mock test paper 1 september 2015 series 1...2 total fixed costs 18,00,000 selling price of a per...

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Test Series: September, 2015

MOCK TEST PAPER – 1

FINAL COURSE: GROUP – II

PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING

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

Time Allowed – 3 Hours Maximum Marks – 100

1. (a) XY Ltd. makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that the unit contribution of Y is one. fifth less than the unit contribution of X, that the total of F 1 and F2 is Rs. 1,50,000, that the BEP of X is 1,800 units (for BEP of X F2 is not considered) and that 3,000 units is the indifference point between X and Y.(i.e. X and Y make equal profits at 3,000 unit volume, considering their respective fixed costs). There is no inventory buildup as whatever is produced is sold.

Required:

Find out the values F1 and F2 and units contributions of X and Y. (5 Marks)

(b) Web Security Ltd. (WSL) is a leading IT security solutions and ISO 9001 certified company. The solutions are well integrated systems that simplify IT security management across the length and depth of devices and on multiple platforms. WSL has recently developed an Antivirus Software and company expects to have life cycle of less than one year. It was decided that it would be appropriate to adopt a market skimming pricing policy for the launch of the product. This Software is currently in the Introduction stage of its life cycle and is generating significant unit profits.

Required:

Explain, with reasons, the changes, if any, to the unit selling price that could occur when the Software moves from the Introduction stage to Growth stage of its life cycle.

Also suggest necessary strategies at this stage. (5 Marks)

(c) ABC Ltd., by using 12,00,000 units of a material C produces jointly 2,00,000 units of A and 4,00,000 units of B. The costs and sales details are as under:

Rs.

Direct Material C @ Rs. 5 per unit 60,00,000

Other variable costs 42,00,000

© The Institute of Chartered Accountants of India

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Total fixed costs 18,00,000

Selling price of A per unit 25

Selling price of B per unit 20

The company receives an additional order for 40,000 units of B at the rate of Rs.15 per unit. If this order has been accepted, the existing price of B will not be affected. However, the present price of A should be reduced evenly on the entire sale of A to market the additional units to be produced.

Required:

Find the minimum average unit price to be charged on A to sustain the increased sales. (5 Marks)

(d) An oil refinery can blend three grades of crude oil to produce quality A and quality B petrol. Two possible blending processes are available. For each production run, the older process uses 5 units of crude Q, 7 units of crude P and 2 units of crude R and produces 9 units of A and 7 units of B. The newer process uses 3 units of crude Q, 9 unit of crude P and 4 units of crude R to produce 5 units of A and 9 units of B. Because of prior contract commitments, the refinery must produce at least 500 units of A and at least 300 units of B for the next month. It has, 1,500 units of crude Q, 1,900 units of crude P and 1,000 of crude R. For each unit of A, refinery receives Rs.60 while for each unit of B, it receives Rs.90

Required:

Formulate the problem as linear programming model so as to maximize the revenue. (5 Marks)

2. (a) Kitchen King Ltd. (KKL) manufactures consumer durable products in a very highly competitive market. KKL is considering launching a new product ‘Kitchen Care’ into the market and gathered the following data:

Expected Market Price Rs.5,000 per unit

Direct Material Cost Rs.1,850 per unit

Direct Labour Cost Rs.80 per hour

Variable Overhead Cost Rs.1,000 per unit

Packing Machine Cost (specially to be purchased for this product) Rs.5,00,000

KKL expects the selling price for the new product will continue throughout the product’s life and a total of 1,000 units can be sold over the entire lifetime of the product.

Direct labour costs are expected to reduce as the volume of output increases due to the effects of 80% learning curve (index is -0.3219). The expected time to be taken for the first unit is 30 hours and the learning effect is expected to end after 250 units


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have been produced. Units produced after first 250 units will take the same time as the 250th unit.

Required:

(i) Calculate the expected total labour hours over the life time of the product ‘Kitchen Care’.

(ii) Profitability of product ‘Kitchen Care’ that KKL will earn over the life time of the product.

(iii) Average target labour cost per unit over the life time of the product if KKL requires average profit of Rs.800 per unit, to achieve its long term objectives.

Note: 250 -0.3219 = 0.1691, 249 -0.3219 =0.1693 (11 Marks)

(b) The following is a part of a network.

What are activities P and Q called? How would you rectify the situation?

(5 Marks)

3. (a) Imagine yourself to be the Executive Director of a 5-Star Hotel which has four banquet halls that can be used for all functions including weddings. The halls were all about the same size and the facilities in each hall differed. During a heavy marriage season, 4 parties approached you to reserve a hall for the marriage to be celebrated on the same day. These marriage parties were told that the first choice among these 4 halls would cost Rs.25,000 for the day. They were also required to indicate the second, third and fourth preferences and the price that they would be willing to pay. Marriage party A & D indicated that they won’t be interested in Halls 3 & 4. Other particulars are given in the following table-

Revenue/Hall (Rs.)

Marriage Party Hall 1 Hall 2 Hall 3 Hall 4

A 25,000 22,500 X X

B 20,000 25,000 20,000 12,500

C 17,500 25,000 15,000 20,000

D 25,000 20,000 X X


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Where X indicates that the party does not want that hall. Decide on an allocation that will maximize the revenue to your hotel. (8 Marks)

(b) A Hotel having 50 single rooms is having 80% occupancy in normal season (8 months) and 50% in off- season (4 months) in a year (take 30 days month).

Annual Fixed Expenses (Rs. Lakh)

Salary of the Staff (excluding Room Attendant) 7.50

Repair & Maintenance 2.60

Depreciation on Building & Furniture 2.40

Other Fixed Expenses like Dusting, Sweeping etc. 3.25

Total 15.75

Variable Expenses (per Guest per Day)

Linen, Laundry & Security Support Rs. 30.00

Electricity & Other Facilities Rs. 20.00

Misc Expenses like Attendant etc. Rs. 25.00

Management wishes to make a Margin of 25% of Total Cost.

Required:

(i) Calculate the Tariff Rate per Room.

(ii) Calculate the Break Even Occupancy in Normal Season assuming 50% Occupancy is Off-Season.

(iii) Management is proposing 10% cut in Tariff to improve Occupancy at 100% and 70% in Normal Season and Off-Season respectively. Give your views on it.

(iv) What is the minimum rise in Occupancy % to take care of risk of fall in Profit due to Tariff-Cut? (8 Marks)

4. (a) W & T is a leading consumer goods firm. The budgeted and actual data of W & T for the year 2013-14 are as follows:-

Particulars Budget Actual Variance

Sales / Production (units) 2,00,000 1,65,000 (35,000)

Sales (Rs.) 21,00,000 16,92,900 (4,07,100)

Less: Variable Costs (Rs.) 12,66,000 10,74,150 1,91,850

Less: Fixed Costs (Rs.) 3,15,000 3,30,000 (15,000)

Profit 5,19,000 2,88,750 (2,30,250)


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The budgeted data shown in the table is based on the assumption that total market size would be 4,00,000 units but it turned out to be 3,75,000 units.

Required:

Prepare a statement showing reconciliation of budget profit to actual profit through marginal costing approach for the year 2013-14 in as much detail as possible.

(12 Marks)

(b) How do you know whether an alternative solution exists for a transportation problem? (4 Marks)

5. (a) DTS Manufacturers Ltd. (DTSML) is specialist in the manufacturing of Industrial Products. They manufacture and market two types of products under the name ‘L’ and ‘M’. Company produces two products from three basic raw materials ‘N’, ‘O’, and ‘P’. Company follows a 13-period reporting cycle for budgeting purpose. Each period is four weeks long and has 20 working days. Data relating to the purchase of raw materials are presented below:

Raw

Material

Purchase Price

(Per Kg)

Standard Purchase Lot (Kg)

Reorder

Point (Kg)

Projected Inventory Status at the end of 5th period (Kg)

Lead Time

in Working

Days On Hand On Order

N Rs. 1.00 90,000 72,000 96,000 90,000 10

O Rs. 2.00 30,000 45,000 54,000 - 30

P Rs. 1.00 60,000 60,000 84,000 60,000 20

Past experience has shown that adequate inventory levels for ‘L’ and ‘M’ can be maintained if 40 percent of the next period’s projected sales are on hand at the end of a reporting period. Other relevant information is as follows:

Product Raw Material Specifications

Projected Inventory Levels

Projected Sales

N O P At the end of current (5th )

period

6th Period

7th Period

8th Period

Kg Kg Kg Units Units Units Units

L 1.25 0.50 - 18,000 45,000 52,500 57,000

M 2.00 - 1.50 16,800 42,000 27,000 24,000

The sales of ‘L’ and ‘M’ do not vary significantly from month to month. Consequently, the safety stock incorporated into the reorder point for each of the raw materials in adequate to compensate for variations in the sales of the finished products.


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Raw materials orders are placed the day the quantity on hand falls below the reorder point. DTSML’s suppliers are very trustworthy so that the given lead times are reliable.

The outstanding orders for raw materials ‘N’ and ‘P’ are due to arrive on the 10th and 4th working day of the 6th period, respectively. Payments for all raw material orders are remitted by the 10th day of the delivery.

You are required to determine the following items for raw materials ‘N’, ‘O’, and ‘P’ for inclusion in the 6th period report to management:

1. Projected quantities (in Kg) to be issued to production.

2. Projected quantities (in Kg) ordered and the date (in terms of working days) the order is to be placed.

3. The projected inventory balance (in Kg) at the end of the period.

4. The payments for purchases with due date. (10 Marks)

(b) The budgeted results of P Ltd. as under:

Product Sales Values (Rs.) P / V Ratio (%)

A 2,50,000 50

B 4,00,000 40

C 6,00,000 30

Fixed overheads for the period is Rs.5,02,200.

The management is worried about the results. You are required to prepare a statement showing the amount of loss, if any, being incurred at present and recommend a change in the sale value of each product as well as in the total sales value maintaining the same sales– mix, which will eliminate the said loss.

(6 Marks)

6. (a) Star Engineers, UK based firm, has just invented a new part ‘K-12’. New part has a budgeted total profit of Rs.75,000 from the first 256 parts. The time taken to produce the first part was 112.50 hours. The labour rate is Rs.20 per hour. A 90% learning curve is expected to apply indefinitely.

Required:

Calculate the sensitivity of the budgeted total profit from the first 256 parts to changes in the learning rate. (8 Marks)

(b) INZ Bank operated for years under the assumption that profitability can be increased by increasing Rupee volumes. But that has not been the case. Cost analysis has revealed the following:


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Activity Activity

Cost (Rs.)

Activity

Driver

Activity

Capacity

Providing ATM Service 1,00,000 No. of Transactions 2,00,000

Computer Processing 10,00,000 No. of Transactions 25,00,000

Issuing Statements 8,00,000 No. of Statements 5,00,000

Customer Inquiries 3,60,000 Telephone Minutes 6,00,000

The following annual information on three products was also made available:

Activity Driver Checking Accounts Personal Loans Gold Visa

Units of Product 30,000 5,000 10,000

ATM Transactions 1,80,000 0 20,000

Computer Transactions 20,00,000 2,00,000 3,00,000

Number of Statements 3,00,000 50,000 1,50,000

Telephone Minutes 3,50,000 90,000 1,60,000

Required:

(i) Calculate rates for each activity.

(ii) Using the rates computed in requirement (i), calculate the cost of each product. (8 Marks)

7. Answer any four of the following questions:

(a) What is target costing? It is said that target costing fosters team work within the organisation. Explain how target costing creates an environment in which team work fosters. (4 Marks)

(b) State, how is Zero base Budgeting superior to Traditional Budgeting. (4 Marks)

(c) What should be the basis of transfer pricing, if unit variable cost and unit selling price are not constant? (4 Marks)

(d) What do you mean by DPP? What are its benefits? (4 Marks)

(e) A car rental agency has collected the following data on the demand for five-seater vehicles over the past 50 days.

Daily Demand 4 5 6 7 8

No. of Days 4 10 16 14 6

The agency has only 6 cars at present.


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(i) Use the following 5 random numbers to generate 5 days of demand for the rental agency

Random Nos: 15, 48, 71, 56, 90

(ii) What is the average number of cars rented per day for the 5 days?

(iii) How many rentals will be lost over the 5 days? (4 Marks)


Test Series : September, 2015



PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS/HINTS

1. (a) Let Cx be the Contribution per unit of Product X. Therefore Contribution per unit of Product Y =Cy=4/5Cx = 0.8Cx Given F1 + F2 = 1,50,000, F1 = 1,800Cx (Break even volume × contribution per unit) Therefore F2 = 1,50,000 – 1,800Cx. 3,000Cx –F1 =3,000 × 0.8Cx – F2 or 3,000Cx – F1 =2,400 Cx-F2 (Indifference point) i.e., 3,000Cx – 1,800Cx = 2,400Cx – 1,50,000 + 1,800Cx

i.e., 3,000Cx = 1,50,000, Therefore Cx = Rs.50/- (1,50,000 / 3,000) Therefore Contribution per unit of X = Rs.50 Fixed Cost of X = F1 = Rs.90,000 (1,800 × 50) Therefore Contribution per unit of Y is Rs.50 × 0.8 = Rs.40 and Fixed cost of Y = F2 = Rs.60,000 (1,50,000 – 90,000) The value of F1 = Rs.90,000, F2 = Rs.60,000 and X = Rs.50 and Rs.40

(b) Following acceptance by early innovators, conventional consumers start following their lead. New competitors are likely to now enter the market attracted by the opportunities for large scale production and profit. WSL may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability. The price needs to be lowered so that the product becomes attractive to different market segments thus increasing demand to achieve the growth in sales volume. Strategies at this stage may include the following: (i) Improving quality and adding new features such as Data Theft Protection,

Parental Control, Web Protection, Improved Scan Engine, Anti Spyware, Anti Malware etc.

(ii) Sourcing new market segments/ distribution channels. (iii) Changing marketing strategy to increase demand. (iv) Lowering price to attract price-sensitive buyers.


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(c) Product A & B are joint products and produced in the ratio of 1:2 from the same direct material- C.

Production of 40,000 additional units of B results in production of 20,000 units of A. Calculation of Contribution under existing situation

Particulars Amount (Rs.)

Amount (Rs.)

Sales Value: A – 2,00,000 units @ Rs.25 per unit B – 4,00,000 units @ Rs.20 per unit

Less: Material - C (12,00,000 units @ Rs.5 per unit) Less: Other Variable Costs Contribution

50,00,000 80,00,000

1,30,00,000 60,00,000

42,00,000

28,00,000

Let Minimum Average Selling Price per unit of A is Rs.X Calculation of Contribution after acceptance of additional order of ‘B’

Particulars Amount (Rs.) Amount (Rs.)

Sales Value: A – 2,20,000 units @ Rs. X per unit B – 4,00,000 units @ Rs.20 per unit 40,000 units @ Rs.15 per unit Less: Material- C (12,00,000 units x 110%) @ Rs.5 per unit Less: Other Variable Costs (Rs. 42,00,000 x 110%) Contribution

2,20,000 X 80,00,000

6,00,000

2,20,000 X + 86,00,000 66,00,000

46,20,000

2,20,000 X –

26,20,000

Minimum Average Selling Price per unit of A

Contribution after additional order of B = Contribution under existing production ⇒ 2,20,000 X – 26,20,000 = 28,00,000 ⇒ 2,20,000 X = 54,20,000

⇒ X = 54,20,0002,20,000

= Rs.24.64

Minimum Average Selling Price per unit of A is Rs.24.64


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(d) Let x1, x2 the number of times the refinery decides to use older process and newer

process respectively. Objective Function

Maximize Z = 60 (9x1 + 5x2) + 90 (7x1 + 9x2) = 1,170x1 + 1,110x2 Subject to

9x1 + 5x2 ≥ 500 …Commitment for A 7x1 + 9x2 ≥ 300 …Commitment for B 5x1 + 3x2 ≤ 1,500 …Availability of Q 7x1 + 9x2 ≤ 1,900 …Availability of P 2x1 + 4x2 ≤ 1,000 …Availability of R and

x1 ≥ 0, x2 ≥ 0. 2. (a) (i) Calculation of ‘Total Labour Hours’ over the Life Time of the Product

‘Kitchen Care’

The average time per unit for 250 units is Yx = axb

Y250 = 30 × 250 -0.3219

Y250 = 30 × 0.1691

Y250 = 5.073 hours

Total time for 250 units = 5.073 hours × 250 units = 1,268.25 hours

The average time per unit for 249 units is Y249 = 30 × 249–0.3219

Y249 = 30 × 0.1693

Y249 = 5.079 hours

Total time for 249 units = 5.079 hours × 249 units

= 1,264.67 hours

Time for 250th unit = 1,268.25 hours – 1,264.67 hours

= 3.58 hours


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Total Time for 1,000 units = (750 units × 3.58 hours) + 1,268.25 hours

= 3,953.25 hours (ii) Profitability of the Product ‘Kitchen Care’


Amount (Rs.)

Sales (1,000 units) 50,00,000 Less:Direct Material 18,50,000 Direct Labour (3,953.25 hours × Rs.80) 3,16,260 Variable Overheads (1,000 units× Rs.1,000) 10,00,000 31,66,260 Contribution 18,33,740 Less: Packing Machine Cost 5,00,000 Profit 13,33,740

(iii) Average ‘Target Labour Cost’ per unit


Expected Sales Value 50,00,000 Less: Desired Profit (1,000 units × Rs.800) 8,00,000 Target Cost 42,00,000 Less: Direct Material (1,000 units × Rs.1,850) 18,50,000 Variable Cost (1,000 units × Rs.1,000) 10,00,000 Packing Machine Cost 5,00,000 Target Labour Cost 8,50,000 Average Target Labour Cost per unit (Rs.8,50,000 ÷ 1,000 units)

850

(b) Activities P and Q are called duplicate activities (or parallel activities) since they have the same head and tail events. The situation may be rectified by introducing a dummy either between P and S or between Q and S or before P or before Q (i.e. introduce the dummy before the tail event and after the duplicate activity or Introduce the dummy activity between the head event and the duplicate activity). Possible situations are given below:


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3. (a) The objective of the given problem is to identify the preferences of marriage parties

about halls so that hotel management could maximize its profit. To solve this problem first convert it to a minimization problem by subtracting all the

elements of the given matrix from its highest element. The matrix so obtained which is known as loss matrix is given below-

Loss Matrix/Hall

Marriage Party 1 2 3 4

A 0 2,500 X X B 5,000 0 5,000 12,500 C 7,500 0 10,000 5,000 D 0 5,000 X X

Now we can apply the assignment algorithm to find optimal solution. Subtracting the minimum element of each column from all elements of that column-


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Loss Matrix/Hall


A 0 2,500 X X

B 5,000 0 0 7,500

C 7,500 0 5,000 0

D 0 5,000 X X

The minimum number of lines to cover all zeros is 3 which is less than the order of the square matrix (i.e.4), the above matrix will not give the optimal solution. Subtracting the minimum uncovered element (2,500) from all uncovered elements and add it to the elements lying on the intersection of two lines, we get the following matrix-

Loss Matrix/Hall


A 0 0 X X

B 7,500 0 0 7,500

C 10,000 0 5,000 0

D 0 2,500 X X

Since the minimum number of lines to cover all zeros is 4 which is equal to the order of the matrix, the below matrix will give the optimal solution which is given below-

Loss Matrix/Hall


A 0 0 X X

B 7,500 0 0 7,500

C 10,000 0 5,000 0

D 0 2,500 X X

Optimal Schedule is-

Marriage Party Hall Revenue (Rs.)

