Professional Documents
Culture Documents
EXECUTIVE PROGRAMME
JUNE 2011
MODULE I
GUIDELINE ANSWERS
EXECUTIVE PROGRAMME
JUNE 2011
MODULE I
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These answers have been written by competent persons
and the Institute hopes that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.
C O N T E N T S
Page
MODULE I
NOTE : Guideline Answers of the last Five Sessions need to be updated in the light of
changes & references given below :
EXECUTIVE PROGRAMME
UPDATING SLIP
TAX LAWS
MODULE – I – PAPER 3
December 2008 & All questions The Income tax, Wealth tax, and Service
December 2010 Tax are subject to changes by the Annual
Finance Acts. In order to update all the
answers, the students are advised to refer
to the latest law keeping in mind the
following amendments/changes, for
December 2011 examination.
(i) All changes made by the Finance
Act, 2010 relevant to Assessment
Year 2011 - 12 or before for Direct
Taxes and all changes made by the
Finance Act, 2011 for Indirect Taxes.
(ii) All the circulars, clarifications/
notifications issued by the CBDT/
CBEC/Central Government which
became effective on or before six
months prior to the date of the
respective examination.
(iii) The levy of Gift tax has been
suspended w.e.f. 1st October, 1998 by
insertion of clause (3) to Section 3 of
Gift tax Act, 1958 by Finance (No. 2)
Act, 1998. Therefore, Gift Tax Act has
been excluded from the scope of
examination unless otherwise
informed.
The questions based on case laws, in
conflict with the latest law be treated
as of academic interest only.
1 EP–GCL– June 2011
EXECUTIVE PROGRAMME EXAMINATION
JUNE 2011
As stated above, State legislatures have the exclusive powers to make laws with
respect to subjects enumerated in the State List and Parliament has no power to encroach
upon them is subject to certain exceptions. Our Constitution makes a few exceptions to
this general rule by authorizing the Parliament to make law even on the subjects
enumerated in the State list.
(a) In the National Interest (Article 249) : If the Upper House of the Parliament i.e.
Council of State (Rajya Sabha) declares by two thirds of its members present
and voting, that it is necessary or expedient in the national interest that Parliament
should make a law on that matter of State List. Such a resolution is valid for one
year unless renewed by a fresh resolution.
(c) Break down of Constitutional Machinery in a State (Articles 356 and 354)
(President’s Rule in a State) : Parliament can make with respect to all State
matters as regards a State in which there is a break-down of constitutional
machinery and is under Presidential rule.
1
EP–GCL– June 2011 2
(d) On request of two or more States (Article 252) : If two or more States are
desirous that on any particular subject included in the State List, there should
be a common legislation, then they may make a request to Parliament to make
such a law on that particular subject. Such request shall be made by passing
resolution in the legislatures of the concerned States. The law thus made by
Parliament can be adopted by other States also.
Answer 1(b)
The Constitution of India seeks to secure to the people “Liberty of thought, expression,
belief, faith and worship; Equality of status and of opportunity; and Fraternity assuring
the dignity of the individual”. With this object, the fundamental rights are envisaged in
Part III of the Constitution. These are :
Fundamental rights are deemed essential to protect the rights and liberties of people
of India against the encroachment of the State power. In Maneka Gandhi v. Union of
India, AIR1978 SC 597 the Supreme Court laid down that these rights represent the
values cherished by the people of this country, to protect the dignity of the individual, to
create conditions for the dignity of the individual and to create conditions for the fullest
development of human personality. Fundamental rights can be enforced in the courts of
law.
On the other hand the Directive Principles of State Policy contained in Part IV of the
Constitution set out the aims and objects to be taken up by the State in the Governance
of the country. The idea of Welfare State can be achieved if the state endeavours to
implement them with high sense of moral duty. Articles 36 to 51 provide different kinds
of social, economic and community welfare character of Directive principles. The Directive
Principles cannot be enforced in the courts of law.
3 EP–GCL– June 2011
The Directives, however, differ from the fundamental rights or the ordinary laws of
the land in the following respects:
(i) The Directives are not enforceable in the courts and do not create any justiciable
rights in favour of individuals.
(ii) The Directives require to be implemented by legislation and so long as there is
no law carrying out the policy laid down in a Directive neither the state nor an
individual can violate any existing law.
(iii) The Directives per-se do not confer upon or take away any legislative power
from the appropriate legislature.
(iv) The courts cannot declare any law as void on the ground that it contravenes any
of the Directive Principles.
(v) The courts are not competent to compel the Government to carry out any
Directives or to make any law for that purpose.
(vi) Though it is the duty of the state to implement the Directives, it can do so only
subject to the limitations imposed by the different provisions of the Constitution
upon the exercise of the legislative and executive power by the state.
In State of Madras v. Champakam Dorairajan ,AIR 1951 SC 226, the Supreme
Court laid down that Chapter on Fundamental Rights is sacrosanct, not liable to be
abridged by legislative or executive act or order. In Tamil Nadu v. Lak Bair, AIR1984
SC 326, the Supreme Court held that Directive Principles are not enforceable as such.
Yet the court should make a real attempt at harmonizing and reconciling the Directive
Principles and Fundamental Rights and any collision between them should be avoided
as far as possible.
Fundamental Rights assure political freedom to citizens protecting them from
excessive State action whereas Directive Principles aim at securing social and economic
freedoms by appropriate State action. Fundamental Rights and Directive Principles
together constitute the conscience of the constitution and represent basic rights inherent
in people of this country. The Directive Principles of State Policy are not subordinate to
Fundamental Rights strictly speaking, but should conform and run as subsidiary to
Fundamental Rights.
Answer 1(c)
The writ of Habeas Corpus
The writ of habeas corpus is a remedy available to a person who is confined without
legal justification. The words “habeas corpus” literally mean “to have a body”. This writ
is used to secure release of a person who has been detained unlawfully or without legal
justification. The great value of this writ is that it enables an immediate determination of
a persons’ right to freedom. This writ is issued to the authority who has the aggrieved
person in his custody. Under Article 32 of the Constitution, the Supreme Court can issue
writ of habeas corpus against a person/authority who has detained a person without
legal justification. Likewise the High Court under Article 226 of the Constitution can
issue writ of habeas corpus in similar circumstances provided that the person or authority
against whom the writ is sought is within the territorial jurisdiction of that High Court on
the date of filing the writ petition.
EP–GCL– June 2011 4
Question 2
Write notes on any four of the following :
(i) Penalties which can be imposed on public information officer under section 20
of the Right to Information Act, 2005
(ii) Temporary and perpetual injunction
(iii) Malicious prosecution
(iv) Res gestae
(v) Primary and secondary evidence. (4 marks each)
Answer 2(i)
Penalty on Public Information Officer
Section 20 of the Right to Information Act, 2005 imposes stringent penalty on a
Public Information Officer (PIO) for failing to provide information. Every PIO will be
liable for fine of ` 250 per day, up to a maximum of ` 25,000/-, for -
The Limitation Act makes specific provisions for exclusion of certain time in some
cases for computation of the prescribed periods of limitation. These provisions are as
follows:
"Cognizable offence" as per section 2(c) of the Cr.P.C.means an offence for which,
and "cognizable case" means a case in which, a police officer may, in accordance with
the First Schedule or under any other law for the time being in force, arrest without
warrant. In a “cognizable offence”, no authority is needed to arrest the accused.
Answer 4(b)(ii)
Hacking : Section 66 of the information Technology Act, 2000 deals with “hacking”
with computer system. The term “hacking” with respect of computer terminology denotes
the act of obtaining unauthorized access to a computer system. Section 66 of the
Information Technology Act, 2000, provides that:
(1) Whoever with intent to cause, or knowing that he is likely to cause, wrongful
loss or damage to the public or any person, destroys or deletes or alters any
information residing in a computer resource or diminishes its value or utility or
affects it injuriously by any means, commits hacking.
The Section imputes intention as per knowledge to the hacker. Modification of the
contents of a computer will also be an offence. Modification includes addition, alteration
and erasure. As is evident, the maximum punishment prescribed for hacking with computer
system under Section 66(2) is imprisonment upto three years or with fine upto two lakh
rupees or both.
Passing Off : The Information Technology Act does not contain a specific provision,
declaring illegal any fraudulent use, by one person, of other person’s domain name.
However, even in the absence of specific legislation on the subject, such conduct can
become actionable under the law of torts. In fact, judicial decisions, both in India and
elsewhere, amply demonstrate the potency of the law of torts in this context. The tort of
“passing off” is wide enough to afford legal redress (in damages) to a person who is the
holder of a particular domain name and who suffers harm as a result of the fraudulent
use of his domain name by another person. Such conduct has been regarded as falling
under the tort of “passing off”.
The crux of the action of “passing off” lies in actual or possible or probable deception.
The principles relating to “passing off” were held to be applicable to domain names in
Rediff Communication Ltd. v. Cyberbooth, (2000) 1 Recent Arbitraton Judgements, 562
(Bombay High Court).
11 EP–GCL– June 2011
The domain name “Rediff” (of the plaintiff) and the domain name “Rediff” (of the
defendant) were held to be deceptively similar and capable of causing deception, as the
fields of business activity of both the parties were similar. The grant of a temporary
injunction, restraining the defendant from using the name in question, was held to be
proper.
A similar view has been taken in Yahoo Inc. v. Akash Arora, (1999) 2 Recent
Arbitration Judgements, 176 (Delhi).
Answer 4(iii)
Computer Network and Computer System
Computer Network : It is an interconnection of one or more computers through
various modes. As per Section 2(1) (j) of the Information Technology Act, 2000 “computer
network” means the interconnection of one or more computers through -
(i) the use of satellite, microwave, terrestrial line or other communication media;
and
(ii) terminals or a complex consisting of two or more interconnected computers,
whether or not the interconnection is continuously maintained.
“Computer System” means a device or collection of devices, including input and output
support devices and excluding calculators which are not programmable and capable of
being used in conjunction with external files, which contain computer programmes,
electronic instructions, input data, and output data, that performs logic, arithmetic, data
storage and retrieval, communication control and other functions. [Section 2(1) (l)]
Question 5
(a) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) The publication of defamatory statement through written words is known as
__________.
(ii) A pending suit, action, petition or the like is known as _________.
(iii) The doctrine which underlines the general principle that no one shall be
vexed twice for the same cause is known as _________.
(iv) A statement given by a judge on the grounds of decree or order is known as
_________.
(v) Actionable claims are claims to _________ debts. (1 mark each)
(b) Write the most appropriate answer from the given options in respect of the
following :
(i) The Constitution of India was enacted on ––
(a) 26th November, 1949
(b) 26th January, 1950
(c) 28th January, 1950
(d) None of the above.
EP–GCL– June 2011 12
(ii) The Preamble of the Constitution —
(a) Is a part of the Constitution
(b) Can be used for interpreting the Constitution
(c) Both (a) and (b)
(d) None of the above.
(iii) The relief of cancellation of instrument is founded upon the principle of —
(a) Preventive justice
(b) Protective justice
(c) Proper justice
(d) None of the above.
(iv) As per the Transfer of Property Act, 1882, a person is an ostensible owner
of an immovable property where he becomes interested therein by —
(a) Express consent
(b) Implied consent
(c) Either (a) or (b)
(d) Both (a) and (b).
(v) Second appeal to the Central Information Commission or the State Information
Commission, as the case be, may be filed within ––
(a) 30 days
(b) 60 days
(c) 90 days
(d) 120 days.
of the date on which the decision was given by the First Appellate Authority.
(vi) The right of review has been conferred by the Code of Civil Procedure,
1908. It provides that any person considering himself aggrieved by a decree
or order may apply for a review of the judgement to the —
(a) Appellate Court
(b) High Court
(c) District Court
(d) Court which passed the decree or order. (1 mark each)
(c) Define res judicata and state the conditions of its application. (5 marks)
Answer 5(a)
(i) The publication of defamatory statement through written words is known as
Libel .
(ii) A pending suit, action, petition or the like is known as Lis pendens .
(iii) The doctrine which underlines the general principle that no one shall be vexed
twice for the same cause is known as Res Judicata .
13 EP–GCL– June 2011
(iv) A statement given by a judge on the grounds of decree or order is known as
Judgement .
(v) Actionable claims are claims to Unsecured debts.
Answer 5(b)
(i) (b) 26th of January, 1950
(ii) (c) Both (a) and (b)
(iii) (b) Protective justice
(iv) (c) Either (a) or (b)
(v) (c) 90 days
(vi) (d) Court which passed the decree or order
Answer 5 (c)
Doctrine of Res-judicata
Section 11 of the Civil Procedure Code,1908 deals with the doctrine of res judicata
that is bar or restraint on repetition of litigation of the same issues.
General principle is that no one shall be twice vexed for the same cause. For the
applicability of the principle of res judicata embodied in Section 11, the following
requirements are necessary :
(i) The matter directly and substantially in issue in former suit shall also be directly
and substantially in issue in later suit.
(ii) The former suit has been decided—former suit means which is decided earlier.
(iii) The said issue has been heard and finally decided.
(iv) Such former suit and the latter are between the same parties or litigation under
the same title or persons claiming under parties above.
(v) The Court which determined the earlier suit must be competent to try the latter
suit.
(vi) Any matter which might or ought to have been made a ground of defence or
attack in such a former suit shall be deemed to have been a matter directly in
issue in such suit.
(vii) Relief claimed in the plaint but not expressly granted shall be deemed to have
been refused.
(viii) In representation suit any issue has been decided then res-judicata shall apply
to them.
Question 6
State, with reasons in brief, whether the following statements are true or false :
(i) A contract which is dependent upon the personal qualifications can be specifically
enforced.
(ii) ‘Arbitral tribunal’ means a sole arbitrator or a panel of arbitrators.
EP–GCL– June 2011 14
(iii) A mere right to sue can be transferred.
(iv) A complaint in a criminal case is what a plaint is in a civil case.
(v) In a declaratory decree, the right of any person to any property or his legal
character is ascertained.
(vi) A writ of certiorari is issued to prevent a lower court from usurping jurisdiction
which is not legally vested in it.
(vii) All documents produced for the inspection of the court are known as documentary
evidence.
(viii) An instrument not ‘duly stamped’ can be accepted in evidence by an arbitral
tribunal. (2 marks each)
Answer 6
(i) False : As per Section 14 of the Specific Relief Act, 1963 a contract which is
dependant upon the personal qualification or volition of the parties cannot enforce
specific performance.
(ii) True : Section 10 of the Arbitration and Conciliation Act, 1996 provides that, the
parties are free to determine the number of arbitrators, provided that such number
shall not be an even number. If they fail to determine the number of arbitrators,
the arbitral tribunal shall consist of a sole arbitrator.
(iii) False : As per Section 6 of the Transfer of Property Act, 1882 a mere right to
sue cannot be transferred.
(iv) True : Complaint means any allegation made orally or in writing to a Magistrate,
with a view to his taking action under this Code, that some person, whether
known or unknown, has committed an offence.
(v) True : A declaratory decree is a decree whereby any right as to any property or
the legal character of a person is judicially ascertained.
(vi) False : It is available to any person, wherever any body of persons having legal
authority to determine questions affecting the rights of subjects and having the
duty to act judicially in excess of their legal authority.
(vii) True : As per section 3 of the Indian Evidence Act, 1872.
(viii) True : As per Section 35 of the Indian Stamp Act, 1899 instruments not duly
stamped are inadmissible in evidence for any purpose whatsoever by any person
authorised by law (such as judges or commissioners) or by the consent of the
parties (such as arbitrators) to record evidence.But in special cases they may
be admitted in evidence after imposing penalty.
Question 7
(a) Alok was running a school at a certain place. Bimal started another school near
the school of Alok. As a result of this, most of the students of Alok’s school left
his school and joined Bimal’s school. Due to competition, Alok had to reduce
the fees by ` 40 per student per quarter thereby suffering huge monetary loss.
15 EP–GCL– June 2011
Alok instituted a suit against Bimal in the court for claiming compensation. Is
the suit instituted by Alok maintainable ? (6 marks)
(b) Ashok intentionally and falsely leads Bikram to believe that certain land belongs
to Ashok, and thereby induces Bikram to buy and pay for it. Afterwards, the
land becomes the property of Ashok, and Ashok seeks to set aside the sale on
the ground that at the time of the sale he had no title to the property. Can he be
allowed to prove his want of title ? (5 marks)
(c) A document was executed by several persons at different times. The person in
whose favour such execution was made, presented the document for re-
registration after expiry of three months. Can such document be registered and
if so, within what period ? (5 marks)
Answer 7(a)
The suit is not maintainable. The present problem is based on the leading case of
Gloucester Grammer School (1410) Y.B. Hill. 11 Hen, 4, of 47, pp. 21. Under the law of
torts, it is not every damage that is a damage in the eyes of law. It must be a damage
which the law recognizes as such. There are two maxims, namely, damnum sine injuria
and injuria sine damno that explain this proposition.
The given problem comes under the purview of maxim damnum sine injuria. Damnum
means harm, loss or damage in respect of money, comfort, health, etc. Injuria means
infringement of a right conferred by law on the plaintiff. The maxim means that in a given
case, a man may have suffered damage and yet have no action in tort, because the
damage is not to an interest protected by the law of torts. Therefore, causing damage,
however substantial to another person is not actionable in law unless there is also a
violation of a legal right of the plaintiff. Common examples are; where the damage
results from an act done in the exercise of legal rights.
In the given case, the suit filed by Alok is not maintainable because Bimal is exersing
his legal right and the monetary loss suffered by Alok has resulted from an act done in
the exercise of Bimal’s legal right.
Answer 7(b)
This case falls under the Doctrine of Feeding the Grant of Estoppel, covered in
Section 43 of the Transfer of Property Act, 1882. According to Section 43 of the Transfer
of Property Act, 1882 if a person fraudulently or erroneously makes a representation
that he is authorised to transfer certain immoveable property while he does not have any
authority at that time and he attempts to transfer also, whenever he gets such authority
or property itself, he can not deny that he made such representation before, provided the
transferee has not rescinded the contract till that time. In other words, he is estopped
from denying that he made such fraudulent or erroneous statement before.
In the given case, Ashok knew at the time of sale to Bikram that he was not the
owner of the land but he intentionally and fraudulently makes Bikram believe that Ashok
is the owner. Therefore, when he subsequently gets the land, he has to transfer it to
Bikram if Bikram had not rescinded the contract.
Answer 7(c)
The document can be registered. Section 24 of the Registration Act, 1908 says, a
EP–GCL– June 2011 16
document executed by several persons at different times may be presented for registration
and re-registration within four months from the date of each execution.
In the given case, the document has been presented for re-registration after the
expiry of three months of its execution. Therefore, the said document can be registered.
Question 8
(a) A mill owner employed an independent contractor to construct a reservoir on his
land to provide water for his mill. There were old disused mining shafts under
the site of the reservoir, which the contractor failed to observe because they
were filled with soil. Therefore, the contractor did not block them. When water
was filled in the reservoir, it burst through the shafts and flooded the plaintiff’s
coal mines on the adjoining land. Is the mill owner liable to compensate for loss
or damage caused to the plaintiff ? Give reasons. (6 marks)
(b) There was a partition of property between a Hindu father and his five sons. The
deed provided that if any one of his sons wanted to sell his share, he shall sell
it to one of his brothers only and not to any stranger. The consideration for that
share shall be ` 1,000 only. Are these conditions valid ? Give reasons.
(5 marks)
(c) Ram and Shyam entered into an agreement to refer a dispute relating to
genuineness of a will to an arbitral tribunal. Inspite of this, Shyam commenced
proceedings relating to this dispute in the district court of competent jurisdiction.
Ram filed an application for stay of legal proceedings under the Arbitration and
Conciliation Act, 1996. Will Ram succeed ? Explain. (5 marks)
Answer 8(a)
This problem is based on Rylands v. Flethcer (1868) L.R. 3 H.L. 330 regarding
strict or absolute liability in which harm to the plaintiff occurred without intention of
negligence on the defendant’s part.
In this case it was held that a man acts at his peril and is the insurer of the safety of
his neighbour against accidental harm. Such duty is absolute because it is independent
of negligence on the part of the defendant or his servants. If a person brings or
accumulates on his land anything which, if it should escape may cause damage to his
neighbours, he does so at his own peril….”
In this case mill owner will be liable for the compensation on the basis of strict
liability.
Answer 8(b)
Section 10 of Transfer of Property Act, 1882 says that when property is transferred,
the transfer should not be restrained absolutely from alienating the property. One may
give property to another subject to a condition, but the condition should not be one which
absolutely prevents the transferee from alienating the property.
The given problem is based on Trichinpoly Varthaga Sangum v. Shunmoga
Sunderam (1939) Madras 954. In this case it was held that the condition absolutely
prevented the son from selling the property to any one for good value. In this case the
17 EP–GCL– June 2011
market value of the property of the son was far greater than Rs.1,000. Hence, the
condition was declared invalid.
