the society of auditors and prime academy model exam …the company uses just-in- time manufacturing...

PRIME/43rd /FINAL 1

The Society of Auditors and Prime Academy

Model Exam – FINAL - Advanced Management Accounting

No. of Questions: 7 Total Marks: 100

No. of Page: 7 Time Allowed: 3 hrs

Question No 1 is Compulsory answer any five of the remaining questions Working notes should form part of the respective answers

Wherever necessary candidates can make assumptions and disclose the same by way of a note.

1(a) ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.

Majority of its revenue comes from export to Euro Zone and US. To strengthen its position further in the Global Market, it is planning to enhance quality and provide assurance through long term warranty. For the coming years company has set objective to reduce the quality costs in each of the primary activities in its value chain. State the primary activities as per Porter’s Value Chain Analysis in the value chain of ABC Ltd with brief description.

(b) State the validity of following statements along with the reasons:

(i) Two activities have common predecessor and successor activities. So, they can have common initial and final nodes. (ii) In respect of any activity whether real or dummy, the terminal node should bear a number higher than the initial node number. (iii) For every critical activity in a network, the earliest start and the earliest finish time as well as the latest finish time and the latest start time are the same.

(iv) The optimal duration of a project is the minimum time in which it can be completed. (v) Resource leveling aims at smoothening of the resource usage rate without changing the project duration.

(c) Find the optimal solution for the assignment problem with the following cost matrix:

Area /Salesman W X Y Z

A 12 10 8 9

B 8 9 11 7

C 11 14 12 10

D 9 9 8 9

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(d) In WM Ltd. the ‘OB’ equipment is about to be replaced either by ‘CF’ system or by an ‘OF’ system. Finance costs 12% a year and the other estimated costs are as follows:

CF (Rs.) OF (Rs.)

Initial Cost 28,000 40,000

Annual Operating Costs 24,000 p.a. 18,000 p.a.

Required: If the company expected the new system (either CF or OF) to last at least for 12 years, which system should be chosen?

(4 x 5 = 20 Marks)

2(a) AUD International Co. is a multiproduct firm. It is planning to launch a new product X- 500

in coming months. Production will be in batches of 1,000 units throughout the life of the

product. It is also possible to achieve 90% learning rate but the learning would cease after

64th batch. Other relevant data of product X-500 is as follows:

Expected Life 2,56,000 units

Selling Price per unit Rs. 123 Direct Material per unit Rs. 36 Direct Labour Cost first batch Rs. 52,500 Other Variable Costs Rs. 24 Specific Fixed Cost Rs. 38,75,000

Required: Calculate the Expected Profit to be earned from the product over its lifetime. Note: The learning index for a 90% learning curve is -0.152; (64) –0.152 = 0.5314; 63) –0.152 = 0.5327 It is now thought that a learning effect will continue for all of the 256 batches that

will be produced. Calculate the Rate of Learning required to achieve a lifetime product profit of Rs. 1,00,00,000 , assuming that a constant rate of learning applies throughout the products life. (8 Marks)

(b) Universal LTD. is engaged in marketing of wide range of consumer goods. M, N, O and Pare the zonal sales officers for your zones. The company fixes annual sales target for them individually. You are furnished with the following: The standard costs of sales target in respect of M, N, O and P are Rs. 5,00,000, Rs. 3,75,000, Rs. 4,00,000 and Rs. 4,25,000 respectively.

M, N, O and P respectively earned Rs. 29,900, Rs. 23,500, Rs. 24,500 and Rs. 25,800 as commission at 5% on actual sales affected by them during the previous year.

The relevant variances as computed by a qualified accountant are as follows:

Particulars M

N

O

P Sales Price Variance 4,000 (F) 6,000 (A) 5,000 (A) 2,000 (A)

Sales Volume Variance 6,000 (A) 26,000 (F) 15,000 (F) 8,000 (F)

Sales Margin Mix Variance 14,000 (A) 8,000 (F) 17,000 (F) 3,000 (A)

Note: (A) = Adverse variance and (F) = Favorable variance

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PRIME/43rd /FINAL 3

Required:

(i) Compute the amount of Sales Target Fixed and the Actual Margin Earned in case of each of the zonal sales officer.

(ii) Evaluate the overall performance of these zonal sales officers taking three relevant base factors and then recommend whose performance is the best. (8 Marks)

3(a) Oxford Medical Care Co. (OMCC) is a pharmaceutical firm, operating its entire business through its four customers Ox1, Ox2, Ox3, and Ox4. Ox1 and Ox2 are small pharmaceutical stores while Ox3 and Ox4 are large discount stores with attached pharmacies. OMCC uses discount pricing strategy and prices its products at variable cost plus 25%.

Item Small Pharmaceuticals

Large Pharmaceuticals Activity Rate

Ox1 Ox2 Ox3 Ox4 Number of Orders 4 9 6 3 `750 Order Size `40,000 `20,000 `4,25,000 `4,00,000 n/a Average Discount 4.50% 9.50% 17.50% 11.50% n/a Regular Deliveries 4 9 6 3 `375 Expedited Deliveries 2 0 2 0 `1,250 General Administration Cost

`20,250 `48,375

Required: Prepare a Customer Profitability Statement that shows the profit from each customer and each customer channel. Recommend some points to improve OMCCs profit. (8 Marks)

(b) Aves Airlines Ltd. operates its services under the brand ‘Yellow Bird’. The ‘Yellow Bird’ route network spans prominent business metropolis as well as key leisure destinations across the Indian subcontinent. ‘Yellow Bird’, a low-fare carrier launched with the objective of commoditizing air travel, offers airline seats at marginal premium to train fares across India. Profits of the ‘Yellow Bird’ have been decreasing for several years. In an effort to improve the company’s performance, consideration is being given to dropping several flights that appear to be unprofitable. Income statement for one such flight from ‘New Delhi’ to ‘Kullu’ (Y-09) is given below (per flight):

Rs. Rs.

Ticket Revenue (175 seats x 80% Occupancy x `7,000 ticket price)

9,80,000

Less: Variable Expenses (`1,400 per person) 1,96,000

Contribution Margin 7,84,000

Less: Flight Expenses:

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PRIME/43rd /FINAL 4

Salaries, Flight Crew 2,05,000

Salaries, Flight Assistants 45,500

Baggage Loading and Flight Preparation 72,000

Overnight Costs for Flight Crew and Assistants at destination 18,000

Fuel for Aircraft 2,55,000

Depreciation on Aircraft (Based on obsolescence)

51,000

Liability Insurance 1,53,000

Flight Promotion 35,000

Hanger Parking Fee for Aircraft at destination 15,000 8,49,500

Net Gain / (Loss) (65,500)

The following additional information is available about flight Y-09. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid by the flight. The baggage loading and flight preparation expense is an allocation of ground crew’s salaries and depreciation of ground equipment. One third of the liability insurance is a special charge assessed against flight Y-09 because in the opinion of insurance company, the destination of the flight is in a “high-risk” area. The hanger parking fee is a standard fee charged for aircraft at all airports. If flight Y-09 is dropped, ‘Golden Bird’ Airlines has no authorization at present to replace it with another flight. Required: Prepare an analysis showing what impact dropping flight Y-09 would have on the airline’s profit. ( 8 Marks )

4(a) Electro Life Ltd. is a leading Home Appliances manufacturer. The company uses just-in- time manufacturing process, thereby having no inventory. Manufacturing is done in batch size of 100 units which cannot be altered without significant cost implications. Although the products are manufactured in batches of 100 units, they are sold as single units at the market price. Due to fierce competition in the market, the company is forced to follow market price of each product. The following table provides the financial results of its four unique products: Alpha Beta Gamma Theta Total

Sales (units) 2,00,000 2,60,000 1,60,000 3,00,000

Revenue(Rs) 26,00,000 45,20,000 42,40,000 32,00,000 145,60,000

Less: MaterialCost Rs.

6,00,000 18,20,000 18,80,000 10,00,000 53,00,000

Less: Labour Cost Rs. 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000

Less: Overheads Rs. 8,00,000 7,80,000 3,20,000 12,00,000 31,00,000

Profit / (Loss) Rs. 4,00,000 (1,60,000) 7,60,000 (2,00,000) 8,00,000

Since, company is concerned about loss in manufacturing and selling of two products so, it has approached you to clear picture on its products and costs. You have conducted a detailed investigation whose findings are below: The overhead absorption rate of Rs. 2 per machine hour has been used to allocate overheads into the above product costs. Further analysis of the overhead cost shows that some of it is

PRIME A

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PRIME/43rd /FINAL 5

caused by the number of machine hours used, some is caused by the number of batches produced and some are product specific fixed overheads that would be avoided if the product were discontinued. Other general fixed overhead costs would be avoided only by the closure of the factory. Numeric details are summarized below: Rs. Rs.

Machine Hour related 6,20,000

Batch related 4,60,000

Product specific fixed overhead:

Alpha 10,00,000

Beta 1,00,000

Gamma 2,00,000

Theta 1,00,000 14,00,000 General Fixed Overheads 6,20,000

TOTAL 31,00,000

The other information is as follows:

Alpha Beta Gamma Theta Total

Machine Hours 4,00,000 3,90,000 1,60,000 6,00,000 15,50,000

Labour Hours 1,00,000 2,60,000 1,60,000 1,50,000 6,70,000

You are required to : (i) Prepare a profitability statement that is more useful for decision making than the profit statement prepared by Electro Life Ltd. (ii) Calculate the break even volume in batches and also in approximate units for Product ‘Alpha’. ( 8 Marks )

(b) A firm manufactures two products A and B on which the profits earned per unit are Rs. 10 and Rs.20 respectively. Each product is processed on two machines M1 and M2. Product A requires 4 hours of processing time on M1 and 2 hours on M2. Product B requires 2 hours of processing time on M1 and 4 hours on M2. Machine M1 is available for not more than 60 hours, while machine M2 is available for 48 Hours. Formulate the above data into a linear programming model and find the optimum profit through simplex method.What is your conclusion regarding optimality. ( 8 Marks )

5(a) A small maintenance project consists of jobs in the table below. With each job is listed its normal time and a minimum, or crash time, in days. The cost (in Rs/day) of each job is also given.

Job Normal Time (Days) Crash Time (Days) Crash cost Rs/day

1-2 18 14 40

1-3 23 22 20

2-3 08 05 60

2-4 10 06 40 3-4 03 02 80

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PRIME/43rd /FINAL 6

(a) Crash the project duration in steps and arrive at the minimum duration. What will be the critical path and the cost of crashing? (b) If there is an indirect cost of Rs. 70 per day. What will be the optimal project duration and cost of crashing. ( 8 Marks )

(b) A company has two divisions. Eastern Division manufactures a unique timing device. It is never sold outside the company and it cannot be obtained from any other source Western division incorporates this device in a finished product which it sells. One device is used for each unit of product. Most of Eastern Division's costs are fixed upto Rs.600 for any output till 1000 units. There after total costs increase at the rate of Rs.100 for every additional 1000 units made. In the hope of optimising his division's results, Eastern Division's Manager has set a transfer price of 50p per unit. Western Division costs in assembling the timing device in the finished product and selling it are, in addition to the transfer price of the timing device, Rs.1200 for any output to 1000 units and Rs. 200 for every 1000 units thereafter. Western Division finds that it can only increase its sales by spending more on promotion or reducing selling prices. Western Division's sales forecast is

Sales in units 1000 2000 3000 4000 5000 6000

Net sales revenue for thousand units (RS.) 1900 1700 1500 1250 960 770

You are required: (i) To prepare schedule of Western Division's costs (including purchases from Eastern Division), sales revenue and net income at the indicated sales levels. (ii) To state what level of sales maximizes Western Division's net income of the company at that level. (iii) To assume that the company's divisional structure and transfer pricing is abandoned and prepare a further schedule of costs, sales and net income for the company as a whole, at the indicated sales levels. (iv) To state what level of sales maximizes the company's net income and explain why it differs from that calculated under a divisional organization (v) To state what range of transfer price will maximize the company's net income as well as western division’s income. ( 8 Marks)

6(a) The following table shows all the necessary information on the available supply from each warehouse, the requirement of each market and the unit transportation cost in rupees

Warehouses

Markets Supply

I II III IV

A 5 2 4 3 22

B 4 8 1 6 15

4-5 08 06 50

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PRIME/43rd /FINAL 7

C 4 6 7 5 8

Requirement 7 12 17 9 45/45

The shipping clerk has worked out the following schedule from experience: 12 units from A to II, 1 unit from A to III, 9 units from A to IV, 15 units from B to III, 7 units from C to I and I unit from C to III. Check if the clerk has made the Optimal Schedule. Find the Optimal Schedule and Minimum Total Shipping Cost. ( 6 Marks )

(b) A Company produces three products, details of costs and sales value per unit is given below: Rs. per unit

Products / Particulars A B C Sales Value 2000 3000 2500 Direct Material 500 1000 800 Direct Wages Rs.100 per hour 500 700 400 Variable Overheads 300 600 700

80% of Direct Material is imported @ Rs.500per kg. Import is restricted to 5000kg. Capacity available for production of A and C is restricted to 6250 and 6000 hours respectively. Fixed Cost is Rs.20 lakhs. You are required to compute the most profitable product mix and profit thereof. Company identifies a source of alternative material as replacement of imported material. Availability of material will not be restricted but carrying cost will be @Rs.2.75 per kg. The Company plans to modify its process to suit the new material and enhance its capacity for all the products by 20% above the present one with an investment of Rs.25 lakhs at an interest cost of 15%. Company expects 30% rise in its profit. Find out the price the company can pay to alternative source. ( 10 Marks ) 7. Answer any four: (a) Write a short note on Predatory Pricing. (b) Distinguish between Activity based costing and Activity based management. (c) State any five qualitative factors relevant for decision making. (d) Distinguish between Traditional and Zero based budgeting. (e) List down the advantages of simulation. (4 X 4 = 16 Marks)

PRIME A

CADEMY

1 PRIME/46th ME/FINAL

THE SOCIETY OF AUDITORS AND PRIME ACADEMY

46th SESSION - FINAL - MODEL PRACTICE EXAM

PAPER 5 – ADVANCED MANAGEMENT ACCOUNTING

1) (a) Primary activities are the activities that are directly involved in transforming

inputs into outputs and delivery and after-sales support to output. Following are

the primary activities in the value chain of ABC Ltd.:-

(i) Inbound Logistics: These activities are related to the material handling and

warehousing. It also covers transporting raw material from the supplier to the

place of processing inside the factory.

(ii) Operations: These activities are directly responsible for the transformation

of raw material into final product for the delivery to the consumers.

(iii) Outbound Logistics: These activities are involved in movement of finished

goods to the point of sales. Order processing and distribution are major part

of these activities.

(iv) Marketing and Sales: These activities are performed for demand creation

and customer solicitation. Communication, pricing and channel management

are major part of these activities.

(v) Service: These activities are performed after selling the goods to the

consumers. Installation, repair and parts replacement are some examples of

these activities.

(b) (i) Invalid

Reason: As per the rules of network construction, parallel activities between

two events, without intervening events, are prohibited. Dummy activities are

needed when two or more activities have same initial and terminal events.

Dummy activities do not consume time or resources.

(ii) Valid

Reason: As per the conventions adopted in drawing networks, the head event or

terminal node always has a number higher than that of initial node or tail event.

(iii) Invalid

Reason: For every critical activity in a network, the earliest start time and the

latest start time is same and also the earliest finish time and the latest finish

time is same.

(iv) Invalid

Reason: The optimum duration is the time period in which the total cost of

the project is minimum.

(v) Valid

Reason: Resource leveling is a network technique used for reducing the

requirement of a particular resource due to its paucity or insufficiency within

a constraint on the project duration. The process of resource leveling utilize

the large floats available on non-critical activities of the project and cuts

down the demand of the resource.

PRIME A

CADEMY


(c)

Salesman W X Y Z

A 3 1 0 1

B 0 1 4 0

C 0 3 2 0

D 0 0 0 1

The Optimal Assignment is

Salesman Job Cost

A Y 8

B Z 7

C W 11

D X 9

Hence, the total minimum cost of the project is Rs. 35.

Note: Alternative Solution to the problem is also possible

Salesman W X Y Z

A 3 1 0 1

B 0 1 4 0

C 0 3 2 0

D 0 0 0 1

Salesman Job Cost

A Y 8

B W 8

C Z 10

D X 9

(d) Calculation of Life-cycle Costs

C

F

O

F (`) (`)

Initial Cost 28,000 40,000

Add: Annual Operating Costs 1,48,656

(`24,000 ×

6.194)

1,11,492

(`18,000 ×

6.194) Total Life Cycle Costs 1,76,656 1,51,492

The annuity of 12% finance costs for 12 years is 6.194.

Analysis

When we compare only the initial cost, we will tend to purchase CF system, for its

cheap acquisition cost. But when we compare the total life-cycle costs, the OF

system is most preferable, for its lowest total life-cycle costs.

Salesman W X Y Z

A 4 2 0 1

B 1 2 4 0

C 1 4 2 0

D 1 1 0 1

PRIME A

CADEMY


2 (a) Total Direct Labour Cost for first 64 batches based on learning curve of 90% (when the

direct labour cost for the first batch is Rs. 52,500

The usual learning curve model is

y = axb

Where

y = Average Direct Labour Cost per

batch

for x batches

a = Direct Labour Cost for first batches

x = Cumulative No. of batches

produced b = Learning Coefficient /Index

y = Rs. 52,500 × (64) –0.152

= Rs. 52,500 × 0.5314

= Rs. 27,898.50

Total Direct Labour Cost for first 64 batches

= 64 batches × `27,898.50

= `17,85,504

Total Direct Labour Cost for first 63 batches based on learning curve of 90%

(when the direct labour cost for the first batch is `52,500)

y = `52,500 × (63) –0.152

= `52,500 × 0.5327

= `27,966.75

Total Direct Labour Cost for first 63 batches

= 63 batches × `27,966.75

= `17,61,905

Direct Labour Cost for 64th batch = `17,85,504 - `17,61,905

= `23,599

Total Labour Cost over the Product‟ s Life

= `17,85,504 + (192 batches × `23,599)

= `63,16,512

Statement Showing “Life Time Expected Profit”

Particulars Amount (`)

Sales (`123 × 2,56,000 units) 3,14,88,000

Less: Direct Material (`36 × 2,56,000 units) 92,16,000

Less: Direct Labour 63,16,512

Less: Other Variable Cost (`24 × 2,56,000 units) 61,44,000

Less: Specific Fixed Cost 38,75,000

Profit 59,36,488

PRIME A

CADEMY


(ii) In order to achieve a Profit of `1,00,00,000 the Total Direct Labour Cost

over the Product‟ s Lifetime would have to equal `22,53,000.

Statement Showing “Life Time Direct Labour Cost”

Particulars Amount (`)

Sales (`123 × 2,56,000 units) 3,14,88,000

Less: Direct Material (`36 × 2,56,000 units) 92,16,000

Less: Other Variable Cost (`24 × 2,56,000 units) 61,44,000

Less: Specific Fixed Cost 38,75,000

Less: Profit 1,00,00,000

Direct Labour 22,53,000

Average Direct Labour Cost per batch for 256 batches is `8,800.78

(`22,53,000 / 256 batches).

Total Direct Labour Cost for 256 batches based on learning curve of r%

(when the direct labour cost for the first batch is `52,500)

y = `52,500 × (256)

b `8,800.78 = `52,500 × (256)

b 0.1676 = (256) b

log

0.1676

= b × log 28

log

0.1676

= b × 8 log 2

Log 0.1676 = (log r/ Log 2) X 8 Log 2

log 0.1676 = log r8 0.1676 = r8

r =

r = 80%

(b) Statement Showing “Sales Target Fixed and Actual Margin”

Particula

rs

Zonal Sales Officers

M (`) N (`) O (`) P (`)

Commissioned Earned 29,900 23,500 24,500 25,800

Actual Sales (Commission Earned/

5%)

5,98,000 4,70,000 4,90,000 5,16,000

Sales Price Variance 4,000(F) 6,000(A) 5,000(A) 2,000(A)

Sales Volume Variance 6,000(A) 26,000(F) 15,000(F) 8,000(F)

Sales Target (Budgeted Sales) 6,00,000 4,50,000 4,80,000 5,10,000

Standard Cost of Sales Target 5,00,000 3,75,000 4,00,000 4,25,000

Budgeted Margin 1,00,000 75,000 80,000 85,000

Sales Margin Mix Variance 14,000(A) 8,000(F) 17,000(F) 3,000(A)

Sales Price Variance 4,000(F) 6,000(A) 5,000(A) 2,000(A)

Actual Margin 90,000 77,000 92,000 80,000

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CADEMY


Note: Since no information has been given about Sales Margin Quantity Variance,

therefore for calculating actual margin the same has been assumed to be zero.

Statement Showing “Evaluation of the Performance of Zonal Sales

Officers”

Particulars Zonal Sales Officers

M N O P

Efficiency towards the Target Sales

(a) Whether target achieved No Yes Yes Yes

(b) Actual Sales to Target Sales

Ratio

99.67

%

104.44% 102.08% 101.18%

(c) Rank IV I I

I

III

Contribution Approach

(a) Contribution Earned (`) 90,00

0

77,000 92,000 80,000

(b) Rank II I

V

I III

Margin Vs Sales Ratio

(a) Budgeted Margin/ Sales Target Ratio

16.67

%

16.67% 16.67% 16.67%

(b) Actual Margin Vs Actual Sales

Ratio

15.05

%

16.38% 18.78% 15.50%

(c) Rank IV II I III

An analysis on performance of four Zonal Sales Officers based on three base

factors, the performance of officer O is the best.

3(a) Statement Showing “Customer Profitability Analysis”

Particulars Ox1 Ox2 Channe

l Total

Ox3 Ox

4

Channel

Total Small Stores Large Stores

Revenue 1,60,000 1,80,000 3,40,000 25,50,00

0

12,00,000 37,50,000

Discount 7,200 17,100 24,300 4,46,250 1,38,000 5,84,250

Net Revenue 1,52,800 1,62,900 3,15,700 21,03,75

0

10,62,000 31,65,750

Variable Costs 1,28,000 1,44,000 2,72,000 20,40,00

0

9,60,000 30,00,000

Contribution

Margin

24,800 18,900 43,700 63,750 1,02,000 1,65,750

Order Processing 3,000 6,750 9,750 4,500 2,250 6,750

Regular Deliveries 1,500 3,375 4,875 2,250 1,125 3,375

Expedited

Deliveries

2,500 --- 2,500 2,500 --- 2,500

Customer Profit 17,800 8,775 26,575 54,500 98,625 1,53,125

Channel Cost 20,250 48,375

Channel Profit 6,325 1,04,750

Recommendations

Small Pharmaceuticals

Even though Ox1 has lower sales volume (11% lesser from Ox2), it is contributing

around 67% of small store‟ s profit as its order is for larger quantities and discount

offered is very less.

OMCC is only just at breakeven point with small pharmaceuticals. To improve

profit OMCC should:

(i) Coordinate with Ox2 to increase order size and try to negotiate a smaller

discount. (ii) Try to work with Ox1 to reduce expedite deliveries.

Large Pharmaceuticals

PRIME A

CADEMY


OMCC makes substantial profit from the large pharmaceuticals. Ox4 alone

contributing around 55% of total customer‟ s profit and its order is for larger

quantities. Therefore, Ox 4 is most favorable customer and may be given little

extra attention. For Ox3, OMCC may have no options but to treat it as less

profitable customer as Ox3 accounts more than 60% of sales.

(b) Statement Showing Impact on Airline’s Profit if Flight Y-09 is Discontinued

` `

Contribution Margin lost if the flight is discontinued (7,84,000)

Less: Flight Costs which can be avoided if the flight is discontinued:

FlightPromotion…………………………………………35,000

FuelforAircraft…………………………………………2,55,000

LiabilityInsurance(1/3x`1,53,000)………………………51,000

Salaries,FlightAssistants…………………………………45,500

Overnight Costs for Flight Crew and Assistants…………………… 18,000 4,04,500

(3,79,500)

If Aves Airlines Ltd. goes for discontinuation of flight K-09, its profit will go down by

`.3,79,500. Following costs are not relevant to the decision:

− Salaries, flight crew - Fixed annual salaries which will not change

− Baggage loading and flight preparation- This is an allocated cost, which will

continue even if the flight is discontinued.

− Depreciation of aircraft -Sunk Cost

− Liability insurance (two third)

− Hanger parking fee- This cost will be incurred regardless of whether the flight is

made.

4(a) Statement of Profitability of Electro Life Ltd

Products (Amount in `.)

Alpha Beta Gamma Theta Total

Sales 26,00,000 45,20,000 42,40,000 32,00,000 1,45,60,000

Direct Materials 6,00,000 18,20,000 18,80,000 10,00,000 53,00,000

Direct Wages 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000

Overheads(W.N.2)

Machine Related 1,60,000 1,56,000 64,000 2,40,000 6,20,000

Batch Related 1,00,000 1,30,000 80,000 1,50,000 4,60,000

Contribution 9,40,000 3,34,000 9,36,000 6,10,000 28,20,000

ProductSpecific

Fixed Overheads

10,00,000 1,00,000 2,00,000 1,00,000 14,00,000

Gross Profit (60,000) 2,34,000 7,36,000 5,10,000 14,20,000

General Fixed Overheads 6,20,000

Profit 8,00,000

PRIME A

CADEMY


(ii) Break even point

Total sale value of product ‘Alpha’ = Rs. 26,00,000

Total contribution of product ‘Alpha’ = Rs. 9,40,000

Specific Fixed Overheads (Product ‘Alpha’) = Rs. 10,00,000

Break-even Sales = Specific Fixed cost x Total sales Value

Total contribution

=Rs.10,00,000/Rs.9,40,000*Rs. 26,00,000

=Rs.27,65,957.45

Break-even Sales units = Rs.27,65,957.45/Rs.13 = 2,12,766 units

However production must be done in batches of 100 units. Therefore, 2128 batches are

required for break even .Due to production in batches, 34 units( 2128 batches x 100 units -

212766 units) would be produced extra. These 34 units would add extra cost Rs. 282.20 (34

units x Rs. 8.3*).Accordingly, break-even units as calculated above will increase by 22 units

( Rs. 282.2/ Rs.13).

(*) Rs.600000+Rs.800000+Rs.160000+Rs.100000

200000 units

Break-even units of Product “ Alpha” is 2,12,788 units (2,12,766 units + 22 units )

Working

s: W.N.-1

Calculation Showing Overhead Rates

Overhead’s

Related

Factors

Overhe

ad Cost

(`) [a]

Total No. of

Units of

Factors [b]

Overhead

Rate (`)

[a] / [b]

Machining Hours 6,20,000 15,50,000 hrs. 0.40

Batch Production 4,60,000 9,200 batches 50.00

W.N.-2

Statement Showing - Overhead Costs Related to Product

Particulars Alph

a

Beta Gamma Theta

Machining hrs. ` 1,60,000 ` 1,56,000 ` 64,000 ` 2,40,000

related overheads (4,00,000 hrs

×

(3,90,000 hrs

×

(1,60,000

hrs ×

(6,00,000 hrs

×

`0.40) ` 0.40) ` 0.40) ` 0.40)

PRIME A

CADEMY


Batch related `1,00,000 `1,30,00

0

`80,00

0

`1,50,000 overheads (2,000

batches

(2,600

batches ×

(1,600

batches ×

(3,000

batches × ` 50) ` 50) ` 50) × ` 50)

(b) Max Z = 10A+20B

Sub to 4A + 2B ≤ 60; 2A + 4B ≤ 48; A,B ≥ 0

10 20 s1 s2 Ratio

Profit

Product

Mix Quantity A B C D

0 s1 60 4 2 1 0

60/2 =

30

0 S2 48 2 4 0 1

48/4 =

12

zj 0 0 0 0 0

Yj-Zj 10 20 0 0

0 S1 36 3 0 1 - 1/2

20 B 12 1/2 1 0 1/4

zj 40 10 20 0 5

Yj-Zj 0 0 0 -5

Optimal Profit is Rs. 240/-

Conclusion - Alternative answer is there since y-z of A= 0. This can be verified by doing one

more iteration by bringing in X1 in place of S1.

5(a) The Network for the given problem:

The Various Paths in the network

are:

1–2–3–4–5 with project duration = 37 Days

1–2–4–5 with project duration = 36 Days


The Critical Path is 1–2–3–4–5. The normal length of the

project is 37 days. Crashing Step 1:

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Crashing Cost = ` 40 × 3 Days

= `120

Now the various paths in the network with revised duration

are: 1–2–3–4–5 with project duration = 34 Days



Crashing Step 2:

Crash Activity 1–

1 Day

Crashing Cost = ` (40 + 20) × 1

Day = ` 60

Now the various paths in the network with revised

duration are: 1–2–3–4–5 with project duration = 33 Days



Crashing Step 3:

Crash Common Activity 4–5 by Two

Days

Crashing Cost =

=

` 50 × 2

Days

` 100 Now the various paths in the network with revised



1–3– 4–5 with project duration = 31 Days

Crashing Step 4:

Crash Activity 3–4 by 1 Day

Crashing Cost = ` 80 × 1

Day = ` 80

Now the various paths in the network with revised




Further crushing is not possible.

Revised Network for the given

problem:

Statement Showing “Crashing Cost & Total Cost”

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Normal

Project

Length

Days

Job Crashed Crashing

Cost

Indirect

Cost

Total Cost

37 – – `2,590

(`70 × 37 Days)

`2,590

36 1–2 ` 40 `2,520

(`70 × 36 Days)

`2,560

35 1–2 `80

(` 40 + `40)

`2,450

(`70 × 35 Days)

`2,530

34 1–2 `120

(` 80 + `40)

`2,380

(`70 × 34 Days)

`2,500

33 1–2,1–

3 `180

(`120 + `60)

`2,310

(`70 × 33 Days)

`2,490

32 4–5 `230

(` 180 + ` 50)

`2,240

(`70 × 32 Days)

`2,470

31 4–5 ` 280

(` 230 + `50)

`2,170

(`70 × 31 Days)

`2,450*

30 3–4 `360

(` 280 + `80)

`2,100

(`70 × 30 Days)

`2,460

Crash Cost at minimum duration of 30 Days is ` 360.

Since the total cost (crashing cost + indirect cost) starts increasing

from 30 days, the Optimum Project Duration is 31 days with the Crashing

Cost of Rs. 280.

(b) WESTERN DIVISION INCOME STATEMENT

Sales Volume 1,000 2,000 3,000 4,000 5,000 6,000

Net Sales Revenue 1,900 3,400 4,500 5,000 4,800 4,620

Cost:

Western Div. Costs. 1,200 1,400 1,600 1,800 2,000 2,200

Eastern Div. Transfer cost 500 1,000 1,500 2,000 2,500 3,000

Total Cost 1,700 2,400 3,100 3,800 4,500 5,200

Net Income / (Loss) 200 1,000 1,400 1,200 300 -580

(b)A sales level of 3,000 units per day maximises Western Division's net income at

1,400. At 3,000 units per day, Eastern Division's net income will be :

Rs.000's

Transfer revenue from Western (at 50 p per unit) 1,500

Fixed Costs 600

Additional Costs (100 per 1,000) 200 800

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Net Income 700

Company net income:

Rs.000's

Western Division revenue 4,500

Eastern Division Costs 1600

Western Division costs 800 2400

Net Income 2,100

(c) COMPANY INCOME STATEMENT

sales units per day 1,000 2,000 3,000 4,000 5,000 6,000

Net sales revenue 1,900 3,400 4,500 5,000 4,800 4,620

Costs:

Fixed to (1,000 units) 1,800 1,800 1,800 1,800 1,800 1,800

Additional variables (3,00 per 1,000) 300 600 900 1,200 1,500

Total costs 1,800 2,100 2,400 2,700 3,000 3,300

Net Income 100 1,300 2,100 2,300 1,800 1,320

(d) The company's Net income is maximized at a sales level of 4,000 units per day. Under divisional

organization a sales level of 3,000 units maximizes Western Division income because of the fact that

sales revenue per unit falls as sales volume increases where as the transfer price per unit remains

constant. Consequently, marginal sales revenue for the 1,000 units above 3,000 is Rs.500, which

does not cover the transfer cost plus Western Division marginal costs Rs.(500+200). The sales level

to maximize company income, however will be the same whatever reporting structure is adopted.

Any calculation should ignore intra company profits so that the effect on company income may be

assessed clearly. Thus, the marginal revenue of Rs.500 more than covers company's marginal costs

Rs.(200+100) for the 1,000 units between 3,000 and 4,000 and it is only when sales exceed 4,000

that company income is reduced.

6(a) The Initial basic solution worked out by the shipping clerk is as follows-

1 2 4 3

C1 C2 C3 C4

0 R1 5

12

2

1

4

9

3 22

-3 R2 4 8

15

1 6 15

3 R3

7

4 6

1

7 5 8

7 12 17 9 45

Note: The net evaluation of Cell R3C4 has a negative value of 1. Hence the

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allotment by shipping clerk is not optimal.

2 2 4 3

C1 C2 C3 C4

0 R1 5

12

2

2

4

8

3 22

-3 R2 4 8

15

1 6 15

2 R3

7

4 6

7

1

5 8

7 12 17 9 45

Note: Since all the net evaluation of the cells are positive. Optimal Solution is

obtained. The optimal cost is Rs. 104 ( 12*2 + 2*4 + 8*3 + 15*1 + 7*4 + 1*5)

(b)

Particulars A B C Total

Sales Price 2,000 3,000 2,500

Imported Material 400 800 640

Domestic Material 100 200 160

Direct Wages 500 700 400

Variable Overheads 300 600 700

Total Variable Costs 1,300 2,300 1,900

Contribution per unit 700 700 600

Imported Material in kg 0.80 1.60 1.28

Contribution per kg of Imported Material 875.00 437.50 468.75

Ranking based on Cont. per kg of Imported Mat. 1.00 3.00 2.00

Labour Hours Required 5.00 7.00 4.00

Contribution per Labour hour 140.00 100.00 150.00

Ranking based on Contribution per Labour Hour 2.00 3.00 1.00

Units to be prod. on basis of labour hours available 1,250

1,500

Imported Material required/available in kg 1,000 2,080 1,920

Optimum Product Mix 1,250 1,300 1,500

Contribution 875,000 910,000 900,000

Total Contribution

2,685,000

Fixed Cost

2,000,000

Profit

685,000

Profitability to be maintained after process modifications & capacity enhancement

Particulars A B C Total

Units to be Produced 1,500 1,560 1,800

Sales value 3,000,000 4,680,000 4,500,000 12,180,000

Substitute Material required (kg) 1,200 2,496 2,304 6,000

Total variable cost per unit (excl.Imported Mat) 900 1,500 1,260

Total variable cost (excl. Imported Mat) 1,350,000 2,340,000 2,268,000 5,958,000

Contribution required + Sub Material Cost

6,222,000

Profit required at enhance rate

890,500

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Fixed Cost (incl. interest on invt.)

2,375,000

Contribution required

3,265,500

Substitute material cost of 6000 kg

2,956,500

Cost per kg

492.75

Transport Cost

2.75

Price May be offered per kg

490

7) (a) Predatory Pricing occurs when a firm with significant market power sets prices at a sufficiently

low level with the purpose of damaging or forcing a competitor to withdraw from the market. It

may involve dumping, i.e. selling a product in a foreign market at below cost, or below the

domestic market price (subject to, for example, adjustments for taxation differences,

transportation costs, specification differences).

(b) The ABC refers to the technique for determining the cost of activities and the output that those

activities produce. It is the logical distribution of overhead i.e. overhead should be distributed

on the consumption of resources consumed by goods and services. The aim of ABC is to

generate improved cost data for use in managing a company’s activities.

The ABM is much a broader concept. It refers to the management philosophy that focuses on

the planning, execution and measurement of activities as the key to competitive advantage.

(c) Qualitative Factors may include:

(i) The liquidity risk;

(ii) The state of the economy, and its levels of inflation;

(iii) Effect of new technological breakthroughs;

(iv) Effect of a decision on employee morale, motivation, leadership and so on;

(v) Effect of a decision on long-term future profitability;

(vi) Effect of a decision on a company’s public image and the reaction of

customers.

(d)

Traditional Budgeting Zero based budgeting

Accounting Oriented Responsibility Accounting Oriented

Reference is past budget.

Some managers only inflate

them.

Fresh approach without any previous

reference. Nothing is taken into

account without justification

Routine Approach Investigative Approach

(e) Advantages of simulation are enumerated below:

(i) Simulation techniques allow experimentation with a model of the system

rather than the actual operating system. Sometimes experimenting with the

actual system itself could prove to be too costly and, in many cases too

disruptive. For example, if you are comparing two ways of providing food

service in a hospital, the confusion that would result from operating two

different systems long enough to get valid observations might be too great.

Similarly, the operation of a large computer centre under a number of different

operating alternatives might be too expensive to be feasible.

(ii) The non-technical manager can comprehend simulation more easily than a

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complex mathematical model. Simulation does not require simplifications and

assumptions to the extent required in analytical solutions. A simulation model

is easier to explain to management personnel since it is a description of the

behaviour of some system or process.

(iii) Sometimes there is not sufficient time to allow the actual system to operate

extensively. For example, if we were studying long-term trends in world

population, we simply could not wait the required number of years to see

results. Simulation allows the manager to incorporate time into an analysis. In

a computer simulation of business operation the manager can compress the

result of several years or periods into a few minutes of running time.

(iv) Simulation allows a user to analyze these large complex problems for which

analytical results are not available. For example, in an inventory problem if the

distribution for demand and lead time for an item follow a standard

distribution, such as the poison distribution, then a mathematical or analytical

solution can be found. However, when mathematically convenient

distributions are not applicable to the problem, an analytical analysis of the

problem may be impossible. A simulation model is a useful solution procedure

for such problems.

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PAPER 6 – INFORMATION SYSTEMS CONTROL AND AUDIT


No. of Pages: 2 Time Allowed: 3 hrs

Question Number 1 is compulsory. Answer any 5 questions from the remaining 6 questions

1) ABC Bank Limited is a large public sector bank. It is evaluating implementation of Security Policy

as per RBI guidelines and bring in better IT Governance and Risk Management. It also wishes to

strengthen its application controls and bring in a BCP process. In this context, answer the

following:

a. Explain in brief the controls recommended by RBI (5 Marks)

b. Explain the term Enterprise Risk Management (5 Marks)

c. Briefly describe Run-to-Run controls as part of Application level processing controls

(5 Marks)

d. Explain the Objectives and Goals of BCP (5 Marks)

2) (a) What are the characteristics of Information (6 Marks)

(b) Detail the three types of Anti-Virus scanners (6 Marks)

(c) Briefly explain functioning of Snapshot and ITF (4 Marks)

3) (a) What are the points to be considered for better information protection (6 Marks)

(b) Explain the similarities between Grid computing and Cloud Computing (6 Marks)

(c) Explain Prototyping approach (4 Marks)

4) (a) What are some of the poor project management issues associated with failed projects ? What are

some of the good project management techniques (6 Marks)

(b) What are the objectives and scope of IT Act, 2000 ? (6 Marks)

(c) Explain Term Business Impact Analysis (BIA) (4 Marks)

5) (a) Explain the term confidentiality, integrity and availability (6 Marks)

(b) What are the factors which justify the need for IS Audit ( 6 Marks)

(c) Explain in brief programmed decision making and non-programmed decision making (4 Marks)

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6) (a) Explain the terms hot site, warm site and cold site (6 Marks)

(b) What are the objectives to be achieved by preliminary investigation (6 Marks)

(c) Explain in brief Key Management practices for IT Compliance (4 Marks)

7) Write short notes on any four of the following –

a. Interoperability amongst cloud vendors

b. Virtualisation

c. Application level firewall

d. Data Mining

e. Benefits of CoBIT (4 x 4 = 16 Marks)

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PAPER 6 – INFORMATION SYSTEMS CONTROL AND AUDIT

1)

a. System Controls

i. Duties of system programmer and designer not to be assigned to persons operating the system.

Users should not have right to make modifications.

ii. Contingency plans/DR plans to be put in place and same tested periodically.

iii. Controls should be designed, documented and implemented to protect against malicious activities

iv. Formal change management technique to be introduced. Change management controls to be

audited

i. Board of Directors and Senior Management to ensure control environment is effective

ii. IS Audit Policy should be reviewed annually.

iii. Quality Assurance Process on Internal Audit should be effected atleast once in three years.

b. According to the Committee of Sponsoring Organisation (COSO) framework, ERM is

defined as a process effected by the Board, management across the enterprise to :

a. Apply strategy setting relating to Risk

b. Manage risk within the risk appetite (i.e how much risk the management is willing to take)

c. To provide reasonable assurance regarding achievement of entity objectives

Controls in an organisation are to be holistic and comprehensive. They should consider the overall

business objectives, processes, organisational structure, technology deployed and risk appetite.

An overall risk management strategy is to be adopted and implemented across the organisation. Such a

strategy should consider implementation of information and associated risks while formulating IT

Security Policy and controls.

c. Run-to-run controls:

Refer to using batch figures /control totals to monitor a batch as it moves from one program

module /procedure /run to another.

Ensures that with each run, the system processes the batch completely and correctly.

S.No. Type of run-to-run

control

Meaning

i. Re-calculate Control

totals

After each process/ run, batch control

totals, hash-totals, record counts re-

calculated and compared with control

records

Will expose issues like unprocessed

records, duplicate records etc.

ii. Transaction codes Refers to comparison of transaction

codes of each record with that of the

codes in the control record. This ensures

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that only correct type of transactions is

being processed.

iii. Sequence checks This check compares the sequence of

each record in the batch with that of the

previous record to ensure that proper

sorting has taken place.

This is important since the order of

record in the batch is critical for correct

and complete processing.

d. Primary objective is to enable organisation to survive a disaster and restore normalcy of

business operations.

Ensuring employee or personnel safety

Continuation of critical business operations

Reducing the duration of serious business disruptions to operations and resources (i.e minimising

the length of time of the disruption to limp back to normalcy at the earliest)

Minimising or containing immediate damage or loss

Lay down the management and reporting structure and authority to act in event of a disaster

Formulation of teams and their co-ordination

Simplify the recovery effort

Identify and prioritise the critical aspects of a business and its supporting functions

2) (a)

Timeliness : Available when required

2. Purpose : Must have a purpose at the time of transmission

3. Mode & format : Mode- visual, verbal or written Format- so designed

to assist decision making (Ex: Classified/ tabulated/

exceptions only)

4. Redundancy : Excess information per unit of data

5. Rate : Number of numeric characters /minute – for humans

Number of bits per second – for machines

6. Frequency : Periodicity of information flow

7. Completeness : As complete/comprehensive as possible

8. Reliability : Source from which information originates should be

reliable/ confidence level high

9. Cost benefit analysis : Benefits derived from using the information should justify

cost of procuring the information

10. Validity : Information should be as close to the purpose it purports

11. Quality : Correctness (Ex: Without any personal bias)

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(b) Anti-virus scanners are counter measures against virus attacks- they help in detection, quarantine

(isolation) and removal of viruses. Anti-virus scanners can be of the following three types:

i. Scanners: They have a data base of known virus signatures/bit patterns and compare the same with

those on the system to identify it there is a virus. They check memory, boot sector (start-up files),

executables (program files) and system files (ex: operating system files) for virus bit patterns. Effectiveness of scanners are dependent on how update is their database of known viruses

ii. Active Monitors and Heuristic scanners: They verify critical interrupt calls and operating system

calls which resemble virus like action. These may lead to too many false positives – i.e they cannot

differentiate between a genuine function of OS and a virus action (hoax). Hence effort may be

wasted on pursuing these false alarms and hence donot serve the purpose.

iii. Integrity Checkers: As a first step the integrity checkers calculate a hash or binary check data

called Cyclic Redundancy Check (CRC). The logic of these checkers are program CRC values

donot undergo frequent changes and after CRC value is calculated for the first time, every time the

program is called for execution, the CRC is compared to ensure that there are no changes to the

program. They have a limitation in as much that for the first time when CRC is calculated they

assume that the program is free from viruses.

---------------------------------------------------------------------------------------------------------------------------

-----------

(c)

Examines the way transactions are processed

Selected transaction points are marked with a special code that triggers a snapshot (takes

pictures of transactions as they move through an application system).

The “before image” & “after image” is captured to validate the processing.

Auditor reviews the images to ensure that the processing logic is executed properly, its

authenticity, accuracy and completeness.

The key areas to focus while using snapshots are:

Choosing the right location/points based on materiality of the transactions

Deciding on the time of capture

Reporting system design and implementation to present data in a meaningful way for the

auditors to understand

ii. Integrated Test Facility:

A small set of fictitious records are placed in master file (representing fictitious divisions,

departments ,or supplier/customer)

These dummy entries/records processed along with regular records. They donot affect actual

records and employees unaware of the testing taking place.

At the end of processing, the system collects ITF records and the processing results. The

auditor compares with expected results to verify if controls working as desired.

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3) (a)

S.No. Points to be

considered

Meaning

1. Not all data have

same value

Organisation must determine value of different data (relative

importance) and then decide on the type of protection.

Ex: Payroll data more sensitive than petty cash expenses data &

hence varied degree of protection needs to be applied.

2. Know where critical

data resides

Refers to company’s information systems infrastructure. Each

piece of information requires different levels of protection.

Identifying information’s location helps establish an integrated

security solution.

This approach provides significant cost benefits so as to ensure that

cost of protection need not exceed the value of data.

3. Develop an access

control

methodology

Information loss can happen by mere copying or disclosure of data

and need not have to be removed to cause damage.

This can be addressed by providing for adequate access control

methods like user-IDs and passwords.

4. Protect information

on stored media

Data loss/theft can occur if employees have facility to copy data

into removable media- floppies, CDs - hence need to be controlled.

Magnetic media like hard discs should be controlled to protect

programs and data.

During migration/change-over from one system to another, all

discs and data should be controlled(to prevent loss, duplication,

exposure).

5. Review hard copy

outputs

Refers to review of hardcopy output of employee’s daily work –

like drafts, working papers, papers kept in recycle or trash

containers (may be valuable. If falls in wrong hands may be

misused)

---------------------------------------------------------------------------------------------------------------------------

(b) Similarities between Cloud and Grid Computing:

1. Scalability

Both cloud and Grid are scalable. (i.e ability to handle additional work load or usage levels).

Achieved through load balancing of applications running on different devices and interconnection

of such devices. CPU, network bandwidth, storage capacity can be allocated/de-allocated on

demand.

2. Multitenancy and Multi tasking

Multitenancy refers to more than one user on the same resource (ex: co-hosting of websites on the

same web server). Multitasking is the ability of a system to handle more than one task at a given

time.

Both Cloud and Grid involve multitenancy and multi tasking- several customers can perform

different tasks, accessing a single or multiple application instance.

Such sharing reduces infrastructure cost and peak load usage.

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3. Storage:

Storage in grid computing is well suited for data-intensive storage- it may not be suitable for storing

objects as small as 1 byte.

In cloud computing we can store an object as low as 1 byte or as large as several terabytes.

4. Computation :

A computational grid focusses on computationally intensive operations (which require high CPU

capabilities).

Cloud computing offer 2 types of instances- standard CPU and high CPU.

(c)

Meaning of prototype: It is a usable system or a system component that is built quickly at a

lesser cost and with the intention of being modified or replaced with a full scale or fully

operational system.

Using traditional approach may take years to complete. Hence for smaller systems the

organisations build prototype/pilot versions.

The users are allowed to work with the prototype, their suggestions are incorporated into the

prototype and a revised prototype is developed. This process goes on till a prototype is reached

which incorporates all user requirements.

The final prototype can either be :

1. Refined/turned into the real system

or

2. Scrapped and the knowledge used to build the real system.

4) (a) Some poor project management issues associated with failed projects

a) Underestimation of time for project completion

b) Failure of top management to monitor/control the project closely.

c) Underestimation of resources (men, computing resources and finance) required to complete the

project.

d) Size and scope of project underestimation

e) Inadequate project control mechanism. (i.e. failure to identify key stages, deliverable dates etc.)

f) “Scope Creep” i.e. system specification keeps changing due to non-existence of “Software

Baseline”

g) Poor planning

Some good project management techniques include:

a) User participation in requirement analysis and user acceptance/sign-off in authorising the system.

b) Deputation of appropriate staff for systems development effort with clearly defined job

descriptions, responsibilities and authority.

c) Clear documentation of scope and nature of the system.

d) Feasibility study based on which senior management approves the systems development project.

e) A well thought out master plan incorporating realistic time and cost estimate for project control.

f) Risk identification and assessment for managing project risk.

g) Decomposition of the project into manageable phases

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h) Approval of each phase before commencing development of the subsequent phase.

i) Making quality assurance plan and SDLC methodology as part of the development effort

-------------------------------------------------------------------------------------------------------------------

(b) Objectives of the IT Act, 2000 (May 2012):

To grant legal recognition for transactions carried out through electronic commerce (where data

interchange is through electronic means)

To recognise digital signatures as a method of authentication

To facilitate filing of electronic documents with Government departments

To facilitate and give legal sanction to electronic fund transfers (EFTs) between banks/financial

institutions

To recognise book keeping in electronic form by the Banks

To amend the Indian Penal Code, the Indian Evidence Act , Bankers’ Book Evidence Act and the

RBI Act

Scope of the Act (Chapter 1)

It shall extend to the whole of India and, save as otherwise provided in this Act, it applies also to

any offence or contravention there under committed outside India by any person.

It has been made effective from 17.10.2000. (Amendment Act is effective 23.12.2008-Assent of

the President on 05.02.2009- Notified on 27.10.2009 )

This Act shall not apply to: (As per First Schedule) (AM)

a. a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable

Instruments Act, 1881 (26 of 1881);

b. a power-of-attorney as defined in S. 1A of the Powers-of-Attorney Act, 1882;

c. a trust as defined in section 3 of the Indian Trusts Act, 1882;

d. a will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 including any

other testamentary disposition by whatever name called;

e. any contract for the sale or conveyance of immovable property or any interest in such property;

f. any such class of documents or transactions as may be notified by the Central Government in

the Official Gazette.

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(c) Refers to a process of determining the impact of losing the support of any resource-i.e the loss that

would be suffered assuming some IT asset (say a server, database etc.) is not available.

The business impact analysis assessment study will establish the escalation (increase) of that loss

over a period of time –i.e how the loss would increase when the unavailability time increases. Thus

the organisation can arrive at “tolerable down-time” or “pain threshold”- the length of time

business units can survive without IT resources.

Tasks carried out as part of BIA are:

a. Identifying organisational risks including single point failure risks and other infrastructure risks

b. Identification of key business processes

c. Analysing the threats and quantifying the same in relation to key business processes- both in

terms of downtime and financial loss.

d. Identifying the dependencies and interdependencies of key business processes- so that their

priority/order of recovery could be understood.

e. Ascertaining the tolerable downtime for each business process

f. Determining the recovery infrastructure required

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Data for the purpose of BIA is assimilated through questionnaires, workshops (where business

teams meet and discuss), interviews (of key personnel in each department) and review of documents

like IT plan, security policy etc.

The BIA report is tabled at the BCP Committee for them to make appropriate decisions regarding

recovery strategy.

5) (a)

S.No. Control Obj. Meaning Example

1. Confidentiality Data and information are

disclosed/made-available only to

those who have a right to know

it (i.e. unauthorised persons

should not have access to data)

Payroll data should be known only

to the payroll department.

Manager in purchase department

need not know the payroll details

of all employees in the

organisation

2. Integrity Data is protected against

unauthorised modifications

Sales price master data in the look-

up list should not be modifiable by

all sales employees or billing

clerks.

3. Availability Information system are available

and usable when required

System should have minimum

down time. In case of

hardware/software problem (Ex:

disk crash) availability is affected.

--------------------------------------------------------------------------------------------------------------------------

(b)

S.No. Factors Meaning

1. Cost of Data Loss Data is a key asset to most businesses today. It

helps organisations adapt and survive in a

competitive environment.

2. Incorrect Decision Making For correct decision making process, accurate

data is required- which is dependent on a well

controlled IT environment.

3. Cost of Computer Abuse Threats due to malware, hackers etc. can cause

loss or damage to IT infrastructure

4. Value of IT Assets Most of the IT Assets are expensive investments

that a Company makes.

5. High Cost of computer

errors

System errors- like processing errors- can lead to

wide spread impact as they tend to affect a broad

range of transactions

6. Need to maintain data

privacy

Corporates may be handling sensitive personal

information- which if misused- may affect the

privacy of individuals

7. Need to maintain data

integrity

This objective is to ensure that there are no

unauthorized modifications to data.

8. System Effectiveness

Objective

This objective determines if the investments in IT

are leading to business objectives being achieved

9. System Efficiency Objective This objective determines if there is optimal use

of IT Assets.

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(c) Programmed decisions:

Meaning: Refer to decisions that are made on problems and situations by referring to

predetermined set of precedents, procedures, techniques and rules.

Characteristic: Well-structured in advance and time-tested for validity, consistent over

situations and time.

When a problem/issue requires decision making, the relevant pre-determined rule/

procedure applied and hence decision arrived at.

Such decisions are made in respect of familiar, routine, recurring problems which are

amenable to structured solutions by applying well-known operating procedures.

Organisations create a repository/collection of such rules and procedures based on

manager’s previous experience and familiarity.

Note: Structured/ programmed decision does not necessarily mean simple problems.

Organisations can also solve complex problems through structured decisions.

ii. Non- programmed decisions:

Meaning: Decisions made on situations and problems which are novel and non-repetitive

and about which not much information is available.

They are non-programmed implying that they are not made by applying any standard

procedures, rules or guidelines.

They are solved by using the managerial intelligence, experience and judgment

No single best solution may be available as the decision environment is uncertain. The

solutions and decisions may be unique or unusual.

Note: In real business situations most of the decisions share a feature of programmed and

non- programmed decisions

---------------------------------------------------------------------------------------------------------------------------

6) (a)

S.No. Type of Site Meaning When to use? Cost

1. Hot Site It is a fully configured

site with all hardware

and software- in some

cases may contain data

also.

If fast recovery is

critical.

Expensive to

maintain

2. Warm Site Partially configured-

may contain hardware

that are difficult to

obtain- a few selected

peripherals and power

supply

If intermediate

level of back-up is

sufficient

Less expensive

than a hot site

but more

expensive than a

cold site

3. Cold Site Only physical location

and power supply

provided- no hardware

is available.

If the tolerable

downtime is large

Least expensive

but difficult to

configure in

case of a

disaster

PRIME A

CADEMY


(b) Objectives to be achieved by the preliminary investigation:

a. Request clarification- To understand what the user wants, why he wants it and what the current

procedure/system in place is.

b. Determine the project size- To understand whether the user requirement can be satisfied by a

new system or can the existing system be modified to meet the user request.

This is critical since it would determine the time and other resources required to develop the

project.

c. Determining whether the proposed project is technically and operational feasible.

Technical feasibility implies that the current technology should support the request and

operational feasibility implies the new proposed system should be capable of being operated

upon/used by the final users.

d. Do a cost benefit analysis (CBA)/economic feasibility of the proposed project

Costs of the new project are compared with the expected future benefits. Future benefits could

be either in terms of increased revenue, decreased operational costs or improved customer

service.

Ex: A new billing point of sale system could lead to lesser billing errors, saving on stationery

cost and customer satisfaction by reducing waiting time.

e. Report the finding of the study to management:

The final report on the study carried out along with the recommendations and

justification/supporting for the same should be submitted to management for their final

decision.

(c) Key management practices for IT Compliance

i. Identify external compliance requirements: On a periodic basis there has to be a review of local

and international laws, regulations and other external requirements that must be complied with from

an IT Perspective.

ii. Optimise response to external requirements: Corporate policies and procedures are to be aligned

with external regulatory requirements.

iii. Confirm External Compliance: Confirm compliance of policies, principles, standards, procedures

and methodologies with legal , regulatory and contractual requirements.

iv. Obtain Assurance of External Compliance: Obtain and report assurance of compliance and

adherence to policies, principles, standards, procedures and methodologies. Corrective actions to

close compliance gaps to be taken in timely manner.

7) a. Interoperability amongst cloud vendors

When a customer deploys with one cloud vendor, he may find it difficult to shift to another cloud

vendor- as they may have different or proprietary Application Processing Interfaces (APIs), different

formats for data porting etc. This may require data re-organisation.

There are no industry level cloud computing standards as of now- however key players like IBM and

Amzon are supporting interoperability.

b. Virtualisation

It is the ability to make a few physical servers behave like several logical servers- allows servers and

storage devices to share and utilize applications. Migration from one server to another is easy.

c. Application level firewall

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CADEMY


This firewall system does not permit direct exchange of information between the internal and external network.

They work on the concept of bastion host- i.e all incoming requests from the internet to the corporate

network are handled by the bastion host- which is heavily fortified. If there is a hack attack, only the bastion host is compromised and not the entire network.

Application firewalls are also configured as proxy servers (a special purpose code) to act on behalf

of some inside the organisation’s LAN. When someone from the LAN wants to access the internet, a

request goes to the proxy server which connects to the internet, obtains information and passes it on to

the computer on the LAN. Thus they act as a go-between , examine packets and eliminate known

vulnerabilities

d. Data Mining

The analysis step of the "Knowledge Discovery and Data Mining" process, or KDD, an

interdisciplinary subfield of computer science, is the computational process of discovering patterns in

large data sets involving methods at the intersection of artificial intelligence, machine

learning, statistics, and database systems. The overall goal of the data mining process is to extract

information from a data set and transform it into an understandable structure for further use.

This can be used in various business applications like market analysis and management by finding

patterns that are helpful in target marketing, customer relation management, market based analysis,

cross selling, market segmentation, risk analysis, customer retention, improved underwriting, quality

control, fraud analysis etc.

e. Benefits of CoBIT

Maintain high quality information to support business decisions

Achieve strategic goals and realize business benefits through the effective and innovative use of IT

Achieve organisational excellence through reliable, efficient application of technology

Maintain IT related risk at acceptable level

Optimise cost of IT services and technology

Support compliance with relevant laws, regulations, contractual agreements and policies.

PRIM

E ACADEMY

http://en.wikipedia.org/wiki/Computer_science

http://en.wikipedia.org/wiki/Data_set

http://en.wikipedia.org/wiki/Artificial_intelligence

http://en.wikipedia.org/wiki/Machine_learning

http://en.wikipedia.org/wiki/Machine_learning

http://en.wikipedia.org/wiki/Statistics

http://en.wikipedia.org/wiki/Database_system

PRIME/46th ME/O/FINAL 1

THE SOCIETY OF AUDITORS AND PRIME ACADEMY 46th SESSION - FINAL - MODEL PRACTICE EXAM

PAPER 7 - DIRECT TAX LAWS No. of Questions: 7 Total Marks: 100 No. of Pages: 6 Time Allowed: 3 hrs

Question No. 1 is compulsory. Attempt any five questions from the remaining six questions.

Working notes should form part of the answer. Wherever necessary, suitable assumption(s) may be made and disclosed by the candidates.

1. a) Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y.2017-18. You are

required to compute his gross salary from the details given below:

Basic Salary INR 10,000 p.m.

D.A. (50% is for retirement benefits) INR 8,000 p.m.

Commission as a percentage of turnover 0.1%

Turnover during the year INR 50,00,000

Bonus INR 40,000

Gratuity INR 25,000

His own contribution in the RPF INR 20,000

Employer’s contribution to RPF 20% of his basic salary

Interest accrued in the RPF @ 13% p.a. INR 13,000

(5 Marks)

b) Rajesh owns a house in Hyderabad. During the previous year 2017-18, 3/4th portion of the house was self-occupied and 1/4th portion was let out for residential purposes at a rent of INR 12,000 p.m. The tenant vacated the property on February 28th2018. The property was vacant during March, 2018. Rent for the months of January 2018 and February 2018 could not be realised in spite of the owner’s efforts. All the conditions prescribed under Rule 4 are satisfied. Municipal value of the property is INR 4, 00,000 p.a., fair rent is INR 4, 40,000 p.a. and standard rent is INR 4, 80,000. He paid municipal taxes @10% of municipal value during the year. A loan of INR 30, 00,000 was taken by him during the year 2009 for acquiring the property. Interest on loan paid during the previous year 2017-18 was INR 1, 48,000. Compute Rajesh’s income from house property for the A.Y. 2018-19. (5 Marks)

c) R, an individual resident in India, bought 1,000 equity shares of INR 10 each of A Ltd. at INR 50 per share on 30.5.2017. He sold 700 equity shares at INR 35 per share on 30.9.2017 and the remaining 300 shares at INR 25 per share on 20.12.2017. A Ltd. declared a dividend of 50%, the record date being 10.8.2017. R sold on 1.2.2018, a house from which he derived a long-term capital gain of INR 75,000. Compute the amount of capital gain arising to R for the assessment year 2018-19. (5 Marks)

d) Sigma Consulting (P) Ltd., an Indian company established in the year 2005, reports total income of INR 15 lakh for the previous year ended 31st March, 2018. Tax deducted at source by different payers amounted to INR 1, 35,600 and tax paid in foreign country on a doubly taxed income amounted to INR

PRIME A

CADEMY


22,000 for which the company is entitled to relief under section 90 as per the double taxation avoidance agreement. During the year, the company paid advance tax as under:

Date of payment Advance tax paid (INR)

14-06-2017 38,000

13-09-2017 73,000

14-12-2017 92,000

15-03-2018 77,000

The company filed its return of income for the A.Y. 2018-19 on 22nd October, 2018. Compute interest, if any, payable by the company under sections 234A, 234B and 234C and fee payable under section 234F. Assume that transfer pricing provisions are not applicable. Note – Turnover of Sigma Consulting (P) Ltd. for P.Y. 2015-16 is INR 55 crore. (5 Marks)

2. The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of agricultural produce, consumer items and other products for the year ended 31.03.2018 is as under: Trading Account

Particulars INR Particulars INR

Opening Stock 3,75,000 Sales 1,55,50,000

Purchases 1,25,75,000 Closing Stock 4,50,000

Freight & Cartage 1,26,000

Gross profit 29,24,000

1,60,00,000 1,60,00,000

Profit and Loss Account

Particulars INR Particulars INR

Bonus to staff 47,500 Gross profit 29,24,000

Rent of premises 53,500 Income-tax refund 20,000

Advertisement 5,000 Warehousing charges 15,00,000

Bad Debts 75,000

Interest on loans 1,67,500

Depreciation 71,500

Goods and Services tax demand paid

1,08,350

Miscellaneous expenses 5,25,650

Net profit of the year 33,90,000

44,44,000 44,44,000

On scrutiny of records, the following further information and details were extracted/ gathered: (i) There was a survey under section 133A on the business premises on 31.3.2018 in which it was

revealed that the value of closing stocks of 31.3.2017 was INR 8, 75,000 and a sale of INR 75,000 made on 13.3.2018 was not recorded in the books. The value of closing stocks after considering these facts and on the basis of inventory prepared by the department as on 31.3.2018 worked out at INR 12, 50,000, which was accepted to be correct and not disputed.

(ii) Income-tax refund includes amount of INR 4,570 of interest allowed thereon. (iii) Bonus to staff includes an amount of INR 7,500 paid in the month of December 2017, which was

provided in the books on 31.03.2017.

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CADEMY


(iv) Rent of premises includes an amount of INR 5,500 incurred on repairs. The assesse was under no obligation to incur such expenses as per rent agreement.

(v) Advertisement expenses include an amount of INR 2,500 paid for advertisement published in the souvenir issued by a political party. The payment is made by way of an account payee cheque.

(vi) Miscellaneous expenses include: (a) amount of INR 15,000 paid towards penalty for non-fulfilment of delivery conditions of a

contract of sale for the reasons beyond control, (b) Amount of INR 1, 00,000 paid to the wife of a director, who is working as junior lawyer for

taking an opinion on a disputed matter. The junior advocate of High Courts normally charge only INR 25,000 for the same opinion,

(c) Amount of INR 1, 00,000 paid to an Electoral Trust by cheque. (vii) Goods and Services Tax demand paid includes an amount of INR 5,300 charged as penalty for

delayed filing of returns and INR 12,750 towards interest for delay in deposit of tax. (viii) The company had made an investment of INR 25 lacs on the construction of a warehouse in rural

area for the purpose of storage of agricultural produce. This was made available for use from 15.09.2017 and the income from this activity is credited in the Profit and Loss account under the head “Warehousing charges”.

(ix) Depreciation under the Income-tax Act, 1961 works out at INR 65,000. (x) Interest on loans includes an amount of INR 80,000 on which tax was not deducted.

Compute the income chargeable to tax for assessment year 2018-19 of Pingu Trading Pvt. Ltd, ignoring MAT. Support your answer with working notes. (16 Marks)

3. A. The regular assessment of MNO Ltd. for the Assessment Year 2016-17 was completed under section

143(3) on 13th March, 2018. There was an audit objection by the Revenue Audit team that interest on loan should be disallowed partly as there was diversion of borrowed fund to sister concern without charge of interest. Based on the above facts: (i) State, with reasons, whether the Assessing Officer can issue notice under section 148 on the basis

of audit objection of the Revenue Audit team. (ii) If the action stated in (i) above is not permitted, what is the option open to the Revenue

Department to deal with the said audit objection? (8 Marks)

B. Piyush, who returned to India on 12th June, 2017 for permanently residing in India after a stay of about 20 years in U.K., provides the sources of his various incomes and seeks your opinion to know about his liability to income tax thereon in India in assessment year 2018-19: (i) Income of rent of the flat in London which was deposited in a bank there. The flat was given on

rent by him after his return to India since July, 2017. (ii) Dividends on the shares of three German Companies which are being collected in a bank account

in London. He proposes to keep the dividend on shares in London with the permission of the Reserve Bank of India.

(iii) He has got two sons, one of whom is of 12 years and other 19 years. Both his sons are staying in London and not returning to India with him. Each of his sons is having income of INR 75,000 in U.K. in foreign currency (not received in India) and of INR 20,000 in India.

(iv) During the preceding accounting year when he was a non-resident, he had sold 1000 shares which were acquired by him in British Pound Sterling and the sale proceeds were repatriated. The profit in terms of British Pound Sterling on sale of these 1000 shares was 175% of the cost at INR 37,500 while in terms of Indian Rupee it was INR 50,000.

(8 Marks)

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CADEMY


4. A. Examine, in the context of provisions of the Income-tax Act, 1961, the taxability or otherwise of the

income/receipt in each of the following cases for the A.Y. 2018-19: (i) Income of INR 75,000 derived by a nursery from the sale of seedlings grown without carrying out

all the basic operations on land. (ii) Ms. Reema, born and brought up in the State of Sikkim, has a net profit of INR 4, 28,000 from the

business located in Sikkim and interest of INR 32,000 on the securities issued by the Central Government.

(iii) Amount of INR 10 lakh transferred to the NPS Account of Mr. Sriram, an employee of Gamma Ltd., under Atal Pension Yojana, from an approved superannuation fund.

(iv) Receipt by Smt. Vidya, widow of Mr. Sharma (who was an employee of M/s. Phi Ltd.), on 25.10.2017 of INR 7.40 lakhs, being amount standing to the credit of Mr. Sharma’s NPS Account, in respect of which deduction has been allowed under section 80CCD to Mr. Sharma in the earlier previous years. Such amount was received by her as a nominee on closure of the account.

(v) Amount of INR 1, 20,000, being 10% of salary of Mr. Ganesh, contributed by his employer Alpha Ltd. to an approved superannuation fund. (8 Marks)

B. The Assessing Officer lodged a complaint against M/s. KLM, a firm, under section 276CC of the Income-tax Act, 1961 for failure to furnish its return of income for the A.Y.2015-16 within the due date under section 139(1). The tax payable on the assessed income, as reduced by the advance tax paid and tax deducted at source, was INR 60,000. The appeal filed by the firm against the order of assessment was allowed by the Commissioner (Appeals). The Assessing Officer passed an order giving effect to the order of the Commissioner (Appeals). The tax payable by the firm as per the said order of the Assessing Officer was INR 1,000. The Assessing Officer has accepted the order of the Commissioner (Appeals) and has not preferred an appeal against it to the Income Tax Appellate Tribunal. The firm desires to know of the maintainability of the prosecution proceedings in the facts and circumstances of the case. (4 Marks)

C. An institution operating for promotion of education claiming exemption under section 11 since 1994 furnishes the following data for the assessment year 2018-19: CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS,POLITICAL PARTIES AND ELECTORAL TRUSTS

S. No Particulars INR in crores

(i) Fees collected from students 14

(ii) Construction of a new computer science laboratory 0.50

(iii) Land acquired to be used as a cricket field for the students 2

(iv) Amount earmarked and set apart for construction of an arts block within the next 4 years.

4

Compute the total income of the institution for the A.Y.2018-19. (4 Marks)

5. A. Does the CIT (Appeals) have the power to change the status of assesse?

Mega Trends Inc. v. CIT (2016) 388 ITR 16 (Mad). (4 Marks) B. Can business contracts, business information, etc., acquired by the assesse as part of the slump sale

and described as 'goodwill', be classified as an intangible asset to be entitled for depreciation under section 32(1)? Areva T and D India Ltd. v. DCIT (2012) 345 ITR 421 (Delhi) (4 Marks)

C. Can the loss suffered by an erstwhile partnership firm, which was dissolved, be carried forward for set-off by the individual partner who took over the business of the firm as a sole proprietor, considering the succession as a succession by inheritance? Pramod Mittal v. CIT (2013) 356 ITR 456 (Delhi) (4 Marks)

PRIME A

CADEMY


D. Would the reassessment proceedings initiated under section 147 against the legal heirs of the deceased assesse be valid if notice of reassessment was sent to the legal heirs after the limitation period, though a notice addressed to the deceased assesse was sent prior to the limitation period? Vipin Walia v. ITO (2016) 382 ITR 19 (Del) (4 Marks)

6. A. Mr. Kamesh, an individual resident in India furnishes you the following particulars of income earned in

India, Country "X" and Country "Y" for the previous year 2017-18. India has not entered into double taxation avoidance agreement with these two countries.

Particulars INR

Income from profession carried on in India 7,50,000

Agricultural income in Country "X" (gross) 50,000

Dividend received from a company incorporated in Country "Y" (gross) 1,50,000

Royalty income from a literary book from Country "X" (gross) 6,00,000

Expenses incurred for earning royalty 50,000

Business loss in Country "Y" (Proprietary business) 65,000

Rent from a house situated in Country "Y" (gross) 2,40,000

Municipal tax in respect of the above house (not allowed as deduction in country “Y”)

10,000

Note: Business loss in Country "Y" not eligible for set off against other incomes as per law of that country. The rates of tax in Country "X" and Country "Y" are 10% and 25%, respectively. Compute total income and tax payable by Mr. Kamesh in India for Assessment Year 2018-19. (8 Marks)

B. ABC Ltd. is a domestic company liable to tax@30%. The following are the particulars furnished by the company for A.Y.2018-19:

Particulars of total income INR

(1) As per the return of income furnished u/s 139(1) (15,00,000)

(2) Determined under section 143(1)(a) (8,00,000)

(3) Assessed under section 143(3) (5,00,000)

(4) Reassessed under section 147 4,00,000

Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum of penalty?

(5 Marks) C. What do you mean by substantial question of law? Examine. (3 Marks)

7. A. Tai Ltd. filed its return of income for assessment year 2017-18 on 6th June, 2017. The return is

selected for regular assessment under section 143(3) for which notice under section 143(2) is served on the company on 3rd October, 2018. The company responded to the notice under section 143(2). Examine whether the service of the notice is within time and if not, whether the assessment order can be challenged by the assesse. (4 Marks)

B. Explain the circumstances under which the Assessing Officer can resort to provisional attachment of the property of the assesse. Also, state the period of time for which such attachment can take place.

(4 Marks)

C. Mr. Vallish, a non-resident, made an application to the Authority for Advance Rulings on 9.9.2017 in relation to a transaction proposed to be undertaken by him. On 1.11.2017, he decides to withdraw the said application. Can he withdraw the application on 1.11.2017? Examine. (4 Marks)

PRIME A

CADEMY


D. Where a building, comprising of several floors, has been developed and re-constructed, would exemption under section 54/54F be available in respect of the cost of construction of – (i) The New Residential House (I.E., All Independent Floors Handed Over To The Assesse); Or (ii) A Single Residential Unit (I.E., Only One Independent Floor)? cit V. Gita Duggal (2013) 357 Itr 153 (Delhi) (4 Marks)

E. The proprietary firm of "Mr.Amolak" a practicing Chartered Accountant, was converted into partnership on 01.09.2017 when his son joined him in the

firm for 50% share. All the assets and liabilities of the erstwhile proprietary firm were transferred into the newly constituted partnership firm.

"Mr.Amolak" was credited and paid an amount of INR5 lacs in his account

from the firm. Explain as to chargeability of this amount of INR5lacs in the

hands of "Mr.Amolak "when it stands paid for:

. (i) transfer of business into partnership;

. (ii) goodwill by the incoming partner. (4 Marks)

PRIME A

CADEMY


THE SOCIETY OF AUDITORS AND PRIME ACADEMY 46th SESSION - FINAL - MODEL PRACTICE EXAM

PAPER 7 - DIRECT TAX LAWS - SUGGESTED ANSWERS

1. A. Computation of Gross Salary of Mr. B for the A.Y.2018-19

Particulars INR INR

Basic Salary [ INR 10,000 × 12] 1,20,000

Dearness Allowance [INR 8,000 × 12] 96,000

Commission on turnover [0.1% × INR 50,00,000] 5,000

Bonus 40,000

Gratuity [Note 1] 25,000

Employee’s contribution to RPF [Note 2] -

Employers contribution to RPF [20% of INR 1,20,000] 24,000

Less: Exempt [Note 3] 20,760 3,240

Interest accrued in the RPF @ 13% p.a. 13,000

Less: Exempt @ 9.5% p.a. 9,500 3,500

Gross Salary 2,92,740

Note 1: Gratuity received during service is fully taxable. Note 2: Employee’s contribution to RPF is not taxable. It is eligible for deduction under section 80C. Note 3: Employers contribution in the RPF is exempt up to 12% of the salary. i.e., 12% of [Basic Salary + Dearness Allowance forming part of retirement benefits + Commission based on turnover] = 12% of [INR 1, 20,000 + (50% × INR 96,000) + INR 5,000] = 12% of INR 1, 73,000 = INR 20,760 National Pension scheme is a scheme approved by the Government for Indian citizen aged between18-60 years. Subscriber of the NPS account contributes some amount in their account. In case of any employee, being a subscriber of the NPS account, employer may also contribute into the employee’s account.

Employer’s contribution to NPS account would form part of salary of employees. However, while computing total income of the employee-assesse, a deduction under section 80CCD is allowed to the assesse in respect of the employer as well as employee contribution under a pension scheme referred therein. (Deduction under section 80CCD will be discussed in detail in Chapter 11 – “Deductions from Gross Total Income”)

Profits in lieu of salary [Section 17(3)]

It includes the following:

(i) Compensation on account of termination of his employment

The amount of any compensation due to or received by an assesse from his employer or former employer at or in connection with the termination of his employment.

(ii) Compensation on account of modification of the terms and conditions of employment

The amount of any compensation due to or received by an assesse from his employer or former employer at or in connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary. Note: It is to be noted that merely because a payment is made by an employer to a person who is his employee does not automatically fall within the scope of the above provisions. The payment must be arising due to master-servant relationship between the payer and the payee. If it is not on that account, but due to considerations totally unconnected with employment, such payment is not profit in lieu of salary.

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CADEMY


Example: A was an employee in a company in Pakistan. At the time of partition, he migrated to India. He suffered loss of personal movable property in Pakistan due to partition. He applied to his employer for compensating him for such loss. Certain payments were given to him as compensation. It was held that such payments should not be taxed as ‘profit in lieu of salary’ - Lachman Dass Vs. CIT [1980] 124 ITR 706 (Delhi).

(iii) Payment from provident fund or other fund

Any payment due to or received by an assesse from his employer or former employer from a provident or other fund other than - Gratuity [Section 10(10)] - Pension [Section 10(10A)] - Compensation received by a workman under Industrial Disputes Act, 1947 [Section 10(10B)] - from provident fund or public provident fund [Section 10(11)] - from recognized provident fund [Section 10(12)] - from approved superannuation fund [Section 10(13)] - any House Rent Allowance [Section 10(13A)], To the extent to which it does not consist of employee’s contributions or interest on such contributions. Note: If any sum is paid to an employee at the time of maturity from an unrecognised provident fund it is to be dealt with as follows:

(a) That part of the sum which represents the employer’s contribution to the fund and interest thereon is taxable under salaries.

(b) that part of the sum which represents employee’s contribution and interest thereon is not chargeable to tax since the same have already been taxed under the head ‘salaries’ and ‘other sources’ respectively.

(iv) Keyman Insurance policy

Any sum received by an assesse under a Keyman Insurance policy including the sum allocated by way of bonus on such policy.

(v) Lumpsum Payment or otherwise

Any amount, whether in lumpsum or otherwise, due to the assesse or received by him, from any person –

(a) before joining employment with that person, or (b) after cessation of his employment with that person.

(i) Compensation on account of termination of employment and compensation on account of modification of the terms and conditions of employment The Compensation on account of termination of employment and compensation on account of modification in terms and conditions of employment would be taxable as “profits in lieu of salary”. However, the retrenchment compensation would be exempt under section 10(10B), subject to limits specified therein. Exemption of retrenchment compensation [Section 10(10B)] The retrenchment compensation means the compensation paid under Industrial Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any law. It also includes compensation paid on transfer of employment under section 25F or closing down of an undertaking under section 25FF of the Industrial Disputes Act, 1947. The retrenchment compensation would be exempt under section 10(10B), subject to following limits.

(a) Amount calculated in accordance with the provisions of section 25F of the Industrial Disputes Act, 1947

PRIME A

CADEMY


i.e. 15

26×

Avg salary of last 3 months x Completed years of service and part thereof in exxcees of 6 months Or

(b) An amount, not less than INR 5,00,000 as may be notified by the Central Government in this behalf, Whichever is lower.

Note: The above limits will not be applicable to cases where the compensation is paid under any scheme approved by the Central Government for giving special protection to workmen under certain circumstances.

B. There are two units of the house. Unit I with 3/4th area is used by Rajesh for self-occupation

throughout the year and no benefit is derived from that unit, hence, it will be treated as self-occupied and its annual value will be nil. Unit 2 with 1/4th area is let-out during the previous year and its annual value has to be determined as per section 23(1). Computation of Income from house property of Mr. Rajesh for the A.Y. 2018-19

Particulars INR

Unit I (3/4th area – self-occupied)

Annual Value Nil

Less: Deduction under section 24(b) 3/4th of INR 1,48,000 1,11,000

Income from Unit I (self-occupied) 1,11,000)

Unit II (1/4th area – let out)

Computation of GAV

Step 1 – Computation of Expected Rent (ER)

ER = Higher of municipal valuation (MV) and fair rent (FR), but restricted to standard rent (SR). However, in this case, standard rent of INR 1,20,000 (1/4th of INR 4,80,000) is more than the higher of MV of INR 1,00,000 (1/4th of INR 4,00,000) and FR of INR 1,10,000 (1/4th of INR 4, 40,000). Hence the higher of MV and FR is the ER. In this case, it is the fair rent.

1,10,000

Step 2 – Computation of actual rent received/ receivable INR 12,000×9 = 1,08,000 [The property was let-out for 11 months. However, rent for 2 months i.e., January and February, 2018 could not be realized. As per Explanation to section 23(1), actual rent should not include any amount of rent which is not capable of being realized. Therefore, actual rent has been computed for 9 months]

1,08,000

Step 3 – GAV is the higher of ER and actual rent received/receivable. However, as per section 23(1)(c), where the let-out property is vacant for part of the year and owing to vacancy, the actual rent is lower than the ER, then the actual rent received would be the GAV of the property. In this case, the actual rent is lower than the ER owing to vacancy, since had the property not been vacant in March 2018, the actual rent would have been INR 1,20,000 (i.e. INR 1,08,000 + INR 12,000), which is higher than the ER of INR 1,10,000. Therefore, in this case, section 23(1) (c) would apply and the actual rent of INR 1,08,000 would be the GAV, since it is lower than the ER owing to vacancy.

1,08,000

Gross Annual Value (GAV) 1,08,000

Less: Municipal taxes paid by the owner during the previous year relating to let-out portion 1/4th of (10% of INR 4,00,000) =INR 40000/4 = INR 10,000

10,000

Net Annual Value(NAV) 98,000

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Less: Deductions under section 24

(a) 30% of NAV = 30% of INR 98,000 (b) Interest paid on borrowed capital (relating to let out portion)

[1/4th of INR 1,48,000

29,400 37,000

66,400

Income from Unit II (let-out) 31,600

Loss under the head “Income from house property” (-1,11,000 + 31,600) -79,400

C. The amount of capital gains arising to R has to be computed applying the provisions of sub-section

(7) of section 94, which provides that “where: (a) any person buys or acquires any securities or unit within a period of three months prior to the

record date; and (b) such person sells or transfers –

(i) such securities within a period of three months after such date; or (ii) such unit within a period of nine months after such date; and

(c) the dividend or income on such securities or unit received or receivable by such person is exempted,

Then the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purpose of computing his income chargeable to tax”.

For this purpose, “record date” means such date as may be fixed by a company for the purpose of entitlement of the holder of the securities to receive dividend; “securities” includes stocks and shares.

Computation of capital gains of Mr. R for the assessment year 2018-19

Particulars INR INR

Long-term capital gain on sale of building 75,000

Less: Short-term capital loss on sale of shares

700 shares 7,000

300 shares 7,500 14,500

Taxable long-term capital gains 60,500

Computation of capital gain on sale of shares of A Ltd. by Mr. R

Date of purchase of shares 30.5.2017

Record date 10.8.2017

Date of sale of shares 30.9.2017 20.12.2017

Number of shares sold 700 300

Sale price per share INR 35 INR 25

Particulars INR INR

Sale consideration 24,500 7,500

Less: Cost of acquisition 35,000 15,000

10,500 7,500

Less: Dividend income as per section 94(7)[700× INR 10×50%] [See Note below]

3,500 -

Short-term capital loss on sale of shares 7,000 7,500

Note: (1) 700 shares are sold within 3 months after the record date. Hence, as per section 94(7), the

related dividend income should be deducted from the loss. (2) 300 shares having been sold after 3 months of record date, section 94(7) is not attracted.

Therefore, the dividend income of INR 1,500 [300×INR 10×50%] should not be deducted. Such dividend is exempt under section 10(34).

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(3) Short-term capital loss can be set-off against long-term capital gains as per the provisions of section 74(1)(a). Therefore, short-term capital loss on sale of shares can be set-off against long-term capital gains on sale of building.

D. Interest under section 234A: Since the return of income has been furnished by Sigma Consulting (P)

Ltd. on 22nd October, 2018 i.e., 22 days after the due date for filing return of income (30.9.2018), interest under section 234A will be payable for 1 month @ 1% on the amount of tax payable on the total income, as reduced by tax reliefs and prepaid taxes.

Particulars INR

Tax on total income (INR 15, 00,000 x 30.9%) (Since turnover of P.Y. 2015-16 > INR 50 crore)

4,63,500

Less: Advance tax paid 2,80,000

Less: Tax deducted at source 1,35,600

Less: Relief of tax allowed under section 90 22,000

Tax payable on self-assessment Interest = INR 25,900 x 1% = INR 259

25,900

Interest under section 234B: Where the advance tax paid by the assesse is less than 90% of the assessed tax, the assesse would be liable to pay interest under section 234B.

Computation of assessed tax INR

Tax on total income (INR 15, 00,000 x 30.9%) 4,63,500



Assessed tax 90% of assessed tax = INR 3,05,900 x 90% = INR 2,75,310

3,05,900

Since the advance tax paid by Sigma Consulting (P) Ltd. (INR 2,80,000) is more than 90% of the assessed tax (INR 2,75,310), it is not liable to pay interest under section 234B.

Interest under section 234C

Particulars INR

Tax on total income (INR 15, 00,000 x 30.9%) 4,63,500



Tax due on returned income/Total advance tax payable

3,05,900

Calculation of interest payable under section 234C:

Date Advance tax paid till date INR

Advance tax payable till date %

Minimum % of tax due on returned income to be paid till date to avoid interest u/s 234C (c)

Shortfall Interest

% Amount INR INR INR

15.6.2017 38,000 15% 12% 36,708 - Nil (See Note below)

15.9.2017 1,11,000 45% 36% 1,10,124 - Nil (See Note below)

15.12.2017 2,03,000 75% 75% 2,29,425 26,425 26,425 x 1% x 3

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months = 793

15.3.2018 2,80,000 100% 100% 3,05,900 25,900 25,900 x 1% = 259

Interest payable under section 234C (Nil + Nil + INR 793 + INR 259) INR 1,052

Note: Since the advance tax paid by Sigma Consulting (P) Ltd. on 14th June, 2017 is more than 12% of the tax due on returned income (i.e., INR 3, 05,900) and the advance tax paid on 13th September, 2017 is more than 36% of the tax due on returned income, it is not liable to pay any interest under section 234C in respect of these two quarters. Fee under section 234F INR 5,000 is payable under section 234F by way of fee, since the return was filed after the due date but before 31.12.2018

2. Computation of Income of Pingu Trading Pvt. Ltd. chargeable to tax for the A.Y.2018-19

Particulars INR

Net profit as per profit and loss account 33,90,000

Add: Difference in the value of stocks detected on survey under section 133A on 31.03.2018 chargeable as income (See Note 1)

3,75,000

37,65,000

Less: Income-tax refund credited in the profit and loss account, out of which interest is to be considered separately under the head “Income from other sources”

20,000

37,45,000

Add: Expenses either not allowable or to be considered separately but charged in the profit & loss account

Repair expenses on rented premises where assesse is under no obligation to incur such expenses are not allowable as per section 30(a)(i). However, if such expenses are required for carrying on the business efficiently, the same are allowable under section 37. In this case, assuming that such expenses are required for carrying on business efficiently, the same are allowable under section 37.

Advertisement in the souvenir of political party not allowable as per section 37(2B) (See Note 3)

2,500

Payment made to the wife of a director examined as per section 40A(2) and the excess payment made to be disallowed (See Note 5)

75,000

Payment made to electoral trust by cheque (See Note 6) 1,00,000

Penalty levied by the Goods and Services tax department for delayed filing of returns not allowable as being paid for infraction of law (See Note 7)

5,300

Depreciation as per books 71,500

30% of interest paid on loan without deduction of tax at source not allowable as per section 40(a)(ia)

24,000

40,23,300

Less: Depreciation allowable as per Income-tax Act, 1961 65,000

39,58,300

Less: Income from specified business (warehousing charges) credited to profit and loss account, to be considered separately (See Note 8)

15,00,000

Income from business (other than specified business) 24,58,300

Computation of income/loss from specified business (See Note 8)

Income from specified business INR 15,00,000

Less: Deduction under section 35AD @ 100% of INR 25 lakhs INR 25,00,000

Loss from specified business to be carried forward as per section 73A (10,00,000)

Income from Other Sources

Interest on income-tax refund 4,570

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Gross Total Income 24,62,870

Less: Deduction under section 80GGB

Contribution to political party (See Note 3) INR 2,500

Contribution to an Electoral trust (See Note 7) INR 1,00,000 1,02,500

Total Income 23,60,370

Notes: (1) The business premises were surveyed and differences in the figures of opening and closing

stocks and sales were found which have not been disputed and accepted by the assesse. Therefore, the trading account for the year is to be re-cast to arrive at the correct amount of the gross profit/ net profit for the purpose of return of income to be filed for the previous year ended on 31.3.2018.

REVISED TRADING ACCOUNT

Particular INR Particular INR

Opening Stock 8,75,000 Sales (INR 1,55,50,000 +INR 75,000)

1,56,25,000

Purchases 1,25,75,000 Closing Stock 12,50,000

Freight and Cartage 1,26,000

Gross Profit 32,99,000

1,68,75,000 1,68,75,000

The difference of gross profit of INR 32,99,000 – INR 29,24,000 = INR 3,75,000 is to be added as income of the business for the year. (2) Bonus for the previous year 2016-17 paid after the due date for filing return for that year would

have been disallowed under section 43B for the P.Y.2016-17. However, when the same has been paid in December 2017, it should be allowed as deduction in the P.Y.201718 (A.Y.2018-19). Since it is already included in the figure of bonus to staff debited to profit and loss account of this year, no further adjustment is required.

(3) The amount of INR 2,500 paid for advertisement in the souvenir issued by a political party attracts disallowance under section 37(2B). However, such expenditure falls within the meaning assigned to “contribute” under section 293A of the Companies Act, 1956, and is hence, eligible for deduction under section 80GGB. Any contribution to the political party or electoral trust made by way of cash is not allowed as deduction under section 80GGB. Since in the present case, the payment to the political party is made by way of an account payee cheque, it is allowed as deduction under section 80GGB

(4) The penalty of INR 15,000 paid for non-fulfilment of delivery conditions of a contract for reasons beyond control is not for the breach of law but was paid for breach of contractual obligations and therefore, is an allowable expense.

(5) It has been assumed that INR 25,000 is the reasonable payment for the wife of Director, working as a junior lawyer, since junior advocates of High Courts normally charge only INR 25,000 for the same opinion and therefore, the balance INR 75,000 has been disallowed.

(6) Payment to an electoral trust qualifies for deduction under section 80GGB since the payment is made by way of a cheque. However, since the amount has been debited to profit and loss account, the same has to be added back for computing business income.

(7) The interest of INR 12,750 paid on the delayed deposit of goods and services tax is for breach of contract and hence, is allowable as deduction. However, penalty of INR 5,300 for delay in filing of returns is not allowable since it is for breach of law.

(8) Deduction @ 100% of the capital expenditure is available under section 35AD in respect of specified business of setting up and operating a warehouse facility for storage of agricultural produce which commences operation on or after 1.04.2012. It is presumed that INR 25 lakhs does not include expenditure on acquisition of any land.

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The loss from specified business under section 35AD (warehousing) should be segregated from the income from other businesses, since, as per section 73A(1), any loss computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business. In view of the provisions of section 73A (1), the loss of INR 10 lakhs from the specified business cannot be set-off against income from other businesses. Such loss has to be carried forward to be set-off against profit from specified business in the next assessment year. The return should be filed on or before the due date under section 139(1) for carry forward of such losses.

3. A. (i) Section 147 states that if the Assessing Officer has reason to believe that any income chargeable to

tax has escaped assessment for any assessment year, he may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section.

The Assessing Officer should, therefore, have reason to believe that income chargeable to tax has escaped assessment. The belief should be that of the Assessing Officer and not of the revenue audit team. Further, the Income-tax Act, 1961 does not confer jurisdiction on the Assessing Officer to change its opinion on the interpretation of a particular provision earlier adopted by it. If the issue had already been considered earlier during the course of scrutiny assessment and the Assessing Officer had come to a conclusion that no disallowance of interest paid by the assesse is required, even though loans had been given to sister concern without any interest, the same issue cannot be the basis of reassessment, merely because the revenue audit team takes a different view. The Supreme Court, in ACIT v. ICICI Securities Primary Dealership Ltd. (2012) 348 ITR 299, held that re-opening of the assessment by the Assessing Officer on the ground of change of opinion is not valid. Therefore, the Assessing Officer cannot issue notice under section 148 on the basis of audit objection of the Revenue Audit team. If the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of reopening would be invalid.

(ii) The option open to the Revenue is initiation of proceedings under 263, by the jurisdictional Commissioner. He has the power to call for and examine the records, if he is of the opinion that the order passed by the Assessing Officer under section 143(3) is erroneous in so far as it is prejudicial to the interests of the Revenue.

However, where the Assessing Officer has considered the issue in the original assessment and come to a conclusion that no disallowance of interest is called for, the Commissioner cannot initiate revisionary proceedings, merely because he holds a different view. Only where the view taken by the Assessing Officer is unsustainable in law, the Commissioner will be justified in initiating the revisionary proceedings under section 263. It was so held in CIT vs. Sohana Woollen Mills (2008) 296 ITR 238 (P & H). Mere audit objection and possibility of a different view are not sufficient to conclude that the order of the Assessing Officer is erroneous or prejudicial to the interest of revenue.

B. Piyush returned to India on 12th June 2017 for permanently residing in India after staying in UK for 20 years. During the P.Y.2017-18, he stays in India for 293 days. Since he has stayed in India for a period of 182 days or more during the previous year 2017-18, he would be a resident in India for the A.Y.2018-19. However, he would be a resident but not ordinarily resident, assuming that he was a non-resident in nine out of ten previous years preceding P.Y.2017-18 / his stay in India during the

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seven previous years is less than 730 days. The residential status of Piyush for A.Y.2018-19 is, therefore, Resident but Not Ordinarily Resident. As per section 5(1), only income which is received/deemed to be received/accrued or arisen/deemed to accrue or arise in India is taxable in case of a Resident but not Ordinarily Resident. Income which accrues or arises outside India shall not be included in his total income, unless it is derived from a business controlled in, or a profession set up in, India. (i) Rental income from a flat in London which was deposited in a bank there shall not be taxable in

the case of a resident but not ordinarily resident, since both the accrual and receipt of income are outside India.

(ii) Dividends from shares of three German Companies, collected in a bank account in London, would also not be taxable in the case of a resident but not ordinarily resident since both the accrual and receipt of income are outside India.

(iii) As per section 64(1A), all income accruing or arising to a minor child is includible in the hands of the parent, after providing for deduction of INR 1,500 per child under section 10(32).

Accordingly, income of INR 20,000 accruing to his minor son, aged 12 years, in India is includible in the income of Piyush, after providing deduction of INR 1,500. Therefore, INR 18,500 is includible in the income of Piyush. Income accruing to the minor child outside India (which is also received outside India) is not includible in the income of Piyush. Since the other son is major, his income is not includible in the income of Piyush. (iv) Repatriation of sale proceeds of 1000 shares sold in the preceding accounting year, when

Piyush was a non-resident, is not taxable in the A.Y.2018-19 since it is not the income of the P.Y.2017-18.

Consequently, only the income includible under section 64(1A) would form part of the total income of Mr. Piyush for A.Y.2018-19. Since his total income (i.e., INR 18,500) is less than the basic exemption limit, there would be no liability to income-tax for A.Y.2018-19.

4. A. (i) Explanation 3 to section 2(1A) provides that the income derived from saplings or seedlings grown

in a nursery shall be deemed to be agricultural income, whether or not the basic operations were carried out on land. Accordingly, the income of INR 75,000 derived by a nursery from the sale of seedlings grown without carrying out all the basic operations on land shall be treated as agricultural income and exempt from tax under section 10(1).

(ii) Section 10(26AAA) exempts the income which accrues or arises to a Sikkimese individual from any source in the State of Sikkim and the income by way of dividend or interest on securities. Therefore, the income of Ms. Reema from a business located in Sikkim and interest income on the securities issued by the Central Government shall not be subject to tax.

(iii) Any payment from an approved superannuation fund made by way of transfer to the account of an employee under a notified pension scheme referred to in section 80CCD and notified by the Central Government is exempt under section 10(13). Since Atal Pension Yojana is a notified pension scheme under section 80CCD, the amount of ` 10 lakhs transferred from an approved superannuation fund to the NPS Account of Mr. Sriram, an employee of Gamma Ltd., is exempt under section 10(13).

(iv) The proviso to section 80CCD (3) provides that the amount received by the nominee, inter alia, on closure of NPS account on the death of the assesse, shall not be deemed to be the income of the nominee. Accordingly, the amount of INR 7.40 lakhs standing to the credit of Mr. Sharma’s NPS Account, received by the nominee Smt. Vidya, on closure of the account after death of her husband, would not be deemed to be her income.

(v) The amount of any contribution by the employer to an approved superannuation fund in respect of an employee would be a taxable perquisite under section 17(2), to the extent it exceeds INR 1, 50,000. In this case, since the contribution by the employer, Alpha Ltd., is only INR 1, 20,000, no

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part of the said contribution would be taxable as perquisite under section 17(2) in the hands of the employee, Mr. Ganesh.

B. Section 276CC provides for prosecution for wilful failure to furnish a return of income within the

prescribed time, in a case where tax would have been evaded had the failure not been discovered. Since the amount of tax which would have been evaded does not exceed INR 25 lakh, the imprisonment would be for a term of 3 months to 2 years. In addition, fine would also be attracted. However, in a case where the return of income is not filed within the due date, prosecution proceedings will not be attracted if the tax payable by the assesse on the total income determined on regular assessment, as reduced by the advance tax, if any, paid and any tax deducted at source, does not exceed INR 3,000. In this case, even though the tax liability of the firm as per the original order of assessment exceeded INR 3,000, however, as a result of the order of the Commissioner (Appeals), it got reduced to INR 1,000, which is less than INR 3,000. Therefore, since the tax liability of the firm on final assessment was determined at INR 1,000, the prosecution proceedings are not maintainable. In Guru Nanak Enterprises v. ITO (2005) 279 ITR 30, where the facts were similar, the Supreme Court held that prosecution was unwarranted.

C. Computation of total income of the institution for the A.Y. 2018-19

Particulars INR in crores

Fees received 14.00

Less : 15% (exempt even if not spent for the objects of the institution) 2.10

11.90

Less : Accumulated for specified purpose (See Note 2) 4.00

Balance to be spent 7.90

Actual amount spent on construction of computer science lab (See Note 1) 0.50

Actual amount spent on purchase of land for cricket field (See Note 1) 2.00

Total Income 5.40

Notes: (1) The institution must utilise 85% of its income within the previous year for the objects of the

institution. The institution can apply its income either for revenue expenditure or for capital expenditure provided the expenditure is incurred for promoting the objects of the institution. Land acquired and meant for use as cricket field for students is a capital expenditure incurred for promoting the objects of the institution and hence, eligible for deduction. Likewise, the amount spent on construction of computer science laboratory is also eligible for deduction.

(2) Section 11(2) provides that a trust/institution can accumulate or set apart its income for a specified purpose by furnishing statement in prescribed format to the concerned Assessing Officer. However, the period for which the funds can be accumulated cannot exceed 5 years. The amount so accumulated should be invested in the specified forms and modes. In this case, the institution has to furnish statement in Form 10 on or before the due date of filing return of income to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is being accumulated or set apart, which shall, in no case, exceed five years. Further, the institution has to invest INR 4 crore in the specified forms and modes.

5. A. Facts of the case: The assesse filed its return of income as a partnership firm for the relevant

assessment year admitting a total income of Rs.174.36 lakhs. The firm consisted of thirteen individuals and two firms. The return of income was selected for scrutiny which led to disallowance

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of certain deductions to the tune of Rs.262.50 lakhs. The assesse preferred an appeal. The CIT (Appeals) invoked section 251 and issued a show cause notice proposing to change the assesses status to AOP on the reasoning that a partnership firm cannot be a partner in another firm. The assesse filed writ of certiorari to quash the show cause notice. Note: ‘Certiorari’ is “a writ issued by a superior court calling up the record of a proceeding in a lower court for review”. High Court’s Observations: The Revenue contended that the CIT(Appeals) has power to modify assesses status, since a partnership firm is a relationship between persons who have agreed to share the profits of the business carried on by all or any of them acting for all, and the term persons only connotes natural persons. Since some of the partners are other firms, the assessment cannot be carried out as a firm. They relied on the Supreme Court’s ruling in Dhulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC) to argue this point. The High Court observed that, under section 251(1), the powers of the first appellate authority are coterminous with those of the Assessing Officer and the appellate authority can do what the Assessing Officer ought to have done and also direct him to do what he had failed to do. If the Assessing Officer had erred in concluding the status of the assesse=e as a firm, it could not be said that the Commissioner (Appeals) had no jurisdiction to go into the issue. The appeal was in continuation of the original proceedings and unless fetters were placed upon the powers of the appellate authority by express words, the appellate authority could exercise all the powers of the original authority.

B. Facts of the case: In the present case, a transferor under a transfer by way of slump sale transferred its on-going business unit to the assesse company. On perusal of the sale consideration, it was found that some part of it was attributable to the tangible assets and the balance payment was made by the assesse company for acquisition of various business and commercial rights categorized under the separate head, namely, "goodwill" in the books of account of the assesse. These business and commercial rights comprised the following: business claims, business information, business records, contracts, skilled employees, knowhow. The assesse company claimed depreciation under section 32 on the excess amount paid which was classified as “goodwill” under the category of intangible assets. Assessing Officer’s contention vis-a-vis Assesses contention: The Assessing Officer accepted the allocation of the slump sale between tangible and intangible assets (described as Goodwill). However, he claimed that depreciation in terms of section 32(1)(ii) is not allowable on goodwill. He further contended that the assesse has failed to prove that such payment can be categorized under “other business or commercial right of similar nature” as mentioned in section 32(1)(ii) to qualify for depreciation.

The assesse argued that any right which is obtained for carrying on the business effectively, is likely to come within the sweep of the meaning of intangible asset. Therefore, the present case shall qualify for claiming depreciation since business claims, business information, etc, are in the nature of “any other business or commercial rights”. However, the Revenue argued that, the business or commercial rights acquired by the assesse would not fall within the definition of intangible assets under section 32. High Court’s Observations: The Delhi High Court observed that the principle of ejusdem generis provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind. The Court applied this principle for interpreting the expression "business or commercial rights of similar nature" specified in section 32(1)(ii). It is seen that such rights need not be the same as the description of "know-how, patents, trademarks, licenses or franchises" but must be of similar nature as that of specified assets. The use of these general words after the specified intangible assets in section 32(1) (ii) clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible

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assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. Further, it was observed that the above mentioned intangible assets are invaluable assets, which are required for carrying on the business acquired by the assesse without any interruption. In the absence of the aforesaid intangible assets, the assesse would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assesse has got a running business. The aforesaid intangible assets are, therefore, comparable to a license to carry on the existing business of the transferor.

C. Facts of the case: In the present case, the assesse was previously a partner in a firm. As per the

dissolution deed of the partnership firm, with effect from 18th September, 2004, he took over the entire business of the partnership firm in his individual capacity including fixed assets, current assets and liabilities and the other partner was paid his dues. He then ran the business as a sole proprietor with effect from that date. The assesse, relying upon section 78(2) and the decisions of the Supreme Court in CIT v. Madhukant M. Mehta (2001) 247 ITR 805 (SC) and Saroj Aggarwal v. CIT (1985) 156 ITR 497 (SC), claimed the set-off of the losses suffered by the erstwhile partnership firm against his income earned as an individual proprietor, considering the case as inheritance of business.

However, considering that only the person who has suffered the loss is entitled to carry forward and set-off the same, the claim of the assessee was disallowed by the Assessing Officer. The Tribunal concurred with the Assessing Officer’s view. High Court’s Observations: The High Court observed that upon dissolution, the partnership firm ceased to exist. Also, the partnership firm and the proprietorship concern are two separate and distinct units for the purpose of assessment. As per section 170(1), the partnership firm shall be assessed as such from 1st April of the previous year till the date of dissolution (i.e., 18th September, 2004). Thereafter, the income of the sole-proprietorship shall be taxable in the hands of the assesse as an individual. Thus, section 170(1) provides as to who will be assessable in respect of the income of the previous year from business, when there is a change in the person carrying on business by succession. Section 78(2), however, deals with carry forward of losses in case of succession of business. It provides that only the person, who has incurred the losses, and no one else, would be entitled to carry forward the same and set it off. An exception provided thereunder is in the case of succession by inheritance. Therefore, section 170(1) providing the person in whose hands income is assessable in case of succession and section 78(2) providing for carry forward of losses in case of succession of business, deal with different situations and resultantly, there is no contradiction between these sections. The income earned by the sole proprietor would include his share of loss as an individual but not the loss suffered by the erstwhile partnership firm in which he was a partner. The exception given in section 78(2), permitting carry forward of losses by the successor in case.of inheritance, is not applicable in the present case since the partnership firm was dissolved and ceased to continue. Taking over of business by a partner cannot be considered as a case of inheritance due to death as per the law of succession. The High Court opined that the decision in Madhukant M. Mehta’s case and Saroj Aggarwal’s case cannot be applied since this is not a case of succession by inheritance. High Court’s Decision: Therefore, the loss suffered by the erstwhile partnership firm before dissolution of the firm cannot be carried forward by the successor sole-proprietor, since it is not a case of succession by inheritance. The assesse sole-proprietor is, therefore, not entitled to set off the loss of the erstwhile partnership firm against his income.

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Note - In Madhukant M. Mehta’s case, the sole proprietor had expired and after his death the heirs succeeded the business as a partnership concern. Therefore, the losses suffered by the deceased proprietor was allowed to be set-off by the partnership firm since the case falls within the exception mentioned under section 78(2), i.e., a case of succession by inheritance. Also, in Saroj Aggarwal’s case, upon death of a partner, his legal heirs were inducted as partners in the partnership firm. The partnership firm was not dissolved on the death of the partner. The partnership firm which suffered the losses continued with induction of the legal heirs of the deceased partner. This, being a case of succession by inheritance, the benefit of carry forward of losses was given to the re-constituted partnership firm. In the present case, however, the partnership firm was dissolved and the takeover of the running business of the firm by the erstwhile partner as a sole proprietor was not a case of succession by inheritance. Hence, the carry forward of losses of the firm by the sole proprietor was not allowed in this case.

D. Facts of the case: A notice under section 148 dated 27th March, 2015 was addressed to the assesse

for the assessment year 2008-09. The notice got returned unserved with the postal authorities endorsing on it the remarks “addressee expired”. Later, the Assessing Officer issued a letter dated 15.06.2015 to the petitioner seeking details of legal heirs/successors of the deceased (assesse) to complete the proceedings for the assessment year 2008-09.

The assesse, being one of the legal representatives of the deceased, wrote to the Assessing Officer pointing out that the proceedings initiated under section 148 were barred by limitation. The Assessing Officer proceeded to make the assessment under section 147 which the assesse challenged by means of a writ. High Court’s Observations: The High Court took note of section 159 which sets out the procedure to be adopted when the assessment is made on the legal representatives. Section 159(2)(a) states that any proceeding already taken against an assesse ‘before his death’ shall be deemed to have been taken against the legal representative. As per section 159(2)(b), any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative of the deceased assesse, even if it had not been taken while the assesse was alive. The Assessing Officer initiated proceedings under section 147 against the deceased for the assessment year 2008-09. The time limit for issue of notice was 31.03.2015, since the income escaping assessment exceeded ` 1 lakh. On March 27, 2015 when the notice was issued, the assesse was already dead. If the Department intended to proceed under section 147, it could have done so prior to 31.03.2015 by issuing a notice to the legal representatives of the deceased. Beyond that date, it could not have proceeded in the matter even by issuing notice to the legal representatives of the assesse. High Court’s Decision: The High Court, accordingly, held that issue of notice on the legal representatives beyond the limitation time would render the reassessment proceedings invalid.

6. A. Computation of total income of Mr. Kamesh for A.Y.2018-19

Particulars INR INR

Income from House Property [House situated in country Y]

Gross Annual Value1 2,40,000

Less: Municipal taxes (assumed as paid in that country) 10,000

Net Annual Value 2,30,000

Less: Deduction under section 24 – 30% of NAV 69,000

1,61,000

Profits and Gains of Business or Profession

Income from profession carried on in India 7,50,000

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Less: Business loss in country Y set − off 2 65,000

6,85,000

Income from Other Sources

Agricultural income in country X 50,000

Dividend received from a company in country Y 1,50,000

Royalty income from a literary book from Country X (after deducting expenses of INR 50,000)

5,50,000 7,50,000

Gross Total Income 15,96,000

Less: Deduction under Chapter VIA

Under section 80QQB – Royalty income of a resident from literary work

3

3,00,000

Total Income 12,96,000

Computation of tax liability of Mr. Kamesh for A.Y.2018-19

Particulars INR

Tax on total income [30% of INR2,96,000 + INR 1,12,500]4 2,01,300

Add: Education cess@2% 4,026

Secondary and higher education cess @ 1% 2,013

2,07,339

Less: Rebate under section 91 (See Working Note below) 71,820

Tax Payable 1,48,394

Tax payable (rounded off) 1,48,390

Working Note: Calculation of Rebate under section 91 INR INR

Average rate of tax in India [i.e., INR 2,07,339 / INR 12,96,000 x 100]

16%

Average rate of tax in country X 10%

Agricultural Income 50,000

Royalty Income [INR 6,00,000 – INR 50,000 (Expenses) – INR 3,00,000 (deduction under section 80QQB)]5

2,50,000

3,00,000

Rebate under section 91 on INR 3, 00,000 @10% [being the lower of average Indian tax rate (16%) and foreign tax rate (10%)]

30,000

Average rate of tax in country Y 25%

Doubly taxed income pertaining to country Y

Income from house property 1,61,000

Dividend 1,50,000

3,11,000

Less: Business loss set-off 65,000

2,46,000

Rebate under section 91 on INR 2, 46,000 @16% (being the lower of average Indian tax rate (16%) and foreign tax rate (25%)]

39,360

Total rebate under section 91 (Country X + Country Y) 69,360

Note: Mr. Kamesh shall be allowed deduction under section 91, since the following conditions are fulfilled:- (a) He is a resident in India during the relevant previous year (i.e., P.Y.2017-18). (b) The income in question accrues or arises to him outside India in foreign countries X and Y during

that previous year and such income is not deemed to accrue or arise in India during the previous year.

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(c) The income in question has been subjected to income-tax in the foreign countries X and Y in his hands and it is presumed that he has paid tax on such income in those countries.

(d) There is no agreement under section 90 for the relief or avoidance of double taxation between India and Countries X and Y where the income has accrued or arisen.

B. ABC Ltd. is deemed to have under-reported its income since: (1) the assessment under 143(3) has the effect of reducing the loss determined in a return

processed under section 143(1)(a); and (2) The reassessment under section 147 has the effect of converting the loss assessed under

section 143(3) into income. Therefore, penalty is liveable under section 270A for under-reporting of income. Computation of penalty liveable under section 270A

Particulars INR INR

Assessment under section 143(3) Under-reported income:

Loss assessed u/s 143(3) (-) Loss determined under section 143(1)(a)

(5,00,000) (8,00,000)

3,00,000

Tax payable on under-reported income@30% 90,000

Add: EC & SHEC@3% Penalty leviable@50% of tax payable Reassessment under section 147 Under-reported income: Total income reassessed under section 147 (-) Loss assessed under section 143(3) Tax payable on under-reported income@30% Add: EC & SHEC@3% Penalty leviable@50% of tax payable

2,700

92,700

4,00,000 (5,00,000)

9,00,000

2,70,000

8,100

2,78,100

46,350

1,39,050

Note – The following assumptions have been made – (1) None of the additions or disallowances made in assessment or reassessment qualifies under

section 270A(6); and (2) The under-reported income is not on account of misreporting.

C. The expression “substantial question of law” has not been defined anywhere in the Act. However, it

has acquired a definite meaning through various judicial pronouncements. The tests are: (1) whether directly or indirectly it affects substantial rights of the parties; or (2) the question is of general public importance; or (3) whether it is an open question in the sense that issue is not settled by the pronouncement of

the Supreme Court or Privy Council or by the Federal Court; or (4) the issue is not free from difficulty; or (5) it calls for a discussion for alternative view.

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7. A. The time limit for service of notice under section 143(2) is six months from the end of the financial

year in which the return of income was furnished by the assesse. The return of income for assessment year 2017-18 was filed by the assesse on 6th June, 2017. Therefore, the notice under section 143(2) has to be served by 30th September, 2018. However, the notice was served on the assesse only on 3rd October, 2018. Hence, the notice issued under section 143(2) is time-barred.

However, as per section 292BB, where an assesse had appeared in any proceedings or cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed that any notice required to be served upon him, has been duly served upon him in time in accordance with the provisions of the Act and such assesse shall be precluded from raising any objection in any proceeding or enquiry that the notice was (a) not served upon him or (b) not served upon him in time or (c) served upon him in an improper manner. The above provision shall not be applicable where the assesse has raised such objection before the completion of such assessment or reassessment. Therefore, in the instant case, if the assesse, Tai Limited, had raised an objection to the proceeding, on the ground of non-service of the notice under section 143(2) upon it on time, then, the validity of the assessment order can be challenged. In absence of such objection, the assessment order cannot be challenged.

B. As per the provisions of section 281B, there can be provisional attachment of property to protect the interest of Revenue in certain cases i.e.- (i) The proceeding for the assessment of any income or for the assessment or reassessment of any

income which has escaped assessment should be pending. (ii) Such attachment should be necessary for the purpose of protecting the interest of Revenue in

the opinion of the Assessing Officer. (iii) The previous approval of the Principal Chief Commissioner or Chief Commissioner, Principal

Commissioner or Commissioner, Principal Director General or Director General or Principal Director or Director has been obtained by the Assessing Officer.

(iv) The Assessing Officer, may, by an order in writing attach provisionally any property belonging to the assesse in the manner provided in the Second Schedule.

Such provisional attachment shall cease to have effect after the expiry of a period of six months from the date of order made under section 281B (1). However, the period can be extended by the Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or Commissioner, Principal Director General or Director General or Principal Director or Director, as the case may be, for the reasons to be recorded in writing for a further period or periods as he thinks fit. The total period of extension in any case cannot exceed 2 years or 60 days after the date of order of assessment or reassessment, whichever is later. The Assessing Officer shall, by order in writing, revoke provisional attachment of a property made under section 281B(1) in a case where the assesse furnishes a guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests of the revenue.

C. Section 245Q(3) of the Income-tax Act, 1961 provides that an applicant, who has sought for an

advance ruling, may withdraw the application within 30 days from the date of the application. Since more than 30 days have elapsed from the date of application by Mr. Vallish to the Authority for Advance Rulings, he cannot withdraw the application.

However, the Authority for Advance Rulings (AAR), in M.K. Jain AAR No.644 of 2004, has observed that though section 245Q (3) provides that an application may be withdrawn by the applicant within 30 days from the date of the application, this, however, does not preclude the AAR from permitting

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withdrawal of the application after the said period with its permission, if the circumstances of the case so justify.

D. Facts of the case: In the present case, the assesse was the owner of property comprising the basement, ground floor, first floor and second floor. In the year 2006, she entered into a collaboration agreement with a builder for developing the property. According to the terms of the agreement, the builder was to demolish the existing structure on the plot of land and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, second floor and third floor with terrace at its own costs and expenses. The assesse handed over to the builder, the physical possession of the entire property, along with 22.5% undivided interest over the land. The handing over of the entire property was, however, only for the limited purpose of development. The builder was to get the third floor plus the undivided interest in the land to the extent of 22.5% for his exclusive enjoyment. In addition to the cost of construction incurred by the builder on development of the property, a further amount of INR 4 crores was payable by the builder to the assesse as consideration against the rights of the assesse. Assesses contention vis-à-vis Assessing Officer’s contention: The assesse, in her return of income, showed only INR 4 crores as sales consideration. The Assessing Officer, however, took the view that the sale consideration for the transfer should include not only the amount of INR 4 crores received by the assesse in cash, but also the cost of construction amounting to INR 3.44 crore incurred by the developer in respect of the other floors, which were handed over to the assesse. The assesse contended that if the cost of construction incurred by the builder is to be added to the sale price, then, the same should also correspondingly be considered as re-investment in the residential house for exemption under section 54. However, the Assessing Officer rejected the claim for exemption under section 54 on the ground that the floors obtained by the assesse contained separate residential units having separate entrances and cannot qualify as a single residential unit. He contended that deduction under section 54F was allowable, and that too only in respect of cost of construction incurred in respect of one unit i.e., one floor. Appellate Authorities’ views: The Commissioner (Appeals), on the basis of the judgment in CIT v. D. Ananda Basappa [2009] 309 ITR 0329 (Kar.), took a contrary view. The Tribunal concurred with the view of the Commissioner (Appeals). High Court’s Observations: The High Court observed that sections 54 and 54F use the expression “residential house” and not “residential unit” and it is the Assessing Officer who has introduced a new concept of “residential unit” into these sections. Sections 54 and 54F require the assesse to acquire a "residential house" and so long as the assesse acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the section should be taken to have been satisfied. There is nothing in these sections which requires the residential house to be constructed in a particular manner. The only requirement is that it should be for residential use and not for commercial use. The physical structuring of the new building, whether lateral or vertical should not come in the way of considering the building as a residential house. High Court’s Decision: The High Court held that the fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction under section 54 or section 54F. It is neither expressly nor by necessary implication prohibited. Therefore, the assesse is entitled to exemption of capital gains in respect of investment in the residential house, comprising of independent residential units handed over to the assesse. Note – The Department’s Special Leave Petition against the Delhi High Court’s judgment was dismissed on 29th August, 2014.

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E. (i) If the amount was paid for transfer of business / profession to partnership

As per section 45(3), the profits and gains arising from the transfer of a capital asset by a person to the firm in which he becomes a partner shall be chargeable to tax as the income of the previous year which such transfer takes place. The amount recorded in the books of account of the firm would be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset. Since in this case, consideration of ` 5 lacs is received for such transfer, profit or gain accrues to the transferor for the purposes of section 45. The amount of ` 5 lacs would be the full value of consideration received as a result of transfer and the capital gains resulting from this transfer would be chargeable to tax.

(ii) If the amount is paid by the incoming partner for Goodwill

The Supreme Court, in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294, observed that the income chargeable to capital gains tax is to be computed by deducting from the full value of consideration “the cost of acquisition of the capital asset”. If it is not possible to ascertain the cost of acquisition, then, transfer of such asset is not chargeable to tax. Section 55(2)(a) provides that the cost of acquisition of certain self-generated assets, including goodwill of a business, is Nil. Therefore, in respect of these self-generated assets covered under section 55(2)(a), the decision of the Supreme Court in B.C. Srinivasa Setty’s case would not apply. However, in respect of other self-generated assets, including goodwill of profession, the decision of the Supreme Court in B.C. Srinivasa Setty’s case, would continue to be applicable. In effect, in case of self-generated assets not covered under section 55(2)(a), since the cost is not ascertainable, there would be no capital gains tax liability. Therefore, in this case, since the consideration of ` 5 lakhs is paid towards goodwill of a profession, whose cost is NOT to be taken as ‘Nil’ since it is not covered under section 55(2)(a), the liability to capital gains tax will not arise.

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PAPER 8 – INDIRECT TAXES


No. of Pages: 4 Time Allowed: 3 hrs

Question 1 is compulsory

Answer any Five out of Six Qns.

Working Notes Should form part of Answers

1)

a. Given the following exchange rates, determine the GST Liability –

RBI Reference Rates => USD 63 / GBP 93 / EUR 75

Axis Bank gives you the following transactions to determine GST

a. Sale of USD 15000at INR 61.43

b. Purchase of GBP 25000 of INR 91.70

c. Cross Currency Conversion of USD 4,50,000 into EUR at USD 1.180 per EUR

b. A philanthropic association makes a substantial donation each year to a reputed private management

institute to subsidise the education of low income group students who have gained admission there.

The fee for these individuals is reduced thereby, coming to Rs. 3 Lakhs a year, compared to Rs. 5 Lakh

a year for other students.

What would be the taxable value of service of coaching and instruction provided by the institution?

c. M/s. X Co. Pvt Ltd, crosses the turnover of Rs. 20 Lakhs on 25th June 2018. It makes an application

for registration on 26th June 2018, however due to discrepancies in registration application; the

registration number was received only 1st August 2018? Whether M/s. X Co. Pvt Ltd can take ITC of

GST contained in opening stock as on 26th June 2018 even though the registration number was

received on 1st August 2018?

d. An importer entered into a contract for supply of crude sunflower seed oil @ US 435 CIF / Ton. Under

the contract, the consignment was to be shipped in the month of July. The period was extended by

mutual agreement and goods were shipped on 5th August at old prices.

In the meanwhile, international prices had gone up due to volatility in market and other imports during

the month of August were at higher prices. Department sought to increase the assessable value on the

basis of the higher prices of contemporaneous imports.

Decide whether the contention of the Department is correct, with reference to a decided case law, if

any. ( 4 X 4 = 16 Marks )

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2)

a. You agreed to sell your land property for a sum of Rs.90 Lakhs and received an advance of Rs.15

Lakhs. The agreement states that the buyer shall settle the balance within 60 Days, failing which 50%

of the Advance Money will be forfeited, and the balance returned to him. After 60 Days, the buyer

fails to settle the transaction and the contract is automatically cancelled. You return Rs.7.5L (50% of

the advance received) to the other party, retaining the balance, as agreed. Is there a supply involved?

b. A movie is provided on demand as on-board entertainment during the Bangalore-Delhi leg of a

Singapore-Bangalore-Delhi flight for a charge of Rs.500 per passenger in addition to the fare of the

passenger. What will be the place of supply in this case? Will your answer change, if the above service

is provided on a Delhi-Bangalore-Singapore-Malaysia flight during the Singapore-Malaysia Leg?

c. List the parties who shall be compulsorily required to obtain registration under GST Act.

d. After visiting USA for a month, Mrs & Mr X (Indian residents aged 40 & 45 years respectively)

brought to India a laptop computer valued at Rs.80,000, used personal effects valued at Rs.90,000 and

a personal computer for Rs.52,000. What is the customs duty payable? ( 4 x 4 = 16 Marks )

3)

a. Z Ltd has purchased steel of 10,000 Metric Tonne on 15.08.2017. The goods are received by Z Ltd in

the following manner:

On 25.08.2017 – 2,500 Metric Tonne

On 28.08.2017 – 2,500 Metric Tonne

On 01.09.2017 – 2,500 Metric Tonne

On 02.09.2017 – 2,500 Metric Tonne

Whether Z Ltd can take proportionate ITC relating to 5,000 Metric Tonne in August and balance in

September?

b. An ice-cream parlour selling only ice-cream, wishes to obtain registration as a composition dealer.

Can he do so?

c. Explain the pre-requisites to avail input tax credit.

d. Compute the total customs duty and IGST payable under Customs Law on imported machine, based

on the following information:

Particulars USD

Cost of the machine at the factory of the exporter USD 20,000

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Transport charges from factory of exporter to the port of shipment USD 800

Handling charges paid for loading machine in the ship USD 50

Freight charges from exporting country to India USD 5000

Buying commission paid by the importer USD 100

Lighterage charges paid by the importer at the port of importation INR 12,000

Freight incurred from the port of entry to inland container depot INR 60,000

Ship demurrage charges paid at the port of importation INR 24,000

Date of BOE – 20-1-2018 (BCD rate - 20% & Exchange rate as per CBEC – 60 per USD)

Date of entry inwards – 25-03-2018 (BCD rate - 10% & Exchange rate as per CBEC – 65 per USD)

IGST is charged at 12% ( 4 x 4 = 16 Marks )

4) Define the following terms& explain the relevant provisions

i. Anti-dumping duty

ii. Pilfered goods

iii. Prohibited goods

iv. Composite & mixed supply ( 4 x 4 = 16 Marks )

5)

a. An individual wishes to sell his car, which was used by him for personal purposes, to a second hand

car dealer. Is thus considered as supply?

b. Comment on the applicability of GST in the following independent cases –

a. Service provided by a private transport operator to Scholar Boys Higher Secondary School in

relation to transportation of students to and from the school.

b. Services provided by a School by way of renting of its school ground to be used as Parking Space

by a Star Hotel located in the next compound.

c. Rental income from house provide to a family.

d. Transport of milk, agricultural produce, chemical fertilizers and newspaper registered with the

Registrar of Newspaper by a Goods Transport Agency in a Goods Carriage.

e. Transportation of petroleum and petroleum products and household effects by railways.

f. Transport facility provided by a School, not recognized by Government, to its students through feel

of buses and cabs owned by School.

g. Amount charged by cord blood bank for preservation of stem cells.

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c. M/s. Free Company Pvt Ltd a dealer in laptops, donated laptops worth Rs. 45 Lakhs as part of CSR

Activities. GST of Rs. 8.1 Lakhs was paid on such laptops. Whether ITC can be availed as CSR

Activity is mandatory and in the course or furtherance of business? (4+8+4 Marks)

6)

a. A pharmaceutical company supplies a drug intermediate to its own unit in another state for conversion

into formulations. These supplies are taxable as per Schedule I of CGST Act. The product is exclusive

to this company, and there is no market sale in India of this drug intermediate.

How will the value of the supply of this drug intermediate be determined under GST laws?

b. Mr X, an unregistered person under GST purchases the goods supplied by Mr. Y who is a registered

person without receiving a tax invoice from Mr. Y and thus helps in tax evasion by Mr. Y. What

disciplinary action may be taken by tax authorities to curb such type of cases and on whom?

c. i. What is the time period within which invoice has to be issued for supply of services?

ii. What is the time period within which invoice has to be issued in a case involving continuous supply

of goods?

iii. What is the time period within which invoice has to be issued in a case involving continuous

supply of services?

iv. What is the time period within which invoice has to be issued where the goods being sent or taken

on approval for sale? (4+4+8 Marks)

7)

a. A Ltd, a company importing a particular exempted good has incorrectly paid duty inanother

classification of goods. Whether the same can be claimed as refund? Support your case with a decided

case law.

b. List some supplies which are “deemed exports” for the purpose of benefits under Foreign Trade Policy

2015 – 2020

c. Will an e-commerce operator be liable to pay tax in respect of supply of goods or services made

through it, instead of actual supplier?

d. Under what circumstances can the principal directly supply goods from the premises of job worker

without declaring the premises of job worker as his additional place of business?

(8+4+2+2 = 16 Marks)

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PAPER 8 – INDIRECT TAX LAWS

1 (a) There are two options in the GST calculation on exchange of currency, which are discussed as below:

Option 1 – Value of Difference between the “RBI reference rate” & “Bank rate” multiplied by the

value of currency proposed to be converted.

Option 2 – Value of supply shall be considered based on the below mentioned slabs:

Curr value exchanged in INR Value of supply

Upto Rs.1L 1% or Rs.250, whichever is higher.

Above Rs.1L, upto Rs.10L Rs.1,000 Plus 0.5% of amount in excess of Rs.1L

Above Rs.10L

Lower of the following -

a. Rs.60000

b. Rs.5500 Plus 0.1% of amount in excess of Rs.10L

a. Sale of USD 15000 @ 61.43 (Option 1)

Particulars Amount Remarks

RBI Reference Rate 63.00 (Given)

Contracted Rate 61.43 (Given)

Exchange diff 1.57

Total USD 15,000 USD

Value of supply 23,550

GST at 18% 4,239

Sale of USD 15000 @ 61.43 (Option 2)

Currency value = 15000 x 61.43 = 9,21,450 and hence is covered by Slab 2

GST amount is calculated as follows:

INR Amount Supply value Remarks

Upto 1 Lakh 1,000 (@ 1%)

Above 1 lakh and less than 10 lakh 4,107 (@ 0.5% of the amount > 1L)

Total 5,107

GST @ 18% 919

b. Purchase of GBP 25000 of INR 91.70 (Option 1)


RBI Reference Rate 93.00 (Given)

Contracted Rate 91.70 (Given)

Exchange diff 1.30 Difference

Total GBP 25,000 GBP value

Value of Supply 32,500

GST at 18% 5,850

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Purchase of GBP 25000 of INR 91.70 (Option 2)

Currency value = 25000 x 91.70 = 22,92,500 and hence is covered by Slab 3

GST amount is calculated as follows:

Slab Rate Approach Amount Remarks

Value of Currency Exchanged in INR 22,92,500 (GBP 25000 x Rs.91.7)

Value of Supply (Lower of the following)

a. Rs.60000

b. 5500 Plus (2292500 - 10L) x 0.1% 1292.5

Value of Supply 6,793

GST at 18% 1,223 Rs.

Cross Currency Conversion from USD to EUR

Particulars Remarks Amount

USD 450000 x 1/1.18 = 3,81,356 EUR

Value based on EUR 3,81,356 x RBI Rate 75 x 1% 2,86,017

Value based on USD 8,25,000 x RBI Rate 63 x 1% 5,19,750

Lower of the above = Value of Service = 2,86,017

GST @ 18% 40,042

(b) As per Section 15(2)(e), the value of a supply includes subsidies directly linked to the price,

excluding State and Central Government subsidies. In the given case, the subsidy is not from the

Government but is from a philanthropic association. Thus, the subsidy is to be added back to the price

to arrive at the taxable value, which is 5 Lakhs a year.

(c) As per Section 18 of the CGST Act, a person who has applied for registration within 30 days of

becoming liable for registration is entitled to ITC of input tax in respect of goods held in stock (inputs

as such and inputs contained in semi-finished or finished goods) on the day immediately preceding the

date from which he becomes liable to pay tax.

What is important is making an application within 30 days. It does not matter if the registration

number is received after 30 days. Thus, GST shall be availed on stock as on 25th June 2018.

(d) The contention of the department is incorrect.

The facts are as given in the case of CCus Vishakapatnam vs Aggarwal Industries Ltd. The Supreme

Court in the instant case, observed that since the contract entered into for the supply of crude

sunflower oil @ US 435 CIF per Ton could not be performed on time, the extension of time for

shipment was agreed upon by the contracting parties.

The Supreme court pointed out that the commodity involved had volatile fluctuations in its price in

the international market, but having delayed the shipment, the supplier did not increase the price of

the commodity even after the increase in its price in the international market.

Further, there was no allegation regarding the supplier and importer being in collusion. Thus, the

appeal was allowed in the favour of the assesse and the contract price was accepted as “transaction

value”

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(e) The duties of Anti-profiteering Authority are:

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 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 or

recovery of the amount not returned, as the case may be.

c. Imposition of penalty

d. Cancellation of registration

iv. To furnish a performance report to the GST Council by the 10th of the month succeeding

each quarter

2 (a) As per provisions of Section 2(52), “goods“ means every kind of movable property other than money

and securities but includes actionable claim, growing crops, grass and things attached to or forming

part of the land which are agreed to be severed before supply or under a contract of supply.

Land is an immovable property, and as per Schedule III, the same is neither a good nor a service, and

hence exempted from GST.

Amount received for the proposed sale of land is not subject to GST levy. Also, character of forfeiture

is dependent on the nature of product on which advance has been received, and thus the advance

forfeited is also not subject to GST.

Thus, the above transactions shall not amount to supply under GST.

(b) As per Provisions of Section 12(10), place of service provided on board a conveyance, including a

vessel, aircraft, train or otherwise, shall be the location of the first scheduled point of departure of that

conveyance for the journey.

In case of services provided in the Bangalore-Delhi leg of Singapore-Bangalore-Delhi, the place of

supply shall be the first scheduled point of departure. Hence, Singapore shall be the place of supply,

which is outside India and thus, not charged to GST.

In case of services provided in the Singapore-Malaysia leg of Delhi-Singapore-Malaysia, the place of

supply shall be the first scheduled point of departure. Hence, Delhi shall be the place of supply, and

thus, charged to GST.

(c) Parties who are required to obtain compulsory registration are covered by Section 24 of CGST Act

and are as below:

i. persons making any inter-State taxable supply

ii. casual taxable persons making taxable supply;

iii. persons who are required to pay tax under reverse charge;

iv. person who are required to pay tax under sub-section (5) of section 9;

v. non-resident taxable persons making taxable supply;

vi. persons who are required to deduct tax under section 51, whether or not separately

registered under this Act;

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vii. persons who make taxable supply of goods or services or both on behalf of other taxable

persons whether as an agent or otherwise;

viii. Input Service Distributor, whether or not separately registered under this Act;

ix. persons who supply goods or services or both, other than supplies specified under sub-

section (5) of section 9, through such electronic commerce operator who is required to

collect tax at source under section 52;

x. every electronic commerce operator;

xi. every person supplying online information and database access or retrieval services from

a place outside India to a person in India, other than a registered person; and

xii. such other person or class of persons as may be notified by the Government on the

recommendations of the Council.

(d) As per Baggage Rules, 2016, an Indian resident arriving from a country other than Nepal, Bhutan or

Myanmar is allowed duty free clearance of-

i. Used personal effects and travel souvenirs without any value of limit.

ii. Articles (other than certain specified articles) upto a value of Rs.50,000 carried as

accompanied baggage (general duty free baggage allowance)

Further, such general duty free baggage allowance of a passenger cannot be pooled with

the general duty free baggage allowance of any other passenger.

One laptop computer when imported into India by a passenger of the age of 18 years or above (other

than member of crew) is exempt from whole of the customs duty.

Accordingly, there will be no customs duty on used personal effects (worth Rs.90,000) of Mrs. & Mr.

X and laptop computer brought by them will be exempt from duty.

Duty payable on personal computer after exhausting the duty free baggage allowance will be

Rs.52,000 – Rs.50,000 = Rs.2,000

Effective rate of duty for baggage = 36.05% (incl cess), and thus, customs duty = 721

3 (a) As per Proviso to Section 16(2), in case of receipt of material in lots, the recipient of goods shall be

eligible to avail input credit only after receipt of the last lot and proportionate ITC is not allowed.

Thus, in the given case, input can be availed only on 2nd September 2017.

(b) Composition levy is governed by Section 10 of the CGST Act. The following parties are eligible to

obtain registration under composition levy:

i. Manufacturers, other than manufacturers of such goods as may be notified by the

Government (Ice cream, Pan Masala, Tobbacco prodcuts etc.)

ii. Restaurant services

iii. Traders or any other supplier eligible for composition levy

Thus, as per the above provisions, restriction is only for manufacturer of ice-creams. In the given

case, the ice-cream parlour is not considered as manufacturer and thus, can obtain composition

dealership under “restaurant services”

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(c) As per provisions of Section 16(2), a registered person shall be eligible to avail input tax credit in

respect of goods or services or both only if the following are satisfied:

i. he is in possession of a tax invoice or debit note issued by a supplier registered under this

Act, or such other tax paying documents as may be prescribed

ii. he has received the goods or services or both.

iii. subject to the provisions of section 41, the tax charged in respect of such supply has been

actually paid to the Government, either in cash or through utilisation of input tax credit

admissible in respect of the said supply

iv. he has furnished the return under section 39:

In case payment is not made to the supplier of goods or service or both, within 180 days, the recipient

of shall be required to reverse the input availed and shall be eligible to re-claim the input only after

payment to the supplier.

(d) Computation of customs duty and IGST payable on imported goods


Cost of the machine at factory USD 20,000

Transport charges upto port USD 800

Handling charges at port USD 50

FOB USD 20850

FOB value in INR @ 60 12,51,000 Note 1

Freight charges upto India 3,00,000 USD 5000 x 60

Lighterage charges paid by importer 12,000 Note 2

Ship demurrage charges 24,000 Note 2

Insurance charges @ 1.125% of FOB 14,074

CIF 16,01,074

Add: Landing charges @ 1% of CIF 16,011 Note 3

Assessable value 16,17,085

Add: BCD @ 10% 1,61,709 Note 4

Add: Edu cess @ 3% 4,851 (2% + 1%)

Total 17,83,644

Add: IGST @ 18% on 1783644.19 2,14,037 Note 5

Total customs & IGST payable 3,80,597

Notes

1. Rate of exchange notified by CBEC on the date of presentation of bill of entry is considered.

2. Cost of transport of the imported includes ship demurrage charges and lighterage charges.

3. Insurance charges & landing charges are included @ 1.125% of FOB value of goods & 1% of

CIF value of goods respectively.

4. Rate of duty is the rate prevalent on the date of presentation of bill of entry or the rate

prevalent on the date of entry inwards, whichever is later.

5. Integrated tax leviable under Section 3(7) of Customs Tariff Act, 1975 is levied on the sum of

total of the assessable value of the imported goods, customs duties and applicable education

cess & secondary higher education cess.

6. Buying commission is not included in the assessable value.

7. Freight incurred from port of entry to inland container depot is not includible in assessable

value.

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4 (a) Anti-dumping duty is a duty which is levied on any article imported into India at less than its normal

value. Anti-dumping duty shall be imposed to an extent not exceeding the margin of the dumping in

relation to that article.

Margin of Dumping means difference price between its export price and normal value

Normal Value means comparable value at which the goods are sold in the domestic market of the

exporting country or territory in ordinary course of trade. If normal value cannot be determined, then

normal value shall be comparable export price to an appropriate third country or cost of production in

the country of origin plus administrative, selling, general costs and profits.

(b) If any imported goods are pilfered after the unloading thereof and before the proper officer has made

an order for clearance for home consumption or deposit in a warehouse, the importer shall not be

liable to pay the duty leviable on such goods except where such goods are restored to the importer

after pilferage.

(c) The term “prohibited goods” has been defined under Section 2(33) meaning “any goods the import or

export of which is subject to any prohibition under this Act, or any other law for the time being in

force but does not include any such goods in respect of which the conditions subject to which the

goods are permitted to be imported or exported have been complied with.

Purposes for which import / export can be prohibited:

i. The maintenance of the security of India

ii. The maintenance of public order and standards of decency or morality

iii. Prevention of smuggling

iv. Prevention of shortage of goods of any description

And likewise

(d) Composite supply means a supply made by a taxable person to a recipient consisting of two or more

taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled

and supplied in conjunction with each other in the ordinary course of business, one of which is a

principal supply.

E.g. where goods are packed and transported with insurance, the supply of goods, packing materials,

transport and insurance is a composite supply and supply of goods is a principal supply

Mixed supply means two or more individual supplies of goods or services, or any combination

thereof, made in conjunction with each other by a taxable person for a single price where such supply

does not constitute a composite supply.

E.g. A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, and

aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items

can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these

items are supplied separately.

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5 (a) Section 9(4) of the said Act mandates that tax on supply of taxable goods by an unregistered supplier

to a registered person will be paid by the registered person under reverse charge mechanism.

This provision, however, has to be read in conjunction with section 2(105) read with section 7 of the

said Act.

Section 2 (105) defines supplier as a person supplying the goods or services.

Section 7 provides that a supply is a transaction for a consideration by a person in the course or

furtherance of business.

Thus, even though the sale of old used equipment by an individual is for a consideration, it cannot be

said to be in the course or furtherance of his business (as selling used cars is not the business of the

said individual), and hence does not qualify to be a supply per se.

(b)

a. Not applicable, since services provided to an educational institute by way of transportation of

students are exempted from GST

b. Applicable, since services provided by an educational institute are exempt only if provided to

students or in relation to an education course. Thus, rental income from the star hotel shall attract

GST.

c. Not applicable. Rental income from residential dwelling is exempt from levy of tax.

d. Not Applicable. Transportation of products mentioned are exempt from levy of tax.

e. Applicable. Transportation by railway are exempt only for goods such as defence material, salt,

agricultural produce, relief material. Petroleum and household goods are not chargeable to tax.

f. Not applicable, since services provided by an educational institute for transportation of students

are exempted from GST

g. Not applicable. Specifically exempt under GST

(c) As per Section 135 of the Companies Act 2013, prescribed companies are required to mandatorily

spend minimum 2% of the average net-profits of the Company made during 3 immediately preceding

financial years, in pursuance of CSR policy. Such expenditure is clearly in the course or furtherance

of business.

However as per Section 17, No ITC shall be allowed for goods lost, stolen, destroyed, written off or

disposed of by way of gift or free samples and thus, tax paid on such procurements are to be reversed.

6 (a) Since the supply is made to a distinct person, the same will be valued in accordance with Rule 28 of

CGST Rules relating to valuation.

There is no open market value of the drug intermediate as also there are no like goods. Therefore,

value of supply of such drug intermediate will be determined in terms of Clause (c) of Rule 28, ie., by

using Rule 30. Thus, value of supply of such drug intermediate will be 110% of its cost of production

or manufacture.

However, if the recipient unit is eligible for full ITC, the value declared in the invoice will be deemed

to be open market value of the drug intermediate and thus, the invoice value will be the value of

taxable supply.

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(b) Both Mr. X & Mr. Y will be offenders and will be liable to penalty as under:

Mr. X – Penalty under Section 122(3) which may extend to Rs.25,000/-

Mr. Y – Penalty under Section 122(1) which will be higher of the following, namely:

Rs. 10,000/- or 100% of tax evaded

(c)

i. A registered person supplying taxable services shall, before or after the provision of service but

within a prescribed period, issue a tax invoice, showing description, value, tax charged.

Prescribed time limit is 30 days from the date of provision of service. For banks, financial

institutions, NBFC, time limit is 45 days from date of provision of service.

ii. In case of continuous supply of goods, where successive statement of accounts or successive

payments are involved, the invoice shall be issued before or at the time each such statement is

issued or, as the case may be, each such payment is received.

iii. In case of continuous supply of services, time limit for raising invoice shall be as below:

a. Where due date of payment is ascertainable from the contract, the invoice shall be issued on

or before the due date of payment

b. Where due date of payment is not ascertainable from the contract, the invoice shall be issued

before or at the time when the supplier of service receives the payment

c. Where payment is linked to completion of event, invoice shall be issued on or before the date

of completion of that event

iv. Where goods being sent or taken on approval for sale or return are removed before the supply

takes place, the invoice shall be issued before or at the time of supply or 6 months from date of

removal, whichever is earlier.

7 (a) Case Law – Parimal Ray vs CCus 2015 (318) ELT 379 (Cal.)

The company had imported tunnel boring machines which were otherwise fully exempt from customs

duty. However, owing to erroneous classification of such machines, they paid large amounts of

customs duty.

On expiry of 3 years, the petitioners filed a writ petition claiming refund of the amount so paid. The

said refund claim was rejected on the ground that the petitioners failed to make a proper application of

refund under Section 27 of Customs Act, 1962 within 1 year from date of payment of duty.

The said case was heard by High Court and its judgement is as below:

High court observed that the claim for refund can be made only if there is over-payment of duty or

interest. The amount paid by the company cannot be considered as tax payment, and shall be treated

as money advanced by one party to another and as per Contract Act 1872 provisions, shall be returned

within reasonable time.

Thus, the High Court directed the department to refund the sum paid by the company.

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(b) As per FTP 2015-2020, following are treated as deemed exports:

i. Supplies against Advance Authorisation/DFIA

ii. Supplies to EOU/STP/EHTP/BTP

iii. Supplies against EPCG authorisation

iv. Supply to marine freight containers by 100% EOU

v. Supplies to project against International Competitive Bidding

vi. Supplies to projects where imports permitted at zero customs duty

vii. Supply to mega power projects

viii. Supplies to UN or International organisations for their official use

ix. Supplies to nuclear projects

(c) Yes, but only in case of certain notified services. In such cases, tax shall be paid by the electronic

commerce operator if such services are supplied through it and all the provisions of the Act shall

apply to such electronic commerce operator as if he is the person liable to pay tax in relation to supply

of such services..

(d) The goods can be supplied directly from the place of business of the job worker without declaring it

as additional place of business in two circumstances namely, where the job worker is a registered

person or where the principal is engaged in supply of such goods as may be notified by the

commissioner.

(e) As per Section 13(2)(b), the time of supply of services, if the invoice is not issued in time, is the date

of payment or the date of provision of service, whichever is earlier. In this case, the service is

provided on 5th September but not invoiced within the prescribed time. Thus, time of supply is the

date of provision of service, which is 5th September.

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