A 2 22,500 B 3 20,000 C 4 20,000


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D 1 25,000 Total 87,500

(b) (i) Variable Cost per Room-Day = Rs.75 (Rs.30 + Rs.20 + Rs.25) Total Occupancy = 12,600 Room-Days (50 × 30 × 8 × 0.8 + 50 × 30 × 4 × 0.5) Total Variable Cost = Rs.9.45 lakhs (12,600 Room-Days × Rs.75) Fixed Cost = Rs.15.75 lakhs Total Cost = Rs.25.20 lakhs (Rs.9.45 lakhs + Rs.15.75 lakhs) Profit (25% of Total Cost) = Rs.6.30 lakhs (25% of Rs.25.20 lakhs) Tariff per Day = Rs.250.00 [(Rs.25, 20,000 + Rs.6,30,000) / 12,600 Room-

Days]

(ii) Contribution per Day = Rs.175.00 (Rs.250 − Rs.75) BEP (Room–Day) = 9,000 Room-Days (Rs.15,75,000 / Rs.175) During Off Season for 4 months

Rooms Occupied = 3,000 Days (50 × 30 × 4 × 0.5) For BEP, Occupancy During Normal Period = 6,000 Days i.e. Occupancy 50%

(iii) If 10% Discount is allowed, Tariff = Rs.225 per Room-Day Contribution per Room-Day = Rs.150 (Rs.225 − Rs.75) (with tariff cut) Total Occupancy = 16,200 Room-Days (50 × 30 × 8) + (50 × 30 × 4 × 0.7) Total Contribution for the year = Rs.24.30 lakhs (16,200 Room-Days × Rs.150)


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Fixed Cost (unchanged) = Rs.15.75 lakhs Profit = Rs.8.55 lakhs As the Proposal increases the Profit, it may be accepted.

(iv) To maintain the Same Profit, Contribution Required = Rs.22.05 lakhs With New Tariff, Contribution per day = Rs.150 Number of Room-Days Occupied = 14,700 Room-Days (Rs.22,05,000 / 150) Increase % in Occ. Required = 16.67 % [(14,700 – 12,600) / 12,600]

4. (a) Statement of Reconciliation - Budgeted Vs Actual Profit

Particulars Rs.

Budgeted Profit 5,19,000 Less: Sales Volume Contribution Planning Variance (Adverse) 52,125 Less: Sales Volume Contribution Operational Variance (Adverse) 93,825 Less: Sales Price Variance (Adverse) 39,600 Less: Variable Cost Variance (Adverse) 29,700 Less: Fixed Cost Variance (Adverse) 15,000 Actual Profit 2,88,750

Workings

Basic Workings

Budgeted Market Share (in %) = 2,00,000units4,00,000units

= 50%

Actual Market Share (in %) = 1,65,000units3,75,000units

= 44%

Budgeted Contribution = Rs.21,00,000 – Rs.12,66,000 = Rs.8,34,000

Average Budgeted Contribution (per unit) = Rs.8,34,000Rs.2,00,000

= Rs.4.17


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Budgeted Sales Price per unit = Rs.21,00,000Rs.2,00,000

= Rs.10.50

Actual Sales Price per unit = Rs.16,92,900Rs.1,65,000

= Rs.10.26

Standard Variable Cost per unit = Rs.12,66,000Rs.2,00,000

= Rs.6.33

Actual Variable Cost per unit = Rs.10,74,150Rs.1,65,000

= Rs.6.51

Calculation of Variances

Sales Variances:………. Volume Contribution Planning* = Budgeted Market Share % × (Actual Industry Sales Quantity in units – Budgeted Industry Sales Quantity in

units) × (Average Budgeted Contribution per unit) = 50% × (3,75,000 units – 4,00,000 units) × Rs.4.17 = Rs. 52,125 (A) (*) Market Size Variance

Volume Contribution Operational** = (Actual Market Share % – Budgeted Market Share %) × (Actual Industry Sales Quantity in units) × (Average Budgeted Contribution per

unit) = (44% – 50%) × 3,75,000 units × 4.17 = Rs. 93,825 (A) (**) Market Share Variance

Price = Actual Sales – Standard Sales = Actual Sales Quantity × (Actual Price – Budgeted Price) = 1,65,000 units×(Rs.10.26 – Rs.10.50) = Rs.39,600 (A) Variable Cost Variances:……….


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Cost = Standard Cost for Production – Actual Cost = Actual Production × (Standard Cost per unit– Actual Cost per unit) = 1,65,000 units × (Rs.6.33 – Rs.6.51) = Rs.29,700(A) Fixed Cost Variances:………. Expenditure = Budgeted Fixed Cost – Actual Fixed Cost = Rs.3,15,000 – Rs.3,30,000 = Rs.15,000 (A)

Fixed Overhead Volume Variance does not arise in a Marginal Costing system

(b) The Δ ij matrix or Cij – (ui + vj) matrix, where Cij is the cost matrix and (ui + vj) is the cell evaluation matrix for unallocated cell.

The Δ ij matrix has one or more ‘Zero’ elements, indicating that, if that cell is brought into the solution, the optional cost will not change though the allocation changes.

Thus, a ‘Zero’ element in the Δ ij matrix reveals the possibility of an alternative solution.

5. (a) 1. Projected Raw Material Issues (Kg): ‘N’ ‘O’ ‘P’ ‘L’ (48,000 units-Refer Note) 60,000 24,000 --- ‘M’ (36,000 units-Refer Note) 72,000 - 54,000 Projected Raw Material Issues 1,32,000 24,000 54,000 Note:

− Based on this experience and the projected sales, the DTSML has budgeted production of 48,000 units of ‘L’ and 36,000 units of ‘M’ in the sixth period.

= 52,500 x 40% + 45,000 – 18,000 = 48,000 = 27,000 x 40% + 42,000 – 16,800 = 36,000

− Production is assumed to be uniform for both products within each four-week period.

2. and 3. Projected Inventory Activity and Ending Balance (Kg):


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‘N’ ‘O’ ‘P’

Average Daily Usage 6,600 1,200 2,700 Beginning Inventory 96,000 54,000 84,000 Add: Orders Received: Ordered in 5th period 90,000 - 60,000 Ordered in 6th period 90,000 - - Sub Total 276,000 54,000 144,000 Less: Issues 132,000 24,000 54,000 Projected ending inventory balance 144,000 30,000 90,000

Note:

− Ordered 90,000 Kg of ‘N’ on fourth working day. − Order for 90,000 Kg of ‘N’ ordered during fifth period received on tenth

working day. − Order for 90,000 Kg of ‘N' ordered on fourth working day of sixth period

received on fourteenth working day. − Ordered 30,000 Kg of ‘O’ on eighth working day. − Order for 60,000 Kg of ‘P’ ordered during fifth period received on fourth

working day. − No orders for ‘P’ would be placed during the sixth period.

4. Projected Payments for Raw Material Purchases:

Raw Material

Day/Period Ordered

Day/Period Received

Quantity Ordered

Amount Due (Rs.)

Day/Period Due

‘N’ 20th/5th 10th /6th 90,000 Kg 90,000 20th/6th ‘P’ 4th/5th 4th /6th 60,000 Kg 60,000 14th/6th ‘N’ 4th/6th 14th /6th 90,000 Kg 90,000 4th/7th ‘O’ 8th/6th 18th /7th 30,000 Kg 60,000 8th/8th

(b) Statement of Profitability

Product Sales Value

(Rs.)

P / V Ratio

(%)

Contribution

(Rs.)

A 2,50,000 50 1,25,000 B 4,00,000 40 1,60,000


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C 6,00,000 30 1,80,000 Total 12,50,000 4,65,000 Less: Fixed Overheads 5,02,200 Profit / (Loss) (37,200)

Additional Sale Value of each Product

Product Sales Value (Rs.)

A Rs.74,400 (Rs.37,200 ÷ 0.5) B Rs.93,000 (Rs.37,200 ÷ 0.4) C Rs.1,24,000 (Rs.37,200 ÷ 0.3)

Additional Total Sales Value maintaining the same Sale – Mix = Rs.37,200 ÷ 0.372* = Rs.1,00,000

* Combined P / V Ratio = Total Contribution 100Total Sales

×

= ×Rs. 4,65,000 100Rs.12,50,000

= 37.2% 6. (a) Cumulative Average Time for 256 parts = 48.43 hrs.*

[112.50 × (0.908)] Total Time for 256 parts = 12,398.08 hrs. [48.43 hrs.× 256 parts] Total Labour Cost of 256 parts = Rs.2,47,961.60 [12,398.08 hrs.× Rs.20] Revised Labour Cost for zero profit = Rs.3,22,961.60 [Rs.2,47,961.60 + Rs.75,000] Total Time for 256 parts (Revised) = 16,148.08 hrs. [Rs.3,22,961.60/ Rs.20] Cumulative Average Time for 256 parts (Rev.) = 63.08 hrs. [16,148.08/256]

The usual learning curve model is


13

y = axb

Where

y = Cumulative Average Time per part for x parts

a = Time required for first part x = Cumulative number of parts b = Learning coefficient (log r/log 2) Accordingly

63.08 = 112.50× (256) b 0.5607 = 28b

log 0.5607 = log 28b log 0.5607 = 8 × b × log2

log 0.5607 = 8 × logr log2

× log 2

log 0.5607 = 8 log r log 0.5607 = log r8 0.5607 = r8

r = 8 0.5607

r = 0.9302 Learning Rate (r) = 93.02%. Therefore Sensitivity = 3.02/90 = 3.36%

Students may also take 48.38 hrs. (112.50 × 0.43)

(b) Calculation showing Rates for each Activity


14

Activity Activity

Cost

[a]

(Rs.)

Activity

Driver

No. of Units of

Activity Driver

[b]

Activity

Rate

[a] / [b]

(Rs.)

Providing ATM Service

1,00,000 No. of ATM Transactions

2,00,000 0.50

Computer Processing 10,00,000 No. of Computer Transactions

25,00,000 0.40

Issuing Statements 8,00,000 No. of Statements 5,00,000 1.60

Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60

Calculation showing Cost of each Product

Activity Checking

Accounts (Rs.)

Personal Loans

(Rs.)

Gold Visa

(Rs.)

Providing ATM Service

90,000 (1,80,000 tr. x 0.50)

--- 10,000 (20,000 tr. x 0.50)

Computer Processing

8,00,000 (20,00,000 tr. x 0.40)

80,000 (2,00,000 tr. x 0.40)

1,20,000 (3,00,000 tr. x 0.40)

Issuing Statements

4,80,000 (3,00,000 st. x 1.60)

80,000 (50,000 st. x 1.60)

2,40,000 (1,50,000 st. x 1.60)

Customer Inquiries

2,10,000 (3,50,000 min. x 0.60)

54,000 (90,000 min. x 0.60)

96,000 (1,60,000 min. x 0.60)

Total Cost [a] Rs.15,80,000 Rs.2,14,000 Rs.4,66,000 Units of Product [b]

30,000 5,000 10,000

Cost of each Product [a] / [b]

52.67

42.80 46.60

7. (a) Target cost is the difference between the estimated selling price of a proposed product with specified functionality and quality and target margin. This is a cost management technique that aims to produce and sell products that will ensure the target margin. It is an integral part of the product design. While designing the product the company allocates value and cost to different attributes and quality. Therefore, they use the technique of value engineering and value analysis. The target cost is achieved by assigning cost reduction targets to different operations


15

that are involved in the production process. Eventually, all operations do not achieve the cost reduction targets, but the overall cost reduction target is achieved through team work. Therefore, it is said that target costing fosters team work.

(b) Zero base budgeting is superior to traditional budgeting in the following manner: • It provides a systematic approach for evaluation of different activities. • It ensures that the functions undertaken are critical for the achievement of the

objectives. • It provides an opportunity for management to allocate resources to various

activities after a thorough cost-benefit analysis. • It helps in the identification of wasteful expenditure and then their elimination. • If facilitates the close linkage of departmental budgets with corporate

objectives • It helps in the introduction of a system of Management by Objectives.

(c) If unit variable cost and unit selling price are not constant then the main problem that would arise while fixing the transfer price of a product would be as follows:

There is an optimum level of output for a firm as a whole. This is so because there is a certain level of output beyond which its net revenue will not rise. The ideal transfer price under these circumstances will be that which will motivate these managers to produce at this level of output.

Essentially, it means that some division in a business house might have to produce its output at a level less than its full capacity and in all such cases a transfer price may be imposed centrally.

(d) Direct Product Profitability (DPP) is ‘Used primarily within the retail sector, and involves the attribution of both the purchase price and other indirect costs such as

distribution, warehousing, retailing to each product line. Thus a net profit, as opposed to a gr oss profit, can be identified for each product. The cost attribution process utilises a variety of measures such as warehousing space, transport time to reflect the resource consumption of individual products.’

Benefits of Direct Product Profitability: (i) Better Cost Analysis - Cost per product is analysed to know the profitability of

a particular product. (ii) Better Pricing Decision- It helps in price determination as desired margin can

be added with the actual cost. (iii) Better Management of Store and Warehouse Space- Space Cost and Benefit

from a product can be analysed and it helps in management of store and warehouse in profitable way.


16

(iv) The Rationalisation of Product Ranges etc. (e) Random Number Assignment

Daily Demand Days Probability Cumulative

Probability

Random No.

Assigned

4 4 0.08 0.08 00 − 07 5 10 0.20 0.28 08 − 27 6 16 0.32 0.60 28 − 59 7 14 0.28 0.88 60 − 87 8 6 0.12 1.00 88 − 99

Simulation Table

Day Random No. Demand No. of Cars on

Rent

Rent Lost

1 15 5 5 --- 2 48 6 6 --- 3 71 7 6 1 4 56 6 6 --- 5 90 8 6 2 Total 29 3

Average no. of Cars Rented are 5.8 29Cars5

Rental Lost equals to 3 Cars


1




PAPER – 6: INFORMATION SYSTEMS CONTROL & AUDIT

Question No. 1 is compulsory.

Attempt any five questions from the remaining six Questions.


1. PQR is an Open University that decides to launch a web based knowledge portal to

facilitate its students of distance education for different courses. It proposes to provide

various resources easily on anytime and anywhere basis by uploading its course

materials, e-lectures and e-reference books on the website. As a part of this, the

management of the university invites various technical experts who can propose a

capable and efficient solution as per the requirements and guidelines of the university.

Also the University decides to encourage people to collaborate and share information

online through social networks.

(a) The company appoints an Accountant for his active involvement during the

development work of the proposed system. Discuss some of the aspects on which

an accountant can play a vital role during proposed system’s development.

(5 Marks)

(b) The proposed system is expected to ease the day-to-day operations and increases

the quality of the products. However, at the same time the new system becomes

vulnerable for many cyber attacks. Discuss the major possible cyber attacks that

can occur against the new proposed system. (5 Marks)

(c) What are the provisions given in Information Technology (Amendment) Act, 2008 for

the retention of documents etc. in electronic form? (5 Marks)

(d) Discuss other major areas where Computer - based applications be implemented.

(5 Marks)

2. (a) Discuss Information Technology Infrastructure Library (ITIL) Framework. (6 Marks)

(b) What do you understand by the term “Business Continuity Planning (BCP) Manual”?

(6 Marks)

(c) Discuss advantages of Continuous Audit Techniques. (4 Marks)

3. (a) What do you mean by “Bring Your Own Device (BYOD)? Discuss the emerging

BYOD Threats. (8 Marks)

(b) Discuss the impact of Technology on Internal Controls. (4 Marks)


2

(c) You are a System Analyst and are appointed by a company ABD to carry out the

Feasibility Study of the proposed system. Under which dimensions, you would carry

out the feasibility study? (4 Marks)

4. (a) Discuss in brief, the Managerial Controls and their categories. (6 Marks)

(b) Discuss the Risk Management Strategy that is adopted when risks are identified

and analyzed? (6 Marks)

(c) Discuss the similarities between Cloud Computing and Grid Computing. (5 Marks)

5. (a) Under COBIT 5, discuss various key management practices for assessing and

evaluating the system on Internal Controls in an enterprise. (6 Marks)

(b) What objectives are achieved when audit trails are maintained? (6 Marks)

(c) What do you understand by “System Development Methodology”? (4 Marks)

6. (a) You are an IS Auditor who is appointed by an enterprise to review its Business

Continuity Management (BCM) arrangements. What are the key areas you would

emphasize upon? (6 Marks)

(b) Being an IS Auditor, what are the critical factors that you will consider as a part of

your preliminary review which are going to be critical for your effective audit review?

(6 Marks)

(c) What do you understand by the term “Risk” and what are the common sources of

Information Systems’ risk. Also briefly explain the term “Vulnerability”. (4 Marks)

7. Write short notes on any four of the following:

(a) Management Information System (MIS) - an integrated application

(b) System Control Audit Review File (SCARF)

(c) Expert System

(d) Life Cycle of Social Networks

(e) Explicit and Tacit Knowledge (4 × 4 = 16 Marks)


1




PAPER – 6: INFORMATION SYSTEMS CONTROL & AUDIT


1. (a) Accountants’ Involvement in Development Work

Most accountants are uniquely qualified to participate in systems development

because they may be among the few people in an organization, who can combine

knowledge of IT, business, accounting, and internal control, as well as behavior and

communications, to ensure that new systems meet the needs of the user and

possess adequate internal controls. An accountant can help in various related

aspects during system development; some of them are as follows:

(i) Return on Investment (ROI): This defines the return, an entity shall earn on a

particular investment i.e. capital expenditure. This financial data is a prime

consideration for any capital expenditure entity decides to incur. The important

data required for this analysis being the cost of project, the expected

revenue/benefit for a given period. The analysis ideally needs to be done

before the start of the development efforts for better decision making by

management. This includes estimates for typical costs of a computer based

information system like Development Costs that include costs of the system

development process, like salaries of developers; Operating Costs including

hardware/software rental or depreciation charges, salaries of computer

operators and other data processing personnel, who will operate the new

system; and Intangible Cost that cannot be easily measured.

(ii) Computing Cost of IT Implementation and Cost Benefit Analysis: For

analysis of ROI, accountants need the costs and returns from the system

development efforts. For correct generation of data, proper accounting needs

to be done. Accountants shall be the person to whom management shall look

for the purpose.

(iii) Skills expected from an Accountant: An accountant, being an expert in

accounting field must possess skills to understand the system development

efforts and nuances of the same. S/he is expected to have various key skills,

including understanding of the business objectives, expert book keeper, and

understanding of system development efforts etc.

(b) Cyber Attacks: The major possible Cyber attacks are as follows:

• Phishing: It is the act of attempting to acquire information such as usernames,

passwords, and credit card details by masquerading as a trustworthy entity in


2

an electronic communication. Communications purporting to be from popular

social web sites, auction sites, online payment processors or IT administrators

are commonly used to lure the unsuspecting public.

• Network Scanning: It is a process to identify active hosts of a system, for

purpose of getting information about IP addresses etc.

• Virus/Malicious Code: As per Section 43 of the Information Technology Act,

2000, "Computer Virus" means any computer instruction, information, data or

program that destroys, damages, degrades or adversely affects the

performance of a computer resource or attaches itself to another computer

resource and operates when a program, data or instruction is executed or

some other event takes place in that computer resource;

• Spam: E-mailing the same message to everyone on one or more Usenet News

Group or LISTSERV lists is termed as Spam.

• Website Compromise/Malware Propagation: It includes website defacements

and malware hosting on websites in an unauthorized manner.

• Cracking, Eavesdropping, E-mail Forgery and Threats and Scavenging is

some of the other cyber attacks.

(c) [Section 7] Retention of Electronic Records

(1) Where any law provides that documents, records or information shall be

retained for any specific period, then, that requirement shall be deemed to

have been satisfied if such documents, records or information are retained in

the electronic form, if -

(a) the information contained therein remains accessible so as to be usable

for a subsequent reference;

(b) the electronic record is retained in the format in which it was originally

generated, sent or received or in a format which can be demonstrated to

represent accurately the information originally generated, sent or

received;

(c) the details which will facilitate the identification of the origin, destination,

date and time of dispatch or receipt of such electronic record are

available in the electronic record:

PROVIDED that this clause does not apply to any information which is

automatically generated solely for the purpose of enabling an electronic record

to be dispatched or received.

(2) Nothing in this section shall apply to any law that expressly provides for the

retention of documents, records or information in the form of electronic

records.


3

(d) Major areas of computer based applications are finance and accounting, marketing

and sales, manufacturing, inventory/stock management, human resource

management etc., which are given as follows:

• Finance and Accounting – The main goal of this subsystem is to ensure the

financial viability of the organization, enforce financial discipline and plan and

monitor the financial budget. It also helps in forecasting revenues, determining

the best resources and uses of funds and managing other financial resources.

Typical sub-application areas in finance and accounting are - Financial

accounting; General ledger; Accounts receivable/payable; Asset accounting;

Investment management; Cash management; Treasury management; Fund

management and Balance sheet.

• Marketing and Sales – Marketing and sales activities have a key role for

running a business successfully in a competitive environment. The objective of

this subsystem is to maximize the sales and ensure customer satisfaction. The

marketing system facilitates the chances of order procurement by marketing

the products of the company, creating new customers and advertising the

products. The sales department may use an order processing system to keep

the status and track of orders, generate bills for the orders executed and

delivered to the customer, strategies for rendering services during warranty

period and beyond, analyzing the sales data by category such as by region,

product, sales manor sales value. The system may also be used to compute

commissions for dealers or salesmen and thus helps the corporate managers

to take decisions in many crucial areas.

• Production or Manufacturing – The objective of this subsystem is to

optimally deploy man, machine and material to maximize production or service.

The system generates production schedules and schedules of material

requirements, monitors the product quality, plans for replacement or

overhauling the machinery and also helps in overhead cost control and waste

control.

• Inventory /Stores Management - The inventory management system is

designed with a view to keeping the track of materials in the stores. The

system is used to regulate the maximum and minimum level of stocks, raise

alarm at danger level stock of any material, give timely alert for re-ordering of

materials with optimal re-order quantity and facilitate various queries about

inventory like total inventory value at any time, identification of important items

in terms stock value (ABC analysis), identification most frequently moving

items (XYZ analysis) etc. Similarly well-designed inventory management

system for finished goods and semi-finished goods provides important

information for production schedule and marketing/sales strategy.


4

• Human Resource Management - Human resource is the most valuable asset

for an organization. Effective and efficient utilization of manpower in a dispute-

free environment in this key functional area ensures to facilitate disruption free

and timely services in business. Human Resource Management System

(HRMS) aims to achieve this goal. Skill database maintained in HRM system,

with details of qualifications, training, experience, interests etc. helps

management for allocating manpower to right activity at the time of need or

starting a new project. This system also keeps track of employees’ output or

efficiency. Administrative functions like keeping track of leave records or

handling other related functions are also included HRM system. An HRM

system may have the following modules – Personnel administration;

Recruitment management; Travel management; Benefit administration; Salary

administration; Promotion management etc.

2. (a) Information Technology Infrastructure Library (ITIL): The IT Infrastructure

Library (ITIL) is a set of practices for IT Service Management (ITSM) that focuses

on aligning IT services with the needs of business. ITIL describes procedures, tasks

and checklists that are not organization-specific, used by an organization for

establishing a minimum level of competency. It allows the organization to establish

a baseline from which it can plan, implement, and measure. It is used to

demonstrate compliance and to measure improvement.

ITIL V3 represents an important change in best practice approach, transforming ITIL

from providing a good service to being the most innovative and best in class. This

release of ITIL V3 brought with it an important change of emphasis, from an

operationally focused set of processes to a mature service management set of

practice guidance. It also brought a rationalization in the number of volumes

included in the set. Details of these aforementioned volumes are given as follows:

I. Service Strategy: The centre and origin point of the ITIL Service Lifecycle, the

ITIL Service Strategy (SS) volume, provides guidance on clarification and

prioritization of service-provider investments in services. It provides guidance

on leveraging service management capabilities to effectively deliver value to

customers and illustrate value for service providers. The Service Strategy

volume provides guidance on the design, development, and implementation of

service management, not only as an organizational capability, but also as a

strategic asset. It provides guidance on the principles underpinning the

practice of service management to aid the development of service

management policies, guidelines, and processes across the ITIL Service

Lifecycle. IT Service Generation; Service Portfolio Management; Financial

Management; Demand Management; and Business Relationship Management

are some of the common activities involved in Service Strategy.

II. Service Design: Service Design translates strategic plans and objectives and

creates the designs and specifications for execution through service transition


5

and operations. It provides guidance on combining infrastructure, applications,

systems, and processes, along with suppliers and partners, to present feasible

service offerings. It includes design principles and methods for converting

strategic objectives into portfolios of services and service assets. The Service

Design volume provides guidance on the design and development of services

and service management processes. It includes design principles and methods

for converting strategic objectives into portfolios of services and service

assets. Service Catalogue Management; Service Level Management;

Availability Management; Capacity Management; IT Service Continuity

Management; Information Security Management; and Supplier Management

are the major activities under Service Design.

III. Service Transition: Service Transition provides guidance on the service

design and implementation ensuring that the service delivers the intended

strategy and that it can be operated and maintained effectively. Service

Transition planning provides guidance on managing the complexity of changes

to services and service management processes to prevent undesired

consequences whilst permitting for innovation. It provides guidance on the

support mechanism on transferring the control of services between customers

and service providers. The Service Transition volume provides guidance on

the development and improvement of capabilities for transitioning new and

changed services into operations. This includes Service Transition Planning

and Support; Change management and Evaluation; Service Asset and

Configuration Management; Release and Deployment Management; Service

Validation and Testing; and Knowledge Management.

IV. Service Operation: Service Operation provides guidance on the management

of a service through its day-to-day production life. It also provides guidance on

supporting operations by means of new models and architectures such as

shared services, utility computing, web services, and mobile commerce. This

includes major functions like Service Desk; Application management; IT

Operations; IT Technical Support; Incident Management; Request fulfillment

and Event Management.

V. Continual Service Improvement: Continual Service Improvement provides

guidance on the measurement of service performance through the service life-

cycle, suggesting improvements to ensure that a service delivers the maximum

benefit. This volume provides guidance on creating and maintaining value for

customers through improved design, introduction, and operation of services. It

combines principles, practices, and methods from change management,

quality management, and capability improvement to achieve incremental and

significant improvements in service quality, operational efficiency, and

business continuity. It provides guidance on linking improvement efforts and

outcomes with service strategy, design, and transition, focusing on increasing


6

the efficiency, maximizing the effectiveness and optimizing the cost of services

and the underlying IT Service Management processes.

(b) Business Continuity Planning (BCP) Manual: An incident or disaster affecting

critical business operations can strike at anytime. Successful organizations have a

comprehensive BCP Manual, which ensures process readiness, data and system

availability to ensure business continuity. A BCP manual is a documented

description of actions to be taken, resources to be used and procedures to be

followed before, during and after an event that severely disrupts all or part of the

business operations. The BCP is expected to provide:

• Reasonable assurance to senior management of enterprise about the

capability of the enterprise to recover from any unexpected incident or disaster

affecting business operations and continue to provide services with minimal

impact.

• Anticipate various types of incident or disaster scenarios and outline the action

plan for recovering from the incident or disaster with minimum impact and

ensuring ‘Continuous availability of all key services to clients’.

The BCP Manual is expected to specify the responsibilities of the BCM team, whose

mission is to establish appropriate BCP procedures to ensure the continuity of

enterprise's critical business functions. In the event of an incident or disaster

affecting any of the functional areas, the BCM Team serves as liasioning teams

between the functional area(s) affected and other departments providing support

services.

BCM is business-owned, business-driven process that establishes a fit-for-purpose

strategic and operational framework that:

• Proactively improves an enterprise’s resilience against the disruption of its

ability to achieve its key objectives;

• Provides a rehearsed method of restoring an enterprise’s ability to supply its

key products and services to an agreed level within an agreed time after a

disruption; and

• Delivers a proven capability to manage a business disruption and protect the

enterprise’s reputation and brand.

(c) Some of the advantages of Continuous Audit techniques are given as under:

• Timely, Comprehensive and Detailed Auditing – Evidence would be

available more timely and in a comprehensive manner. The entire processing

can be evaluated and analyzed rather than examining the inputs and the

outputs only.

• Surprise test capability – As evidences are collected from the system itself

by using continuous audit techniques, auditors can gather evidence without the


7

systems staff and application system users being aware that evidence is being

collected at that particular moment. This brings in the surprise test advantages.

• Information to system staff on meeting of objectives - Continuous audit

techniques provides information to systems staff regarding the test vehicle to

be used in evaluating whether an application system meets the objectives of

asset safeguarding, data integrity, effectiveness, and efficiency.

• Training for new users – Using the ITFs, new users can submit data to the

application system, and obtain feedback on any mistakes they make via the

system’s error reports.

3. (a) Bring Your Own Device (BYOD): BYOD (Bring Your Own Device) refers to

business policy that allows employees to use their preferred computing devices, like

smart phones and laptops for business purposes. It means employees are welcome

to use personal devices (laptops, smart phones, tablets etc.) to connect to the

corporate network to access information and application. The BYOD policy has

rendered the workspaces flexible, empowering employees to be mobile and giving

them the right to work beyond their required hours. The continuous influx of readily

improving technological devices has led to the mass adoption of smart phones,

tablets and laptops, challenging the long-standing policy of working on company-

owned devices.

Emerging BYOD Threats

These risks can be classified into four areas as outlined below:

• Network Risks: As BYOD permits employees to carry their own devices

(smart phones, laptops for business use), the IT practice team is unaware

about the number of devices being connected to the network. As network

visibility is of high importance, this lack of visibility can be hazardous. For

example, if a virus hits the network and all the devices connected to the

network need be scanned, it is probable that some of the devices would miss

out on this routine scan operation. In addition to this, the network security lines

become blurred when BYOD is implemented.

• Device Risks: It is normally exemplified and hidden in ‘Loss of Devices’. A lost

or stolen device can result in an enormous financial and reputational

embarrassment to an organization as the device may hold sensitive corporate

information. Data lost from stolen or lost devices ranks as the top security

threats as per the rankings released by Cloud Security Alliance. With easy

access to company emails as well as corporate intranet, company trade

secrets can be easily retrieved from a misplaced device.

• Application Risks: It is normally exemplified and hidden in ‘Application

Viruses and Malware’. A related report revealed that a majority of employees’

phones and smart devices that were connected to the corporate network


8

weren’t protected by security software. With an increase in mobile usage,

mobile vulnerabilities have increased concurrently. Organizations are not clear

in deciding that ‘who is responsible for device security – the organization or the

user’.

• Implementation Risks: It is normally exemplified and hidden in ‘Weak BYOD

Policy’. The effective implementation of the BYOD program should not only

cover the technical issues mentioned above but also mandate the development

of a robust implementation policy. Because corporate knowledge and data are

key assets of an organization, the absence of a strong BYOD policy would

fail to communicate employee expectations, thereby increasing the chances of

device misuse. In addition to this, a weak policy fails to educate the user,

thereby increasing vulnerability to the above mentioned threats.

(b) Impact of Technology on Internal Controls: These are discussed as follows:

• Competent and Trustworthy Personnel: Personnel should have proper skill

and knowledge to discharge their duties. Substantial power is often vested in

the errors responsible for the computer-based information systems developed,

implemented, operated, and maintained within organizations. Unfortunately,

ensuring that an organization has competent and trustworthy information

systems personnel is a difficult task.

• Segregation of Duties: In a computerised system, the auditor should be

concerned with the segregation of duties within the IT department. As a basic

control, segregation of duties prevents or detects errors or irregularities. Within

an IT environment, the staff in the IT department of an enterprise will have a

detailed knowledge of the interrelationship between the source of data, how it

is processed and distribution and use of output.

• Authorization Procedures: In manual systems, auditors evaluate the

adequacy of procedures for authorization of examining the work of employees.

In computer systems, authorization procedures often are embedded within a

computer program.

• Adequate Documents and Records: In a manual system, adequate

documents and records are needed to provide an audit trail of activities within

the system. In computer systems, documents might not be used to support the

initiation, execution, and recording of some transactions. If the controls over

the protection and storage of documents, transaction details, and audit trails

etc. are placed properly, it will not be a problem for auditor.

• Physical Control over Assets and Records: Physical control over access

and records is critical in both manual systems and computer systems. In the

manual systems, protection from unauthorised access was through the use of

locked doors and filing cabinets. Computerised financial systems have not


9

changed the need to protect the data. This concentration of information

systems assets and records also increases the losses that can arise from

computer abuse or a disaster. The nature and types of control available have

changed to address these new risks.

• Adequate Management Supervision: In a manual system, management

supervision of employee activities is relatively straightforward as the managers

and the employees are often at the same physical location. In computer

system, however, data communication facilities can be used to enable

employees to be closer to the customers they service. Thus supervision of

employees might have to be carried our remotely. The Management’s

supervision and review helps to deter and detect both errors and fraud.

• Independent Checks on Performance: In manual systems, independent

checks are carried out because employees are likely to forget procedures,

make genuine mistakes, become careless, or intentionally fail to follow

prescribed procedures. If the program code in a computer system is

authorized, accurate, and complete, the system will always follow the

designated procedures in the absence of some other type of failure like

hardware or systems software failure.

• Comparing Recorded Accountability with Assets: Data and the assets that

the data purports to represent should periodically be compared to determine

whether incompleteness or inaccuracies in the data exist or whether shortages

or excesses in the assets have occurred. Internal controls must be

implemented to ensure the veracity of program code, because traditional

separation of duties no longer applies o the data being prepared for

comparison purposes.

• Delegation of Authority and Responsibility: In a computer system, however,

delegating authority and responsibility in an unambiguous way might be

difficult because some resources are shared among multiple users. Further,

more users are developing, modifying, operating, and maintaining their own

application systems instead of having this work performed by IS professionals.

(c) Feasibility Study: A feasibility study is carried out by the system analysts, which

refers to a process of evaluating alternative systems through cost/benefit analysis

so that the most feasible and desirable system can be selected for development.

The Feasibility Study of a system is evaluated under following dimensions described

briefly as follows:

(i) Technical Feasibility: It may try to answer, whether implementation of the

project viable using current technology? It is concerned with issues pertaining

to hardware and software. Essentially, an analyst ascertains whether the

proposed system is feasible with existing or expected computer hardware and

software technology.


10

(ii) Financial Feasibility: The solution proposed may be prohibitively costly for

the user organization. For example, monitoring the stock through VSAT

network connecting multiple locations may be acceptable for an organization

with high turnover. But this may not be a viable solution for smaller ones.

(iii) Economic Feasibility: It includes an evaluation of all the incremental costs

and benefits expected if the proposed system is implemented. After problems

or opportunities are identified, the analysts must determine the scale of

response needed to meet the user's requests for a new system as well as the

approximate amount of time and money that will be required in the effort.

(iv) Schedule or Time Feasibility: Schedule feasibility involves the design team’s

estimating how long it will take a new or revised system to become operational

and communicating this information to the steering committee.

(v) Resources Feasibility: This focuses on human resources. Implementing

sophisticated software solutions becomes difficult at specific locations because

of the reluctance of skilled personnel to move to such locations.

(vi) Operational Feasibility: It is concerned with ascertaining the views of

workers, employees, customers and suppliers about the use of computer

facility. A system can be highly feasible in all respects except the operational

and fails miserably because of human problems.

(vii) Behavioral Feasibility: It refers to the systems, which is to be designed to

process data and produce the desired outputs. However, if the data input for

the system is not readily available or collectable, then the system may not be

successful.

(viii) Legal Feasibility: Legal feasibility is largely concerned with whether there will

be any conflict between a newly proposed system and the organization’s legal

obligations. Any system, which is liable to violate the local legal requirements,

should also be rejected.

4. (a) Managerial Controls: The managerial controls must be performed to ensure the

development, implementation, operation and maintenance of information systems in

a planned and controlled manner in an organization. The controls at this level

provide a stable infrastructure in which information systems can be built, operated,

and maintained on a day-to-day basis.

Types of Management Subsystem and their description

Management Subsystem

Description of Subsystem

Top Management Top management must ensure that information systems function is well managed. It is responsible primarily for long – run policy decisions on how


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Information Systems will be used in the organization.

Information Systems Management

IS management has overall responsibility for the planning and control of all information system activities. It also provides advice to top management in relation to long-run policy decision making and translates long-run policies into short-run goals and objectives.

Systems Development Management

Systems Development Management is responsible for the design, implementation, and maintenance of application systems.

Programming Management

It is responsible for programming new system; maintain old systems and providing general systems support software.

Data Administration Data administration is responsible for addressing planning and control issues in relation to use of an organization’s data.

Quality Assurance Management

It is responsible for ensuring information systems development; implementation, operation, and maintenance conform to established quality standards.

Security Administration It is responsible for access controls and physical security over the information systems function.

Operations Management

It is responsible for planning and control of the day-to-day operations of information systems.

(b) When risks are identified and analyzed, it is not always appropriate to implement

controls to counter them. Some risks may be minor, and it may not be cost effective

to implement expensive control processes for them. Risk management strategy is

explained and illustrated below:

• Tolerate/Accept the risk. One of the primary functions of management is

managing risk. Some risks may be considered minor because their impact and

probability of occurrence is low. In this case, consciously accepting the risk as

a cost of doing business is appropriate, as well as periodically reviewing the

risk to ensure its impact remains low.

• Terminate/Eliminate the risk. It is possible for a risk to be associated with the

use of a particular technology, supplier, or vendor. The risk can be eliminated

by replacing the technology with more robust products and by seeking more

capable suppliers and vendors.


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• Transfer/Share the risk. Risk mitigation approaches can be shared with

trading partners and suppliers. A good example is outsourcing infrastructure

management. In such a case, the supplier mitigates the risks associated with

managing the IT infrastructure by being more capable and having access to

more highly skilled staff than the primary organization. Risk also may be

mitigated by transferring the cost of realized risk to an insurance provider.

• Treat/mitigate the risk. Where other options have been eliminated, suitable

controls must be devised and implemented to prevent the risk from manifesting

itself or to minimize its effects.

• Turn back. Where the probability or impact of the risk is very low, then

management may decide to ignore the risk.

(c) Cloud Computing and Grid Computing both are scalable. Scalability is accomplished

through load balancing of application instances running separately on a variety of

operating systems and connected through Web services. CPU and network

bandwidth is allocated and de-allocated on demand. The system's storage capacity

goes up and down depending on the number of users, instances, and the amount of

data transferred at a given time.

• Both computing types involve multitenancy and multitasking, meaning that

many customers can perform different tasks, accessing a single or multiple

application instances. Sharing resources among a large pool of users assists

in reducing infrastructure costs and peak load capacity. Cloud and grid

computing provide Service-Level Agreements (SLAs) for guaranteed uptime

availability of, say, 99 percent. If the service slides below the level of the

guaranteed uptime service, the consumer will get service credit for receiving

data not in stipulated time.

5. (a) The key management practices for assessing and evaluating the system of internal

controls in an enterprise are given as follows:

• Monitor Internal Controls: Continuously monitor, benchmark and improve

the IT control environment and control framework to meet organizational

objectives.

• Review Business Process Controls Effectiveness: Review the operation of

controls, including a review of monitoring and test evidence to ensure that

controls within business processes operate effectively. It also includes

activities to maintain evidence of the effective operation of controls through

mechanisms such as periodic testing of controls, continuous controls

monitoring, independent assessments, command and control centers, and

network operations centers. This provides the business with the assurance of

control effectiveness to meet requirements related to business, regulatory and

social responsibilities.


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• Perform Control Self-assessments: Encourage management and process

owners to take positive ownership of control improvement through a continuing

program of self- assessment to evaluate the completeness and effectiveness

of management’s control over processes, policies and contracts.

• Identify and Report Control Deficiencies: Identify control deficiencies and

analyze and identify their underlying root causes. Escalate control deficiencies

and report to stakeholders.

• Ensure that assurance providers are independent and qualified: Ensure

that the entities performing assurance are independent from the function,

groups or organizations in scope. The entities performing assurance should

demonstrate an appropriate attitude and appearance, competence in the skills

and knowledge necessary to perform assurance, and adherence to codes of

ethics and professional standards.

• Plan Assurance Initiatives: Plan assurance initiatives based on enterprise

objectives and conformance objectives, assurance objectives and strategic

priorities, inherent risk resource constraints, and sufficient knowledge of the

enterprise.

• Scope assurance initiatives: Define and agree with management on the

scope of the assurance initiative, based on the assurance objectives.

• Execute assurance initiatives: Execute the planned assurance initiative.

Report on identified findings. Provide positive assurance opinions, where

appropriate, and recommendations for improvement relating to identified

operational performance, external compliance and internal control system

residual risks.

(b) Audit Trail Objectives: Audit trails can be used to support security objectives in

three ways:

• Detecting Unauthorized Access: Detecting unauthorized access can occur in

real time or after the fact. The primary objective of real-time detection is to

protect the system from outsiders who are attempting to breach system

controls. A real-time audit trail can also be used to report on changes in

system performance that may indicate infestation by a virus or worm.

Depending upon how much activity is being logged and reviewed; real-time

detection can impose a significant overhead on the operating system, which

can degrade operational performance. After-the-fact detection logs can be

stored electronically and reviewed periodically or as needed. When properly

designed, they can be used to determine if unauthorized access was

accomplished, or attempted and failed.

• Reconstructing Events: Audit analysis can be used to reconstruct the steps

that led to events such as system failures, security violations by individuals, or


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application processing errors. Knowledge of the conditions that existed at the

time of a system failure can be used to assign responsibility and to avoid

similar situations in the future. Audit trail analysis also plays an important role

in accounting control. For example, by maintaining a record of all changes to

account balances, the audit trail can be used to reconstruct accounting data

files that were corrupted by a system failure.

• Personal Accountability: Audit trails can be used to monitor user activity at

the lowest level of detail. This capability is a preventive control that can be

used to influence behavior. Individuals are likely to violate an organization’s

security policy if they know that their actions are not recorded in an audit log.

(c) A System Development Methodology is a formalized, standardized, well-organized

and documented set of activities used to manage a system development project. It

refers to the framework that is used to structure, plan and control the process of

developing an information system. Each of the available methodologies is best

suited to specific kinds of projects, based on various technical, organizational,

project and team considerations. The methodology is characterized by the following:

• The project is divided into a number of identifiable processes, and each

process has a starting point and an ending point. Each process comprises

several activities, one or more deliverables, and several management control

points. The division of the project into these small, manageable steps

facilitates both project planning and project control.

• Specific reports and other documentation, called Deliverables must be

produced periodically during system development to make development

personnel accountable for faithful execution of system development tasks.

• Users, managers, and auditors are required to participate in the project, which

generally provide approvals, often called signoffs, at pre-established

management control points. Signoffs signify approval of the development

process and the system being developed.

• The system must be tested thoroughly prior to implementation to ensure that it

meets users’ needs as well as requisite functionalities.

• A training plan is developed for those who will operate and use the new

system.

• Formal program change controls are established to preclude unauthorized

changes to computer programs.

• A post-implementation review of all developed systems must be performed to

assess the effectiveness and efficiency of the new system and of the

development process.


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Since organizations vary significantly in the way they automate their business

procedures, and each new type of system usually differs from others, several

different system development approaches are often used within an organization. All

these approaches are not mutually exclusive, which means that it is possible to

perform some prototyping while applying the traditional approach. These

approaches are established as models and include Waterfall - Linear framework

type, Prototyping-Iterative framework type, Incremental - Combination of linear and

iterative framework type, Spiral - Combination linear and iterative framework type,

Rapid Application Development (RAD), Iterative Framework Type, and Agile

Methodologies models.

6. (a) Reviewing BCM Arrangements: An audit or self-assessment of the enterprise’s

BCM program should verify that:

• All key products and services and their supporting critical activities and

resources have been identified and included in the enterprise’s BCM strategy;

• The enterprise’s BCM policy, strategies, framework and plans accurately

reflect its priorities and requirements (the enterprise’s objectives);

• The enterprise’ BCM competence and its BCM capability are effective and fit-

for-purpose and will permit management, command, control and coordination

of an incident;

• The enterprise’s BCM solutions are effective, up-to-date and fit-for-purpose,

and appropriate to the level of risk faced by the enterprise;

• The enterprise’s BCM maintenance and exercising programs have been

effectively implemented;

• BCM strategies and plans incorporate improvements identified during incidents

and exercises and in the maintenance program;

• The enterprise has an ongoing program for BCM training and awareness;

• BCM procedures have been effectively communicated to relevant staff, and

that those staff understand their roles and responsibilities; and

• Change control processes are in place and operate effectively.

(b) The following are some of the critical factors, which should be considered by an

Information Systems auditor as part of his/her effective preliminary review.

(i) Knowledge of the Business: Related aspects are given as follows:

• General economic factors and industry conditions affecting the entity’s

business,

• Nature of Business, its products & services,

• General exposure to business,


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• Its clientele, vendors and most importantly, strategic business

partners/associates to whom critical processes have been outsourced,

• Level of competence of the Top management and IT Management, and

• Finally, Set up and organization of IT department.

(ii) Understanding the Technology: An important task for the auditor as a part of

his preliminary evaluation is to gain a good understanding of the technology

environment and related control issues. This could include consideration of the

following:

• Analysis of business processes and level of automation,

• Assessing the extent of dependence of the enterprise on Information

Technology to carry on its businesses i.e. Role of IT in the success and

survival of business,

• Understanding technology architecture which could be quite diverse such

as a distributed architecture or a centralized architecture or a hybrid

architecture,

• Studying network diagrams to understand physical and logical network

connectivity,

• Understanding extended enterprise architecture wherein the organization

systems connect seamlessly with other stakeholders such as vendors

(SCM), customers (CRM), employees (ERM) and the government,

• Knowledge of various technologies and their advantages and limitations

is a critical competence requirement for the auditor. For example,

authentication risks relating to e-mail systems,

• And finally, Studying Information Technology policies, standards,

guidelines and procedures.

(iii) Understanding Internal Control Systems: For gaining understanding of

Internal Controls emphasis to be placed on compliance and substantive

testing.

(iv) Legal Considerations and Audit Standards: Related points are given as follows:

• The auditor should carefully evaluate the legal as well as statutory

implications on his/her audit work.

• The Information Systems audit work could be required as part of a

statutory requirement in which case he should take into consideration the

related stipulations, regulations and guidelines for conduct of his audit.

• The statutes or regulatory framework may impose stipulations as regards

minimum set of control objectives to be achieved by the subject


17

organization. Sometimes, this may also include restrictions on the use of

certain types of technologies e.g. freeware, shareware etc.

• The IS Auditor should also consider the Audit Standards applicable to his

conduct and performance of audit work. Non-compliance with the

mandatory audit standards would not only impact on the violation of the

code of professional ethics but also have an adverse impact on the

auditor’s work.

(v) Risk Assessment and Materiality: Risk Assessment is a critical and inherent

part of the Information Systems Auditor’s planning and audit implementation. It

implies the process of identifying the risk, assessing the risk, and

recommending controls to reduce the risk to an acceptable level, considering

both the probability and the impact of occurrence. Risk assessment allows the

auditor to determine the scope of the audit and assess the level of audit risk

and error risk (the risk of errors occurring in the area being audited).

Additionally, risk assessment will aid in planning decisions such as:

• The nature, extent, and timing of audit procedures.

• The areas or business functions to be audited.

• The amount of time and resources to be allocated to an audit

(c) Risk: Formally, risk can be defined as the potential harm caused if a particular

threat exploits a particular vulnerability to cause damage to an asset, and risk

analysis is defined as the process of identifying security risks and determining their

magnitude and impact on an organization. Risk assessment includes the following:

• Identification of threats and vulnerabilities in the system;

• Potential impact or magnitude of harm that a loss of Confidentiality, Integrity

and Authentication would have on enterprise operations or enterprise assets,

should an identified vulnerability be exploited by a threat; and

• The identification and analysis of security controls for the information system.

Information systems can generate many direct and indirect risks. These risks lead to

a gap between the need to protect systems and the degree of protection applied.

The gap is caused by widespread use of technology; interconnectivity of systems;

elimination of distance, time and space as constraints; unevenness of technological

changes; devolution of management and control; attractiveness of conducting

unconventional electronic attacks against organizations; and external factors such

as legislative, legal and regulatory requirements or technological developments;

external dangers from hackers, leading to denial of service and virus attacks,

extortion and leakage of corporate information; growing potential for misuse and

abuse of information system affecting privacy and ethical values; and increasing

requirements for availability and robustness.


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Vulnerability: Vulnerability is the weakness in the system safeguards that exposes

the system to threats. It may be a weakness in information system/s, cryptographic

system (security systems), or other components (e.g. system security procedures,

hardware design, internal controls) that could be exploited by a threat.

Vulnerabilities potentially “allow” a threat to harm or exploit the system. For

example, vulnerability could be a poor access control method allowing dishonest

employees (the threat) to exploit the system to adjust their own records. Some

examples of vulnerabilities are given as follows:

• Leaving the front door unlocked makes the house vulnerable to unwanted

visitors.

• Short passwords (less than 6 characters) make the automated information

system vulnerable to password cracking or guessing routines.

Missing safeguards often determine the level of vulnerability. Determining

vulnerabilities involves a security evaluation of the system including inspection of

safeguards, testing, and penetration analysis.

7. (a) Management Information Systems (MIS) – an integrated application: MIS has

been defined by Davis and Olson as “An integrated user-machine system designed

for providing information to support operational control, management control and

decision making functions in an organization”. MIS supports the managers at

different levels to take strategic (at top level) or tactical (at middle level)

management decisions to fulfill the organizational goals. MIS provide reports to

management that can help in making effective, structured types as applicable to

decisions of day-to-day operations. These reports and displays can be made

available on demand, periodically or whenever exceptional conditions occurred. MIS

supports the integrated approach wherein all the functional and operational

information sub-systems are tied together into one entity. An integrated Information

system has the capability of generating more meaningful information to

management as it takes a comprehensive view or a complete look at the

interlocking sub-systems that operate within a company.

(b) System Control Audit Review File (SCARF): The SCARF technique involves

embedding audit software modules within a host application system to provide

continuous monitoring of the system’s transactions. The information collected is

written onto a special audit file- the SCARF master files. Auditors then examine the

information contained on this file to see if some aspect of the application system

needs follow-up. In many ways, the SCARF technique is like the snapshot technique

along with other data collection capabilities. Auditors might use SCARF to collect

the following types of information:

• Application System Errors - SCARF audit routines provide an independent

check on the quality of system processing, whether there are any design and


19

programming errors as well as errors that could creep into the system when it

is modified and maintained.

• Policy and Procedural Variances - Organizations have to adhere to the

policies, procedures and standards of the organization and the industry to

which they belong. SCARF audit routines can be used to check when

variations from these policies, procedures and standards have occurred.

• System Exception - SCARF can be used to monitor different types of

application system exceptions. For example, salespersons might be given

some leeway in the prices they charge to customers. SCARF can be used to

see how frequently salespersons override the standard price.

• Statistical Sample - Some embedded audit routines might be statistical

sampling routines, SCARF provides a convenient way of collecting all the

sample information together on one file and use analytical review tools thereon.

• Snapshots and Extended Records - Snapshots and extended records can be

written into the SCARF file and printed when required.

• Profiling Data - Auditors can use embedded audit routines to collect data to

build profiles of system users. Deviations from these profiles indicate that there

may be some errors or irregularities.

• Performance Measurement - Auditors can use embedded routines to collect

data that is useful for measuring or improving the performance of an

application system.

(c) Expert System - An Expert System is highly developed DSS that utilizes knowledge

generally possessed by an expert to share a problem. Expert Systems are software

systems that imitate the reasoning processes of human experts and provide

decision makers with the type of advice they would normally receive from such

expert systems. For instance, an expert system in the area of investment portfolio

management might ask its user a number of specific questions relating to

investments for a particular client like – how much can be invested. Some of the

business applications of Expert Systems are as follows:

• Accounting and Finance - It provides tax advice and assistance, helping with

credit- authorization decisions, selecting forecasting models, providing

investment advice.

• Marketing - It provides establishing sales quotas, responding to customer

inquiries, referring problems to telemarketing centers, assisting with marketing

timing decisions, determining discount policies.

• Manufacturing - It helps in determining whether a process is running correctly,

analyzing quality and providing corrective measures, maintaining facilities,


20

scheduling job-shop tasks, selecting transportation routes, assisting with

product design and faculty layouts.

• Personnel - It is useful in assessing applicant qualifications, giving employees

assisting at filling out forms.

• General Business - It helps in assisting with project proposals, recommending

acquisition strategies, educating trainees, evaluating performance.

(d) Life Cycle of Social Networks: For any social network, there are a number of

steps in its life cycle. For all the steps in the life cycle, Web 2.0 provides tools and

concepts, which are not only cost effective but very easy to implement. Often, online

networks have a tendency to die out very fast due to lack of proper tools to

communicate. Web 2.0 provides excellent communication mechanism concepts like

Blogging and individual email filtering to keep everyone in the network involved in

the day to day activities of the network.

Life Cycle of Social Networks with Web 2.0

(e) Explicit knowledge: Explicit knowledge is that which can be formalized easily and

as a consequence is easily available across the organization. Explicit knowledge is

articulated, and represented as spoken words, written material and compiled data.

This type of knowledge is codified, easy to document, transfer and reproduce. For

example - Online tutorials, Policy and procedural manuals.

Tacit knowledge: Tacit knowledge, on the other hand, resides in a few often-in just

one person and hasn’t been captured by the organization or made available to

others. Tacit knowledge is unarticulated and represented as intuition, perspective,

beliefs, and values that individuals form based on their experiences. It is personal,

experimental and context-specific. It is difficult to document and communicate the

tacit knowledge. For example – hand-on skills, special know-how, employee

experiences.




FINAL: GROUP – II

PAPER – 7: DIRECT TAX LAWS

Question 1 is compulsory

Answer any five questions from the remaining six questions.


1. (a) Mr. Murli, aged 54 years, employed as a Marketing Manager with M & M Ltd., furnishes the following particulars of assets transferred by him during the P.Y. 2014-15 –

Particulars Date of transfer

Net Sale consideration

Rs.

(1) A residential house in Bangalore which he had purchased in February, 2000 at a cost of Rs. 31,12,000.

28/2/2015 2,00,00,000

(2) Listed equity shares of Indian companies purchased in August 2012 at a cost of Rs. 1 lakh.

15/3/2015 3,00,000

(3) Unlisted shares purchased in June 2012 at a cost of Rs. 75,000.

15/3/2015 1,25,000

(4) Units of equity oriented fund purchased in August 2012 at a cost of Rs. 70,000

15/3/2015 1,00,000

(5) Units of debt oriented fund purchased in March 2010 at a cost of Rs. 63,200

15/3/2015 1,45,000

Mr. Murli made the following investments out of the net consideration from sale of residential house at Bangalore –

Particulars Rs.

(1) Purchased a residential flat in Pune on 30/6/2015 52,00,000

(2) Purchased a residential flat in Madurai on 31/7/2015 38,00,000

(3) Invested in 3 year bonds of NHAI on 30/3/2015 25,00,000

(4) Invested in 3 year bonds of RECL on 18/6/2015 45,00,000

Compute the total income and tax liability of Mr. Murli for A.Y.2015-16, if his salary income (computed) is Rs. 32 lakh and interest on fixed deposits with banks is


2

Rs. 2 lakh. Assume that he has contributed Rs. 1,50,000 to public provident fund and paid medical insurance premium of Rs. 14,000 to insure his health.

Cost Inflation Index of F.Y.1999-2000: 389; F.Y.2009-10: 632; F.Y.2012-13: 852; F.Y.2014-15: 1024. (10 Marks)

(b) The net profit of Milestone Ltd. as per profit and loss account for the previous year 2014-15 is Rs.170 lakhs after debiting/crediting the following items:

(i) Provision for income-tax: Rs. 14 lakhs

(ii) Dividend Distribution tax: Rs.2 lakhs

(iii) Securities transaction tax: Rs.1 lakh

(iv) Transfer to General Reserve: Rs. 6 lakhs

(v) Provision for deferred tax: Rs. 9 lakhs

(vi) Proposed Dividend: Rs. 5 lakhs

(vii) Preference Dividend: Rs. 3 lakhs

(viii) Provision for permanent diminution in value of investments: Rs.2 lakhs

(ix) Provision for gratuity based on actuarial valuation: Rs.4 lakhs

(x) Depreciation debited to Profit & Loss Account is Rs. 18 lakhs. This includes depreciation on revaluation of assets to the tune of Rs.4 lakhs.

(xi) Agricultural income: Rs. 5 lakhs (Expenditure to earn agricultural income: Rs. 2 lakh)

(xii) Long term capital gains exempt under section 10(38): Rs. 7 lakhs (Expenditure to earn long-term capital gains: Rs. 0.75 lakhs)

(xiii) Transfer from Special Reserve: Rs. 3 lakhs

(xiv) Transfer from Revaluation Reserve: Rs. 5 lakhs

Brought forward losses and unabsorbed depreciation as per books of the company are as follows:

Previous year Brought forward loss

(Rs. in lakhs)

Unabsorbed Depreciation

(Rs. in lakhs)

2011-12 3 4

2012-13 2 -

2013-14 8 5

Compute the book profit of Milestone Ltd. under section 115JB for the A.Y. 2015-16. Compute the tax liability of the company for the A.Y.2015-16, if the total income computed as per the provisions of the Income-tax Act, 1961 is Rs.100 lakhs.

(10 Marks)


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2. Seed Ltd. is engaged in the business of manufacturing articles and things. Its profit and loss account shows a net profit of Rs. 500 lakhs for the year ended 31-03-2015 after debiting and crediting the following items:

♦ Depreciation provided in accounts as per straight line basis is Rs. 30 lakhs.

Normal depreciation allowable as per the Income-tax Rules, 1962 is Rs. 28 lakhs. The company has made addition to machinery during the year to the extent of Rs. 100 lakhs, in June, 2014. It was put to use in July, 2014.

♦ The company has made cash payments for purchases and expenditure as below:

On 04-06-2014 Rs. 5 lakhs (Due to strike by bank staff)

On 05-06-2014 Rs. 7 lakhs (Due to cash demanded by the supplier)

Payment made to transport operator for hiring of lorry as follows:

07-05-2014 Rs. 50,000; 08-01-2015 Rs. 75,000; 02-03-2015 Rs. 32,000.

♦ Rs. 5 lakhs contribution to a University approved and notified under section 35(1)(ii).

♦ Sales tax of Rs. 1.45 lakhs, pertaining to the year ended 31-03-2014, was paid on 10-12-2014.

♦ Rent paid and professional charges to a consultant including service tax was Rs. 5,61,800 and Rs. 2,24,720 respectively. Tax was not deducted on the service tax portion for both the payments.

♦ The company has imported 1000 kgs raw materials from a supplier in US at the rate $75/kg on 31-03-2014. The exchange rate was Rs. 59/$ when the imports were made. The payment to the supplier was made on 20-01-2015 when the exchange rate was Rs. 62/$. The company had not entered into a forward contract to hedge the risk. The differential amount was debited to profit and loss account the previous year 2014-15.

♦ The company has also purchased goods of Rs. 55 lakhs from M/s. Beta Ltd. in which Directors have substantial interest. The market value of the goods is Rs. 54 lakhs.

♦ The company has incurred legal expenses for the following:

Issue of Bonus shares Rs. 10 lakhs.

Alteration of Memorandum of Association Rs. 2 lakhs (in connection with enhancement of authorized capital).

♦ Donation paid to a political party is Rs. 25 lakhs by way of cheque.

Compute the total income and tax payable by the company for the assessment year 2015-16. Ignore MAT provisions. (16 Marks)


4

3. (a) ABC Limited purchased a machine on 1st April, 2014 for Rs. 10 crores by availing 70% loan facility from bank. The machine was required for extension of the business of the company and was put to use into effective production on 1st February, 2015. Interest on loan is charged at 12% per annum.

Advise ABC Limited on the treatment of interest payment made on this loan and depreciation allowable for A.Y.2015-16. Assume that this machine is the only machine in the said block of assets. (6 Marks)

(b) A public charitable trust registered under Section 12AA, for the previous year ending 31.3.2015, derived gross income of Rs. 21 lacs, which consists of the following:

(a) Income from properties held by trust (net) Rs. 10 lacs

(b) Income (net) from business (incidental to main objects) Rs. 4 lacs

(c) Voluntary contributions from public Rs. 7 lacs

The trust applied a sum of Rs. 11.60 lacs towards charitable purposes during the year which includes repayment of loan taken for construction of orphanage Rs. 3.60 lacs. Determine the taxable income of the trust for the assessment year 2015-16.

(5 Marks)

(c) Gopal is a fashion designer having lucrative business. His wife is a model. Gopal pays her monthly salary of Rs. 10,000. The Assessing Officer while admitting that the salary is an admissible deduction, in computing the total income of Gopal had applied the provisions of section 64(1), and had clubbed the income (salary) of his wife in Gopal hands.

Discuss the correctness of the action of the Assessing Officer. (5 Marks)

4. (a) The assessment of Mr. Raghav for A.Y.2008-09 was made on 28.3.2010 making an addition of Rs. 2,70,000 in respect of certain income received during the P.Y. 2007-08. The assessee contested the addition before Commissioner (Appeals) but lost the case. The Appellate Tribunal passed an order on 26.2.2015 holding that the said income was not taxable in the P.Y.2007-08 but the same was taxable in the year of accrual, being P.Y.2002-03 relevant to A.Y.2003-04. The Assessing Officer issued notice under section 148 for A.Y.2003-04 in March 2015 bringing to tax the sum of Rs. 2,70,000. Is the notice for reassessment valid?

Would your answer change if, in the said case, the assessment order for A.Y.2008-09 was made on 7.4.2010 instead of 28.3.2010? (6 Marks)

(b) Does the Appellate Tribunal, under section 254(2), have the power to review or re-appreciate the correctness of its earlier decision on merits? Also, discuss whether the Tribunal has the power thereunder to recall an order in entirety, to rectify a


5

mistake apparent from record. In this context, distinguish between the power to review and power to recall, with the aid of recent case laws. (6 Marks)

(c) “The scope of definition of “case” in respect of which an assessee can make an application to the Settlement Commission has been expanded” – Discuss the correctness or otherwise of this statement, in the context of the definition as amended by the Finance (No.2) Act, 2014. (4 Marks)

5. (a) Discuss the applicability of provisions for deduction of tax at source under section 194H in the following cases –

(i) Discount given to stamp vendors on purchase of stamp papers;

(ii) Discount given on supply of SIM cards and recharge coupons by a telecom company to its distributors under a prepaid scheme. (4 × 2 = 8 Marks)

(b) Mr. Vivek was a partner in M/s. Vivek & Co., which dissolved on 31st August, 2014. As per the dissolution deed of the partnership firm, Mr. Vivek took over the entire business of the partnership firm in his individual capacity including fixed assets, current assets and liabilities and the other partners were paid their dues. Mr. Vivek then ran the business as a sole proprietor with effect from 1st September, 2014. Relying upon the provisions section 78(2) and the decisions of the Supreme Court in CIT v. Madhukant M. Mehta (2001) 247 ITR 805 and Saroj Aggarwal v. CIT

(1985) 156 ITR 497, Mr. Vivek claimed the set-off of the losses suffered by the M/s. Vivek & Co. against his income earned as an individual proprietor for A.Y.2015-16 considering the case as inheritance of business. Discuss whether the claim of Mr. Vivek is tenable. In this regard, also examine whether there is any contradiction between the provisions of section 78(2) and section 170(1). (4 Marks)

(c) Discuss the applicability of the provisions of section 56(2)(viib) in respect of the shares issued by the following closely held companies to resident Indians –

Company

Consideration received for

issue of a share

(Rs.)

Face value of a share

(Rs.)

Fair Market Value (FMV) of a share

(Rs.)

Number of shares

issued

Win (P) Ltd. 370 300 350 1,00,000

Gain (P) Ltd. 330 300 350 2,00,000

Profit (P) Ltd. 290 300 280 3,00,000

Top (P) Ltd. 310 300 275 4,00,000

(4 Marks)

6. (a) M/s. Dhuria & Co., a resident firm, has income of Rs. 95 lakh under the head “Profits and gains of business or profession”. It undertook two projects in Tamil Nadu - a highway project in East Coast Road (ECR) which involves expansion of existing roads by constructing additional lanes and a roadway project in


6

Old Mahabalipuram Road (OMR), which involves relaying of existing roads. The profit from the highway project in ECR is Rs. 50 lakh and roadway project in OMR is Rs. 30 lakh. The firm is also engaged in cement trading, the profit from which is Rs. 15 lakh. The trading unit transferred cement worth Rs. 5 lakh to the ECR project at Rs. 2 lakh. Compute the tax payable by M/s. Dhuria & Co. for A.Y.2015-16, assuming that it has no other income during the P.Y.2014-15. (8 Marks)

(b) A securitization trust distributes income of Rs. 6,50,000 on 17thAugust, 2014 to its investors comprising of -

Category of investor Income distributed (Rs.)

(i) Mutual funds exempt under section 10(23D) 1,50,000

(ii) Individuals and HUFs 1,00,000

(iii) Companies 4,00,000

Compute the additional income-tax payable by the trust under section 115TA. Assuming that the additional income-tax payable as per section 115TA is paid to the credit of the Central Government on 7th November, 2014, compute the interest, if any payable, under section 115TB. (8 Marks)

7. (a) PQR Ltd., an Indian company, has entered into an agreement for sale of product P to Mr. Anshul, an unrelated party, on 15/3/2015. Mr. Anshul had entered into an agreement on 10/3/2015 (for sale of product P) with ABC Inc., a non-resident entity, which is a specified foreign company in relation to PQR Ltd. Would the transaction between PQR Ltd. and Mr. Anshul be deemed as an international transaction entered into between two associated enterprises, if Mr. Anshul is a resident and ordinarily resident for the P.Y.2014-15? (4 Marks)

(b) The details given hereunder relate to two non-residents, Mr. Jack, an Australian cricket player and his sister, Ms. Jill, a musician for the A.Y.2015-16–

Particulars Mr. Jack Ms. Jill

(1) Participation in cricket tournaments in India Rs. 32 lakhs

(2) Winnings from lotteries (net) Rs. 55,280

(3) Contribution of an article relating to the sport of cricket in a sports magazine in India

Rs. 15,000

(4) Performance in a music show in India Rs. 2 lakhs

With reference to the provisions of the Income-tax Act, 1961, you are required to –

(i) Compute their tax liability for the A.Y.2015-16.

(ii) Discuss whether the above income are subject to deduction of tax at source.


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(iii) Explain whether it is necessary for them to file their return of income for A.Y.2015-16. (8 Marks)

(c) Biotech Ltd. filed its return of income for A.Y.2015-16 on 30th September, 2015. In computing its business income, it had claimed a weighted deduction@200% of the expenditure of Rs. 22 lakhs (including cost of building Rs. 10 lakhs) on in-house scientific research under section 35(2AB). The assessee had clearly disclosed the bifurcation of expenditure of Rs. 22 lakhs in its return of income. The Assessing Officer, disallowed Rs. 10 lakhs, being the excess 100% of cost of building which was claimed as weighted deduction under section 35(2AB), since the same was eligible only for deduction@100% under section 35(1)(iv) read with section 35(2). He also levied penalty under section 271(1)(c). Biotech Ltd. agreed with the disallowance made but contended that there no concealment of particulars of income so as to attract penalty under section 271(1)(c), since it has disclosed all the particulars of income, including the bifurcation of expenditure in respect of which deduction was claimed under section 35(2AB). Discuss the correctness of the Biotech Ltd.’s contention. (4 Marks)




FINAL: GROUP – II

PAPER – 7 : DIRECT TAX LAWS


1. (a) Computation of total income of Mr. Murli for A.Y.2015-16

Particulars Rs.

Salaries 32,00,000

Capital gains [See Working Note below] 17,00,600

Interest on fixed deposits 2,00,000

Gross Total Income 51,00,600

Less: Deductions under Chapter VI-A

Under section 80C – PPF 1,50,000

Under section 80D – Mediclaim premium 14,000 1,64,000

Total Income 49,36,600

Tax on total income: Rs.

Tax on long-term capital gains [20% of Rs. 16,50,600] 3,30,120

Tax on other income of Rs. 32,86,000 [Rs. 49,36,600 - Rs. 16,50,600]

8,10,800

11,40,920

Add: Education cess@2% and SHEC@1% 34,228

11,75,148

Working Note – Computation of Capital Gains chargeable to tax for A.Y. 2015-16

Particulars Rs.

(1) Residential house

Gross Sale consideration 2,00,00,000

Less: Indexed cost of acquisition [Rs. 31,12,000 × 1024/389] 81,92,000

1,18,08,000

Less: Exemption under section 54

Investment in one residential house [See Note 1] 52,00,000

Investment in bonds of NHAI/RECL [See Note 2] 50,00,000

Long-term capital gains taxable@20% under section 112 16,08,000


2

(2) & (4)

Listed equity shares and units of equity oriented fund

Capital gains on sale of listed equity shares and units of equity oriented fund held for more than 12 months is a long-term capital gain exempt under section 10(38).

Nil

(3) Unlisted shares

Sale consideration 1,25,000

Less: Cost of acquisition 75,000

Short-term capital gains taxable at normal rates of tax [See Note 3]

50,000

(5) Units of debt-oriented fund

Sale consideration 1,45,000

Less: Indexed cost of acquisition [Rs. 63,200 × 1024/632] 1,02,400

Long-term capital gains taxable at 20% u/s 112 [See Notes 3 & 4]

42,600

Taxable Capital Gains: Rs.

Long-term capital gains taxable@20% u/s 112 [(1) + (5)] 16,50,600

Short-term capital gains taxable at normal rates [3] 50,000

17,00,600

Notes:

(1) Section 54 has been amended by the Finance (No.2) Act, 2014 to provide that the exemption thereunder is available in respect of investment made in one

residential house situated in India. In this case, it is more beneficial for Mr. Murali to avail the exemption under section 54 in respect of residential flat at Pune, since the cost of the Pune flat is higher than the cost of the Madurai flat.

(2) Section 54EC provides for exemption of capital gains invested in bonds of NHAI and RECL within a period of six months from the date of transfer. The maximum deduction thereunder in respect of investment in such bonds, out of capital gains arising from transfer of one or more capital assets during a financial year, would be restricted to Rs. 50 lakhs, irrespective of whether the investment is made in the same financial year or in the subsequent financial year or both. Therefore, in this case, the deduction under section 54EC would be restricted to Rs. 50 lakhs, even though the aggregate investment in eligible bonds within a period of six months is Rs. 70 lakhs.

(3) With effect from A.Y.2015-16, units of debt oriented fund and unlisted shares would qualify as a long-term capital asset only if they are held for a period of


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more than 36 months. Since unlisted shares are held for a period of less than 36 months, the gain arising therefrom is a short-term capital gain chargeable to tax at normal rates. Since the units of debt-oriented fund are held for more than 36 months, the gain arising therefrom is a long-term capital gain chargeable to tax@20%.

(4) Further, the benefit of concessional rate of 10% on long-term capital gains (without indexation) would not be available to units of a debt-oriented fund and unlisted shares with effect from A.Y.2015-16.

(b) Computation of Book Profit of Milestone Ltd. under section 115JB

Particulars Rs. Rs.

Net Profit as per Profit & Loss Account 1,70,00,000

Add: Net Profit to be increased by the following amounts as per Explanation 1 to section 115JB

Income-tax paid or payable or provision therefor

Provision for income-tax Rs. 14,00,000

Dividend distribution tax Rs. 2,00,000 16,00,000

Provision for deferred tax 9,00,000

Transfer to General Reserve 6,00,000

Provision for diminution in the value of investment

2,00,000

Dividend paid or proposed

Proposed dividend Rs. 5,00,000

Preference dividend Rs. 3,00,000 8,00,000

Expenditure to earn income exempt u/s 10 [except section 10(38)]

Expenditure to earn agricultural income [Exempt u/s 10(1)]

2,00,000

Depreciation 18,00,000 61,00,000

2,31,00,000

Less: Net Profit to be reduced by the following amounts as per Explanation 1 to section 115JB

Amount credited to profit and loss A/c from Special Reserve

3,00,000

Depreciation (excluding depreciation on account of revaluation of fixed assets) (i.e., Rs. 18,00,000 – Rs. 4,00,000)

14,00,000


4

Amount credited to profit and loss account from revaluation reserve (to the extent of depreciation on revaluation)

4,00,000

Brought forward business loss or unabsorbed deprecation as per books of account, whichever is less taken on cumulative basis

9,00,000

Income exempt u/s 10 [except section 10(38)]

Agricultural Income [since it is exempt under section 10(1)]

5,00,000 35,00,000

Book Profit 1,96,00,000

Computation of tax liability of Milestone Ltd. for A.Y.2015-16

Particulars Rs. Rs.

18.5% of book profit 36,26,000

Add: Surcharge@5% (since total income > Rs. 1 crore but less than Rs. 10 crore)

1,81,300

38,07,300

Add: Education cess @ 2% 76,146

Secondary and higher education cess @ 1% 38,073 1,14,219

Tax liability on book profit under section 115JB 39,21,519

Total income computed as per the provisions of the Income-tax Act, 1961

1,00,00,000

Tax payable @ 30% 30,00,000

Add: Education cess @2% 60,000

Secondary and higher education cess @1% 30,000 90,000

Tax Payable as per the Income-tax Act, 1961 30,90,000

In case of a company, it has been provided that where income-tax payable on total income computed as per the provisions of the Act is less than 18.5% of book profit, the book profit shall be deemed as the total income and the tax payable on such total income shall be 18.5% thereof plus surcharge, if applicable, plus education cess @2% and secondary and higher education cess @1%. Accordingly, in this case, since income-tax payable on total income computed as per the provisions of the Act is less than 18.5% of book profit, the book profit of Rs. 1,96,00,000 is deemed to be the total income and income-tax is payable @ 18.5% thereof plus


5

surcharge@5% plus education cess @2% and secondary and higher education cess @1%. The tax liability, therefore, works out to Rs. 39,21,519.

Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB(1), the excess of tax so paid, over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years. The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and the tax payable on the total income computed in accordance with the other provisions of the Act.

Particulars Rs.

Tax on book profit under section 115JB 39,21,519

Less: Tax on total income computed as per the other provisions of the Act

30,90,000

Tax credit to be carried forward 8,31,519

This tax credit is allowed to be carried forward for ten assessment years succeeding the assessment year in which the credit became allowable. Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than section 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year.

Notes:

(1) Securities transaction tax does not form part of income-tax and hence, should not be added back to net profit for computing book profit.

(2) Provision for gratuity based on actuarial valuation is a provision for meeting an ascertained liability. Therefore, it should not be added back for computing book profit.

(3) Long-term capital gains on sale of equity shares through a recognized stock exchange on which securities transaction tax (STT) is paid is exempt under section 10(38). One of the adjustments to the book profit is that exempt income under section 10, which is credited to profit and loss account, would be deducted in arriving at the book profit. However, deduction of such long-term capital gains is not allowed for computing book profit. Consequently, expenditure to earn such income should not be added back to arrive at the book profit. Section 10(38) also provides that such long term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.


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2. Computation of Total Income of Seed Ltd. for the A.Y.2015-16


Profits and Gains from Business and Profession

Net profit as per profit and loss account 5,00,00,000

Add: Items debited but to be considered separately or to be disallowed

Depreciation provided on straight line basis (Note 1) 30,00,000

Disallowance under section 40A(3) for payment exceeding Rs. 20,000 made in cash for purchases & expenditure (Note 2)

7,00,000

Disallowance under section 40A(3) for cash payment exceeding Rs. 35,000 in a day to transport operators for hiring of lorry (Note 3)

1,25,000

Contribution to University (considered separately for weighted deduction) (Note 4)

5,00,000

Sales tax of P.Y.2013-14 paid on 10.12.2014 (Note 5)

-

Rent and Professional charges paid to consultant, on which tax has not been deducted on the service tax component (Note 6)

-

Foreign exchange loss actually incurred on payment to a supplier of raw material (Note 7)

-

Disallowance under section 40A(2) for excess payment to related person (Note 8)

1,00,000

Legal expenses for issue of bonus shares (Note 9) -

Legal expenses for alteration of memorandum of association (Note 9)

2,00,000

Donation to political party (Note 10) 25,00,000 71,25,000

5,71,25,000

Less: Items credited but to be considered separately or to be allowed

Depreciation allowable under the Income-tax Act, 1961 (Note 1)

48,00,000

Weighted deduction @ 175% in respect of contribution of Rs. 5 lakhs to a University approved and notified under section 35(1)(ii) (Note 4)

_8,75,000

_56,75,000

Gross Total Income 5,14,50,000


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Less: Deduction under Chapter VI-A

Under section 80GGB [Donation to political party] (Note 10)

_25,00,000

Total Income 4,89,50,000

Computation of tax liability of Seed Ltd. for A.Y.2015-16

Particulars Rs.

Tax @ 30% on total income of Rs. 4,89,50,000 1,46,85,000

Add: Surcharge@5% (since total income exceeds Rs. 1 crore but does not exceed Rs.10 crores)

__7,34,250

Tax payable including surcharge 1,54,19,250

Add: Education cess @ 2% and secondary and higher education cess @ 1%

__4,62,578

Total tax payable 1,58,81,828

Notes:

(1) Depreciation provided in the accounts on straight line basis (i.e., Rs. 30 lakhs) has to be added back and depreciation calculated as per Income-tax Rules, 1962 (i.e. Rs. 28 lakhs) is allowable as deduction under section 32.

Further, as per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed by an assessee engaged in, inter alia, the business of manufacture or production of any article or thing, at the rate of 20% of the actual cost of such machinery or plant. In this case, since the new machinery costing Rs. 100 lakhs is purchased in June 2014, additional depreciation @ 20% is allowable, as the machinery was put to use for more than 180 days during the P.Y.2014-15. Therefore, the total depreciation allowable is Rs. 48 lakhs [i.e., Rs. 28 lakhs + Rs. 20 lakhs].

(2) Cash payments exceeding Rs. 20,000 a day attracts disallowance under section 40A(3). However, Rule 6DD provides for certain exceptions, which includes, inter alia, payments which are required to be made on a day on which the banks were closed either on account of strike. Therefore, cash payment of Rs. 5 lakhs made on the day of strike by bank staff would not attract disallowance under section 40A(3), assuming that such payment was required to be made on the specific date. However, cash payment of Rs. 7 lakhs made on 5-6-2014 due to demand of supplier would attract disallowance under section 40A(3), since the same is not covered under any of the exceptions laid out in Rule 6DD.

(3) In respect of cash payments to transport operators, a higher limit of Rs. 35,000 per day is permissible. Therefore, cash payment of Rs. 32,000 on 2-3-2015 would not attract disallowance under section 40A(3). However, cash payments of Rs. 50,000


8

and Rs. 75,000 on 7.5.2014 and 8.1.2015, respectively, would attract disallowance under section 40A(3) since the same exceeds Rs. 35,000 per day.

(4) Contribution to a university approved and notified under section 35(1)(ii) qualifies for weighted deduction@175%. Hence, the contribution of Rs. 5 lakhs is first added back and thereafter, deduction of Rs. 8.75 lakhs (i.e., 175% of Rs. 5 lakhs) has been provided under section 35(1)(ii).

(5) Sales tax liability of Rs. 1.45 lakhs pertaining to P.Y.2013-14 would have been disallowed under section 43B while computing business income of A.Y.2014-15, since it was paid only on 10.12.2014 (i.e., after the due date of filing return of income of that year). It would be allowed in the year of payment (i.e., P.Y.2014-15). Since it is already debited to profit and loss account, no further adjustment is required.

(6) Rent and professional charges have been debited to profit and loss account. It is stated that tax has not been deducted on the service tax component of rent and professional charges.

As per CBDT Circular No. 4/2008 dated 28.4.2008, service tax paid by a tenant does not partake the nature of income of the landlord. Hence, tax is to be deducted at source under section 194-I on rent paid without including service tax.

Further, in respect of professional charges, CBDT Circular No.1/2014 dated 13.1.2014 clarifies that if in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source on the amount paid/payable without including such service tax component.

Assuming that, in this case, the service tax component is indicated separately in the agreement/contract between the company and the consultant, tax is required to be deducted at source on the professional charges without including such service tax component. Therefore, no disallowance is attracted for non-deduction of tax at source on the service-tax component.

(7) Where the assessee regularly follows accrual system of accounting and provides for loss suffered on account of foreign exchange difference according to Accounting Standard 11 and not with a view to reduce incidence of taxation, such loss is an item of expenditure allowable under section 37(1). It has been so held in CIT vs. Woodward Governor India Pvt. Limited (2009) 312 ITR 254 (SC).

In this case, the foreign exchange loss of Rs. 2,25,000 (1,000 kgs × $ 75 × Rs. 3) has accrued and actually been incurred during the P.Y.2014-15. Hence, the same is allowable as deduction in the A.Y.2015-16. Since the same has already been debited to profit and loss account, no adjustment is required.


9

Note: It is assumed that Seed Ltd. follows mercantile system of accounting and therefore, it can be presumed that the amount of Rs. 44,25,000 (1,000 kgs × $ 75 × Rs. 59) was debited to the profit and loss account in the year P.Y.2013-14

(8) Beta Ltd. is a related person under section 40A(2), since the directors of Seed Ltd. have substantial interest in Beta Ltd. Therefore, excess payment of Rs. 1 lakh to Beta Ltd. for purchase of goods would attract disallowance under section 40A(2).

(9) There is no fresh inflow of funds or increase in capital employed on account of issue of bonus shares and there is only reallocation of the company’s fund. Consequently, since there is no increase in the capital base of the company, legal expenses of Rs. 10 lakhs in connection with issue of bonus shares is a revenue expenditure and is hence, allowable as deduction. It has been so held by Apex Court in case of CIT vs. General Insurance Corpn. (2006) 286 ITR 232.

However, Rs. 2 lakhs, being legal expenses in relation to alternation of memorandum in connection with increase in Authorised Capital is directly related to expansion of the capital base of the company and is, hence, a capital expenditure. Therefore, the same is not allowable as deduction. It has been so held in Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 225 ITR 792 (SC).

Note : A view can also be taken that legal expenses in relation to alternation of memorandum of association in connection with enhancement of authorized capital is allowable as deduction, if the enhancement of capital was for the purpose of issuance of bonus shares.

(10) Donation paid to a political party is not an allowable expenditure under section 37 since it is not laid out wholly or exclusively for the purposes of business or profession. Hence, the same has to be added back while computing business income. However, donation made by a company to a political party is allowable deduction under section 80GGB from gross total income, subject to the condition that payment is made otherwise than by way of cash. It is assumed that such donations are made to a political party registered under section 29A of the Representation of the People Act, 1951. Since the donation is made by cheque the same is allowed as deduction under section 80GGB.

3. (a) Interest on term loan for purchase of machinery: As per section 36(1)(iii), interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business for a period beginning from the date of borrowal of loan for acquiring the asset till the date on which such asset is first put to use is not allowable as deduction. Interest for such period has to be capitalized, by adding the same to the cost of the asset. Therefore, interest@12% p.a. for a period of 10 months from 1st April, 2014 to 31st January, 2015 on Rs. 7 crores, being the amount of loan, has to be capitalized.


10

Rs.

Cost of machinery 10,00,00,000

Add: Interest [12% × 10/12 × Rs. 7,00,00,000] 70,00,000

Actual Cost of machinery 10,70,00,000

Interest @12% for two months (February, 2015 & March, 2015) after the asset is put to use is allowable as deduction under section 36(1)(iii) [12% × 2/12 × Rs. 7,00,00,000]

14,00,000

Depreciation Rs.

Since the machinery is put to use for less than 180 days in the previous year 2014-15, the depreciation would be restricted to 50% of the amount calculated at the prescribed percentage of 15%.

Therefore, depreciation = 50% ×[15% × Rs. 10,70,00,000] 80,25,000

Likewise, the additional depreciation would also be restricted to 50% of the amount calculated at the prescribed percentage of 20%, assuming that ABC Ltd. is engaged in the manufacture or production of any article or thing and that the machinery acquired is a new machinery.

Therefore, additional depreciation = 50% × [20% × Rs. 10,70,00,000]

1,07,00,000

1,87,25,000

Note: The company shall not be entitled for investment allowance under section 32AC since the investment in plant and machinery does not exceed Rs. 25 crores.

(b) Computation of taxable income of public charitable trust

Particulars Rs.

(i) Income from property held under trust (net) 10,00,000

(ii) Income (net) from business (incidental to main objects) 4,00,000

(iii) Voluntary contributions from public 7,00,000

Voluntary contribution made with a specific direction towards corpus are alone to be excluded under section 11(1)(d). In this case, there is no such direction and hence, included.

--

21,00,000

Less: 15% of the income eligible for retention / accumulation without any conditions

3,15,000

17,85,000


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Less: Amount applied for the objects of the trust

(i) Amount spent for charitable purposes (Rs. 11,60,000 - Rs. 3,60,000)

(ii) Repayment of loan for construction of orphan home

8,00,000

3,60,000

Taxable Income 6,25,000

(c) This question is based on the principles laid down by Madras High Court in the case of CIT v. Smt. R. Bharati (1999) 240 ITR 697 where the interpretation of the terms “professional qualifications” and “knowledge” came up for consideration as per proviso to section 64(1)(ii).

These words do not necessarily connote a qualification conferred by a recognized university after examining the candidate who has undergone a course of study in a technical subject or course of study preparing him for a profession of law, accountancy etc. Accordingly, the term “qualification” must be given a wide meaning as referring to the qualities which are required to be possessed by a person performing the work that he does, so long as that work is capable of being regarded as technical or professional.

The word “professional” is a term capable of very broad meaning and would encompass a variety of occupations. A large number of occupations are being practiced which form a source of livelihood and are capable of being regarded, as professions as long as they require certain degree of skill. A person having skill, experience and competence in a line of work can be regarded as professionally qualified for the purpose of section 64(1)(ii).

Applying the rationale of the Madras High Court ruling, a model, having skill, competence and experience in her line can be considered as a professional. Hence, the action of the Assessing Officer is not correct.

4. (a) Section 149(1) provides the time limit for issue of notice under section 148 for assessment, reassessment or recomputation where income has escaped assessment. The time limit prescribed under section 149(1) in a case where income escaping assessment exceeds Rs.1 lakh is 6 years from the end of the relevant assessment year. In this case, the relevant assessment year is A.Y.2003-04, being the year in respect of which the income exceeding Rs. 1 lakh has escaped assessment. The six year time limit under section 149(1) for issuing notice under section 148 relating to A.Y.2003-04 expires on 31.3.2010. In this case, notice under section 148 is issued in March, 2015, which is outside the six year time limit prescribed under section 149(1).

The restriction of time limit under section 149(1) is, however, not applicable where notice under section 148 is issued for making an assessment, reassessment or recomputation to give effect to any finding or direction contained in an order passed by any authority in any proceeding by way of appeal, reference or revision or by a


12

Court in any proceeding under any other law. This relaxation is contained in section 150(1).

However, such relaxation will not apply where any such assessment or reassessment relates to an assessment year in respect of which an assessment or reassessment could not have been made at the time the order which was the subject matter of appeal, reference or revision, as the case may be, was made on account of such assessment or reassessment having become time-barred at that point of time itself. This restriction is contained in section 150(2). The relaxation contained in section 150(1) is, therefore, subject to the restriction contained in section 150(2).

In this case, since the notice under section 148 was issued for the purpose of making reassessment to give effect to an appellate order, the restriction contained in section 149(1) does not apply. The relaxation under section 150(1) will apply in this case, since the order which was the subject matter of appeal was passed on 28.3.2010, which is within the six year time limit from the end of the relevant assessment year, i.e., A.Y.2003-04. Therefore, since the original order which was the subject matter of appeal was passed on 28.3.2010, the relaxation contained in section 150(1) will apply. Consequently, the notice issued under section 148 by the Assessing Officer in March 2015, in this case, would be valid.

However, if the original order was passed on 7.4.2010, it falls outside the six year time limit in relation to A.Y.2003-04, which expires on 31.3.2010. The operation of section 150(1) would then be subject to the restriction contained in section 150(2). According to section 150(2), if on the date of passing of the order which was the subject-matter of appeal (i.e., on 7.4.2010), the reassessment could not have been made on account of the same having become time-barred, then, notice for reassessment cannot be issued now by availing the relaxation given in section 150(1). Therefore, if the original order was passed on 7.4.2010, the notice issued under section 148 by the Assessing Officer in March 2015 would not be valid.

(b) Section 254(2) specifically empowers the Appellate Tribunal to amend any order passed by it, either suo motu or on an application made by the assessee or Assessing Officer, with a view to rectifying any mistake apparent from record, at any time within 4 years from the date of passing the order sought to be amended.

The powers of the Tribunal under section 254(2) relating to rectification of its order are very limited. Such powers are confined to rectifying any mistake apparent from the record. The mistake has to be such that for which no elaborate reasons or inquiry is necessary. Accordingly, the re-appreciation of evidence placed before

the Tribunal during the course of the appeal hearing is not permitted. It cannot

re-adjudicate the issue afresh under the garb of rectification. This issue came up for consideration before the Punjab & Haryana High Court in the case of CIT vs. Vardhman Spinning (1997) 226 ITR 296, wherein it was observed that the


13

jurisdiction to review or modify orders passed by the authorities under the Act cannot be inferred on the basis of a supposed inherent right.

The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR 243 (Delhi)(FB), observed that the justification of an order passed by the Tribunal recalling its own order is required to be tested on the basis of the law laid down by the Apex Court in Honda Siel Power Products Ltd. v. CIT(2007) 295 ITR 466, dealing with the Tribunal’s power under section 254(2) to recall its order where prejudice has resulted to a party due to an apparent omission, mistake or error committed by the Tribunal while passing the order. Such recalling of order for correcting an apparent mistake committed by the Tribunal has nothing to do with the doctrine or concept of inherent power of review. It is a well settled provision of law that the Tribunal has no inherent power to review its own judgment or order on merits or reappreciate the correctness of its earlier decision on merits. However, the power to recall has to be distinguished from the power to review. While the

Tribunal does not have the inherent power to review its order on merits, it can

recall its order for the purpose of correcting a mistake apparent from the

record.

When prejudice results from an order attributable to the Tribunal’s mistake, error or omission, then it is the duty of the Tribunal to set it right. The Delhi High Court observed that the Tribunal, while exercising the power of rectification under section 254(2), can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake, error or omission and the error committed is apparent.

Thus, while the Tribunal does not have the power to review or reappreciate the correctness of its earlier decision on merits under section 254(2), it, however, has the power to recall its order in entirety to rectify a mistake apparent from record.

(c) The statement is correct.

Prior to 1st October, 2014, section 245A(b) defining “case” in respect of which an assessee may make an application to the Settlement Commission, specifically excluded from its scope –

1. a proceeding for assessment or reassessment or recomputation under section 147;

2. a proceeding for making fresh assessment in pursuance of an order under section 254 by the Appellate Tribunal or an order of revision under section 263 or section 264 by Commissioner, setting aside or cancelling an assessment.

This exclusion has now been removed by the Finance (No.2) Act, 2014 with effect from 1st October, 2014. Therefore, the proceedings mentioned in (1) and (2) above would now fall within the definition of “case” in respect of which an assessee can make an application to the Settlement Commission under section 245C.


14

5. (a) (i) The issue as to whether discount given to stamp vendors on purchase of stamp papers can be treated as “commission or brokerage” to attract the provisions for tax deduction at source came up before the Supreme Court in CIT v. Ahmedabad Stamp Vendors Association (2012) 348 ITR 378.

The principal issue in that case was whether stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on “principal-to-principal” basis involving a “contract of sale”.

On this issue, the Gujarat High Court had observed that the crucial question is whether the ownership in the stamp papers passes to the stamp vendor when the treasury officer delivers stamp papers on payment of price less discount. The Gujarat Stamp Supply and Sales Rules contemplate that the licensed vendor, while taking delivery of the stamp papers from the Government offices, is purchasing the stamp papers. The Rules also indicate that the discount which the licensed vendor has obtained from the Government is on purchase of the stamp papers.

If the licensed stamp vendors were mere agents of the State Government, no sales tax would have been leviable when the stamp vendors sell the stamp papers to the customers, because it would have been sale by the Government “through” stamp vendors. However, entry 84 in Schedule I to the Gujarat Sales Tax Act, 1969 specifically exempts sale of stamp papers by the licensed vendors from sales-tax. The very basis of the State Legislature enacting such exemption provision in respect of sale of stamp papers by the licensed vendors makes it clear that the sale of stamp papers by the licensed vendors to the customers would have, but for such exemption, been subject to sales tax levy. The question of levy of sales tax arises only because the licensed vendors themselves sell the stamp papers on their own and not as agents of the State Government. Had they been treated as agents of the State Government, there would be no question of levy of sales tax on sale of stamp papers by them, and consequently, there would have been no necessity for any exemption provision in this regard.

Therefore, although the Government has imposed a number of restrictions on the licensed stamp vendors regarding the manner of carrying on the business, the stamp vendors are required to purchase the stamp papers on payment of price less discount on “principal to principal” basis and there is no “contract of agency” at any point of time. The definition of “commission or brokerage” under clause (i) of the Explanation to section 194H indicates that the payment should be received, directly or indirectly, by a person acting on behalf of another person, inter alia, for services in the course of buying or selling goods. Therefore, the element of agency is required in case of all services and transactions contemplated by the definition of “commission or brokerage”


15

under Explanation (i) to section 194H. When the licensed stamp vendors take delivery of stamp papers on payment of full price less discount and they sell such stamp papers to the retail customers, neither of the two activities (namely, buying from the Government and selling to the customers) can be termed as service in the course of buying and selling of goods. The High Court, therefore, held that discount on purchase of stamp papers does not fall within the expression “commission or brokerage” to attract the provisions of tax deduction at source under section 194H.

The Supreme Court affirmed the above decision of the High Court holding that the said transaction is a sale and the discount given to stamp vendors for purchasing stamps in bulk quantity is in the nature of cash discount and consequently, section 194H has no application in this case.

(ii) The issue as to whether discount given on supply of SIM cards and recharge coupons by a telecom company to its distributors under a prepaid scheme would be treated as commission to attract the provisions of section 194H came up before the Kerala High Court in Vodafone Essar Cellular Ltd. v. ACIT (TDS) (2011) 332 ITR 255.

On this issue, the Kerala High Court observed that it was the SIM card which linked the mobile subscriber to the assessees network. Therefore, supply of SIM card by the assessee-telecom company was only for the purpose of rendering continued services to the subscriber of the mobile phone. The position was the same so far as recharge coupons were concerned, which were only air time charges collected from the subscribers in advance under a prepaid scheme.

There was no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee from the distributors at the time of delivery of SIM cards or recharge coupons were only for rendering services to ultimate subscribers. The assessee was accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor.

Therefore, the distributor only acted as a middleman on behalf of the assessee for procuring and retaining customers and therefore, the discount given to him was within the meaning of commission under section 194H on which tax was deductible.

(b) The facts of the case are similar to the facts of Pramod Mittal v. CIT (2013) 356 ITR 456, wherein the Delhi High Court observed that upon dissolution, the partnership firm ceased to exist. The partnership firm and the proprietorship concern are two separate and distinct units for the purpose of assessment.


16

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., 31st August, 2014, in this case). Thereafter, the income of the sole-proprietorship shall be taxable in the hands of the assessee 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 Delhi 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. Therefore, the Court held that loss suffered by the erstwhile partnership firm before dissolution of the firm cannot be carried forward by the successor sole-proprietor, since it was not a case of succession by inheritance.

Applying the rationale of the Delhi High Court ruling to the case on hand, Mr. Vivek is not entitled to set-off the loss of the erstwhile partnership firm M/s. Vivek & Co. against the income earned by him as a sole-proprietor, since succession of a partnership firm by a sole-proprietor, being an erstwhile partner, is not a case of inheritance.

(c) Applicability of the provisions of section 56(2)(viib)

Co.

Face value of shares (Rs.)

FMV of shares

(Rs.)

Considera-tion

received (Rs.)

Applicability of section 56(2)(viib)

Win (P) Ltd.

300 350 370 The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium (i.e., issue price


17

exceeds the face value of shares). The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib).i.e., Rs. 20 lakh, being Rs. 20 (Rs. 370 - Rs. 350) per share × 1,00,000 shares, shall be treated as income in the hands of Win (P) Ltd.

Gain (P) Ltd.

300 350 330 The provisions of section 56(2)(viib) are attracted since the shares are issued at a premium. However, no sum shall be chargeable to tax under the said section in the hands of Gain (P) Ltd. as the shares are issued at a price less than the FMV of shares.

Profit (P) Ltd.

300 280 290 Section 56(2)(viib) is not attracted since the shares are issued at a discount, though the issue price is greater than the FMV.

Top (P) Ltd.

300 275 310 The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium. The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib). Therefore, Rs. 140 lakh, being Rs. 35 (Rs. 310 - Rs. 275) per share × 4,00,000 shares, shall be treated as income in the hands of Top (P) Ltd.

6. (a) Computation of total income and tax liability of M/s. Dhuria & Co. for A.Y.2015-16

Particulars Rs.

Profit from ECR project 50,00,000

Profit from OMR project 30,00,000

Profit from trading unit 15,00,000


18

Business income/Gross Total Income 95,00,000

Less: Deduction under section 80-IA (See Notes 1 & 2 below) 47,00,000

Total Income 48,00,000

Income-tax @30% 14,40,000

Add: Education cess@2% and SHEC@1% __43,200

Total tax liability under the regular provisions of the Act 14,83,200

The provisions of Chapter XII-BA on Alternate Minimum Tax shall apply to M/s. Dhuria & Co., since the firm has claimed deduction under section 80-IA.

Computation of Alternate Minimum Tax (AMT)

Particulars Rs.

Total Income as per the Income-tax Act, 1961 48,00,000

Add: Deduction under section 80-IA 47,00,000

Adjusted Total Income 95,00,000

AMT = 18.5% × 95,00,000 = 17,57,500

Since the regular income-tax payable as per the provisions of the Act is less than the AMT, the adjusted total income of Rs. 95,00,000 would be deemed to be the total income of M/s. Dhuria & Co. and it would be liable to pay [email protected]% thereof. The tax payable by M/s. Dhuria & Co. for the A.Y.2015-16 would, therefore, be Rs.17,57,500 plus education cess@2% and secondary and higher education cess@1%, totaling Rs.18,10,225.

M/s. Dhuria & Co. would be eligible for credit of Rs.3,27,025, being the difference between the AMT of Rs.18,10,225 and tax of Rs.14,83,200 on total income computed under the regular provisions of the Act. Such credit can be set-off in the year in which tax on total income computed under the regular provisions of the Act exceeds the AMT. Such credit can be carried forward for succeeding ten assessment years.

Notes:

(1) Section 80-IA(1) provides for 100% deduction of profits derived by an undertaking or an enterprise from an eligible business referred to in sub-section (4) for ten consecutive assessment years. Clause (i) of sub-section (4) provides that the deduction under section 80-IA would be applicable to any enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility fulfilling the conditions mentioned therein. The Explanation to this clause defines “infrastructure facility” to include, inter alia, -


mailto:[email protected]%25

19

(a) a road, including a toll road, a bridge or a rail system and

(b) a highway project including housing or other activities being an integral part of the highway project.

The CBDT has, vide Circular No.4/2010 dated 18.5.2010, clarified that widening of an existing road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility for the purpose of section 80-IA(4)(i). However, simply relaying of an existing road would not be classifiable as a new infrastructure facility for this purpose.

Therefore, Dhuria & Co. would be eligible for deduction under section 80-IA in respect of the profits from ECR highway project, since it involves expansion of existing roads by constructing additional lanes as a part of the highway project. However, it would not be eligible for deduction under section 80-IA in respect of profits from the OMR project, which involves only relaying of existing roads.

(2) The ECR project is eligible for deduction@100% of the profits derived from its eligible business (i.e., the business of developing an infrastructure facility, being a highway project) under section 80-IA. However, the Trading Unit is not an “eligible business” and its profits are not eligible for deduction under section 80-IA . Since the trading unit has transferred cement worth Rs.5 lakh to the ECR project at Rs.2 lakh,i.e., a price lower than the fair market value, it is an inter-Unit transfer of goods between eligible business and other business, where the consideration for transfer does not correspond with the market value of goods. As per section 80-IA(8), the profits of eligible business (i.e., ECR project) has to be computed as if the transfer has been made at market value i.e., at Rs.5 lakh, for the purpose of deduction under section 80-IA. Therefore, the profits of the eligible business (i.e., ECR project), for the purpose of deduction under section 80-IA, would be Rs.47 lakh (i.e., Rs.50 lakh – Rs.5 lakh + Rs.2 lakh).

(b) Computation of additional income-tax payable under section 115TA

Category of investor

Income distributed

(Rs.)

Rate of tax

Amount of tax (Rs.)

(i) Mutual funds exempt under section 10(23D)

1,50,000 Nil Nil

(ii) Individuals and HUFs 1,00,000 28.325% 28,325

(iii) Companies 4,00,000 33.99% 1,35,960

1,64,285


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The additional income-tax is payable on or before 31st August, 2014. However, the same was paid only on 7th November 2014.

Consequently, interest@1% per month or part of month is leviable under section 115TB, as follows –

Period

No. of months/ part of a month

1st September, 2014 – 30thSeptember, 2014 (whole of first month) 1

1st October – 31st October, 2014 (whole of second month) 1

1stNovember – 7thNovember, 2014 (part of third month) 1

No. of months for which interest is leviable u/s 115TB 3

Interest under section 115TB is payable @1% per month for 3 months on the amount of additional tax payable i.e., Rs.1,64,285. Therefore, interest payable under section 115TB is Rs.4,929.

Notes:

(i) As per section 115TTA, the securitisation trust will be liable to pay additional income-tax on income distributed to its investors.

(ii) The rates of additional income-tax and the effective rate of tax (i.e., including surcharge@10% and cess@3%) in respect of each category are shown hereunder –

Category of investors to whom income is distributed

Rate Effective rate of tax

(1) Persons, in whose case, income, irrespective of its nature and source, is exempt from tax under the Income-tax Act, 1961 [for example, mutual funds exempt under section 10(23D)]

Nil

Nil

(2) Individuals and HUFs 25% 28.325%

(3) Other Investors [i.e., investors other than mentioned in (1) and (2) above]

30%

33.99%

(iii) Such tax has to be paid within 14 days from the date of distribution or payment of such income, whichever is earlier.

(iv) The securitisation trust will be liable to pay simple interest on the amount of additional income-tax not paid within the specified time i.e., within 14 days from the date of distribution or payment of such income, whichever is earlier. Such interest is leviable at the rate of 1% for every month or part of the month on the amount of such tax not paid or short paid, as the case may be, for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid [Section 115TB].


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7. (a) Section 92B(2) extends the scope of the definition of international transaction given in section 92B(1) by deeming a transaction entered into with a person other than an associated enterprise as a transaction with an associated enterprise, if the following conditions are satisfied:

• there exists a prior agreement in relation to the relevant transaction between the other person and the associated enterprise or,

• where the terms of the relevant transaction are determined in substance between such other person and the associated enterprise; and

• either the enterprise or the associated enterprise or both of them are non-residents.

In such a case, a transaction entered into between the enterprise and the other person shall be deemed to be an international transaction entered into between two associated enterprises, whether or not such other person is a non-resident.

In this case, the agreement between the Indian company, PQR Ltd. and unrelated party, Mr. Anshul for sale of product P was entered into on 15/3/2015. Prior to that date (i.e., on 10/3/2015), Mr. Anshul has entered into an agreement, for sale of product P, with ABC Inc., a non-resident entity. ABC Inc. is deemed to be an associated enterprise of PQR Ltd. since it is a specified foreign company in relation to PQR Ltd., which implies that PQR Ltd. holds 26% or more in the nominal value of the equity share capital of ABC Inc.

In this case, there exists a prior agreement in relation to the transaction for sale of product P between the unrelated party, Mr. Anshul and the associated enterprise, ABC Inc., which is a non-resident entity. Hence, the transaction entered into between PQR Ltd., an Indian company and Mr. Anshul for sale of product P is deemed to be an international transaction entered into between two associated enterprises, irrespective of the residential status of Mr. Anshul.

(b) (i) Computation of tax liability of Mr. Jack for the A.Y.2015-16

Particulars Rs. Rs.

Income taxable under section 115BBA

Income from participation in cricket tournaments in India 32,00,000

Contribution of article in a magazine in India 15,000

32,15,000

Tax@20% under section 115BBA on Rs.32,15,000 6,43,000

Tax@30% under section 115BB on income of Rs. 80,000 (Rs. 55,280 + Rs. 24,720) by way of winnings from lotteries

24,000

6,67,000


22

Add: Education cess@2% and Secondary and higher education cess@1%

20,010

Total tax liability of Mr. Jack 6,87,010

Ms. Jill is a non-resident entertainer, whose income of Rs. 2 lakh from a music show in India is taxable@20% under section 115BBA. Therefore, her tax liability is Rs. 41,200 (being 20% of Rs. 2 lakh plus education cess@2% and secondary and higher education cess@1%)

(ii) Yes, the above income are subject to deduction of tax at source.

Income referred to in section 115BBA is subject to deduction of tax at source@20% under section 194E.

Income referred to in section 115BB (i.e., winnings from lotteries) is subject to deduction of tax at source@30% under section 194B.

Since Mr. Jack and Ms. Jill are non-residents, the amount of tax to be deducted calculated at the prescribed rates mentioned above, would be increased by education cess@2% and secondary and higher education cess@1%.

(iii) Section 115BBA provides that if the total income of the non-resident sportsman or non-resident entertainer comprises of only income referred to in that section and tax deductible at source has been fully deducted, it shall not be necessary for him to file his return of income.

In this case, although Mr. Jack is a non-resident sportsman, he has winnings from lotteries as well. Therefore, he cannot avail the benefit of exemption from filing of return of income as contained in section 115BBA. Hence, he has to file his return of income for A.Y.2015-16.

However, since Ms. Jill’s income comprises of only income referred to in section 115BBA, in respect of which tax is deductible under section 194E, she need not file her return of income for A.Y.2015-16, if tax has been so deducted.

(c) The issue under consideration in this case is whether making an incorrect claim in the return of income would tantamount to concealment of particulars or furnishing of inaccurate particulars for attracting the penal provisions under section 271(1)(c) when no information given in the return of income is found to be incorrect.

This issue came up before the Supreme Court in CIT v. Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158.The Supreme Court observed that in order to attract the penal provisions of section 271(1)(c), there has to be concealment of the particulars of income or furnishing inaccurate particulars of income. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. Making an incorrect claim


23

(i.e. a claim which has been disallowed) would not, by itself, tantamount to furnishing inaccurate particulars.

The Apex Court held that where there is no finding that any details supplied by the assessee in its return are incorrect or erroneous or false, there is no question of imposing penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee.

Applying the rationale of the above Supreme Court ruling to the case on hand, penalty under section 271(1)(c) cannot be imposed on Biotech Ltd. merely for making an incorrect claim which is not sustainable in law, since the company had furnished all the details and no information given by the company was found to be incorrect or erroneous or false.

The contention of Biotech Ltd. is, therefore, correct.





PAPER – 8: INDIRECT TAX LAWS

Question No. 1 is compulsory.

Attempt any five questions from the remaining six Questions.

(Wherever appropriate, suitable assumption should be made and indicated in the answer by the candidate)


1. (a) A SSI unit has effected clearances of goods of the value of Rs. 475 lacs during the financial year 2013-14. The said clearances include the following:

(i) Clearance of excisable goods without payment of excise duty to a 100% EOU

Rs. 120 lacs

(ii) Job work in terms of Notification No. 214/86 CE, which is exempt from duty

Rs. 75 lacs

(iii) Export to Nepal and Bhutan Rs. 50 lacs

(iv) Goods manufactured in rural area with the brand name of the others

Rs. 90 lacs

Examine with reference to the notification governing SSI exemption under the Central Excise Act whether the benefit of exemption would be available to the unit for the financial year 2014-15. (5 Marks)

(b) (i) Future Bank Ltd. furnishes the following information relating to services provided and the gross amount received. Compute the value of taxable service and service tax payable:

Rs. (Lakhs)

(i) Administration charges collected for extending home loans

10

(ii) Discount earned on bills discounted 4.5

(iii) Value of sale and purchase of forward contract 5.7

(iv) Charges received on credit card and debit card facilities extended

3.8

(v) Commission received for service rendered to Government for tax collection

6.0

(vi) Margin earned on reverse repo transaction 25.0

Note: Future Bank Ltd. is not eligible for small service providers’ exemption under Notification No. 33/2012 – ST dated 20.06.2012. (6 Marks)


2

(ii) Compute service tax liability from the following particulars:

Gross amount (excluding all taxes) charged by the service provider for providing works contract service

Rs. 1,00,000

Actual value of material transferred in the above works contract (VAT under the relevant State VAT Law has been paid on this value)

Rs. 70,000

Excise duty paid on inputs Rs. 8,750

Service tax paid on input services Rs. 1,000

Excise duty paid on the capital goods, purchased during the year, used in the provision of works contract service

Rs. 1,000

Rate of service tax 12.36%

(4 Marks)

(c) Compute export duty from the following data:

(i) FOB price of goods: US $ 1,00,000.

(ii) Shipping bill presented electronically on 26-05-2014.

(iii) Proper officer passed order permitting clearance and loading of goods for export (Let Export Order) on 04-06-2014.

(iv) Rate of exchange and rate of export duty are as under:

Rate of Exchange Rate of Export Duty

On 26-05-2014 1 US $ = Rs. 55 10%

On 04-06-2014 1 US $ = Rs. 56 8%

(v) Rate of exchange is notified for export by Central Board of Excise and Customs.

(Make suitable assumptions wherever required and show the workings.) (5 Marks)

2. (a) Compute the assessable value of the goods manufactured by Shivam Enterprises, under section 4 of the Central Excise Act, 1944, with the help of the following particulars:-


Contracted sale price for delivery at buyer’s premises 2,42,000

The contracted sale price includes the following elements of cost:-

(i) Cost of containers supplied by the buyer 15,200

(iii) Loading and handling charges incurred after removal from the factory

6,000

(iii) Dharmada charges 2,100

Note: Sale is completed at factory’s premises. (4 Marks)


3

(b) Discuss the prosecution, arrest and bail implications, if any, in respect of the following cases:

(i) Mr. Akhil provides consulting engineer’s services of Rs. 60 lakh and knowingly evades the payment of service tax.

(ii) Mr. Siddharth avails and utilizes credit of service tax of Rs. 45 lakh without actual receipt of taxable service.

(iii) Mr. Prince fails to supply any information [with service tax implications of Rs. 52 lakh] which he was required to supply under the Service Tax Rules, 1994.

(iv) Miss Nikita collected service tax of Rs. 70 lakh in the month of June but did not deposit the said amount until 31st March. She has committed such offence for the second time. (8 Marks)

(c) What will be the dates of commencement of the definitive anti-dumping duty in the following cases under section 9A of the Customs Tariff Act, 1975 and the rules made thereunder:

(i) where no provisional duty is imposed;

(ii) where provisional duty is imposed;

(iii) where anti-dumping duty is imposed retrospectively from a date prior to the date of imposition of provisional duty. (4 Marks)

3. (a) The assessee is engaged in the manufacture of various types of packaging machines. The machines are made to order according to the specification of individual customers and such machines, before dispatch, are to be tested at the manufacturer’s premises for the customer’s satisfaction. After the satisfaction of the customer, the assessee makes the entry in the RG-1 register (DSA) declaring the machine as manufactured and ready for clearance. For testing the machine, assessee procures certain excisable goods and avails CENVAT credit of the duty paid thereon by treating them as inputs used in the manufacture of packaging machines.

The Department, however, denied such credit on the basis of the following contentions:

(i) The said excisable goods were used only for testing and as such, they cannot be treated as inputs used in manufacturing the final product.

(ii) Testing takes place only after manufacture of final product and any goods used in the process subsequent to manufacture cannot be termed as inputs under rule 2(k) of CENVAT Credit Rules, 2004.

Discuss whether the department is justified in denying the CENVAT credit. You may refer to decided case law, if any, in support of your decision. (4 Marks)


4

(b) A co-operative society rendered rent-a-cab service to M/s. JITO. The members of the society were essentially agriculturists who formed the society after they lost their land when JITO plant was being set up and the society was operating without any profit model. When the society started rendering the service to JITO, there was no service tax levy on rent-a-cab service. However, service tax was imposed on it subsequently. A show cause notice was issued to the society proposing to recover service tax with applicable penalty.

The society paid the entire disputed amount of service tax and thereafter regularly paid the service tax but did not pay the penalty contending that it was a case of new levy and also there were divergent views of different Benches of Tribunal, which had added to the confusion. The issue was debated also with JITO, the service receiver, who first denied to pay the amount of tax.

Decide, with the help of a case law, whether the contention of the assessee is acceptable in law. Discuss in brief the various observations which can be made on the issue. (8 Marks)

(c) Guru India imported various components in different consignments separately on the basis of valid import licences. The Department has taken a stand that though components are imported in different consignments, ultimately taking all together, they are sufficient to manufacture finished goods. Therefore, in view of the provision of Rule 2(a) of the Interpretative Rules, the goods will attract import duty as if they are finished goods and the benefit of an exemption notification exempting only the components will not be available.

Write a brief note, with reference to decided case law, as to whether the stand taken by the Department is correct in law. (4 Marks)

4. (a) “Belated filing of returns/ Annual Financial Information Statement/ Annual Installed Capacity Statement does not attract any late fee.” Discuss the validity of the statement. (4 Marks)

(b) Determine the applicability of service tax in each of the following independent cases:

(i) Construction, erection, commissioning or installation of original works pertaining to an airport.

(ii) Services provided by way of admission to a national park

(iii) The ambulance services provided by an entity which is not a clinical establishment or an authorised medical practitioner or paramedics (8 Marks)

(c) “A resident firm is not eligible to make an application for advance ruling in matters relating to customs duty”. Discuss the validity of the statement under Customs Laws. (4 Marks)


5

5. (a) Describe the power of a Central Excise Officer to summon persons under the Central Excise Act. (4 Marks)

(b) Mention briefly the specific exclusions from the definition of the term 'service' as provided in section 65B (44) of the Finance Act, 1994. (8 Marks)

(c) Briefly explain the provisions relating to creation of first charge on the property of the assessee, as provided under section 142A of the Customs Act, 1962. (4 Marks)

6. (a) Under what circumstances it may be beneficial to pay duty and claim rebate under rule 18 of Central Excise Rules, 2002. (4 Marks)

Or

With reference to the Central Excise Act, 1944 and the rules made thereunder, write a brief note on the circumstances when personal penalty could be imposed on a director of a company or a partner of a firm or an employee or a transporter.

(4 Marks)

(b) Furious Constructions Ltd. is engaged in providing the services by way of construction of roads. The said services are exempt from service tax vide mega exemption Notification No. 25/2012 ST dated 20.06.2012. Examine whether the sub-contractors who provide architect service and consulting engineer service which are used by Furious Constructions Ltd. in relation to such construction service, are also exempt from service tax.

Would your answer be different if the sub-contractor provides the works contract services? (8 Marks)

(c) What are the privileges of Status Holders under Foreign Trade Policy, 2015-2020?

(4 Marks)

7. (a) What are the orders that are appealable to Supreme Court under the Central Excise Act, 1944? (4 Marks)

(b) (i) Mr. Bhola, located in taxable territory receives taxable services provided from a U.K. based company located in non-taxable territory. Examine whether Mr. Bhola is liable to get registered under service tax. (4 Marks)

(ii) Discuss the power to search premises under section 82 of the Finance Act, 1994. (4 Marks)

(c) What is the objective of Merchandise Exports from India Scheme (MEIS)? Which export categories/ sectors are ineligible for reward under this scheme and also explain the basis of calculation of reward? (4 Marks)





PAPER – 8: INDIRECT TAX LAWS

SUGGESTED ANSWERS / HINTS

1. (a) A SSI unit shall be eligible for benefit of exemption notification only if value of clearances during preceding financial year does not exceed Rs. 400 lakhs.

The item wise treatment shall be as under -

1. Clearance to 100% EOU shall be excluded for calculating the limit of 400 lakhs.

2. Clearance under Notification No. 214/86 shall be excluded for calculating the limit of 400 lakhs.

3. Export to Nepal & Bhutan is considered as home consumption and thus, it shall be included for computing limit of 400 lakhs.

4. The turnover of goods manufactured in rural area with the brand name of the others shall be included for computing limit of Rs.400 lakhs.

Calculation of clearances during financial year 2013-14:

Total value of clearances 475 lakhs

Less: Clearance to 100% EOU 120 lakhs

Clearance under Notification No. 214/86 75 lakhs 195 lakhs

280 lakhs

As the value of clearances for home consumption in financial year 2013-14 does not exceed Rs. 400 lakhs, the benefit of exemption shall be available to the SSI unit during financial year 2014-15.

(b) (i) Computation of value of taxable service and service tax payable by Future Bank Ltd.

Sl. No.

Particulars Amount (Rs. in lakh)

(i) Administration charges for extending home loans [Note 1]

10,00,000

(ii) Discount earned on bills discounted [Note 2] -

(iii) Value of sale and purchase of forward contract [Note 3] -


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(iv) Charges received on credit and debit card facilities extended [Note 4]

3,80,000

(v) Commission received for service rendered to Government for tax collection [Note 5]

6,00,000

(vi) Margin earned on reverse repo transaction [Note 6] -

Total 19,80,000

Value of taxable service

10019,80,000

112.36

×

rounded off [since all the amounts are total amounts received]

17,62,193

Service tax payable [ Rs. 17,62,193 × 12%] 2,11,463

Education cess [ Rs. 2,11,463 × 2%] 4229

Secondary and higher education cess [Rs. 2,11,463 × 1%]

2115

Total service tax payable 2,17,807

Notes:

1. Service of extending loans in so far as the consideration is represented by way of interest is covered in the negative list. However, any charges collected over and above the interest represent taxable consideration and is thus, liable to service tax.

2. Services of bills discounting, to the extent the consideration is represented by way of discount, is covered in the negative list of services as such discounting is also a manner of extending credit facility or a loan.

3. Sale or purchase of forward contracts, being transaction in money, is outside the scope of the definition of service.

4. Credit extended through credit and debit cards is not in the nature of loan or advance for interest and thus, the charges received on account of such extended credit is in fact, the consideration for the services rendered by way of credit card.

5. Commission received for service rendered to Government for tax collection is neither transactions in money which is excluded from the definition of service nor covered in negative list or under any exemption notification and is thus, liable to service tax.

6. Reverse repo being a security, which is goods is excluded from the definition of service.


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(ii) Computation of service tax liability as per rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006


Gross amount charged 1,00,000

Less: Actual value of goods transferred (Note-1) 70,000

Value of service portion in the execution of works contract 30,000

Service tax on Rs. 30,000 @12.36% 3,708

Less: CENVAT credit on inputs (Note-2) -

CENVAT credit on input services 1,000

CENVAT credit on capital goods (50%) (Note-3) 500

Service tax payable 2,208

Notes:

1. Since VAT has been paid on the actual value of property in goods transferred in the execution of the works contract, such value adopted for the purposes of payment of VAT has been taken as the value of property in goods transferred in the execution of the said works contract [Clause (c) of Explanation to rule 2A(i) of the Valuation Rules].

2. CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, is not available [Explanation 2 to rule 2A of the Valuation Rules].

3. Only 50% of the duty paid on the capital goods is available as CENVAT credit, in the current year [Rule 4(2)(a) of the CENVAT Credit Rules, 2004].

(c) Computation of export duty

Particulars Amount (US $)

FOB price of goods [Note 1] 1,00,000

Amount (Rs.)

Value in Indian currency (US $ 1,00,000 x Rs. 55) [Note 2] 55,00,000

Export duty @ 8% [Note 3] 4,40,000

Notes:

1. As per section 14(1) of the Customs Act, 1962, assessable value of the export goods is the transaction value of such goods which is the price actually paid or payable for the goods when sold for export from India for delivery at the time and place of exportation.

2. As per third proviso to section 14(1) of the Customs Act, 1962, assessable value has to be calculated with reference to the rate of exchange notified by the CBEC on the date of presentation of shipping bill of export.


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3. As per section 16(1)(a) of the Customs Act, 1962, in case of goods entered for export, the rate of duty prevalent on the date on which the proper officer makes an order permitting clearance and loading of the goods for exportation, is considered.

2. (a) Computation of the assessable value of goods manufactured by Shivam Enterprises:-


Contracted sale price for delivery at buyer’s premises 2,42,000

Less: Loading and handling charges incurred after removal from the factory

6,000

Assessable value of the goods 2,36,000

Notes:-

While computing the assessable value,

1. cost of containers supplied by the buyer is includible [Circular No.

643/34/2002-CX. dated 1-7-2002].

2. loading and handling charges incurred after removal from the factory are not includible.

3. dharmada charges are includible [Circular No. 763/79/2003-CX. dated 21-11-2003].

(b)

Person Offence Prosecution Arrest Bail

Mr. Akhil Non-cognizable offence

6 months to 3 years

Arrest can be ordered by Commissioner of Central Excise

Bailable Offence

Mr. Siddhartha Non-cognizable offence

Upto 1 year No arrest Bailable Offence

Mr. Prince Non-cognizable offence

6 months to 3 years

Arrest can be ordered by Commissioner of Central Excise

Bailable Offence

Miss Nikita Cognizable offence

Upto 7 years Arrest can be ordered by Commissioner of Central Excise without arrest warrant

Non-Bailable/ Bailable Offence


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(c) The Central Government has power to levy anti-dumping duty on dumped articles in accordance with the provisions of section 9A of the Customs Tariff Act, 1975 and the rules framed thereunder.

(i) In a case where no provisional duty is imposed, the date of commencement of anti-dumping duty will be the date of publication of notification, imposing anti-dumping duty under section 9A(1), in the Official Gazette.

(ii) In a case where provisional duty is imposed under section 9A(2), the date of commencement of anti-dumping duty will be the date of publication of notification, imposing provisional duty under section 9A(2), in the Official Gazette.

(iii) In a case where anti-dumping duty is imposed retrospectively under section 9A(3) from a date prior to the date of imposition of provisional duty, the date of commencement of anti-dumping duty will be such prior date as may be notified in the notification imposing anti-dumping duty retrospectively, but not beyond 90 days from the date of such notification of provisional duty.

3. (a) No, the contention of the Department to deny the CENVAT credit is not justified.

The facts of the given case are similar to the case of Flex Engineering Ltd. v.

Commissioner of Central Excise, U.P. 2012 (276) E.L.T. 153 (S.C.). In this case, the Supreme Court held that the process of manufacture would not be complete if a product is not saleable, as a non-saleable product is not marketable.

The Apex Court held that the process of testing the customized packaging machines was inextricably connected with the manufacturing process. Until this process was carried out as per customer’s satisfaction, the manufacturing process was not complete and the machines were not fit for sale. Therefore, manufacturing process was completed only after testing of the said machines.

Thus, in the given case also, the excisable goods used for testing the packaging machines are inputs used in relation to the manufacture of the final product namely packaging machines and the assessee is eligible to avail CENVAT credit of the duty paid on such excisable goods.

(b) The facts of the given case are similar to the case of Ankleshwar Taluka ONGC

Land Loosers Travellers Co. OP. v. C.C.E., Surat-II 2013 (29) STR 352 (Guj.). In this case, the High Court made the following three important observations:

(i) Service tax levy was comparatively new and therefore, both unawareness and confusion were quite possible particularly considering the strata to which the members of the society (assessee) belonged to. They were essentially agriculturists, who lost their lands when plant of service receiver was set up, and therefore, had created society and for many years they were providing rent-a-cab service to the service receiver.


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(ii) There were divergent views of different Benches of Tribunal, which may have added to such confusion.

(iii) The fact that the assessee had persuaded their right of reimbursement of payment of service tax with the service receiver by way of conciliation and arbitration cannot deprive them of the defence of bona fide belief of applicability of service tax.

The High Court held that even if the assessee was aware of the levy of service tax and was not paying the amount on the ground of dispute with the service receiver, there could be no justification in levying the penalty in absence of any fraud, misrepresentation, collusion or wilful mis-statement or suppression.

Moreover, when the entire issue for levying the tax was debatable, that also would surely provide legitimate ground for not imposing the penalty.

Therefore, in view of the above-mentioned ruling of the High Court, the contention of assessee is acceptable in law.

(c) No, the stand taken by the Department is not correct in law. Rule 2(a) of the Interpretative Rules applies when all the components are imported at the same time and when a simple process is required for assembly. This view was also confirmed by the Supreme Court in CC v. Sony India (2008) 231 ELT 385, wherein it has been held that rule 2(a) applies only if all the components are presented at the same time for custom clearance.

In the given case, since the various components are imported in different consignments separately at different points of time, rule 2(a) will not apply. Therefore, import of components will be treated as import of components and not of finished goods for the purpose of benefit of exemption notification.

4. (a) The said statement is not valid. Rule 12 prescribes the provisions relating to filing of various central excise returns. With effect from 01.03.2015, a new sub-rule (6) has been inserted in rule 12 to lay down that where any return [ER-1, ER-3, ER-8] or Annual Financial Information Statement [ER-4] or Annual Installed Capacity Statement [ER-7] is submitted by the assessee after the relevant due date, the assessee will be required to pay an amount calculated at the rate of Rs. 100 per day subject to a maximum of Rs. 20,000 for the period of delay in submission of each such return or statement.

Similarly with effect from 01.03.2015, new sub-rule (6) has been inserted in rule 17. Rule 17 governs the provisions in relation to removal of goods from 100% EOU to Domestic Tariff Area. Sub-rule (3) of rule 17 requires the 100% EOU unit to electronically submit a monthly return in form ER 2 within 10 days from the close of the month to which the return relates, in respect of excisable goods manufactured in, and receipt of inputs and capital goods in, the unit. Delay in filing of such return


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will now attract a late fee of Rs. 100 per day for each day of default subject to a maximum of Rs. 20,000 in terms of newly inserted sub-rule (6).

(b) (i) Taxable With effect from 1.04.2015, service tax will be payable on construction, erection, commissioning or installation of original works pertaining to an airport [Mega Exemption Notification No. 25/2012 ST dated

20.06.2012 amended].

(ii) Exempt With effect from 1.04.2015, services provided by way of admission to a national park has been exempted from service tax. A new entry has been inserted in the notification to give effect to this exemption. [Mega Exemption

Notification No. 25/2012 ST dated 20.06.2012 amended].

(iii) Exempt With effect from 1.04.2015, ambulance services provided by all service providers (whether or not by clinical establishment or an authorised medical practitioner or paramedics) has been exempted from service tax [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(c) The said statement is not valid. Earlier, public sector companies, resident public limited companies and resident private limited companies were notified under section 28E(c)(iii) of Customs Act, 1962 as the class or category of resident persons who can apply for advance ruling in case of specified matters relating to customs duty.

However, Notification No. 27/2015 Cus (NT) dated 01.03.2015 has expanded the scope of advance ruling by additionally notifying resident firm as class or category of residents who can apply for advance ruling in case of specified matters relating to customs duty. Thus, now a resident firm will also be eligible to make an application for advance ruling in matters relating to customs duty.

5. (a) Section 14 of the Central Excise Act, 1944 contains the provisions relating to power of a Central Excise Officer to summon persons. As per this section, any Central Excise Officer empowered by the Central Government in this behalf, shall have power to summon any person whose attendance he considers necessary for:

(i) giving evidence, or

(ii) producing a document or

(iii) any other thing in any enquiry which he is making for any of the purposes of this Act.

All persons so summoned shall be bound to attend, either in person or by an authorised agent, as such officer may direct. Further, these persons shall be bound to state the truth upon any subject in respect of which they are examined and produce documents and other things as may be required. Every inquiry under this section shall be deemed to be a “judicial proceeding” within the meaning of section 193 and section 228 of the Indian Penal Code.


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(b) As per section 65B(44) of the Finance Act, 1994, service does not include:-

(i) an activity which constitutes merely,—

(a) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(b) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(c) a transaction in money or actionable claim;

It has been clarified vide Explanation 2 to clause (44) that transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

(ii) a provision of service by an employee to the employer in the course of or in relation to his employment;

(iii) fees taken in any Court or tribunal established under any law for the time being in force.

Further, it has been provided by way of Explanation 1 to clause (44) that the following are not services–

(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.

(c) Section 142A of the Customs Act, 1962 provides that any amount of duty, penalty, interest or any other sum payable under the Customs Act has a first charge on the property of the assessee or the person in default, save as otherwise provided in the following:-

(i) Any sum payable under section 529A of the Companies Act, 1956.

(ii) Any sum payable under Recovery of Debts Due to Banks and the Financial Institutions Act, 1993


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(iii) Any sum payable under the Securitization and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002.

6. (a) It is usually preferable not to pay duty rather than to pay it and wait for refund from the government. However, in the following situations, it is beneficial to pay duty and claim rebate under Rule 18 of Central Excise Rules, 2002:

(A) If assessee has balance of duty in Capital Goods CENVAT Credit Account, it is advisable to pay duty and claim refund, as balance in Capital Goods CENVAT Credit Account is never refundable. The said situation may take place if duty paid on capital goods is heavy and assessee may not be able to utilize the credit.

(B) An SSI Unit may pay excise duty and claim rebate, as getting refund of CENVAT Credit of inputs is not an easy preposition. Further, he is not entitled to get refund of duty paid on capital goods.

(C) When duty paid goods are proposed to be exported.

(D) Claiming rebate is comparatively easy procedure than claiming refund of duty paid on inputs under CENVAT Credit Rules, 2004.

Or

As per rule 26(1) any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reasons to believe are liable to confiscation under the Act or these rules, shall be liable to a penalty not exceeding the duty on such goods or Rs.2,000 whichever is greater.

Section 9(1)(bbb) of the Central Excise Act also contemplates punishment for such dealings by any person. Thus a director, partner, employee or transporter or trader will be personally liable to penalty if he is personally involved in clandestine removal etc.

Further, penalty can be imposed on such persons if they issue any duty invoice without delivery of the goods or abet in making such invoice [Rule 26(2)(i)].

Penalty is also imposable on such persons if they issue any other document or abet in making such document on the basis of which, user of such document takes any ineligible benefit such as CENVAT credit or refund [Rule 26(2)(ii)].

(b) No, the sub-contractors who provide architect service and consulting engineer service which are used by Furious Constructions Ltd. in relation to such construction service, are not exempt from service tax. According to section 66F(1) of the Finance Act, 1994, reference to a service by nature or description in the Finance Act, 1994 shall not include reference to a service which is used for providing main service. Therefore, if any person is providing architect service and


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consulting engineer services which are used by the contractor in relation to construction of road service, the benefit of the mega-exemption would not be available to such persons unless the activities carried out by the sub-contractor independently and by itself fall in the ambit of the exemption.

Further, exemption is available to 'services by way of construction of roads' and not to 'services in relation to construction of roads'. It is thus apparent that just because the main contractor is providing the service by way of construction of roads, it would not automatically lead to the conclusion that services provided by the sub-contractor to the main contractor shall also be an exempt service.

However, a sub-contractor providing services by way of works contract to the main contractor, providing exempt works contract services, has been exempted from service tax under the mega exemption if the main contractor is engaged in providing exempt services of works contracts.

(c) Status holders are granted certain benefits like:

(a) Authorisation and custom clearances for both imports and exports on self-declaration basis.

(b) Fixation of Input Output Norms (SION) on priority i.e. within 60 days.

(c) Exemption from compulsory negotiation of documents through banks. The remittance receipts, however, would continue to be received through banking channels.

(d) Exemption from furnishing of Bank Guarantee in Schemes under FTP.

(e) Two Star Export Houses and above are permitted to establish export warehouses.

(f) Three Star and above Export House shall be entitled to get benefit of Accredited Clients Programme (ACP) as per the guidelines of CBEC.

(g) Status holders shall be entitled to export freely exportable items on free of cost basis for export promotion subject to an annual limit of Rs. 10 lakh or 2% of average annual export realization during preceding 3 licensing years, whichever is higher.

7. (a) As per section 35L(1) of the Central Excise Act, 1944, an appeal shall lie to the Supreme Court from.

(i) any judgment of the High Court delivered in an appeal made under section 35G if the High Court certifies the case to be fit for appeal to the Supreme Court. The High Court can certify any case on its own motion or on an oral application made by or on behalf of the aggrieved party, immediately after passing of the judgement.


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(ii) any order of the Appellate Tribunal passed having relation to the determination of rate of duty or value of goods, among other things.

Sub-section (2) of section 35L provides that the determination of any question having a relation to the rate of duty shall include the determination of taxability or excisability of goods for the purpose of assessment. Therefore, appeal against orders of Tribunal in such matters would lie before the Supreme Court.

Further, by Special Leave Petition (SLP) under Article 136 of Constitution of India i.e. permission of Supreme Court, even in cases where High Court does not certify it to be a fit case for appeal to Supreme Court, an appeal can be filed before Supreme Court.

(b) (i) Yes. Mr. Bhola is liable to get registered under service tax. Section 68(2) of the Finance Act, 1994 empowers Central Government to notify the taxable services on which the service tax shall be payable by such person as may be specified.

Notification No. 30/2012-Service Tax dated 20.06.2012 thereby specifies that in respect of services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory, service tax is required to paid by person receiving the service.

Therefore, in the present case, service tax is required to be paid by Mr. Bhola, being a person receiving the service and located in taxable territory. Consequently, Mr. Bhola is liable to get registered under service tax.

(ii) Section 82 of the Finance Act, 1994 provides that where the Joint Commissioner/Additional Commissioner of Central Excise/such other Central Excise officer as may be notified by the Board has reasons to believe that any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Chapter, are secreted in any place, he may authorise in writing any Central Excise officer to search for and seize or may himself search and seize such documents or books or things. The search shall be subject to the Code of Criminal Procedure, 1973.

(c) Merchandise Exports From India Scheme (MEIS)

The objective of MEIS scheme is to compensate infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially goods having high export intensity, employment potential and thereby enhancing India’s export competitiveness.

(i) Ineligible categories under MEIS: Some exports categories/sectors ineligible for Duty Credit Scrip entitlement under MEIS are listed below:

(1) EOUs / EHTPs / BTPs/ STPs who are availing direct tax benefits / exemption


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(2) Supplies made from DTA units to SEZ units

(3) Exports through trans-shipment, i.e., exports that are originating in third country but trans-shipped through India

(4) Deemed Exports

(5) SEZ/EOU/EHTP/BPT/FTWZ products exported through DTA units

(6) Export products which are subject to Minimum export price or export duty

(7) Ores and concentrates of all types and in all formations

(8) Cereals of all types

(9) Sugar of all types and all forms unless specifically notified.

(10) Crude / petroleum oil and crude / primary and base products of all types and all formulations

(11) Export of milk and milk products and meat and meat products unless specifically notified.

(ii) Reward under the scheme: Under MEIS, exports of notified goods/products to notified markets shall be eligible for reward at the specified rate(s). Unless otherwise specified, the basis of calculation of reward would be:

(i) on realised FOB value of exports in free foreign exchange,

or

(ii) on FOB value of exports as given in the Shipping Bills in free foreign exchange,

whichever is less.