Answer 8(c)
Generally all disputes which can be decided by a civil court involving private rights
can be referred to arbitration. Thus, disputes about property or money or about the
amount of damages payable for breach of contract etc. can be referred to arbitration.
However, according to the general practice certain matters are not referred to
arbitration. One of them is testamentary matters. testamentary matters for example,
questions about the validity of a will are not referred to arbitration.
In this case, Ram will not succeed. The arbitration agreement as such is not valid.
The question relating to the genuineness of a will can only be decided with law dealing
with probate as given in the Indian Succession Act.
Hence, court can not grant remedy of stay to Ram.
EP–CACMA–June 2011 18
COMPANY ACCOUNTS
COST AND MANAGEMENT ACCOUNTING
Time allowed : 3 hours Maximum marks : 100
NOTE : All working notes should be shown distinctly.
PART A
(Answer Question No. 1 which is compulsory
and any two of the rest from this part)
Question 1
(a) Write the most appropriate answer from the given options in respect of the
following :
(i) As per section 77A(4) of the Companies Act, 1956 from the date of passing
the special resolution, every buy-back should be completed within —
(a) 12 Months
(b) 3 Months
(c) 6 Months
(d) 9 Months.
(ii) Profit prior to incorporation is transferred to —
(a) General reserve
(b) Capital reserve
(c) Profit and loss account
(d) None of the above.
(iii) Dividends are usually paid on —
(a) Paid-up capital
(b) Authorised capital
(c) Called up capital
(d) Subscribed capital.
(iv) Sinking fund for the redemption of debentures is an instance of —
(a) Reserve
(b) Provision
(c) Reserve fund
(d) Reserves and surplus.
(v) At the time of issuance, shares can be underwritten by —
(a) Only one underwriter
(b) At least 2 or more persons jointly
(c) Any number of underwriters
(d) None of the above. (1 mark each)
18
19 EP–CACMA–June 2011
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) Preliminary expenses being of capital nature may be written-off against
____________.
(ii) Companies declaring, distributing or paying dividends are liable to pay tax
on the same at prescribed rate which is known as ___________.
(iii) An intangible asset should be ____________ on disposal or when no future
economic benefits are expected from its use and subsequent disposal.
(iv) The value of the right is the difference between ____________ and the
____________ of the share.
(v) The fair value of a share is the average of the value of the share obtained by
the ____________ method and ____________ method.
(1 mark each)
(c) State, with reasons in brief, whether the following statements are true or false :
(i) According to section 80 of the Companies Act, 1956, the redemption of
preference shares by a company shall be taken as reducing the amount of
its authorised share capital.
(ii) A profit and loss account is a point statement whereas a balance sheet is a
period statement.
(iii) Internally generated goodwill should not be recognised as an asset.
(iv) A company can enforce its lien by forfeiting the shares.
(v) A limited company can retain excess application money as calls-in-advance
even if there is no provision in the articles of association.
(2 marks each)
Answer 1(a)
(i) (a) 12 months
(ii) (b) Capital reserve
(iii) (a) Paid up capital
(iv) (c) Reserve Fund
(v) (c) Any number of underwriters
Answer 1(b)
(i) Preliminary expenses being of capital nature may be written-off against Capital
profits.
(ii) Companies declaring, distributing or paying dividends are liable to pay tax on
the same at prescribed rate which is known as Tax on distributed profit .
(iii) An intangible asset should be Derecognized or eliminated from balance sheet
on disposal or when no future economic benefits are expected from its use and
subsequent disposal.
(iv) The value of the right is the difference between Market value and the Average
price of the share.
EP–CACMA–June 2011 20
(v) The fair value of a share is the average of the value of the share obtained by the
Net assets method and Yield method.
Answer 1(c)
(i) False : According to Section 80 of the Companies Act, the redemption of
preference shares shall not be taken as reducing the amount of its authorised
capital. The main object of Section 80, is to protect the interests of the creditors
of the company. As such the capital structure of the company will remain
unaffected even after the Redemption of Preference Shares.
(ii) False : A profit & loss account is a periodic statement and a balance sheet is a
point statement. Balance sheet is prepared at the end of the financial year
whereas profit and loss account is prepared for the financial year.
(iii) True : An internally generated goodwill should not be recognized as an asset.
However, intangible assets arising from development phase should be recognized
only if certain conditions are fulfilled.
(iv) False : A company cannot enforce its lien by forfeiting the shares because by
virtue of lien, the company has prior right to the shares over any creditor to
whom they are given as security for a loan unless the company was given prior
notice of an existing mortgage or pledge of these shares.
(v) False : A limited company can retain excess application as calls in advance
when the following two conditions are satisfied:
(a) The Articles of the company provide for the acceptance of calls in advance.
(b) The consent of the applicant has been taken either by a separate letter or
by inserting a clause in the company’s prospectus or application form.
Question 2
(a) Distinguish between any two the following :
(i) ‘Bonus shares’ and ‘rights shares’.
(ii) ‘Interim dividend’ and ‘final dividend’.
(iii) ‘Statutory books’ and ‘statistical books’. (3 marks each)
(b) Following are the balance sheets of H Ltd. and S Ltd. as at 31st December,
2010 :
Liabilities H Ltd. S Ltd.
(`) (`)
Equity share of ` 100 each fully paid 5,00,000 2,00,000
General reserve 1,00,000 —
Profit and loss account 80,000 —
14% Debentures –– 1,00,000
Creditors 75,000 45,000
7,55,000 3,45,000
21 EP–CACMA–June 2011
Assets
Fixed assets 3,50,000 1,50,000
Stock 90,000 40,000
Debtors 60,000 30,000
14% Debentures in S Ltd. (at par) 60,000 —
Equity shares in S Ltd. @ ` 80 per share 1,20,000 ––
Bank 75,000 25,000
Profit and loss account — 1,00,000
7,55,000 3,45,000
H Ltd. acquired 1,500 shares in S Ltd. on 1st May, 2010. The profit and loss
account of S Ltd. showed a debit balance of ` 1,50,000 on 1st January, 2010.
During March, 2010, goods costing ` 6,000 were destroyed by fire, against which
the insurance company paid ` 2,000 only to S Ltd. Creditors of S Ltd. include
` 20,000 for goods supplied by H Ltd. on which H Ltd. made a profit of ` 2,000.
Half of the goods were sold out of this. An item of plant (included in fixed
assets) of S Ltd. had book value of ` 15,000. It was to be revalued at ` 20,000
on 1st January, 2010 (ignore depreciation). Prepare consolidated balance sheet
as on 31st December, 2010. (9 marks)
Answer 2(a)(i)
Bonus shares and Rights shares
Bonus shares are allotted to existing shareholders without any consideration being
received from them. They are issued to capitalize the profits of the company. Bonus
shares can be issued only if Articles of Association permit such issue. Shares of the
existing shareholders automatically increase when the bonus shares are issued.
When a company which has already issued shares wants to make further issue of
shares, it is under legal obligation to first offer the fresh issue to the existing shareholders
unless the company has resolved otherwise by a special resolution. Such shares offered
are right shares. The shareholders can accept or reject the offer or transfer the right to
purchase the fresh shares to another person.
Answer 2(a)(ii)
Interim dividend and Final dividend
Interim dividend
Interim dividend means a dividend paid to the shareholders of the company in
anticipation of profits of a period before the accounts of the company for that period
have been prepared. It is dividend paid by the directors anytime between two annual
general meetings of the company.
Declaration of interim dividend does not create a debt against the company and can
be rescinded or varied at any time before payment.
Section 205(1) is not applicable to interim dividend. For declaration and payment of
interim dividend, the directors need to satisfy that there are adequate distributable profits
and payment of interim dividend would not result in payment out of capital.
EP–CACMA–June 2011 22
Final dividend
Final dividend is recommended by the directors and declared by the shareholders in
the annual general meeting. It is declared after the accounts of the company for that
period have been prepared.
Once a final dividend is declared, it is a debt payable to the shareholders and
cannot be revoked or reduced by any subsequent action of the company.
Section 205 is applicable to final dividend as it is based on annual profit and loss
account.
Answer 2(a)(iii)
Statutory books and Statistical books
The Companies Act specifically requires certain books or registers to be kept by a
company maintaining a record of its activities in order to safeguard the interest of the
shareholders and creditors. These books are known as statutory books. Example of
such books according to the companies Act, 1956 are: Register of investments not held
in company’s name (section 49), Register of Fixed Deposits (Section 58A), Register of
Charges (Section 143), Register of Members (Section 150), Books of Accounts (Section
209), and Register of Directors’ Shareholdings (Section 307).
A company usually maintains a number of other books in order to keep complete
records of the numerous details connected with the business operations. Such books
are known as statistical books. The keeping of such book is optional, i.e., there is no
statutory compulsion for keeping such books. For example, share application and
allotment book, share calls book, share certificate book, debenture application and
allotment book, debenture calls book, register of share transfer, shareholders dividend
book, debentures interest book, agenda book and register of share warrants, etc.
Answer 2(b)
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as on 31st December 2010
8,72,250 8,72,250
Working Notes :
(1) Capital Profits (Pre-acquisition profits)
`
Profit & Loss A/c as on 1st January 2010 (-) 1,50,000
Add :
Pre-acquisition profit (1.01.2010 to
30.04.2010) (See Note) 18,000
Appreciation in the value of assets 5,000
Capital Profits (-) 1,31,000
H Ltd.’s share (75%) (-) 98,250
Minority Interest (25%) (-) 32,750
(2) Revenue Profits (Post-acquisition profits)
(01.05.2010 to 31.12.2010)
Profits Earned after acquisition (See Note): ` 36,000
H Ltd. Share (75%) ` 27,000
Minority Interest (25%) ` 9,000
16,500 x 100
= = 16.50%
100,000
Normal rate of return (given) 10%
Value per share
Expected Rate of return on equity capital x Paid up value of shares
=
Normal rate of return
16.50
= x 10 = ` 16.5
10
(iii) Fair Value Method
Intrinsic Value + Yield Value
Fair value of shares =
2
11.42 + 16.50
= = ` 13.96
2
Answer 3(c)
Profit and Loss Appropriation Account
Dr. for the year ended 31st March, 2010 Cr.
Particulars Amount Particulars Amount
` `
Note : Proposed Dividend exceeds 20% of the paid up capital. Therefore transfer to
General reserve should be minimum 10% of the current year profits.
27 EP–CACMA–June 2011
Question 4
(a) Alex Ltd. forfeited 100 shares of `10 each issued at a premium of 20% (to be
paid at the time of application money) on which allotment money of `4 and first
call money of `3 were not received; the final call money of `2 is not yet called.
These shares were originally allotted in the ratio of 4:5. These shares were
subsequently re-issued at a discount of `1 per share, credited as `8 paid-up.
Pass journal entries in the books of Alex Ltd. (3 marks)
(b) What are the conditions which must be fulfilled for redemption of preference
shares ? (6 marks)
(c) Zohar Ltd. has 12%, `4,00,000 debentures outstanding in its books on 1st April,
2009. It also had `2,40,000 balance in sinking fund account represented by 8%
investments (face value of `3,00,000).
On 30th December, 2009, it sold investments of face value of `40,000 @ `90
and purchased own debentures of the face value of `40,000 out of the proceeds,
for immediate cancellation.
The interest dates for both debentures and investments are 30th September
and 31st March respectively. All transactions are made on cum interest basis.
Show debenture account, sinking fund account and sinking fund investment
account. (6 marks)
Answer 4(a)
In the books of Alex Ltd.
Journal Entries
4,00,000 4,00,000
31 Mar.10 By Interest on
Sinking Fund
Account 23,200
2,71,600 2,71,600
2,43,200 2,43,200
40,000 x 8 x 3
800
100 x 12
40,000 x 12 x 3
` 1,200
100 x 12
Total ` 23,200
31 EP–CACMA–June 2011
PART B
(Answer Question No.5 which is compulsory
and any two of the rest from this part.)
Question 5
(a) Write the most appropriate answer from the given options in respect of the
following :
(i) When the sales increase from ` 40,000 to ` 60,000 and profit increases by
` 5,000, the P/V ratio is —
(a) 20%
(b) 30%
(c) 25%
(d) 40%.
(ii) A company which has a margin of safety of ` 4,00,000 makes a profit of
` 80,000. Its fixed cost is ` 5,00,000, its break-even sales will be —
(a) ` 20 lakh
(b) ` 30 lakh
(c) ` 25 lakh
(d) ` 40 lakh.
(iii) Cost is determined before hand under —
(a) Standard costing
(b) Historical costing
(c) Marginal costing
(d) None of the above.
(iv) Continuous stock taking is a part of —
(a) Annual stock taking
(b) Perpetual inventory
(c) ABC Analysis
(d) None of the above.
(v) Absorption means —
(a) Charging of overheads to cost centres
(b) Charging of overheads to cost units
(c) Charging of overheads to cost centres or cost units
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) _____________ budget is a summary budget incorporating the component
functional budgets and which is finally approved, adopted and employed.
EP–CACMA–June 2011 32
(ii) Costs which are pertinent for decision-making are termed as _____________.
(iii) A responsibility centre in which a manager is accountable for costs only is
called _____________.
(iv) Contract in which reimbursement is based on actual allowable cost plus a
fixed fee is called _____________.
(v) Excess of budgeted revenues over the break-even revenue is called
_____________. (1 mark each)
(c) State, with reasons in brief, whether the following statements are true or false :
(i) Direct costs and variable costs are not necessarily the same.
(ii) Idle facility and idle time are the same.
(iii) Overtime premium paid to all factory workers is usually considered direct
labour.
(iv) Assuming inflation, if a company wants to maximise net income, it would
select FIFO as the method of pricing raw materials.
(v) Collection of sundry debtors has no impact on current ratio.
(2 marks each)
Answer 5(a)
Answer 5(b)
(ii) Costs which are pertinent for decision-making are termed as Relevant costs.
(iv) Contract in which reimbursement is based on actual allowable cost plus a fixed
fee is called Cost Plus Contract .
(v) Excess of budgeted revenues over the break-even revenue is called Margin of
Safety .
33 EP–CACMA–June 2011
Answer 5(c)
(i) True : Direct costs are not necessarily the same as variable cost. Direct costs
comprises of direct material cost, direct labour cost and direct expenses. Variable
cost is made up of direct material, direct wages, direct expenses and variable
overheads.
(ii) False : Idle facility is that part of total facility like that part of a plant, machine
or equipment etc. which cannot be effectively utilized in the business whereas
idle time is that time which is paid for, but not utilized for production. Hence, we
may say idle time is part of idle facility.
(iii) True : Because they are usually directly engaged in production or carrying out
some operation or process. Overtime premium paid to the factory workers is
called direct labour cost and they can be easily identified with and charged to
the product.
(iv) False : In case of rising prices, i.e. inflation, the real profits of the concern
becomes low because they may be inadequate to meet the concern’s demand
to purchase raw materials at the ruling price. Therefore, net income cannot be
maximized in inflation.
(v) True : Collection of sundry debtors has no impact on current ratio. Reduction in
sundry debtors would be equal to addition in cash/bank balance. Therefore total
current assets will remain same and hence current ratio will have no impact.
Question 6
(a) Distinguish between any two of the following :
(i) ‘Cost accounting’ and ‘management accounting’.
(ii) ‘Bin card’ and ‘store ledger’.
(iii) ‘Time keeping’ and ‘time booking’. (3 marks each)
(b) From the following particulars of Bright Ltd., prepare cash flow statement as per
AS-3 (Revised) :
Balance Sheets
Liabilities As on As on
31.03.2009 31.03.2010
(` ) (` )
Equity share capital 3,00,000 3,50,000
18% Preference share capital 2,00,000 1,00,000
14% Debentures 1,00,000 2,00,000
Reserves and surplus 1,10,000 2,70,000
Creditors 70,000 1,45,000
Provision for doubtful debts 10,000 15,000
7,90,000 10,80,000
EP–CACMA–June 2011 34
Assets As on As on
31.03.2009 31.03.2010
(` ) (` )
Fixed assets (net) 5,10,000 6,20,000
10% Investments 30,000 80,000
Cash 40,000 75,000
Debtors 1,00,000 2,10,000
Stock 1,00,000 90,000
Discount on debentures 10,000 5,000
7,90,000 10,80,000
Answer 6(a)(ii)
Bin Card and Stores ledger
Answer 6(a)(iii)
Time Keeping
Time-keeping means keeping of record of the total time spent by a worker inside the
EP–CACMA–June 2011 36
factory. It is necessary for the purpose of recording attendance and for calculating
wages. The purpose of time-keeping is to provide basic data for:
(i) pay-roll preparation;
(ii) finding out the labour cost of a job/product/service;
(iii) attendance records to meet statutory requirements;
(iv) determining productivity and controlling labour cost;
(v) calculating overhead cost of a job, product or service;
(vi) to maintain discipline in attendance;
Time Booking
Time-booking means a record from the utilization point of view; the purpose is cost
analysis and cost apportionment.
The objectives of time-booking are:
(i) to apportion overheads against jobs;
(ii) to calculate the labour cost of jobs done;
(ii) to ascertain idle time for the purpose of control;
(iv) to find out that the time during which a worker is in the factory is properly
utilised;
(v) to evaluate labour performance, to compare actual and budgeted time;
(vi) to determine overhead rates of absorbing overhead expenses under the labour
hour and machine hour methods;
Answer 6(b)
Cash Flow Statement of Bright Ltd
for the year ended 31.3.2010
Particulars ` `
Particulars ` `
Particulars ` Particulars `
It has been assumed that new investments have been purchased at the end of current
accounting year.
Question 7
(a) Write short notes on any two of the following :
(i) Essentials of an effective budgetary control system
(ii) Make or buy decisions
(iii) Cost-plus contracts. (3 marks each)
(b) Following are the ratios to the trading activities of National Traders Ltd. :
Debtors’ velocity 3 months
Stock velocity 8 months
Creditors’ velocity 2 months
Gross profit ratio 25%
Gross profit for the year ended 31st December, 2009 amounting to ` 4,00,000.
Closing stock of the year is ` 10,000 more than the opening stock.
Bills receivable amount to ` 25,000.
Bills payable amount to ` 10,000.
Find out –– (i) sales; (ii) sundry debtors; (iii) closing stock; and (iv) sundry
creditors. (6 marks)
(c) Explain the significance of decision-making costs. Briefly explain the various
type of costs used by the management in decision-making. (3 marks)
Answer 7(a)(i)
Essentials of an effective budgetary control system
Some of the pre-requisites for the successful implementation of an effective budgetary
control system are summarised below:
(1) There should be an organization chart laying out in clear terms the responsibilities
39 EP–CACMA–June 2011
and duties of each level of executives and the delegation of authority to the
various levels.
(2) The objectives, plans, and policies of the business should be defined in clear
cut and unambiguous terms.
(3) The budget factor or the key factor(s) which will be the starting point of the
preparation of the various budgets should be indicated.
(4) For formulation and efficient execution of the plan, a Budget Committee should
be set up.
(5) There should be an efficient system of accounting to record and provide data in
line with the budgetary control system.
(6) There should be a proper system of communication and reporting between the
various levels of management.
(7) There should be a Budget Manual wherein all details regarding the plan and its
procedure of operation are given as also the length of the budget period.
(8) The budgets should primarily be prepared by those who are responsible for
performance.
(9) The budgets should be comprehensive, complete, continuous and realistic to
attain.
(10) There should be an assurance from the top management executives for co-
operation and acceptance of the budgetary control system.
Answer 7(a)(ii)
When the management is confronted with the problem whether it would be economical
to purchase a component or a product from outside sources, or to manufacture it internally
are make or buy decisions. Under such circumstances, marginal cost analysis is used
to take decisions. In case the proposal is to buy from outside then, what is already being
made, and the price quoted by the outsider should be lower than the marginal cost. If the
proposal is to make something what is being purchased outside, the cost of making
should include all additional costs like depreciation on new plant, interest on capital
involved and that cost should be compared with the purchase price to come to the right
decision.
Answer 7(a)(iii)
Cost Plus contracts
Cost Plus contract is a pricing method under which contractee agrees to reimburse
the actual cost plus the agreed percentage of profit. This method is usually adopted
when the works to be carried out are urgent and the value of the contract is heavy, for
example in the works of construction during war time, urgent works, defence, public
utility works, ship building, etc. Government and Semi Government organizations usually
adopt the cost plus contracts to assign works. In cost plus contracts, it is possible to
know the cost of contract, cost per each element and the amount of profit to the contractor.
EP–CACMA–June 2011 40
Answer 7(b)
(i) Sales
Gross Profit
Gross Profit Ratio = x 100
Sales
4,00,000
Sales = x 100
25
= ` 16,00,000
(ii) Sundry Debtors
Debtors Velocity : 3 months
Months in Year
Debtors Velocity =
Debtors Turnover Ratio
Net Sales
Total Debtors =
Debtors Turnover Ratio
16,00,000
=
4
= ` 40,00,00
Less : Bills Receivables ` 25,000
Sundry Debtors ` 3,75,000
= ` 16,00,000 – ` 4,00,000
= ` 12,00,000
12,00,000
Or, 1.5 =
Average Stock
41 EP–CACMA–June 2011
12,00,000
Or, Average Stock =
1.5
= ` 8,00,000
Closing Stock = Opening Stock + 10,000
OS + OS + 10,000
Or, 8,00,000 =
2
15,90,000
Or, OS =
2
Or, OS = ` 7,95,000
Closing stock = ` 7,95,000 + ` 10,000 = ` 8,05,000
(iv) Sundry Creditors
Creditors Velocity: 2 months
Months in Year
Creditors Velocity =
Creditors Turnover Ratio
= ` 12,10,000
Purchases
Total Creditors =
Creditors Turnover Ratio
12,10,000
Total Creditors =
6
= ` 2,01,667
Less : Bills Payable = ` 10,000
Sundry Creditors = ` 1,91,667
Answer 7(c)
There are certain costs which are specially used for decision making by the
management. Such decision making costs may be relevant costs or irrelevant costs.
EP–CACMA–June 2011 42
Various types of costs used by management in decision making are briefly described
below:
• Opportunity costs : Opportunity cost is the cost of selecting one course of
action and the losing of other opportunities to carry out that course of action. It
is the amount that can be received if the asset is utilized in its next best
alternative.
• Differential cost : Differential cost has been defined as “the difference in total
cost between alternatives, calculated to assist decision making”. It helps
management to know the additional profit that would be earned if idle capacity is
used or when additional investments are made.
• Imputed costs : Some costs are not incurred and are useful while taking decision
pertaining to a particular situation. Examples: Interest on internally generated
funds, salaries of owners of proprietorship or partnership, notional rent etc.
• Out-of-pocket costs : Out-of-pocket costs signify such outlay required for an
activity. The management would like to know that the income from a particular
project will at least cover the expenditure for the project. Acceptance of a special
order requires to be considered as additional costs need not be incurred if the
special order is not accepted. Hence the importance of out-of-pocket costs.
• Marginal costs : It is the aggregate of variable costs, i.e., prime cost plus
variable overheads. Thus, costs are classified as fixed and variable.
• Replacement costs : This is the cost of replacing an asset at current market
values e.g. when the cost of replacing an asset is considered, it means the cost
of purchasing the asset at the current market price is important and not the cost
at which it was purchased.
Question 8
(a) From the following data provided to you, find out the labour turnover rate by
applying (i) replacement method; and (ii) separation method :
Number of workers on the payroll :
– At the beginning of the month : 500
– At the end of the month : 600.
During the month, 5 workers left, 20 workers were discharged and 75 workers
were recruited. Of these, 10 workers were recruited in the vacancies of those
leaving and while the rest were engaged for an expansion scheme.
(4 marks)
(b) Following information is made available from the costing records of a factory :
(i) The original cost of the machine : ` 1,00,000
Estimated life : 10 years
Residual value : ` 5,000
Factory operates for 48 hours per week : 52 weeks in a year.
Allow 15% towards machine maintenance down time.
43 EP–CACMA–June 2011
5% (of productive time assuming unproductive) may be allowed as setting-
up time.
(ii) Electricity used by the machine is 10 units per hour at a cost of 50 paise
per unit.
(iii) Repair and maintenance cost is `500 per month.
(iv) Two operators attend the machine during operations alongwith two other
machines. Their total wages including fringe benefits, amounting to ` 5,000
per month is paid.
(v) Other overheads attributable to the machine are `10,431 per year.
Using above data, calculate machine hour rate. (6 marks)
(c) Following information is given :
Cost of placing a purchase order ` 20
No. of units to be purchased during the year 5,000 Nos.
Purchase price per unit inclusive of transport cost ` 50
Annual storage cost per unit `5
Details of lead time :
– Average 10 days
– Maximum 15 days
– Minimum 6 days
– For emergency purchase 4 days
Rate of consumption per day :
– Average 15 units
– Maximum 20 units
Calculate –– (i) re-ordering level; (ii) re-order quantity; (iii) maximum level;
(iv) minimum level; and (v) danger level. (5 marks)
Answer 8(a)
(i) Replacement Method
No. of workers replaced 10
x 100 = x 100 = 1.82%
Average no. of workers 550
(ii) Separation Method:
No. of workers left 5 + 20
x 100 = x 100 = 4.55%
Average no. of workers 550
Standing Charges
Wages for operator (` 5,000X12)/3 20,000
Other Overheads 10,431
Total 30,431
Standing charges Per hour (30,431/2,015) 15.10
Machine Expenses
Depreciation
[(1,00,000 – 5,000) / 10 ]/2015 4.71
Repair and maintenance (5,00X12/2,015) 2.98
Electricity (10 units @ 50 paise) 5.00
Machine Hour Rate 27.79
Working Note:
Calculation of effective machine hours:
Total working hours per year (48 x 52) 2,496
Less : 15% maintenance time 375
2,121
Less : 5% for setting up time 106
Effective time 2,015
Answer 8(c)
(i) Re-ordering level (ROL) = Maximum usage x Maximum Reorder Period
= 20 units per day x 15 days
= 300 units
2A x O 2 x 5,000 units x 20
(ii) Reorder Quantity (ROQ) = =
C 5
= 200 units
A = Annual Demand
O = Ordering Cost
C = Carrying Cost
45 EP–CACMA–June 2011
(iii) Maximum Level = ROL + ROQ – (Minimum rate of Consumption X Minimum
Reorder Period)
= 300 units + 200 units – (10 units per day x 6 days)
= 440 units
(iv) Minimum Level = ROL – (Average Rate of consumption x Average Reorder
Period)
= 300 units – (15 units per day x 10 days)
= 300 – 150 units
= 150 units
(v) Danger Level = Average consumption x Lead time for emergency
purchases
= 15 units per day x 4 days
= 60 units
EP–TL– June 2011 46
TAX LAWS
Time allowed : 3 hours Maximum marks : 100
NOTE : All references to sections mentioned in Part - A of the Question Paper relate to
the Income-tax Act, 1961 and the relevant Assessment Year 2011-12 unless
stated otherwise.
PART A
(Answer Question No. 1 which is COMPULSORY
and ANY THREE of the rest from this part)
Question 1
(a) Write the most appropriate answer from the given options in respect of following
having regard to the provisions of the relevant direct tax laws :
(i) The maximum amount of deduction under section 80GG in respect of rent
paid is ––
(a) ` 2,000
(b) ` 3,000
(c) ` 5,000
(d) ` 10,000.
(ii) Mohan Ltd. purchased goods on credit from Sohan Ltd. on 6th May, 2010
for ` 86,000 which is paid as ` 15,000 in cash on 11th May, 2010; ` 30,000
by a bearer cheque on 31st May, 2010; and ` 41,000 by an account payee
cheque on 16th May, 2010. The amount of disallowance under section 40A(3)
is ––
(a) ` 15,000
(b) ` 30,000
(c) ` 41,000
(d) ` 86,000.
(iii) Which of the following income is not included in the term ‘income’ under the
Income-tax Act, 1961 ––
(a) Profit and gains
(b) Dividend
(c) Profit in lieu of salary
(d) Reimbursement of travelling expenses.
(iv) Which of the following income is an agricultural income ––
(a) Income from brick making
(b) Income from agriculture land situated in Pakistan
(c) Prize from government on account of higher crop yield
(d) Compensation received from insurance company on account of loss of
crop.
46
47 EP–TL– June 2011
(v) The maximum exemption under section 10(10AA) in case of leave
encashment is ––
(a) ` 3,50,000
(b) ` 3,00,000
(c) ` 10,00,000
(d) ` 5,00,000. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s):
(i) Belated return of income may be filed within ________ from the end of the
relevant assessment year.
(ii) A person, carrying on profession, has to get his accounts audited on
compulsory basis if his gross receipts in profession for the previous year
relevant to the assessment year 2011-12 exceeds ________ .
(iii) The amount of tax payable by the assessee and the amount of refund due,
under the provisions of the Income-tax Act, 1961 shall be rounded-off to the
nearest ________ .
(iv) The balance of income after deductions admissible under section 80C to
80U is called ________.
(v) Under section 44AB, specified date means ________ of the assessment
year. (1 mark each)
(c) Goldie Ltd. has advanced an interest free loan of ` 5,00,000 to its employee
Ramesh for purchase of car on 1st May, 2010. Ramesh has been regularly repaying
the loan in installments of ` 20,000 per month at the end of each month.
Compute the value of perquisite on account of interest assuming that SBI rate
of interest for such loan as on 1st April, 2010 is 10% per annum.
(5 marks)
Answer 1(a)
(i) (a) ` 2,000
(ii) (b) ` 30,000
(iii) (d) Reimbursement of travelling expenses
(iv) (d) Compensation received from insurance company on account of loss of crop.
(v) (b) ` 3,00,000.
Answer 1(b)
(i) Belated return of income may be filed within One year from the end of the
relevant assessment year.
(ii) A person, carrying on profession, has to get his accounts audited on compulsory
basis if his gross receipts in profession for the previous year relevant to the
assessment year 2011-12 exceeds ` 15,00,000 .
(iii) The amount of tax payable by the assessee and the amount of refund due,
under the provisions of the Income-tax Act, 1961 shall be rounded-off to the
nearest Multiple of Ten rupees .
EP–TL– June 2011 48
(iv) The balance of income after deductions admissible under section 80C to 80U is
called Total Income .
(v) Under section 44AB, specified date means 30th September of the assessment
year.
Answer 1(c)
Computation of Value of perquisite
Total 41,80,000
The exemption shall be allowed to the extent of the minimum of the following amounts:
14,060 x 15 x30
= ` 2,43,346
26
(c) ` 10,00,000
Working Notes:
(i) Completed year of service shall be 30 years as Mr. Naryana served for 29 years
and 7months.
(ii) Salary shall be last drawn basic salary and dearness allowance.
= ` 11,800 + ` 2,260
= ` 14,060.
EP–TL– June 2011 52
Answer 3(b)
Computation of Net Wealth of Mrs. Sarita
for the Assessment Year 2011-12 (`)
(i) House Property at Indore Exempt
(ii) Fixed Deposit in a Nationalised Bank Not an asset
(iii) Fixed Deposit for five years in a Chit Fund Not an asset
(iv) Agricultural Land & Equipment Not an asset
(v) Cars 14,87,000
(vi) Ornaments 13,60,000
(vii) Share application money Not an asset
(viii) Cash in Hand : 2,30,000
Less : Exempt 50,000 1,80,000
(ix) Property in the name of minor Son (Deemed Asset) 50,000
Gross Wealth 30,77,000
Less : Liabilities
Loan taken on Purchasing Tractor Not Deductible
Net Wealth 30,77,000
Wealth Tax Payable
Wealth tax shall be @1% in excess of net wealth of ` 30,00,000 [(30,77,000 –
30,00,000) x 1/100)] is ` 770.
Answer 3(c)
Enhanced compensation of ` 9,00,000 – ` 2,40,000 = ` 6,60,000 shall be taxable
under the head capital gain. Whereas interest on enhanced compensation shall be taxable
under the head Income from other sources as under:
Interest on enhanced compensation received ` 2,40,000
Less : Deduction @50% ` 1,20,000
Balance taxable ` 1,20,000
Question 4
(a) For the assessment year 2011-12, Hari is a non-resident in India. From the
information given below, find out his income chargeable to tax for the assessment
year 2011-12 :
(i) Royalty received by him outside India from the Government of India:
` 17,000.
(ii) Technical fees received from an Indian company in Germany for advice
given by him in respect of a project situated in Iran : ` 1,17,000.
(iii) Income from a business situated in Sri Lanka (goods are sold in Sri Lanka,
53 EP–TL– June 2011
sale consideration is received in Sri Lanka but business is partly controlled
in Sri Lanka and partly in India) : ` 2,17,000.
(iv) Income received in Nepal from a business connection in India : ` 3,17,000.
(v) Gift in foreign currency from a friend received in India on 20th January,
2011 : ` 80,000.
(vi) Past untaxed profit of 2000-01 brought in India on 10th April, 2010 : ` 27,000.
(6 marks)
(b) Distinguish between any three of the following :
(i) ‘Cost of acquisition’ and ‘cost of improvement’.
(ii) ‘Slab rate’ and ‘flat rate’of income-tax.
(iii) ‘Short-term capital gains’ and ‘long-term capital gains’.
(iv) ‘Belated return of income’ and ‘revised return of income’.
(v) ‘Summary assessment’ and ‘scrutiny assessment’. (3 marks each)
Answer 4(a)
Income of Hari a non-resident shall be chargeable to tax for the Assessment Year
2011-12 in the following manner:
(i) As royalty is received from the Government of India, It is
deemed to accrue or arise in India. It is Indian income
hence always be taxable. ` 17,000
(ii) Technical fees received in Germany. The project is situa-
ted in Iran. It is foreign Income. Nil
(iii) Income is received in Sri Lanka as goods are sold in Sri-
Lanks, it arises in Sri Lanka. It is foreign Income there-
fore not taxable in case of non-resident. Nil
(iv) As the business connection is situated in India, it is
deemed to accrue or arise in India ` 3,17,000
(v) Gift in foreign currency, from a friend, received in
India. It is taken as an Income. (Refer working note 1) ` 80,000
(vi) Past untaxed profit of 2000-01 brought in India, not an
income of previous year 2010-11 (Refer working note 2) Nil
Total ` 4,14,000
Working Note:
(1) If the aggregate amount of gifts received by an individual/HUF from all persons
(not being relatives) during a financial year exceeds ` 50,000, it is taxable as
income.
(2) It is income of the previous year 2001-02, it cannot be taxed at the time of
remittance in 2010-11.
EP–TL– June 2011 54
Answer 4(b)(i)
‘Cost of acquisition and ‘Cost of Improvement’
Cost of acquisition is the price which the assessee has paid or the amount which
the assessee has incurred, for acquisition of the asset. Expenses incurred for completing
the title are a part of the cost of acquisition. Cost of acquisition includes deemed cost
of acquisition. Cost of Acquisition of goodwill of a business or a right to manufacture,
produce or process any article or thing tenancy rights storage carriage permits or loom
hours is:
(i) In case of acquisition of such assets purchase from a previous owner, cost of
acquisition means the amount of purchase price and;
(ii) Any other case cost of acquisition shall be nil.
Cost of Improvement in relation to a capital asset being goodwill of a business or
a right to manufacture, produce or process any article or thing or right to carry on any
business shall always be Nil.
Section 55(1) provides that where the capital assets became the property of the
previous owner or the assessee before 1.4.1981 the cost of any improvement means all
expenditure of a capital nature incurred in making any additions or alterations to the
capital asset on or after 1-04-1981 by the previous owner or the assessee.
In other cases it means all capital expenditure in making any additions or alteration
by the assessee after it became his property and where the capital asset became the
property of the assessee by any of the modes specified in Section 49(1) by the previous
owner as the case may be.
Answer 4(b)(ii)
‘Slab rate’ and ‘flat rate’ of income tax
Slab rate of tax is a tax by which the tax rate increases as the taxable base amount
increases. Slab taxes attempt to reduce the tax incidence of people with a lower ability-
to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay.
For Example, for Assessment Year 2011-12 the tax slab for individual is :
Flat rate of tax is a tax system with a constant tax rate. An income tax having a
single rate for all taxpayers regardless of income level and type. Flat rate of taxes
offers simplicity in the taxation system.
For example the Tax rate on Long Term capital gain is 20% and Short Term Capital
gain is 15%, Winning from Horse race, lotteries is 30% etc.
55 EP–TL– June 2011
Answer 4(b)(iii)
‘Short-term capital gains’ and ‘Long-term capital gains
Short-term Capital Gains [Section 2(42A)] : A capital asset held by an assessee
for not more than 36 months immediately preceding the date of its transfer is known as
a short-term capital asset. Capital gain arising on the transfer of short-term capital asset
is called Short term Capital Gain.
However, the following assets shall be treated as short-term capital assets if they
are held for not more than 12 months (instead of 36 months mentioned above) immediately
preceding the date of its transfer :
(a) Equity or preference shares held in a company;
(b) Any other security listed in a recognized stock exchange in India;
(c) Units of the Unit Trust of India or units fo a Mutual Fund specified u/s 10(23D);
(d) Zero coupon bond.
Long-term capital gains [Section 2(29A)] : If the asset is held by the assessee
for more than 36 months or 12 months, as the case may be, such an asset will be
treated as a long-term capital asset. Capital gain arising on the transfer of long-term
capital asset is called Long term Capital Gain.
Answer 4(b)(iv)
‘Belated return of income’ and ‘Revised return of income’
Belated Return : If return is not furnished within the time allowed under
section 139(1) or within the time allowed under notice issued under section 142(1), the
person may, before the assessment is made, furnish the return of any previous year at
any time before the end of one year from the end of relevant assessment year. If return
is submitted after the due date of submission of return of income, the following
consequences will be applicable.
(i) the assessee will be liable for penal interest under section 234A.
(ii) a penalty of ` 5,000 may be imposed under section 271F if belated return is
submitted after the end of assessment year;
(iii) If return of loss is submitted after the due date a few losses cannot be carried
forward;
(iv) If return is submitted belated, deduction under sections 10A, 10B, 80-IA,
80-IAB, 80-IB, 80-IC, 80-ID and 80-IE will not be available.
Revised return under Section 139(5) : If an assessee, after furnishing the return of
income
(i) under section 139(a) or
(ii) in pursuance of to a notice under section 142(1)
discovers any omission or any wrong statement in the return filed, he may furnish a
EP–TL– June 2011 56
revised return. Such revised return can be filed at any time before the expiry of one year
from the end of the relevant assessment year or before the completion of the assessment,
whichever is earlier.
Answer 4(b)(v)
‘Summary assessment’ and ‘Scrutiny assessment’
Under summary assessment, Assessing Officer completes the assessment without
passing a regular assessment order. The Assessing Officer issue an acknowledgement/
intimation under section 143(1) of tax payable or refundable as the case may be on the
basis of Return of Income filed by the assessee under section 139 or in response to a
notice issued under section 142(1). The Assessing Officer (AO) processes the return in
the following manner:
(1) The total income or loss after making adjustments for any arithmetical error in
the return or for any incorrect claim which is apparent from any information in
the return is calculated.
(2) Then the tax and interest, if any, on the basis of the total income computed in
step (1) is computed.
(3) Now following adjustments are made to the tax and interest calculated above to
determine the sum payable by the assessee or any amount of refund due to
him:
• tax deducted at source,
• any tax collected at source,
• any advance tax paid,
• any relief allowable under an agreement under section 90, 90A and 91,
• any rebate allowable under Part A of Chapter VIII,
• any tax paid on self-assessment and
• any amount paid otherwise by way of tax or interest;
(4) The AO shall prepare or generate intimation and send it to the assessee
specifying the sum determined to be payable by, or the amount of refund due to
the assessee.
(5) The amount of refund due to the assessee shall be granted to the assessee.
Since no assessment order is issued by the department for legal purposes the
intimation/acknowledgement shall not be considered as assessment.
No intimation for tax or interest due under section 143(1) shall be sent after the
expiry of one year from the end of financial year in which return of income is made.
Under Scrutiny Assessment the assessing officer may serve a notice under
section 143(2) requiring the assessee to submit the additional evidence to support the
return of the income filed by him under section 139 or 142(1). The assessee can also be
asked to attend the office of the AO or produce the evidence by the date mentioned in
the notice. The AO then makes the assessment of total income or the loss of the
assessee and determine the sum payable by him or refund due to him. The assessment
has to be made after taking into consideration such evidence produced by the assessee
and all relevant material gathered by him.
57 EP–TL– June 2011
In this assessment AO charged with the duty to ensure that the assessee has not
understated the income, has not computed excessive loss, has not under paid taxes
etc. The assessment is completed with the issue of assessment order containing the
tax computed under the signature of AO. Assessment made under this section would be
final one and the department cannot open the case again except under reassessment
proceedings.
Notice under section 143(2) shall not be issued after the expiry of six months from
the end of the financial year in which return was filed.
Question 5
(a) Write short notes on any three of the following :
(i) Amortisation of telecom licence fee
(ii) Consequences of failure to deduct tax at source
(iii) Assessment in case of dissolution of an association of persons
(iv) Self-assessment
(v) Valuation of jewellery under the Wealth-tax Act, 1957. (3 marks each)
(b) Ms. Rajni who draws a salary of ` 20,000 per month received the following gifts
on or after 1st October, 2010 during the year 2010-11 :
(i) Gift of ` 5,00,000 on 16th October, 2010 from a friend.
(ii) Gift of jewellery, fair market value of which is ` 3,00,000 on 17th October,
2010 from her fiancée.
(iii) Gifts of ` 51,000 each received from her four friends on the occasion of her
marriage on 21st October, 2010.
(iv) Gift of ` 1,00,000 on 22nd November, 2010 from her mother’s sister.
(v) Gift of ` 60,000 on 25th November, 2010 from her father’s brother.
(vi) Gift of ` 50,000 on 1st December, 2010 from her husband’s friend.
(vii) Gift of ` 21,000 on 15th December, 2010 from her mother’s friend.
(viii) Gift of ` 26,000 on 25th December, 2010 from her brother’s father-in-law.
(ix) Gift of ` 1,21,000 from her husband’s brother.
(x) Gift of ` 26,000 from her employer.
(xi) Scholarship of ` 1,20,000 from a charitable institution registered under
section 12AA.
(xii) She has purchased an immovable property from Bhawna who is not her
relative for a sum of ` 24,50,000. The stamp duty value of the property is
` 26,00,000.
(xiii) She purchased bullion for ` 4,40,000 whose fair market value is ` 4,85,000.
Compute her total income for the assessment year 2011-12.
(6 marks)
EP–TL– June 2011 58
Answer 5(a)(i)
Amortization of telecom license fee (Section 35ABB)
Where any capital expenditure is incurred by the assessee for acquiring any right to
operate tele-communication services and for which payment has actually been made to
obtain a license, a deduction will be allowed in equal instalments over the period for
which the license remains in force, subject to the following:
(i) If such amount is paid before the commencement of such business, the
deduction, shall be allowed for the previous years beginning with the previous
year in which such business is commenced;
(ii) If the fee is paid after the commencement of such business the deduction shall
be allowed for the previous years beginning with the previous year in which the
licensee fee is actually paid.
Answer 5(a)(ii)
Consequences of failure to deduct tax at source
If a person responsible for deduction of tax at source fails to deduct the appropriate
tax or after making the due deductions fails to deposit into Government Treasury as per
Section 201 he shall be deemed to be an assessee in default and shall be liable to:
(i) Payment of the whole or any part of the tax as due;
(ii) Interest @ 1% per month or part of the month on the tax from the date on which
such tax was deductible to the date on which such tax is actually paid;
(iii) Penalty which may be as high as the amount of tax in default;
(iv) Where the amount of tax which the responsible person has failed to deduct or
pay exceeds ` 1,00,000 he shall be punishable with rigorous imprisonment for
a term not less than six months but which may extend to seven years and with
fine.
In any other case he shall be punished with a rigorous imprisonment of a term not
less than three months but which may be extended to three years and with fine.
Answer 5(a)(iii)
Assessment in case of dissolution of an association of persons (AOP)
As per Section 177 of the Income Tax Act where any business or profession carried
on by an AOP has been discontinued or an AOP is dissolved the Assessing Officer
(AO) shall make an assessment of the total income of the AOP as if no such
discontinuance or dissolution had taken place and all provisions of this Act including the
provisions relating to the levy of penalty or any other sum chargeable under any provision
of the Act apply. Every person who was at the time of such discontinuance or dissolution
a member of the AOP and legal representative of any such person who is deceased
shall jointly and severally be liable for the amount of tax penalty or other sum payable
where such discontinuance or dissolution takes place after any proceeding in respect of
an assessment year have commenced the proceeding may be continued against the
59 EP–TL– June 2011
members from the stage at which the proceedings stood at the time of such
discontinuance or dissolution.
Answer 5(a)(iv)
Self Assessment (Section 140A)
The assessee is required to make a self assessment and pay the tax on the basis
of the return required to be furnished under Section 139, 142, 148, 153A or 158BC. The
tax due (after taking into account any advance tax paid by him or tax deducted from his
income at source) along with interest payable under any provision of the Income Tax
Act for any delay in furnishing the return or any default or delay in payment of advance
tax is to be paid before furnishing the return. Where the amount paid by the assessee
falls short of the aggregate of the tax and interest the amount so paid is to be adjusted
towards interest. The balance if any is adjustable towards the tax payable and the
return of income filed by the asssessee shall be accompanied by proof of payment of
such tax. Any tax paid by the assessee under self-assessment is deemed to have been
paid towards regular assessment.
Answer 5(a)(v)
Valuation of jewellery under the Wealth-tax Act, 1957
The value of Jewellery shall be estimated to be the price which it would fetch, if
sold, in the open market on the valuation date, which may be referred to as Fair Market
Value.
Valuation of jewellery shall be determined in the following manner:
(i) Where the Fair Market Value, as estimated by the assessee, does not exceed
` 5,00,000
In this case, the assessee shall have to file a statement in Form No.O-8A,
along with a return of net wealth submitted by him. However, if the Assessing
Officer is of the opinion that the Fair Market Value of the jewellery exceeds the
value of the jewellery declared by the assessee in his return by more than
33 1/3% of the returned value or ` 50,000, he may refer the valuation of such
jewellery to a Valuation Officer under Section 16A(1) and the value of the jewellery
in such case shall be the Fair Market Value as estimated by the Valuation
Officer.
(ii) Where the Fair Market Value, as estimated by the assessee, exceeds ` 5,00,000
In this case, the assessee has to obtain and furnish a report of a Registered
Valuer in FormNo.O-8, along with a return of net wealth submitted by him.
However, if the Assessing Officer is of the opinion that the Fair Market Value of
the jewellery exceeds the value of the jewellery declared by the assessee in
his return, he may refer the valuation of such jewellery to a Valuation Officer
under section 16A(1) and the value of the jewellery in such case, shall be the
Fair Market Value as estimated by the Valuation Officer. It may be observed,
that in this case, the reference to the Valuation Officer can be done irrespective
of the excess of the Fair Market Value, as estimated by the Assessing Officer
over the Fair Market Value estimated by the Registered Valuer.
EP–TL– June 2011 60
Answer 5(b)
Computation of Total Income of Ms. Rajni
for the Assessment Year 2011-12
` `
Income under the head salary
Salary 20,000 x 12 2,40,000
Add : Cash gift from employer 26,000
2,66,000
Less : Deduction Nil 2,66,000
Income from other sources
(i) Gift from a friend is includable 5,00,000
(ii) Gift of jewellery is taxable 3,00,000
(iii) Gifts received from her 4 friends are exempt as they
have been received on the occasion of her marriage Nil
(iv) Gift from her mother’s sister is exempt as the donor
is covered in the definition of relative Nil
(v) Gift from her father’s brother is exempt as the donor
is covered in the definition of relative Nil
(vi) Gift of ` 50,000 from her husband’s friend on
1.12.2010 is taxable as aggregate sum of money
received during the year exceed ` 50,000 50,000
(vii) Gift of ` 21,000 from her mother’s friend is
includable as agg regate sum of money received
during the year exceed ` 50,000 21,000
(viii) Gift from her brother’s father in law is taxable as the
donor is not covered in the definition of relative 26,000
(ix) Gift from her husband’s brother is exempt as the
donor is covered in the definition of relative Nil
(x) Gift from her employer is taxable as income from
salary Nil
(xi) Gift in the form of scholarship from charitable
Institution registered under section 12AA Exempt
(xii) Difference between stamp duty value and purchase
Price in case of immovable property Not taxable
(xiii) Difference between fair market value of movable
Property and purchase price does not
exceed ` 50,000 Not taxable 8,97,000
Total income 11,63,000
61 EP–TL– June 2011
Question 6
(a) Describe the provisions relating to chargeability of unexplained investment not
recorded in the books of account. (4 marks)
(b) “If an individual writes a book, he shall be allowed deduction from his gross total
income.” Explain the statement. (4 marks)
(c) On 31st December, 1980, Goverdhan purchased a plot for ` 40,000. The fair
market value of the plot on 1st April, 1981 was ` 97,800. On 15th October,
2010, Goverdhan sells the plot for ` 14,30,000 and paid brokerage, etc., @2%
on sales consideration. He invested ` 6,87,000 in the construction of residential
house which was completed before 31st May, 2011.
Compute the taxable amount of capital gains for the assessment year 2011-12
of Goverdhan assuming that he already owns one residential house on the date
of transfer of plot. Cost inflation index for the financial year 2010-11 is 711.
(7 marks)
Answer 6(a)
As per Section 69 of the Income Tax Act where the assessee has made investments
which are not recorded in the books of accounts, if any maintained by him for any
source of Income and the assessee is not in a position to offer any explanation about
the nature and source of the investment or the explanation offered by him is inadequate
or not satisfactory in the opinion of assessing officer, the value of the investment may
be treated as the income of the assessee for the financial year in which the investments
are made.
Answer 6(b)
“If an individual writes a book, he shall be allowed a deduction from his gross total
income under section 80QQB of the Income tax Act, 1961”
Essential conditions for claiming deduction under this section:
(i) The deduction is available to an individual who is resident in India and is an
author of a book.
(ii) The book should be a work of literary, artistic or scientific nature.
(ii) The Income must be derived by him in the exercise of his profession.
(iv) The income must be either :
(a) on account of any lump sum consideration for the assignment or grant of
any of his interests in the copyright of such book; or
(b) of royalty or copyright fees (whether receivable in lump sum or otherwise)
100% of such income or ` 3,00,000, whichever is less is allowed as deduction. No
deduction under this section shall be allowed unless the assessee furnishes a certificate
in the prescribed form (Form No.10CCD) and in the prescribed manner, duly verified by
any person responsible for making such payment to the assessee, along with the return
of income, setting forth such particulars as may be prescribed.
EP–TL– June 2011 62
Answer 6(c)
Computation of Taxable Capital Gains of Goverdhan
For the Assessment Year 2011-12
`
Sales proceeds of Plot 14,30,000
Less : Brokerage etc. 2% 28,600
Net Sales Proceeds 14,01,400
Less : Indexed Cost of Acquisition
97,800 x 711
6,95,358
100
Capital Gains 7,06,042
Less : Deduction under section 54F
7,06,042 x 6,87,000
3,46,119
14,01,400
Taxable Capital Gains 3,59,923
PART B
Question 7
Attempt any four of the following :
(i) Discuss ‘advance ruling’ in service tax. (5 marks)
(ii) Discuss briefly the procedure for registration of service tax provider. (5 marks)
(iii) What is the due date for payment of service tax ? What is the rate of interest for
delayed payment and penalty for default in payment of service tax ? (5 marks)
(iv) What do you mean by ‘taxable services’ in the context of service tax ? How is
the value of taxable services determined ? (5 marks)
(v) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(a) Service tax in India made a humble beginning from ___________ with only
three services.
(b) Currently, the rate of service tax is ____________ (including education cess
and secondary and higher education cess).
(c) Every provider of taxable services whose aggregate value of taxable services
in a financial year exceeds _____________, must mandatorily obtain
registration.
(d) The provision of service tax extends to whole of India except ______________
63 EP–TL– June 2011
(e) Every assessee shall submit the half yearly return by the _____________
of the month following the particular half-year.
(1 mark each)
Answer 7(i)
Advance Ruling in Service Tax
Advance ruling “means the determination by the Authority, of a question of law or
facts specified in the application regarding the liability to pay service tax in relation to a
service proposed to be provided by the applicant.
Applicant means
(i) (a) a non-resident setting up a joint venture in India; or
(b) a resident setting up a joint venture in collaboration with a non-resident.
(c) a wholly owned subsidiary Indian company of which the holding company is
a foreign company who or which, as the case may be, proposes to undertake
any business activity in India;
(ii) a joint venture in India; or
(iii) a resident falling within any such class or category of persons, as the Central
Government may, by notification in the Official Gazette, specify in this behalf.
JUNE 2011
MODULE II
GUIDELINE ANSWERS
EXECUTIVE PROGRAMME
JUNE 2011
MODULE II
ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons and
the Institute hopes that the GUIDELINE ANSWERS will assist
the students in preparing for the Institute's examinations. It is,
however, to be noted that the answers are to be treated as
model answers and not as exhaustive and the Institute is not
in any way responsible for the correctness or otherwise of the
answers compiled and published herein.
C O N T E N T S
Page
MODULE II
1. Company Law ... 1
NOTE : Guideline Answers of the last Four Sessions need to be updated in the light of
changes and references given below :
EXECUTIVE PROGRAMME
UPDATING SLIP
COMPANY LAW
MODULE – II – PAPER 1
NOTE : Guideline Answers of the last Four Sessions need to be updated in the light of
changes & references given below :
UPDATING SLIP
COMPANY LAW
Time allowed : 3 hours Maximum marks : 100
NOTE : 1. Answer SIX questions including Question No. 1 which is COMPULSORY.
2. All references to sections relate to the Companies Act, 1956 unless stated
otherwise.
Question 1
Comment on any four of the following :
(i) The liability of member to pay their guaranteed amount arises only when the
; company has gone into liquidation and not when it is a going concern.
(ii) The managing director and other directors of a company are not liable to be
sued for dues against a company.
(iii) The competent court of law can entertain a petition for winding-up of an illegal
association under company law.
(iv) A company can be regarded as having enemy character under certain
circumstances.
(v) Preference shares are non-cumulative unless expressly stated to be cumulative.
(5 marks each)
Answer 1(i)
A company limited by guarantee or a “guarantee company” is a registered company
having liability of its members limited by its memorandum to such amount as the member
may respectively undertake to contribute to the assets of the company in the event of
its winding up. Clubs, trade associations and societies for promoting different objects
are examples of such a company.
According to sub-section (2) of Section 426, every member of the company shall be
liable to contribute to the extent of any sums unpaid on any shares held by him as if the
company were a company limited by shares. This is in addition to the amount undertaken
to be contributed by him to the assets of the company in the event of its being wound-
up.
Answer 1(ii)
A company being a body corporate can sue and be sued in its own name. To sue
means to institute legal proceedings against (a person) or to bring a suit in a court of law.
All legal proceedings against the company are to be instituted in its own name. Similarly,
the company may bring an action against anyone in its own name. A company’s right to
sue arises when some loss is caused to the company, i.e. to the property of the company.
As a juristic legal person, a company can sue in its name and be sued by others. In
this context, the managing director and other directors are not liable to be sued for dues
against a company.
1
EP–CL– June 2011 2
Answer 1(iii)
The law does not recognize illegal association and therefore it cannot be wound up
by order of Court. In fact, the Court cannot entertain a petition for its winding up of a
company formed in contravention of the provision of Section 4 of the Indian Companies
Act, 1913. The winding up of unregistered companies though lawfully formed cannot be
done under the provisions of this Act. [Raghubar Dayal v. The Sarafa Chamber and
others (24 Com. Cas. 388)].
Answer 1(iv)
The facts in question are similar to the facts in Daimler Co. Ltd. v. Continental Tyre
and Rubber Co. (Great Britain) Ltd. (1916) 2A.C. 307; 32 T.L.R. 624. In one of the
questions in debate was, in substance, whether a company which was incorporated in
England but whose shareholders (save one) and directors were Germans resident in
Germany could sue in this country in time of war between the two countries. Lord
Parker of Waddington, expressed the view that “the character of individual shareholders
cannot of itself affect the character of the company, but the enemy character of individual
shareholders and their conduct may be material on the question whether the company’s
agents or the persons de facto in control of its affairs are in fact adhering to, taking
instructions from, or acting under the control of enemies.
Answer 1(v)
(a) on the last day specified for the payment of such dividend for such period, in the
articles or other instrument executed by the company in that behalf; or
(b) in case no day is so specified, on the day immediately following such period.
Hence, dividend becomes due and accumulated, if the company does not earn
sufficient profits. Hence, Preference shares are cumulative unless expressly stated
otherwise.
3 EP–CL– June 2011
Question 2
(a) Write the most appropriate answer from the given options in respect of the
following :
(i) Which of the following is not a ‘public corporation’ within the meaning of
company law ––
(a) Life Insurance Corporation of India
(b) Damodar Valley Corporation
(c) State Trading Corporation of India Ltd.
(d) None of the above.
(ii) All contracts which are purported to be made on behalf of a company before
its incorporation are known as ––
(a) Preliminary contracts
(b) Provisional contracts
(c) Commercial contracts
(d) None of the above.
(iii) Which of the following financial institution shall not be regarded for the
purposes of the Companies Act, 1956 as ‘public financial institution’ (PFI) –
(a) Life Insurance Corporation of India
(b) Infrastructure Development Finance Company Ltd.
(c) Unit Trust of India
(d) Sundaram Finance Ltd.
(iv) Which of the following is incorrect as regards creditors of a partnership
firm––
(a) Creditors of a partnership firm are creditors of individual partners
(b) A decree against the firm can be executed against the partners jointly
and severally
(c) Both (a) and (b) above
(d) None of the above.
(v) Under section 252, every public company shall have at least ––
(a) Three directors
(b) Two directors
(c) Five directors
(d) Seven directors.
(vi) Under section 285, in the case of every company, a meeting of the Board
of directors shall be held ––
(a) At least once in every three months
(b) At least once in every six months
(c) At least once in every four months
(d) At least once in every two months.
EP–CL– June 2011 4
(vii) Appointment of a whole-time Company Secretary is mandatory for every
producer company in case where average annual turnover exceeds ––
(a) ` 5 crore in each of three financial years
(b) ` 2 crore in each of three financial years
(c) ` 10 crore in each of three financial years
(d) ` 20 crore in each of three financial years.
(viii) Any political contribution made in contravention of section 293A(5)(a) shall
be punishable with fine upto ––
(a) Three times of the contribution
(b) Two times of the contribution
(c) Four times of the contribution
(d) One time of the contribution. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s) / figure(s) :
(i) The words __________ must be added at the end of its name by a private
limited company.
(ii) A company formed under an Act of Parliament or State Legislature is called
a __________ company.
(iii) A subsidiary of a government company is treated as a __________ company.
(iv) The quantum of fee prescribed for registration of a company having share
capital depends on the __________ of the company to be incorporated.
(v) The application for registration of multi-State co-operative society should
be addressed to __________.
(vi) Every producer company shall hold its first annual general meeting (AGM)
within a period of __________ from the date of its incorporation.
(vii) A foreign company is a company which is incorporated in a country outside
India under the law of that other country and has a place of business in
__________.
(viii) Register and index of debentureholders should be preserved for __________
after the redemption of the debentures. (1 mark each)
Answer 2(a)
(i) (c) State Trading Corporation of India Ltd.
(ii) (a) Preliminary contracts.
(iii) (d) Sundaram Finance Ltd.
(iv) (d) None of the above.
(v) (a) Three directors
5 EP–CL– June 2011
(vi) (a) At least once in every three months.
(vii) (a) 5 crore in each of three financial years.
(viii) (a) Fine upto three times of the contribution.
Answer 2(b)
(i) The words Private Limited must be added at the end of its name by a private
limited company.
(ii) A company formed under an Act of Parliament or State Legislature is called a
Statutory company.
(iii) A subsidiary of a government company is treated as a Government company.
(iv) The quantum of fee prescribed for registration of a company having share capital
depends on the Nominal/authorized/registered capital of the company to be
incorporated.
(v) The application for registration of multi-State co-operative society should be
addressed to the Central Registrar of Co-operative Societies, Krishi Bhawan,
New Delhi .
(vi) Every producer company shall hold its first annual general meeting (AGM) within
a period of 90 days from the date of its incorporation.
(vii) A foreign company is a company which is incorporated in a country outside
India under the law of that other country and has a place of business in India.
(viii) Register and index of debentureholders should be preserved for 15 years after
the redemption of the debentures.
Question 3
Distinguish between any four of the following :
(i) ‘Company’ and ‘corporation’.
(ii) ‘Doctrine of indoor management’ and ‘doctrine of constructive notice’.
(iii) ‘Rights issue’ and ‘bonus issue’.
(iv) ‘Motion’ and ‘resolution’.
(v) ‘Whole-time Company Secretary’ and ‘Company Secretary in whole-time practice’.
(4 marks each)
Answer 3(i)
‘Company’ and ‘Corporation’
Company – The word Company is used for an association of two or more than two
persons for some common object. Section 3 of the Act defines company as company
formed and registered under the Companies Act, 1956. Company has two important
characteristics are-
(i) the number of members is more than one, and
EP–CL– June 2011 6
(ii) a member may transfer his share to any person without consent of others.
Generally speaking, an association of persons incorporated according to the relevant
law and clothed with legal personality separate from the persons constituting it is known
as a corporation. Section 2(7) of the Companies Act. 1956 defines these words as
follows:
“Body corporate” or “corporation” includes a company incorporated outside India but
does not include—
(a) a corporation sole:
(b) a co-operative society registered under any law relating to co-operative societies;
and
(c) any other body corporate not being a company which the Central Government
may, by notification in the Official Gazette, specify in this behalf.”
In other words, the expression “Corporation” or “body corporate” is wider than the
word ