Netlon Inc. is not less than 51% of the book value of assets of
Briggs Ltd., Netlon Inc. and Briggs Ltd. are deemed to be associated enterprises for the
transfer pricing regulations.
The deeming provisions would be attracted even if there is a repayment of loan
during the same previous year which brings down his percentage below 51%.
(ii) Netlon LLC has the power to appoint 50% (2 out of 4) of the directors of Briggs Ltd.
Two enterprises would be deemed to be associated enterprises if more than half of
the board of directors of one enterprise are appointed by the other enterprise.
In this case, since Netlon LLC has the power to appoint exactly half (and not more
than half) of the directors of Briggs Ltd., they are not deemed to be associated
enterprises.
(iii) Even though Netlon LLC supplies 91.11% of the raw materials and consumables
required by Briggs Ltd. which is more than the specified threshold of 90%, Netlon
LLC and Briggs Ltd. are not deemed to be associated enterprises
Reason for not deemed to be associated enterprises is since the price of supply is
not influenced by Netlon LLC but is mutually agreed upon once in six months
depending upon prevailing market conditions.
Question 4
(a) Tulsi Private Ltd., a company engaged in ship breaking activity, sold some old and used
plates, wood etc., in respect of which it did not collect tax from the buyer. The company
claimed that such items are usable as such. Hence these are not 'scrap' to attract the
provisions for collection of tax at source. The Assessing Officer treated such items in the
nature of 'scrap' and raised a demand under section 201(1) and interest under section
201(1A).

Is the action of the Assessing Officer in treating such items as 'scrap' tenable in law?
Discuss. (4 Marks)
(b) Discuss whether liability to deduct tax at source arises in the under-mentioned
(independent) situations in respect of following payments made by residents in India:
(i) Dindayal & Co., a partnership firm, has credited a sum of ` 67,000 and ` 4,000
respectively, as interest to partners L (Resident in India) and M (non-resident)
respectively. (4 Marks)
(ii) Lumnous Pvt. Ltd., whose accumulated profits are ` 20 lakhs, wants to disburse a
loan of ` 25 lakhs to Mrs. Nisha, a resident shareholder holding 20% of the equity
shareholding in the company. Can the entire amount of loan be disbursed to the
shareholder, keeping in mind the provisions of the Income-tax Act, 1961? The
Finance Manager feels that this being a pure loan transaction, there is no bar for
disbursing the entire amount. Is his view correct? (4 Marks)
(iii) Payment of ` 5 lakhs made by Shiv & Company (partnership firm) to Jyoti &
Company Ltd. for organising debate competition on the subject 'Rural Heritage of
Rajasthan’. (2 Marks)
(c) "Every jurisdiction, in the domestic law, prescribes the mechanism to determine
residential status of a person. In case, a person is considered to be resident of both
contracting states, it becomes necessary to apply the tie-breaker rule."
Discuss the manner for application of the tie-breaker rule. (6 Marks)
Answer
(a) The issue under consideration in the present case is, can items which are usable as such
be treated as “Scrap” to attract provisions for tax collection at source under section
206C.
The waste and scrap must be from manufacture or mechanical working of material which
is definitely not usable as such because of breakage, cutting up, wear and other reasons.
Any material which is usable as such would not fall within the ambit of the expression
scrap. In case of a company engaged in ship breaking activity, the old and used plates,
wood etc. are usable as such. Since the items in question were usable as such,
therefore, they do not fall within the definition of "scrap"
Thus, in the present case, the action of Assessing Officer in treating such items in the
nature of scrap and raising a demand under section 201(1) and interest under section
201(1A), is not tenable in law.
Note – The facts of the case given are similar to the facts in CIT v. Priya Blue Industries
(P) Ltd (2016) 381 ITR 210, wherein the above issue came up before the Gujarat High
Court. The answer is based on the rationale of the Gujarat High Court in the said case.

(b) (i) Section 194A requiring deduction of tax at source on any income by way of interest,
other than interest on securities credited or paid to a resident, excludes from its scope,
income credited or paid by a firm to its partner.
Section 195 which requires tax deduction at source on payment to non-residents,
does not provide for any exclusion in respect of payment of interest by firm to its
non-resident partner.
Therefore, Dindayal & Co., a partnership firm is not required to deduct tax at source
under section 194A on the amount of interest of ` 67,000 credited to the account of
L, resident in India.
Tax at source under section 195 @ 30.9% [30%, being the rate in force + cess@3%]
in respect of interest of ` 4,000 credited to the account of M, a non-resident is
required to be deducted.
(ii) As per section 2(22)(e), the loan amount of ` 25,00,000 disbursed by Lumnous Pvt.
Ltd. a company in which the public are not substantially interested to M rs. Nisha,
being a shareholder holding not less than 10% (20%, in the present case) of the
equity shares of the company would be deemed as dividend to the extent of
accumulated profits of ` 20,00,000.
` 20,00,000 would be deemed as dividend in the hands of Mrs. Nisha, and
therefore, would be chargeable to tax in her hands.
Consequently, Lumnous Pvt. Ltd. would be required to deduct tax at source under
section 194 at the rates in force i.e., deduct tax of ` 2,00,000, being 10% on the
deemed dividend of ` 20,00,000, since such amount exceeds the threshold limit of
` 2,500. Only the balance amount of ` 23,00,000 [i.e., ` 25,00,000 – ` 2,00,000]
can be disbursed to the shareholders.
Thus, the view of the Finance Manager that this being a pure loan transaction, the
entire amount can be disbursed is incorrect. Only the balance amount of
` 23,00,000, after deducting tax of ` 2,00,000 at source on deemed dividend of
` 20,00,000, can be disbursed.
(iii) The services of event managers in relation to sports activities alone have been
notified by the CBDT as “professional services” for the purpose of section 194J. In
this case, payment of ` 5 lacs was made to Jyoti & Company Ltd., an event
management company for organization of a debate competition. Hence, the
provisions of section 194J are not attracted in this case.
However, TDS provisions under section 194C relating to contract payments would
be attracted and consequently, tax has to be deducted @2% under section 194C.
(c) The tie-breaker rule would be applied in the following manner:
(i) The first test is based on where the individual has a permanent home i.e., a dwelling
place available to him at all times continuously and not occasionally.

(ii) If the individual has permanent home available to him in both Contracting States, he
will be considered a resident of the Contracting State where his personal and
economic relations are closer, in other words, the place where lies his centre of vital
interests.
Thus, preference is given to family and social relations, occupation, place of
business, place of administration of his properties, political, cultural and other
activities of the individual.
(iii) In a case where the individual has a permanent home available to him in both
Contracting States and it is not possible to determine in which one he has his centre
of vital interests; and in a case where the individual has a permanent home
available to him in neither Contracting State, preference is given to the Contracting
State where the individual has an habitual abode.
(iv) If the individual has habitual abode in both Contracting States or in neither of them,
he shall be treated as a resident of the Contracting State of which he is a national.
(v) If the individual is a national of both or neither of the Contracting States, the matter
is left to be considered by the competent authorities of the respective Contracting
States.
Question 5
Attempt Either 5(a)(i) OR 5(a)(ii)
(a) (i) The business premise of Mr. Rajneesh was subjected to a survey under section
133A of the Act. There were some indiscriminating materials found at the time of
survey. The assessee apprehends reopening of assessments of the earlier years.
He wants to know whether he can approach the Settlement Commission.
Explain briefly the basic conditions to be satisfied and the benefits that may accrue
to Mr. Rajneesh by approaching the Settlement Commission. (5 Marks)
(ii) The assessment of Foundation Bank Ltd. for Assessment Year 2014-15 was made
under section 143(3) on 30 th November, 2015 allowing deduction under section
36(1)(vii) and deduction in respect of foreign exchange rate difference as claimed in
the return of income. Subsequently, two notices of reassessment were issued under
section 148 and an order of reassessment was passed under section 147 on 31st
December, 2017 which did not deal with the above deductions. Later the Principal
Commissioner after examining the records of assessment, initiated revisionary
proceeding under section 263 on 31st May, 2018 for disallowing deduction under
section 36(1)(vii) and deduction in respect of foreign exchange rate difference. The
bank claims that the order passed by the Principal Commissioner under section 263
is barred by limitation.
Is the claim made by Foundation Bank tenable in law? (5 Marks)

(b) State with brief reason, whether the following statements are true or false:
(No mark will be awarded for answers without reason.)
(i) Where a notice under section 143(2) is issued to the assessee, it is not required to
process under section 143(1), the return of income filed by the assessee.
(ii) Even without rejecting the books of account, if any, maintained by the assessee, the
Assessing Officer can make a reference to the Valuation Officer under section 142A
for estimating the cost of construction of an immovable property.
(iii) Expenses of special audit conducted under section 142 shall be paid by the Central
Government.
(iv) Only an individual can be regarded as a Tax Return Preparer under section 139B.
(6 Marks)
(c) In the course of search operation under section 132 of the Income-tax Act, 1961, in the
month of July, 2018, Mr. Khemka has made a declaration under section 132(4) to the
Income Tax authorities on the earning of his income not disclosed in respect of previous
year 2017-18. Can that statement save Mr. Khemka from a levy of penalty, if he is yet to
file his return of income for assessment year 2018-19? (3 Marks)
(d) John Butler Tex. Inc., is a company incorporated in Colombo, Sri Lanka. 60% of its
shares are held by I Pvt. Ltd., a domestic company. John Butler Tex. Inc. has its presence
in India also. The data relating to John Butler Tex. Inc., are as under:
Particulars India Sri Lanka
Fixed assets at depreciated values for tax purposes ( ` in crores) 90 70
Intangible assets (` in crores) 40 180
Other assets (` in crores) 30 90
Income from trading operations (` in crores) 15 42
Income from investments (` in crores) 30 13
Number of employees
40 60
(Residents in respective countries)
For POEM purposes, state whether,

(i) The company shall be said to be engaged in 'active business outside India'.
(ii) Because of increased operations in India, more manpower is needed. 30 more
employees may be required in this regard. The company can either take these
employees directly in its roll or can outsource the increased operation to an external
agency which will engage the 15 employees in its roll and finish the work for the
company. Which choice will be better?

Note: If for any test, average figures are needed, the same may be ignored and the data
as given above to the applicant may be used. (6 Marks)
Answer
(a) (i) An assessee may, at any stage of a case relating to him, make an application in the
prescribed form and manner to the Settlement Commission under section 245C.
“Case” means any proceeding for assessment which may be pending before an
Assessing Officer on the date on which such application is made. A proceeding for
assessment or reassessment or recomputation under section 147 shall be deemed
to have commenced from the date on which a notice under section 148 is issued.
In this case, Mr. Rajneesh cannot approach the Settlement Commission merely due
to his apprehension that assessment of earlier years may be reopened, since there
is no case pending before an Assessing Officer.
Therefore, he has to wait for the Assessing Officer to issue notice under section
148. Thereafter, he can make an application to the Settlement Commission under
section 245C, since there would be a “case pending” before the Assessing Officer
on that date.
Another basic condition to be satisfied for making an application is that the
additional amount of income-tax payable on the income disclosed in the application
should exceed ` 10 lakh, and such tax and interest thereon which would have been
paid had the income disclosed in the application been declared in the return of
income should be paid on or before the date of making the application and proof of
such payment should be attached with the application.
If the Settlement Commission is satisfied that Mr. Rajneesh has co-operated in the
proceedings and made true and full disclosure of his income and the manner in
which it has been derived, it may, subject to such conditions as it may think fit to
impose, grant to Mr. Rajneesh -
(i) immunity from prosecution for any offence under the Income-tax Act, 1961,
where the proceedings for such prosecution have been instituted on or after
the date of receipt of application under section 245C; and
(ii) immunity from imposition of penalty under the Income-tax Act, 1961, either
wholly or in part, with respect to the case covered by the settlement.
This is the benefit that may accrue to Mr. Rajneesh, if he approaches the Settlement
Commission.
(ii) No revisionary order shall be made under section 263 after the expiry of two years
from the end of the financial year in which the order sought to be revised was
passed.

The issue under consideration is whether the period of limitation for an order
passed under section 263 has to be reckoned from the original order passed by the
Assessing Officer under section 143(3) of the Income-tax Act, 1961 or from the
order of reassessment passed under section 147, where the subject matter of
revision is different from the subject matter of reassessment under section 147.
Where the subject matter of revision was not the same as the subject matter of
reassessment, the period of limitation would commence from the date of original
assessment and not from the date of reassessment.
In this case, the period of limitation as referred to in section 263 is with reference to
the assessment in which the claim of the assessee as to deduction under section
36(1)(vii) and deduction in respect of foreign exchange rate difference was
considered. These issues were not the subject matter of reassessment proceedings.
Accordingly, the period of limitation shall be reckoned with reference to the original
assessment order and not from the date of the order of reassessment.
Therefore, in this case, the revision proceedings are barred by limitation since the
original assessment order was made on 30.11.2015 and the revision should have
been made by 31.3.2018. However, the revision order was passed only on 31 st May,
2018 and hence, the same is barred by limitation.
Accordingly, the claim of the Foundation Bank Ltd. that the order passed by the
Principal Commissioner under section 263 is barred by limitation is tenable in law.
Note: The facts of the case are similar to the facts in CIT v. ICICI Bank Ltd. (2012)
343 ITR 74, wherein the above issue came up before the Bombay High Court.
Similar issue also came up before the Bombay High Court in CIT v. Lark Chemicals
Ltd (2014) 368 ITR 655. The Bombay High Court relied on the Apex Court decision
in the case of CIT v. Alagendran Finance Ltd. (2007) 293 ITR 1. The above answer
is based on the rationale of the Bombay High Court in the said case.
(b) (i) The statement is false
In respect of returns furnished for A.Y.2017-18 or thereafter, processing of a return
under section 143(1) is necessary even where a notice has been issued to the
assessee under section 143(2).
(ii) The statement is true
Section 142A(2) provides that the Assessing Officer may make a reference to the
Valuation Officer whether or not he is satisfied about the correctness or
completeness of the accounts of the assessee. Thus, even without rejecting the
books of accounts maintained by the assessee, the Assessing Officer may make
reference to the Valuation Officer under section 142A.

(iii) The statement is true

Where the direction for special audit is issued by the Assessing Officer, the
expenses of, and incidental to, such special audit, shall be determined by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner in accordance with the prescribed guidelines. The expenses so
determined shall be paid by the Central Government.
(iv) The statement is true
The definition of Tax Return Preparer includes only an individual who has been
authorised to act as a Tax Return Preparer under the Scheme framed under section
139B.
(c) Since the search is conducted post 15.12.2016, and return is yet to be filed for the P.Y.
2017-18, the penalty would be as follows:
(1) penalty@30%, if undisclosed income is admitted during the course of search in the
statement furnished under section 132(4), and the assessee explains the manner in
which such income was derived, pays the tax, together with interest if any, in
respect of the undisclosed income, and furnishes the return of income for the
specified previous year declaring such undisclosed income on or before the
specified date (i.e., the due date of filing return of income or the date on which the
period specified in the notice issued under section 153A expires, as the case may
be).
(2) penalty@60%, in any other case.
Therefore, even if Mr. Khemka has made a declaration under section 132(4),
penalty@30% of undisclosed income of the specified previous year i.e., P.Y.
2017-18 would be attracted under section 271AAB.
(d) (i) For determining the POEM of a company, the important criteria is whether the company
is engaged in active business outside India or not.
A company shall be said to be engaged in “Active Business Outside India” (ABOI)
for POEM, if
- the passive income is not more than 50% of its total income; and
- less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are
resident in India; and
- the payroll expenses incurred on such employees is less than 50% of its total
payroll expenditure.
John Butler Tex. Inc. shall be regarded as a company engaged in active business
outside India for P.Y. 2017-18 for POEM purpose only if it satisfies all the four
conditions cumulatively.

Condition 1: The passive income of John Butler Tex. Inc. should not be more
than 50% of its total income
Total income of John Butler Tex. Inc. during the P.Y. 2017-18 is ` 100 crores [(` 15
crores + ` 30 crores) + (` 42 crores + ` 13 crores)]
Passive income is the aggregate of, -
(i) income from the transactions where both the purchase and sale of goods is
from/to its associated enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income;
Passive Income of John Butler Tex. Inc. is ` 43 crores, being income from
investment of ` 30 Crores in India and ` 13 crores in Sri Lanka.
Percentage of passive income to total income = ` 43 crore/ ` 100 crore x 100 = 43%
Since passive income of John Butler Tex. Inc. is 43% i.e., is not more than 50% of
its total income, the first condition is satisfied.
Condition 2: John Butler Tex. Inc. should have less than 50% of its total
assets situated in India
Value of total assets of John Butler Tex. Inc. during the P.Y. 2017-18 is ` 500 crores
[` 160 crores, in India + ` 340 crores, in Sri Lanka].
Value of total assets of John Butler Tex. Inc. in India during the P.Y. 2017-18 is
` 160 crores.
Percentage of assets situated in India to total assets = ` 160 crores/` 500 crores x
100 = 32%
Since the value of assets of John Butler Tex. Inc. situated in India is less than 50%
of its total assets, the second condition for ABOI test is satisfied.
Condition 3: Less than 50% of the total number of employees of John Butler
Tex. Inc. should be situated in India or should be resident in India
Number of employees situated in India or are resident in India is 40
Total number of employees of John Butler Tex. Inc. is 100 [ 40 + 60]
Percentage of employees situated in India or are resident in India to total number of
employees is 40/100 x 100 = 40%.
Since employees situated in India or are residents in India of John Butler Tex. Inc.
are less than 50% of its total employees, the third condition for ABOI test is
satisfied.

Condition 4: The payroll expenses incurred on employees situated in India or

residents in India should be less than 50% of its total payroll expenditure
Since the information pertaining to payroll expenditure of employees situated in
India and situated outside India is not given in the question it is assumed that the
condition pertaining to payroll expenditure is also satisfied by John Butler Tex. Inc.
Thus, since the John Butler Tex. Inc. has satisfied all the four conditions, the
company would be said to be engaged in “active business outside India”.
Note – Since the information pertaining to payroll expenditure of employees situated
in India and situated outside India is not given in the question it is also possible to
assume that the condition pertaining to payroll expenditure is not satisfied by John
Butler Tex. Inc.
In such case, the company would not be said to be engaged in “active business
outside India”, since John Butler Tex. Inc. has not satisfied one of condition i.e.,
payroll expenditure out of the specified four conditions.
(ii) Option 1: 30 more employees employed in India for the increased operations
In case John Butler Tex. Inc. employed 30 more employees in India, then
Percentage of employees situated in India or are resident in India to total number of
employees would be 70/130 x 100 = 53.85%.
In such a case, one of the four conditions would not be satisfied and therefore, John
Butler Tex. Inc. would not be considered to be engaged in ABOI.
It may be noted that place of effective management of a company passing the ABOI test
would be presumed to be outside India, if majority of the board meetings are held
outside India. Consequently, the global income of the company would not be subjec t to
tax in India. However, such a presumption cannot be made if the company does not fulfil
any of the four conditions for ABOI.
Option 2: Increased operations outsourced to external agency which will get
the work done by engaging 15 employees in India
For the purpose of ABOI, employees shall include persons, who though not
employed directly by the company, perform tasks similar to those performed by the
employees.
Thus, 15 employees engaged by external agency have also to be included while
determining the percentage of employees situated in India or are resident in India to
the total number of employees.
In such a case, the percentage of employees situated in India or are resident in
India to total number of employees would be 55/115 x 100 = 47.83%
In such a case, John Butler would continue to satisfy the four conditions for ABOI.
Thus, it would be better to outsource the increased operation to an external agency.

Question 6
(a) Mr. B proposes to purchase for his business, certain raw materials from Mr. S. In view of
the scarcity of the products, S insists on cash payments for the purchases, to which B
agrees. On 27-3-2018, the purchases are effected through a cash invoice for ` 3,20,000.
In respect of the above transactions, will there be any detrimental effect in the hands of B
and S under the provisions of the Income-tax Act, 1961? Explain briefly.
Will your answer be different, if the cash purchases are effected by the buyer B on two
different dates for different raw materials for ` 1,80,000 and ` 1,40,000 respectively?
(5 Marks)
(b) Mr. Sarthak a software engineer wants to commence a business in manufacture of solar
powered car. He provides the following information:
(i) The project cost is estimated at ` 5 crores.
(ii) He has a residential house in Surat since 2010 which could be sold for ` 3 crores.
(iii) And the balance ` 2 crores could be financed through bank borrowings at a cost of
13% per annum.
(iv) He has another option viz. his friend Miss Juhi who is willing to contribute ` 2 crores
and become a co-promoter.
The indexed cost of acquisition of the residential house (Computed) is ` 70 lakhs.
Mr. Sarthak seeks your guidance on the project finance taking into account any tax
incentives available under Income Tax Law besides the funding of project through bank
finance or accepting Miss Juhi as Co-promoter.
You are requested to advise Mr. Sarthak, on Income tax aspects to avail tax benefits
within the four corners of law. (9 Marks)
(c) T Inc., a non-resident entity incorporated in Mauritius, has permanent Establishment (PE)
in India. The PE filed its return of income for the assessment year 2018-19 disclosing
income of ` 100 lakhs and paid tax at the rate applicable to the domestic company i.e.
30% plus applicable surcharge and cess on the basis of paragraph 2 of Article 24 of
Double Tax Avoidance Agreement (non-discrimination) between India and Mauritius,
which reads as follows:
"The taxation on PE which is an enterprise of a contracting state has in the other
contracting state shall not be less favourably levied in that other state than the taxation
levied on enterprise of that other state carrying on the same activities in the same
circumstances."
However, the Assessing Officer computed the Tax on the PE at the rate applicable to a
foreign company (40%). Is the action of AO in accordance with law? (3 Marks)

(d) Alpha Inc., a non-resident company has an IT enabled business process outsourcing Unit
in India (BPO) and it provides certain outsourcing services to a resident Indian entity.
Discuss, the tax implications, in the hand of Alpha Inc. due to presence of BPO unit in
India. (3 Marks)
Answer
(a) (1) Where purchases are effected through cash invoice of ` 3,20,000
(i) In the hands of Mr. B
Since Mr. B is making cash payment of ` 3,20,000 for purchase of raw
materials from Mr. S for his business, disallowance under section 40A(3) would
be attracted, since the payment otherwise than by way of account payee
cheque or bank draft or use of ECS through a bank account to a person in a
day exceeds ` 10,000. Accordingly, ` 3,20,000 would not be allowable as
deduction while computing his business income.
(ii) In the hands of Mr. S
Section 269ST prohibits, inter alia, receipt of an amount of ` 2 lakh or more in
aggregate from a person in a day otherwise than by way of account payee
cheque or account payee bank draft or use of ECS through a bank account. If
any person receives any sum in contravention of the provisions of section
269ST, he shall be liable to pay penalty under section 271DA of a sum equal
to the amount of such receipt.
In this case, since S has received ` 3,20,000 by way of cash from Mr. B on
27.3.2018, he has violated the provisions of section 269ST, and hence, is
liable to pay penalty of ` 3,20,000 under section 271DA.
(2) Where cash purchases of ` 1,80,000 and ` 1,40,000 are effected in respect of
different raw materials on two different dates
(i) In the hands of Mr. B
Even if cash payment of ` 1,80,000 and ` 1,40,000 are made by Mr. B on two
different dates for different raw materials, disallowance under section 40A(3)
would be attracted, since the payment in cash in a day to Mr. S exceeds
` 10,000.
(ii) In the hands of Mr. S
If S receives cash of ` 1,80,000 and ` 1,40,000 on two different dates, for
purchase of different raw materials, there would be no violation of section
269ST since receipt on a day is less than ` 2 lakh and the receipts are not in
respect of the same transaction but for purchase of different raw materials.
Hence, provision of section 271DA shall not be attracted.

(b) Under section 80-IAC, where the gross total income of an eligible start-up includes any
profits and gains derived from eligible business, a deduction of 100% of the profits and
gains derived from such business would be available for any 3 consecutive assessment
years out of 7 consecutive assessment years, beginning from the previous year in which
eligible start-up is incorporated.
Under section 54GB, the capital gains arising to an individual from transfer of his long-
term capital asset, being a residential house, would be exempt if invests the net
consideration in a company which is an eligible start-up carrying on eligible business
under section 80-IAC.
In this case, the business of manufacture of a solar powered car falls within the meaning
of eligible business, since it is driven by technology.
In order to avail the benefit of deduction under section 54GB, Mr. Sarthak must invest the
net consideration of ` 3 crores on transfer of long-term capital asset, being his residential
house in Surat, in an eligible start up, by setting up a new company before 1.4.2019 and
subscribing to the equity shares of the company.
The start-up company formed to carry on the business of manufacture of solar powered
car would be an eligible start-up which is technology driven, if it obtains a certificate of
eligible business from IMBC and its turnover does not exceed ` 25 crores in any of the
previous years upto P.Y. 2020-21.
Mr. Sarthak should subscribe to more than 50% of the share capital of the company on or
before the due date of filing of return of income under section 139(1) and the company
should purchase new plant and machinery within one year from the date of subscription
in equity shares by him.
If these conditions are fulfilled, the long-term capital gains of ` 2,30,00,000
[` 3,00,00,000 – ` 70,00,000] arising to Mr. Sarthak would not be chargeable to tax,
since the entire net consideration of ` 3 crores has been utilised to subscribe to the
shares of a company, being an eligible start up.
Furthermore, in any three consecutive assessment years out of seven consecutive
assessment years, beginning from the previous year in which eligible start-up is
incorporated, the company would be eligible to claim deduction of 100% of the profits and
gains of business.
If the balance ` 2 crores is funded through bank borrowings, the interest payable would
qualify for deduction under section 36 while computing the business income of the
company, which would be beneficial in those years in which the company has not availed
100% deduction under section 80-IAC.
On the other hand, if ` 2 crores is funded through subscription of shares by Miss Juhi,
who would be a co-promoter, there would be sharing of both the risks and rewards with
Miss Juhi. Since her shareholding would be only 40%, this arrangement will also not
affect Mr. Sarthak's claim for deduction under section 54GB.

(c) Under section 90(2), where the Central Government has entered into an agreement for
avoidance of double taxation with the Government of any country outside India or
specified territory outside India, as the case may be, then, in relation to the assessee to
whom such agreement applies, the provisions of the Income-tax Act, 1961 shall apply to
the extent they are more beneficial to the assessee.
Thus, in view of paragraph 2 of the Article 24 (Non-discrimination of the Double Taxation
Avoidance Agreement (DTAA), it appears that the PE of T Inc. a non-resident entity,
incorporated in Mauritius, is liable to tax in India at the rate applicable to domestic
company (30%), which is lower than the rate of tax applicable to a foreign company
(40%).
However, Explanation 1 to section 90 clarifies that the charge of tax in respect of a
foreign company at a rate higher than the rate at which a domestic company is
chargeable, shall not be regarded as less favourable charge or levy of tax in respect of
such foreign company.
Therefore, in view of this Explanation, the action of the Assessing Officer in levying
tax@40% on the PE of T Inc. a non-resident entity, incorporated in Mauritius is in
accordance with law.
(d) The CBDT had, vide Circular No.5/2004 dated 28.9.2004, clarified that the non-resident
entity or the foreign company will be liable to tax in India only if the IT enabled BPO unit
in India constitutes its Permanent Establishment.
In the present case, since Alpha Inc. has an IT enabled Business Process Outsourcing
unit in India (BPO) which provides certain outsourcing services to a resident Indian entity,
such BPO would be considered as PE of Alpha Inc., as it carries on business in India
through the BPO Unit.
In such a case, the profits of Alpha Inc., attributable to the business activities carried out
in India by the Permanent Establishment would become taxable in India.
Profits are to be attributed to the Permanent Establishment as if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the enterprise of which it is a
Permanent Establishment.
In determining the profits of a Permanent Establishment, there shall be allowed as
deduction, expenses which are incurred for the purposes of the Permanent
Establishment including executive and general administrative expenses so incurred,
whether in the State in which the Permanent Establishment is situated or elsewhere.

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Further, in the Elective Papers which are Case Study based, the solutions have been worked out on
the basis of certain assumptions/views derived from the facts given in the question or language used
in the question. It may be possible to work out the solution to the case studies in a different manner
based on the assumptions made or views taken.

PAPER-6B – FINANCIAL SERVICES AND CAPITAL MARKETS
The Question paper comprises three case study questions. The candidates are required
to answer any two case study questions out of three.
Answers in respect of Multiple Choice Questions are to be indicated in capital letters, i.e. A or B or
C or D as the case may be.
Case Study - 1
HRS Ltd. is an asset financing company with a proven track record and has been in the business
of mainly providing finance to purchase trucks, tractors, farm equipment and commercial
vehicles. In the past, it was financing used and new vehicles, but over the recent years, it prefers
to concentrate on new vehicles only. Trucks form the major part of the financing business. There
is a lot of competition in this field, but due to the increasing norms on pollution control and the
decrease in the value of second hand vehicles, the company wants to strategically confine itself
only to new vehicles in the coming years. HRS Limited mainly uses debt finance for its
operations. The debt-equity ratio is in the range of 5:1 on an average. This is in line with the
industry.
The company feels that in addition to truck financing, it can expand its business to finance
smaller vehicles such as passenger cars and tempo travellers. The current expansion plan is
described in the succeeding paragraphs:
There has been a recent entrant in the country wide market by a mobile application provider
who has not only ushered in a revolution in the way cars are being hired by common man, but
also in the manner of documentation of bookings, charges, cancellations and in the ownership
of vehicles for such hire. This operator has also lured many entrepreneurs to successfully earn
money either as drivers or as owners of self-driven cars and be engaged by users of the mobile
app. This app has found immense success in the car segment and is also being considered for
trucks for transport as well as connections from goods trains to factories so that companies can
track the distribution of material and finished goods on an optimal cost.
While discussing with this app provider, HRS Ltd. has discovered a huge potential to finance
vehicles to be demanded by virtue of the app users who may be new entrepreneurs, small
transport companies, etc. Since the individual entrepreneurs may turn out to be risky and
counterproductive for HRS for repossession in the event of failure to repay, the app provider,
who has a wide data base and the recovery mechanism for fares realized, has agreed to be the
co-borrower for the vehicles. Under such an arrangement, the vehicles financed will be
hypothecated to HRS by the entrepreneur who is the principal borrower, fully guaranteed by the
app provider. The app provider will also ensure that the used vehicle is also be handed over to
another entrepreneur attached to him. Thus, only the repossessed vehicles will form the used
vehicle financing segment. Agreements are proposed to be drafted with conditions for
repossession within one month of default and redeployment of such vehicles for earning money,

PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 3
by continuing to be hired. GPS system to be installed in the trucks will provide information to
the delivery destination and the origin of loading so that better inventory management and
production processes are ensured. Thus the whole new business is expected to have a huge
success story, going by the success rate in the passenger car booking segment.
In case the app provider or the app itself fails due to technical faults or user- unfriendly situation
or in the event of fierce competition that this app provider may face, the large number of vehicles
financed would have to be managed by another app provider or alternatives set up in-house.
These could take some time.
In the near future, HRS Ltd. would like to cater to vehicle financing as in the earlier line of
business, but mainly to the customers targeted through the app provider, who would be
entrepreneurs in the categories of first time vehicle owners, repeat vehicle owners, small
transport operators, etc. Thus, HRS is not deviating essentially from its vehicle financing activity.
HRS Ltd. has also accepted deposits from the public in the past through its country wide
branches.
The financial information relating to HRS Ltd. is given in Tables 1 and 2. HRS Ltd. was promoted
by HS Holdings Ltd. which has subscribed to 63% of the equity capital of HRS Ltd. There have
been no negative pointers under any law on the company or its directors or management.
The company is professionally managed and has had qualified persons of repute heading the
respective operations and the middle lever managers are also carefully chosen to be able to
manage the country wide operations and to take decisions quickly and efficiently. The managers
who have retired have done so only due to age reasons and there have been no adverse
publicity in any media about any internal mismanagement or controversy.
The company proposes to issue ` 500 crores worth debentures comprising 50,00,000
debentures of ` 1,000 each face value, for a period of five years, the full value being payable
on application. Most of this issue is to be used for redeeming an earlier issue which is due to
mature during the next twelve months.
The company intends to patronize active trading and hence prefers to have tradability of even
one debenture. There will be no option for the company to redeem earlier than the committed
period nor does it allow the holder to claim redemption earlier than stipulated. Land and buildings
worth ` 950 crores are the intended security for this offer. The debentures are proposed to be
issued and redeemed at par. The rate of interest is fixed at 9.5% p.a. throughout the tenor and
interest will be paid on the 30th day of June and December every year.
The company has fulfilled all the conditions under the various regulations and plans for the issue
to open on 15th January, 2019 and remain open for only the minimum period required under
law.
Choose the correct answers to the following questions: (2 Marks x 10 = 20 Marks)
(1.1) This company is:
(A) required to disclose the debt service coverage ratio to SEBI every half year.

(B) required to disclose the debt service coverage ratio to SEBI every quarter.
(C) not required to disclose to SEBI the debt service coverage ratio except at the time of
issuing the prospectus.
(D) not required to disclose to SEBI at any time any debt service coverage ratio.
(1.2) The following is true:
(A) The debenture trust deed must be signed with the debenture trustee and submitted
to SEBI before every issue of debentures.
(B) The debenture trust deed can be signed with the debenture trustee after the issue of
debentures.
(C) The debenture trust deed has to be signed only for and before the first issue of
debentures. For subsequent different debenture issues the deed need not be signed
if the trustee is unchanged.
(D) The debenture trust deed has to be signed with the debenture trustee and can be
submitted to SEBI after the issue of debentures. There need not be submissions for
every tranche.
(1.3) In case this company does not pay the debenture interest or the redemption amount on
time, then
(A) The debenture trustee pays it on behalf of the company to the debenture holders and
later recovers it from the company.
(B) The debenture trustee does not pay the holders any amount, but the debenture
holders have recourse against the company by way of liquidating the assets based
on which the debentures are secured.
(C) SEBI will wait for two months to lapse and suspend the trading of the debentures and
enforce payment of interest.
(D) It can issue fresh debentures and use the proceeds for paying up the principal and
interest overdue.
(1.4) If the redemption of debentures is drawing near and the company wants to use the funds
it has set aside for redemption for some other purpose,
(A) It can, before the redemption becomes due, arrange for a fresh issue of debentures
of any category and use the proceeds of issue to fund the redemption.
(B) Only the shortfall between the redemption amount and the funds set aside can be
raised by a fresh issue of debentures before the due date of redemption.
(C) Only the same type of debentures can be issued afresh for funding the redemption.
(D) It cannot use the fresh issue proceeds to fund the redemption of debentures.

(1.5) For the purpose of paying interest for the first half year, the date from which the interest i s
to be reckoned is:
(A) from the date of allotment
(B) from the date of application
(C) from the date of deemed allotment
(D) from the record date.
(1.6) A company
(A) can list its debentures only if it has listed its equity shares in the exchange.
(B) can list its debentures even without listing its equity shares.
(C) has to list its debentures if it has listed its equity shares.
(D) is itself a listed entity and hence all its securities are tradeable on the exchange.
(1.7) Some debenture-holders of this company have not updated their addresses and their bank
account numbers. Hence the interest payments sent to their bank accounts have been
returned unpaid. There has not been any response to intimations from the company.
Redemption is due next year. Then, for this year, the company
(A) can use this amount for other purposes such as redemption of other debentures or
to provide for the redemption to these debenture-holders themselves.
(B) can write back this amount from interest expenses.
(C) cannot use this amount for any other purpose, but retain it in unpaid interest account
until redemption is due.
(D) cannot use it for any other purpose but transfer it to Investor Protection Fund, treating
the amount as unclaimed interest.
(1.8) The company had an earlier issue of debentures of ` 500 crores which is due for
redemption in eleven months from now. Those debentures were secured by fixed assets
consisting of land and building then worth ` 750 crores. The value of the land and building
has now risen substantially to ` 950 crores and the company therefore proposes to secure
these debentures also with the same assets. The current issue size is ` 500 crores.
(A) The same assets cannot be used for securing another issue of debentures unless the
earlier issue has been redeemed in full.
(B) The cost of the underlying assets is what has to be considered for security. Hence
once offered as security, it cannot be taken again as security.
(C) The company has to provide for the coverage of the shortfall in the security of ` 50
crores before it can issue.
(D) The company can go ahead and use the same assets for coverage of the next issue
also.

(1.9) The following is true of the debenture issue given in the case study:
(A) The promoters of the company should subscribe to at least 20 per cent of the face
value of the debentures viz. ` 100 crores worth debentures and to have a lock in
period of 3 years.
(B) The promoters should subscribe to the market value of the debentures to the extent
of 20 per cent of the issue value and then retain it for at least 3 years.
(C) The promoters should not subscribe to the debenture issue at all.
(D) The promoters are not required to subscribe any value, but they may do so to the
extent they wish to invest or for underwriting purpose and they have no lock in
period, their subscription not being compulsory.
(1.10)The company had NSE as the designated stock exchange in the earlier issue of the ` 500
crore debentures due for redemption in eleven months from now. BSE listing was also
done. Then, the following is true:
(A) NSE has to be the designated stock exchange for this issue also. BSE listing has to
be done as earlier.
(B) There can be listing on any other exchange also, but NSE has to be the designated
exchange.
(C) Any recognized stock exchange can be designated for this issue. Further listing of
this issue in any other exchange is optional.
(D) NSE has to be the designated exchange. Listing on BSE or other stock exchange can
be optional.
(1.11) You are an analyst at a credit rating agency and are part of the team involved in the rating
process of the company. Prepare a report to your director indicating:
(a) assessment of risks;
(b) rating that you would consider appropriate along with a short note on CAMEL criteria
considered. (5 marks)
(1.12) Assuming that you are the company's senior official liaising with the investment banker
to get the prospectus successfully through, how would you present the draft prospectus to
SEBI for approval in accordance with the regulations prevailing as on date?
(You are required to present only the following portions of the prospectus in your answer):
(a) Introduction of the issue (the portion in capital letters forming the first paragraph
relating to the issue)
(b) Credit Rating, assuming independent of your answer to (1.1) that a good rating has
been given by CRISIL and India Research and Ratings
(c) Minimum Subscription

(d) General Risks

(e) Issue Details
(f) Listing
(g) Objects of the Issue and Interim use of the funds
(h) Debt Equity Ratio (pre and post issue)
(i) Regulatory authorities for the Company. (15 marks)
(1.13) Write a short note on the potential benefits on the proposed new unit of business.
(5 marks)
Table ·1
Statement of Profit and
(Figs. in ` lacs)
Loss
Particulars For the year ended March 31,
2018 2017 2016 2015 2014
A Revenue
(i) Revenue from Operations 122000 108000 102800 86300 78800
(ii) Other Income 750 20 30 70 80
Total Revenue 122750 108020 102830 86370 78880
B Expenses
(i) Finance Costs 53700 51800 50500 43800 39000
Depreciation and
(ii) 360 330 360 400 290
amortisation
(iii) Provision and Write offs 31200 24400 21000 12900 11400
(iv) Employee Costs 7150 5500 5800 4300 4000
(v) Other Expenses 7000 6500 7200 6530 5410
Total Expenses 99410 88530 84860 67930 60100
C Profits before tax (A - B) 23340 19490 17970 18440 18780
D Tax Expense after
800 6600 6000 6050 5600
adjustment for deferred tax
E Profit after tax from
22540 12890 11970 12390 13180
continuing operations (C - D)
F No. of o/s shares (lakhs) 327
G EPS -Basic 68.93 39.42 36.61 37.89 40.31
H EPS - Diluted 68.93 39.42 36.61 37.89 40.31

Nominal Value of equity

10 10 10 10 10
share (` /share)
Table-2
State of Assets and Liabilities (Figures ` Lacs)
Particulars For the year ended March 31,

Liabilities 2018 2017 2016 2015 2014
A Shareholders' Funds
Share Capital 3270 3270 3270 3270 3270
Reserves and Surplus 120610 110000 99300 90000 80500
Total Shareholders' Funds 123880 113270 102570 93270 83770
B Non-Current Liabilities
Long Term Borrowings 400000 335000 300000 290000 220000
Other Long Term Liabilities 16000 14000 12000 11000 9000
Long Term Provisions 55000 38000 25000 16000 12500
Total non-current liabilities 471000 387000 337000 317000 241500
C Current Liabilities
Short term borrowings 75000 50000 33000 26000 29000
Total Outstanding dues of
creditors other than micro 2200 1340 1180 750 850
enterprises
Other Current Liabilities 200000 180000 195000 120000 115000
Short term provisions 4000 3900 5000 4100 2900
Total Current Liabilities 281200 235240 234180 150850 147750
D Total Equity and Liabilities
876080 735510 673750 561120 473020
(A+B+C)
Assets
E Fixed assets
Property, Plant and Equipment 1100 8200 9900 9850 9890
Intangible Assets 20 18 14 12 16
Non-Current investments 15000 14500 12500 11500 7000
Deferred Tax Assets (Net) 4300 3600 3000 2500 2400

Long Term Loans and

580000 475000 440000 350000 275000
Advances
Total Non-Current Assets 600420 501318 465414 373862 294306
F Current Assets
Current Investments 105 520 1040 22130 20350
Cash and Bank Balances 36500 44400 23600 47500 70800
Short term loans and
238430 188687 183186 117003 86764
advances
Other Current Assets 625 585 510 625 800
Total current Assets 275660 234192 208336 187258 178714
Total Assets (E+F) 876080 735510 673550 561120 473020
Answer to Case Study 1
(1.1) (D)
(1.2) (D)
(1.3) (B)
(1.4) (A)
(1.5) (C)
(1.6) (B)
(1.7) (C)
(1.8) (D) OR (A)
(1.9) (C)
(1.10) (C)
(1.11) Report to the Director, CRISIL
(a) Assessment of Risks
The various types of risks of HRS Ltd. and their assessments have been briefly discussed
in the following paragraphs:
(i) Business Risk –The Company is banking its hopes on clients to be generated by a
single app provider. Though the provider of the app has been successful in the small
car segment, it is not certain whether it will succeed with truck operators since most
of them may be illiterate and unable to use smart phones necessary for the App.
(ii) Strategic Risk – This is high in this business development. Many drivers delegate
their duties to someone else. If they are going to be tracked by GPS, they may not
switch on their phones and take refuge under the pretext of non-connectivity. They

may have to skip rests and may be given stringent targets of travel, which they may
try to achieve by driving without sleeping which may lead to accidents. Driver’s and
the small transport operators’ electronic and mobile skills may not runon par with App
provider and chances of a huge flop may be highlighted.
(iii) Solvency, Liquidity and Default Risk – Although the Debt Equity ratio of HRS Ltd.
is in accordance with industry line i.e. 5 :1, it is still quite high. The company has
further proposed an issue of ` 500 crore which will be utilized for redeeming an earlier
issue of debentures. This may lead to default risk if the company fails to pay the
interest and the principal amount.
However, due to concessional rates being prevalent in the micro finance segment
from the SME companies and this market being tapped from such consumers, there
is likely to be stiff competition and transfers of loans to the micro segment.
Further, for the year ended 31st March, 2018, current liabilities of the company are
more than its current assets. It means that the company has got a tight liquidity
position. This is a red flag which the company has to manage wisely.
(iv) Operating Risk- The Company has installed GPS System for providing information
to delivery destination and origin of loading for better inventory management and
production process. This will reduce the company’s operating risk to a large extent.
Moreover, the company has made an arrangement for a backup under which if the
existing app provider fails, the large number of vehicles financed would be managed
by another app provider. Thus, the company has managed it’s operating risk well.
(v) Legal Risk–It has been mentioned in the case study itself that there have been no
negative pointers under any law on the company or its directors or management. So,
it seems that the company has managed its legal risk well.
(vi) Compliance Risk–The Company has fulfilled all the conditions under the various
regulations for the proposed debenture issue which is an indication that the company
has managed it’s compliance risk well.
Moreover, with Traffic Rules by drivers, GST rules for transit of goods by the owners
of goods in transit and the truck owners (borrowers), HRS’s control on the location of
assets hypothecated to it and traceability of borrowers and consequent disclosure
compliances by HRS itself are at stake if things do not operate smoothly. There may
be also be increase in compliance costs by ensuring that insurance of not only the
assets but also third party insurances are in place and the progress of claims and
detention of vehicles resulting in non-utilization may have an adverse effect in
repayment of the borrowings.
(vii) Reputation Risk –The Company has also managed it’s reputation risk well as there
have been no adverse publicity in any media about any internal mismanagement or
controversy.

(b) Note on appropriate rating and consideration of CAMEL criteria

The most appropriate rating would be Moderate Safety.
Consideration of CAMEL criteria
(i) Capital – For the year ended 31 st March, 2018, the Company’s reserves and surplus is
` 120610 lakhs as compared to its share capital which is ` 3270 lakh. The company
has a proposed borrowing i.e. debenture issue of ` 500 crore. However, company’s
debt-equity ratio of 5:1 is already highinspite of the fact it is in accordance with
industry standards. And, the proposed debenture may affect its solvency position.
(ii) Assets – The proposed issue will not lead to any major asset expansion as most of
the amount raised will be utilized for redemption of old debt. And, company’s fixed
assets comprising of property, plant and equipment showed a sudden decline from
the year 2017 to 2018. However, intangible assets have increased. Further,
company’s non-current investments are manifesting a steep increase due to upsurge
in company financing of vehicles.
Moreover, the company is accepting deposits from the public and hence is an NBFC
PD and is also a systematically important NBFC with asset base crossing ` 500 crore.
It has to comply with the RBI’s capital adequacy ratios and other similar to banking
requirements of returns and compliances, thereby monitored on par with a bank.
(iii) Management – The company is professionally managed and has had qualified
persons of repute heading the respective operations and the middle level managers
are also carefully chosen to be able to manage the country wide operations and to
take decisions quickly and efficiently.
(iv) Earnings – Company’s revenue has been steadily increasing which is giving an
indication that it will be able to service its debts properly. However, it also depends
upon the company liquidity position.
(v) Liquidity – The Company’s liquidity position is tight. This is manifested in company’s
declining cash position especially its current assets which is reducing steeply in
comparison to its current liabilities.
Thus, I would recommend an investment grade rating to this security as Moderate Safety and
put the company on watch for any possible revision since the new line of financing can either
be very successful or a total failure.
(1.12) INTRODUCTION:
PUBLIC ISSUE BY HRS LIMITED “COMPANY OR ISSUER OF 5,00,000 9.5% SECURED
REDEEMABLE NON-CONVERTIBLE DEBENTURE OF FACE VALUE OF RS. 1000 EACH AT
PAR (“NCD”), FOR AN AMOUNT AGGREGATING UP TO RS.500 CRORES. THIS ISSUE IS
BEING MADE PURSUANT TO THE PROVISIONS OF SECURITIES AND EXCHANGE BOARD
OF INDIA (ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008 AS AMENDED

(THE “DEBT REGULATIONS”). THE COMPANIES ACT 2013 AND THE RULES MADE
THEREUNDER AS AMENDED AND TO THE EXTENT NOTIFIED.
CREDIT RATING
The NCDs proposed to be issued under this Issue have been rated ‘CRISIL AA+/Stable’ by
CRISIL for an amount of up to ₹ 500 Crores vide its letter dated September 8 th 2018 and ‘IND
AA+: Outlook Stable’ by India Ratings and Research for an amount of up to
₹ 500 crores vide its letter dated June 8, 2018. The rating of the NCDs by CRISIL and Ind ia
Rating and Research indicate that instruments with this rating are considered to have high
degree of safety regarding the timely servicing of financial obligations and carry very low credit
risk. The ratings provided by CRISIL and/or India Ratings and Research may be suspended,
withdrawn or revised at any time by the assigning rating agency and should be evaluated
independently of any other rating. These ratings are not a recommendation to buy, sell or hold
securities and investors should take their own decision. Please refer to Annexure A for the
rationale for the above ratings.
LISTING
The NCDs offered through this Draft Prospectus are proposed to be listed on the BSE Limited
(“BSE”) and the National Stock Exchange of India Limited (“NSE”). Our company has obtained
an ‘in-principle’ approval for the Issue from the BSE vide their letter dated… and from the NSE
vide their letter dated…. For the purposes of the Issue, BSE shall be the Designated Stock
Exchange.
An application has been made to the NSE and the BSE for permission to deal in and for an
official quotation of our NCDs. BSE has been appointed as the Designated Stock Exchange. If
permissions to deal in and for an official quotation of our NCDs are not granted by NSE and/or
BSE, our Company will forthwith repay, without interest, all moneys received from the Applicants
in pursuance of their Draft Prospectus.
Our Company shall ensure that all steps for the completion of the necessary formalities for
listing and commencement of trading at all the Stock Exchanges mentioned above are taken
within 12 Working days from the date of closure of the relevant Issue.
For the avoidance of doubt, it is hereby clarified that in the event of non-subscriptions to any
one or more of the Series, such NCDs with Series shall not be listed.
MINIMUM SUBSCRIPTION
In terms of the Debt Regulations for an issuer undertaking a public issue for debt securities the
minimum subscription for a public issue of debt securities shall be 75% of the Issue. If our
Company does not receive the minimum subscription of 75% of the Issue (as specified in the
relevant) as specified in Prospects within the prescribed time lines under Companies Act and
any rules thereto, the entire subscription amount shall be refunded to the Applicants within 12
Days from the date of closure of the Issue. In the event there is a delay by the issuer in making
the aforesaid refund, our Company will pay interest at the rate of 15% per annum for the delayed
period.

Under Section 39(3) of the Companies Act, 2013 and read with Rule 11(2) of the Companies
(Prospectus and Allotment of Securities) Rule 2014 if the stated minimum subscription amount
is not received within the specified period, the application money received is to be credited only
to the bank account from which the subscription was remitted. To the extent possible, where the
required information for making such refunds is available with our Company and/or Registrar,
refunds will be made to the account prescribed. However, where our Company and/or Registrar
does not have the necessary information for making such refunds, our Company and/or
Registrar will follow the guidelines prescribed by SEBI in this regard including its circular
(bearing CIR/IMD/DF-1/20/2012) dated July 27, 2012.
GENERAL RISKS
For taking an investment decision, investors must rely on their own examination of the issuer
and the issue, including the risk involved. Specific attention of the investors is invited to the
portion of the prospectus titled “Risk Factors” and “Material Developments”. This draft
prospectus has not been and will not be approved by any regulatory authority in India, including
the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the
Registrar of Companies or any stock exchange in India.
Issuer Details:
Issuer HRS Ltd
Type of Instrument Secured Redeemable Non-Convertible
Debentures
Mode of Issue Public Issue
Insurance Mode Physical and Demat
Call Option Nil
Put Option Nil
Coupon Rate 9.5%
Default Interest Rate Delay in allotment, refunds, listing dematerialised
credit, execution of debenture trust deed, payment
of interest, redemption of principal amount beyond
the time limits prescribed under applicable
statutory and/ or regulatory requirements at such
rates as stipulated/ prescribed under applicable
laws.
Tenor 5 years
Redemption Date/Maturity Date 15th January 2024
Face Value ` 1000 per NCD
Issue Price ` 1000 per NCD
Redemption Premium/ Discount Nil: Redemption is at par
Market Lot One NCD

Pay-in-date Application Date. The entire issue price is payable

on application
Trading Mode Dematerialised form only
Issue Opening Date 15th January 2019
Issue Closing Date 17th January 2019
Record Date Fifteen days prior to the interest payment date
and redemption date
Interest Payment Dates 30th June and 30th December every year
Securities and Asset Cover The principal amount of the NCDs to be issued
along with the interest due on the outstanding shall
be secured by way of exclusive charge on specific
immovable property. Our company will create
appropriate security (by way of mortgage) in favour
of the Debenture Trustee of the NCD holders on
the assets adequate to ensure 100% asset cover
for the NCDs (along with interest due thereon).
OBJECTS OF THE ISSUE

75% of the net proceeds: Not less than 75% is to be used to fund the redemption of debentures
issued earlier. The debentures are due for redemption in 12 months’ time. Until then the
company reserves the right to keep the amounts of the issue in Government securities to earn
income.
25% of the net proceeds: Not more than 25% for any other general corporate purpose.
REGULATORS OF THE COMPANY
The company is a Non-Banking Financial Company accepting deposits as is evident from its
activities of asset financing and acceptance of deposits. Hence it is governed by RBI regarding
capital adequacy norms (of 15%) and periodic reporting. Since its net worth is more than 500
crores, it is a Systemically Important NBFC and classified as an AFC (Asset Financ ing
Company).
Being a company, it is also regulated by the Companies Act 2013 for operational and procedural
monitoring. Having its shares and debenture listed, it is also subject to SEBI Regulations
regarding issue compliances and listing obligations.
DEBT EQUITY RATIO
Pre – Issue Post Issue
Total Debt 471000 521000
Equity Shareholder’s Fund 123880 123880
Debt/Equity Ratio 3.80 4.20

(1.13) Potential benefits of the proposed new unit of business are as follows:
(i) Under the new proposal, vehicles financed will be hypothecated to HRS by the
entrepreneur who is the principal borrower, fully guaranteed by the app provider. So,
if the principle borrower fails to make the payment to HRS Ltd., the app provider will
step in and make good the loss.
(ii) The used vehicle will also be handed over to another entrepreneur attached to him.
Thus, only the repossessed vehicles will form the used vehicle financing segment.
(iii) Agreements are proposed to be drafted with conditions for repossession within one
month of default and redeployment of such vehicles for earning money, by continuing
to be hired.
(iv) The Company has installed GPS System for providing information to delivery
destination and origin of loading for better inventory management and production
process.
(v) The company has made an arrangement for a backup under which if the existing app
provider fails, the large number of vehicles financed would be managed by another
app provider.
Case Study - 2
The expansion project of BON BON Limited which is under finalization is expected to consist of:
` Lakhs
Capital assets 200
Working capital 300
Total 500
The initial scheme of raising project finance is:
11% Long Term Debt 135
12% Bank borrowings for working capital. 225
Internal accruals 140
Total 500
Extracts from the Balance Sheet of the Company as at the end of the last financial year are
given in Annexure 1.
The Company's risk-free rate is 9%, market return 14% and relevant company assets beta is
estimated at 1.5.

The Company has approached you, a financial and management consultant, to review the above
numbers. They have also given you additional information about the project which is given in
the Annexure 2.
Upon an initial study of the given information, the first thought that strikes you is that Adjusted
Present Value (APV) should be calculated to test whether the project is worth undertaking; also,
that the plan of financing should be re-cast.
Choose the correct answers to the following questions: (2 Marks x 10 = 20 Marks)
(2.1) Gross working capital means
(A) total value of inventories and securities
(B) cash and items convertible into cash at short notice
(C) total current assets
(D) total value of fixed and current assets
(2.2) Negative working capital means
(A) when current assets are less than current liabilities
(B) the outstanding short term loans of an organisation
(C) bank overdraft taken by an institution
(D) the amount of current liabilities
(2.3) Adjusted present value method is used to
(A) determine the validity of a project
(B) decide the present value of a business
(C) measure the value of the inventories
(D) determine the current value of receivables.
(2.4) Determine which of the following is not part of bank financing:
(A) term loans
(B) packing credit
(C) overdraft
(D) commercial paper
(2.5) Bill discounting deals with
(A) accounts receivables
(B) inventories
(C) fixed assets
(D) goodwill

(2.6) Which one of the following does not fall within the scope of credit rating?
(A) Opinion in regard to a debt instrument
(B) Opinion based on an evaluation of business risks
(C) Opinion on the probability of meeting the interest and principal obligations of a
business
(D) Opinion on a holding company, its subsidiaries and associates
(2.7) Which of the following is incorrect as regards the functioning of an investment banker?
(A) they help in raising capital for the client

(B) they take deposits from their customers
(C) they act as an intermediary for their customers in relation to their dealings
(D) they earn an underwriting commission as part of business.
(2.8) In connection with a public issue of shares, merchant bankers are responsible to follow the
regulations prescribed by
(A) RBI
(B) SEBI
(C) IRDAI
(D) Insolvency Board of India
(2.9) Which one of the following does not form part of treasury management?
(A) cash management
(B) management of interest, currency and commodity risks
(C) inventory control
(D) liquidity planning and control
(2.10) Factoring concerns itself with the management of
(A) fixed assets
(B) accounts receivable
(C) stock in trade
(D) accounts payable
In the light of the information supplied above, answer the following:
(2.11) What is Adjusted Present Value (APV) in the context of project feasibility? Calculate the
APV for the above project and state your view on acceptability. (4 marks)

(2.12) Is the debt option as proposed viable for the company? Would you suggest any other
alternative? (4 marks)
(2.13) State what changes you would like to recommend to the project financing plans, briefly
explaining each change. (4 marks)
(2.14) Rewrite and show the project financials after taking into account the changes you
recommend. (18 marks)
ANNEXURE 1
BON BON LIMITED
BALANCE SHEET SUMMARY- ACTUALS FOR THE LAST TWO YEARS
Year ended 31st March (In Rs Lakhs)
2018 2017
Share Capital :
Shares of ` 10 each 50 50
Reserves 200 140
11% Long Term Debt 250 300
12% Bank borrowings 120 125
Total 620 615
Fixed assets 140 150
Net Current assets 480 465
Total 620 615
ANNEXURE 2
PROJECT CASH FLOWS & OTHER DETAILS
Amounts in ` Lakhs
Sales:
Domestic 540 780 1320 1500 1350
Exports 360 520 880 1000 900
Total 900 1300 2200 2500 2250
Profit before depreciation 180 350 400 500 450
Less:
Depreciation 38 38 38 38 38
Interest:
LT Debt 8 14 12 9 6

Short term debt 7 27 27 27 27

Profit before Tax 127 271 323 426 379
Less: tax 44 95 113 149 133
Profit after Tax 83 176 210 277 246
Cash in-flow:
PAT + Dep+ Int 136 255 287 351 317
Terminal in flow:
Capital assets 10
Working capital assets 300
Total 136 255 287 351 627
PROJECT- INTEREST WORKINGS
Amounts in ` Lakhs
LT Debt:
Amount outstanding at the start of the - 135.00 121.50 94.50 67.50
year
Additions during the year 135.00
Repayment during the year - 13.50 27.00 27.00 27.00
Amount outstanding end of the year 135.00 121.50 94.50 67.50 40.50
Interest at 11% on average 7.43 14.11 11.88 8.91 5.94
outstanding
Rounded off 8.00 14.00 12.00 9.00 6.00
WC borrowing:
Amount outstanding at the start of the 112.50 225.00 225.00 225.00 225.00
year
Interest at 12% 6.75 27.00 27.00 27.00 27.00
Answer
(2.1) (C)
(2.2) (A)
(2.3) (A)
(2.4) (D)
(2.5) (A)

(2.6) (D)
(2.7) (B)
(2.8) (B)
(2.9) (C)
(2.10) (B)
(2.11) What is APV & Its Use
If in an exercise of project viability analysis, a scheme of financing its assumed and the cash
flows are then calculated, it would imply that the investment decision and the financing decision
are integrated. Such a course of analysis could lead to justification of an otherwise risky project
because of choice of finance.
It would be ideal to assess financing decision and investment decision separately. It is here that
the APV technique comes in handy. The APV helps to look at justification of the project based
on a cut-off rate that is not influenced by debt and tax shield; it also helps to identify and isolate
the impact of debt financing.
CALCULATION OF ADJSUTED PRESENT VALUE (APV)
Working
1. Cost of Equity using CAPM
Re = Rf + β (Rm – Rf)
= 9% + 1.5% + (14% - 9%)
= 16.5%
APV = Base NPV + PV of Tax Benefit of Debt
2. Calculation of Base NPV
Cash Inflow from the project
Profit before Depreciation 180 350 400 500 450
Less: Depreciation 38 38 38 38 38
142 312 362 462 412
Less: Tax 50 109 127 162 144
92 203 235 300 268
Add: Depreciation 38 38 38 38 38
Cash Flow 130 241 273 338 306
PV @ 16.5% 0.858 0.737 0.632 0.543 0.466
PV 112 178 173 184 143

Total PV of Inflows = 790

PV of Cash Outflows = 500
Base NPV = 290
3. Present Value of Impact of Financing
Interest:
LT Debt 8 14 12 9 6
Short Term Debt 7 27 27 27 27
15 41 39 36 33
Tax Saving @ 35% 5.25 14.35 13.65 12.6 11.55
PV Factor @ 9% 0.917 0.842 0.772 0.708 0.650
PV 4.81 12.08 10.54 8.92 7.51
Total PV of Tax saving from debt = 43.86
Now, APV = Base NPV + PV of Tax Benefit from Debt
= 290 + 43.86 = 333.86 lakhs
Alternatively, above PV of Tax Saving can also be computed at Cost of Debt which is as follows:
135 225
x 0.11+ x 0.12
135 + 225 135 + 225
135 225
= x 0.11+ x 0.12
360 360
= 0.04125 + 0.075 = 0.11625 or say 11.63%
Interest:
LT Debt 8 14 12 9 6
Short Term Debt 7 27 27 27 27
15 41 39 36 33
Tax Saving @ 35% 5.25 14.35 13.65 12.6 11.55
PV Factor @ 11.63% 0.896 0.802 0.719 0.644 0.577
PV 4.70 11.51 9.81 8.11 6.66
Total PV of Tax saving from debt = 40.79

Thus, APV = 290 + 40.79 = ` 330.79 lakhs.

As the APV of the expansion project of BON BON Limited is positive, the project can be
accepted.
(2.12) Viability of the proposed debt option:
The present LT debt/equity ratio of the company is

250/ (50 +200), that is, 1.
It will be good to maintain this ratio.
With the proposed financing option the ratio will change as:
(250 + 135) / (50 + 200 + 140) = 0.99
Hence the proposed LT debt option is quite viable and need not be changed.
(2.13) Suggested Modifications:
(i) In place of the previous proposal of financing the expansion project by issuing 11%
Long Term Debt of ` 135 lakhs, the project is now proposed to be financed by the
issuance of Equity Share Capital of ` 135 lakhs.
The reason is simple. Previous proposal leads to increasing the debt equity ratio of
the company which will unnecessarily enhance the interest burden of the company.
(ii) It would be prudent to continue with the previous proposal of meeting the working
capital needs of the company through the 12% Bank borrowing.
The reason is that it would not be wise or feasible to finance the working capital
requirements of the company with equity share capital which is a long term financing
option.
(2.14) After taking into account the recommended changes as above in 2.13, the project
financials are as follows:
PROJECT CASH FLOWS AND OTHER DETAILS
Amounts in ` Lakhs
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Sales:
Domestic 540 780 1320 1500 1350
Exports 360 520 880 1000 900
Total 900 1300 2200 2500 2250
Profit before depreciation 180 350 400 500 450
Less:
Depreciation 38 38 38 38 38
Interest on short term debt 7 27 27 27 27

Profit before Tax 135 285 335 435 385

Less: Tax @ 35% 47 100 117 152 135
Profit after Tax 88 185 218 283 250
Cash in-flow:
PAT + Dep + Interest 133 250 283 348 315
Terminal in-flow:
Capital assets 10
Working capital assets 300
Total 133 250 283 348 625
Cash Inflow from the project*
Profit before Depreciation 180 350 400 500 450
Less: Depreciation 38 38 38 38 38
142 312 362 462 412
Less: Tax 50 109 127 162 144
92 203 235 300 268
Add: Depreciation 38 38 38 38 38
Cash Flow 130 241 273 338 306
PV @ 16.5% 0.858 0.737 0.632 0.543 0.466
PV 112 178 173 184 143
Total PV of Inflows = 790
PV of Cash Outflows = 500
Base NPV = 290
* In this case, Net Present Value is same as calculated under 2.11 because the
interest factor has not been considered here as it an evaluation of expansion project.
PROJECT – INTEREST WORKINGS

Amounts in ` Lakhs
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
WC Borrowings:
Amount outstanding at the start of 112.5 225 225 225 225
the year
Interest at 12% 6.75 27 27 27 27

Case Study - 3
The details relating to repo/reverse repo transactions are given in Tables 1 and 2.
Table 1:
Details 7.5% 2025 G- GoI 91 day T 9% Corporate
Sec Bill maturing on Bond maturing
31-01-2019 on 8th July, 2020
I II III
Market value per security on 96.9000 98.6000 99.5000
15/11/2018 (` )
Market value per security on 96.9485 98.6493 99.5498
reversal date (` )
Table 2:
Common Parameters
Repo Period 7 days
Repo Commencement Date 16th November, 2018
Coupon Dates 8th January and 8th July every year
Face Value of security ` 100
Day Count Convention 30/360 for coupons and actual/365 for repos
Repo Interest Rate 6.5%
Value of securities To be calculated to four decimal places
Number of securities To be rounded off to the next higher integer
Assume all entities in this case study are Indian entities.
Answer the following questions: (2 Marks x 10 = 20 Marks)
(3.1) The following is true:
(A) Repos can be traded on a recognized stock exchange.
(B) Repos are solely privately traded transactions between a borrower and a lender and
are reversed between the parties at a pre-determined date.
(C) Repos are entered into between two parties, one of whom should be a banking entity.
(D) Repos must have RBI as one entity.
(3.2) In India, repos shall be undertaken for
(A) a minimum period of three days
(B) a minimum period of one day

(C) a maximum period of 270 days

(D) for a maximum period of one month, subject to renewal every month, upto 270 days.
(3.3) If 'E' is an entity that wishes to participate in repo/reverse repo transaction under LAF
(Liquidity Adjustment Facility); then the following is true:
(A) Securities under Columns I, II and III are eligible, provided Column III is listed.
(B) Securities only under Columns I and Il are eligible.
(C) Entity 'E' itself is not eligible if it is not a banking company.
(D) 'E' cannot borrow funds under LAF even if it is a banking company, irrespective of the
securities' eligibility.
(3.4) The following is not true: (consider 'E' to be an eligible entity)
(A) Any regulated entity can participate in a repo transaction.
(B) Exim Bank can buy or sell repos from/to entity 'E'.
(C) An unlisted company can never participate in a repo transaction.
(D) Any entity approved by RBI can participate in a repo transaction.
(3.5) Suppose entity 'E' is an eligible entity and wants to enter into a repo transaction with
Bank 'B' for market value of T bills and CDs of ` 500 crores and ` 200 crores respectively, then,
the amount of borrowing can be (in ` Crores)
(A) 98% of 500 + 98% of 200
(B) 500 + 98% of 200
(C) 98% of 500 + 200
(D) 500 + 200
(3.6) The following is true of the coupon interest on column I of Table 1 securities assuming
E is the receiver of funds in the first leg of the agreement and 'K' is the other party :
(A) Interest from 8-7-18 to 16-11-18 accrues to 'E'. Interest from 16-11-18 to the date of
reversal accrues to K.
(B) K will receive the interest and it is entitled to retain 7 days' interest and has to pay 'E'
the balance interest on receiving the interest.
(C) K is not entitled to any portion of the interest. On receipt of the coupon interest
amount, it has to hand it over to 'E'.
(D) No interest is handed over by K. The repo repayment is adjusted for interest due to
'E' for the 7 day period.
(3.7) On 16-11-2018, when 'E' sells the securities under repo to K,

(A) E sells at the prevailing market related price (say 'x') and repurchases on reversal
date at the same price (x).
(B) E can sell at x, but repurchase has to be at market related price on repurchase date
(say 'y') and y can be different from x.
(C) Repurchase will have to be at x plus the repo interest for the duration of the first leg.
(D) 'E' can sell at an amount agreed to by the repo agreement, say 'z' which can be
different from 'x' and has to repurchase it at 'z' plus interest for the repo period.
(3.8) Suppose that 'E' had made a bid for a term repo of 14-day tenor under the LAF through
a variable rate auction mechanism, then
(A) 'E' can be any entity that accepts deposits.
(B) 'E' can be any entity, provided it is regulated by SEBI
(C) E has to be a scheduled commercial bank
(D) E can be an NBFC, RRB or a commercial bank, provided RBI regulates it.
(3.9) Assuming that 'E' is an eligible participant in a variable rate term reverse repo of 7 days,
for E to be a successful bidder, it should have bid a rate
(A) below the cut off rate
(B) at or above the prevailing reverse repo rate
(C) at or above the cut off rate
(D) at or above the reverse repo rate.
(3.10) The following is in ascending order:
(A) Bank rate, reverse repo rate, repo rate.
(B) Bank rate, repo rate, reverse repo rate
(C) Repo rate, reverse repo rate, bank rate
(D) Reverse repo rate, repo rate, bank rate
Answer the following questions:
(3.11) Suppose entity 'E' wants to raise funds based on the above securities (in table 1), under
a ready forward agreement by selling and simultaneously agreeing to repurchase after 7 days
and that 'E' wants your computations on a per security basis for each of the given securities,
show the following values: consideration for the first leg of the transaction and the consideration
for the second leg showing clearly in your tabulation, who pays what amounts to whom on which
dates under the repo deal based on a per security basis. Assume that 'E' has adequate number
of each type of security for the purpose. Consider 'K' as the other party. (10 marks)

(3.12) Discuss the impact of the above transaction on the coupon interests on the securities on
the due dates and in the intervening period of the repo/reverse repo. What happens if the coupon
date falls in the repo period? (4 marks)
(3.13) Which entity owns the securities and for what period? Discuss from the start date to
reversal date, assuming that 'E' is one party and the other is 'K'. (2 marks)
(3.14) How many securities will it have to offer in order to raise an amount of ` 5 crores? You
may assume a haircut of 2% for the corporate bonds only. (4 marks)
(3.15) Suppose 'E' is an entity having to obey the prescribed capital adequacy norms of RBI,
discuss the implication of the above transaction in terms of the CRR (Cash Reserve Ratio) and
SLR (Statutory Liquidity Ratio) requirements. (4 marks)
(3.16) In case 'E' is a company and under conditions-as per (1) above, if there is another
company 'B' who is willing to lend the funds to 'E' on a longer repo period, say 6 months and at
a lower rate of 5.75%, will there be any violation of any regulation if 'E' agrees to such an offer?
Discuss. (4 marks)
(3.17) Suppose that RBI conducts a seven day term repo auction and 'E' participates in the term
repo auction, then, will 'E' have more funds or lesser funds if it is successful in the auction ?
Explain briefly. (2 marks)
Answer
(3.1) (A)
(3.2) (A)
(3.3) (C)
(3.4) (C)
(3.5) (B)
(3.6) (B) or (C)
(3.7) (D)
(3.8) (C)
(3.9) (A) or (C)
(3.10) (D)

(3.11)
Detail for Entity “E
“Securities that are available 7.5% 2025 G Gol 91 day Treasury 8% Corporate Bonds
for offer as collateral Sec Bill maturing on 31 st maturing on 8th July,
Jan 2019 2020
Face Value per security 100 100 100
Market value of security on 96.9000 98.6000 99.5000
15/11/18
Repo period (days) 7 7 7
Repo commencement date 16 November
th
2018
Repo interest rate 6.50% 6.50% 6.50%
Haircut 0.02
Market value of security on 96.94845 98.6493 99.5498
reversal date
No of securities for a 516000 507100 502510
borrowing of ` 5 crores, round
off to the next higher integer
Compute the following per
security:
Broken period 132 0 132
Broken period interest (first 2.75000 0.0000 3.3000
leg) on 16/11/18
Considerations for the first leg 99.6500 98.6000 100.8100
(K will pay E)
Repo interest 0.1242 0.1229 0.1257
Consideration for the second 99.7742 98.7229 100.9357
leg (E will pay K)
Alternative Solution
7.5% 2025 G-Sec
(i) Dirty Price = Clean Price + Interest Accrued
= ` 96.9000 + ` 100 x 7.5/100 x 132/365
= 99.6500
(ii) First Leg (Start Proceed)
= Nominal Value x (Dirty Price/100 x 100 – Haircut/100)

= 100 x (99.65/100 x 100 – 0/100)

= ` 99.65
(iii) Second Leg (Repayment of Maturity)
= Start Proceed x (1 + Repo Rate x No. of Days/365)
= ` 99.65 x (1 + 0.065 x 7/365)
= ` 99.7742
GOI 91 day T Bill
(i) Dirty Price = Clean Price + Interest Accrued
Dirty Price = ` 98.6000 + 0 = ` 98.6000

` 98.6000
` 98.6000 x (1 + 0.065 x 7/365)
= ` 98.7229
9% Corporate Bond maturing on 8 th July, 2020
(i) Dirty Price = 99.5000 + 100 x 9/100 x 132/365 = ` 102.80
= ` 102.80 (100 – 2/100)
= ` 100.8100
` 100.8100 x (1+ 0.065 x 7/365)
= ` 100.9357
Table showing values, parties and date of Repo Transactions
First Leg Second Leg Pay Receives Date
` 99.6500 ---- K E 16/11/2018
7.5% 2025 G-Sec
---- ` 99.7742 E K 23/11/2018
` 98.6000 ---- K E 16/11/2018
GOI 91 day T Bill
---- ` 98.7229 E K 23/11/2018
` 100.8100 ---- K E 16/11/2018
9% Corporate Bond
---- ` 100.9357 E K 23/11/2018

(3.12) The repo seller is the borrower of funds and the securities are accounted for by E as the
owner of the securities, though they are handed over to the buyer of the repo (lender of funds).
As per the terms of the repo, the intervening period’s coupon interest belongs to the original
owner of the securities and has to be accrued by E. On the coupon date, though the other party
(repo buyer) will receive the interest, it has to hand over the interest to the repo seller ‘E’ on the
date of receipt of the coupon interest. The repo terms provide only for the repo interest during
the period. The first leg of the repo has as consideration also the broken period interest up to
the date of the repo from the last coupon date. The interest for the second leg is on the amount
borrowed plus the broken period interest and this is the amount paid by the borrower ‘Ë’ to K.
For E, values of interest on amount borrowed.
Thus, there will be no impact of the above transaction on the coupon interests on the securities
on the due dates and in the intervening period of the repo/reverse repo.
If the coupon date falls in the repo period, it will be received by the buyer of securities. It is
similar to the concept of cum-dividend price of share where if the coupon date falls in the repo
period, it belongs to the buyer of securities.
(3.13) E is the seller of the repos, borrower of the funds and sells the securities, but due to the
repurchase agreement, it continues to show them as its investments, reflecting its continued
economic interest in the securities in the repo period. Securities are physically han ded over to
the lender of funds, K, who is the buyer of the repo. E will mark them to market, classify them
as per norms and enjoy the coupon interest in the repo period. K is merely a lender of funds,
holder of the securities physically and on record of the security issuer, but has no right to part
with the security or enjoy it’s interest.
(3.14) (i) Securities to be offered to raise an amount of ` 5 crore in case of 7.5% 2025 G-Sec
= ` 5 crores/` 96.9000 = 516000
(ii) Securities to be offered to raise an amount of ` 5 crore in case of GOI 91 day T Bill
= ` 5 crores/` 98.6000 = 507100
(iii) Securities to be offered to raise an amount of ` 5 crore in case of 9% Corporate Bond
maturing on 8th July, 2020
= ` 5 crores/` 99.5000 = 502510
(3.15) Funds borrowed on column I and II securities will be exempt from CRR/SLR computation.
However, for III, these borrowed funds shall be reckoned as liabilities for the CRR and SLR.
(3.16) There is no violation regarding the duration. But RBI stipulates that no party shall enter
into repos below the repo rates prescribed by RBI from time to time and without the minimum
haircuts prescribed by RBI.
(3.17) It seems that E will have more funds if it is successful in the auction.

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PAPER – 1 : FINANCIAL REPORTING

© The Institute of Chartered Accountants of India

The following additional information is available:

© The Institute of Chartered Accountants of India

Trade receivables 3 290

© The Institute of Chartered Accountants of India

Nisha Ltd. Sandhya Ltd.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

5. Calculation of Consolidated Other Equity

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Calculation of impairment loss

*` 14 lakh + ` 45 lakh = ` 59 lakh.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Revenue from extended warranty (10,000 - 300) ` 9,700

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Preparation and levelling 4,40,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Profit and Loss A/c Dr. 18,05,600

© The Institute of Chartered Accountants of India

Expense recognized in the financial year 2016-2017= (21,96,000 x 9/12) + (6,34,400

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Note: Since question requires computation of Impairment Loss on 31.3.2019, hence

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Deferment of sales promotion expenses of ` 4,50,000 is not correct. It should be

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Profit before taxation (A-B) 151

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(b) 1. Calculation of Target index

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© The Institute of Chartered Accountants of India

Balance Sheet extracts as on 31 st March, 2018

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© The Institute of Chartered Accountants of India

Balance Sheet extracts as on 31 stMarch 2018

© The Institute of Chartered Accountants of India

Expected Profit on employing the particular executive

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(b) New bond

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© The Institute of Chartered Accountants of India

It is assumed that security returns are generated by a two factor model.

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P/E Ratio 8 times (given)

© The Institute of Chartered Accountants of India

Alternatively, the risk premium of Securities X & Y can be calculated as follows:

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© The Institute of Chartered Accountants of India

Return = (` 3277.45 – ` 2625)/ `2625 = 24.86%

From the above, it can be said that reinvestment option is better.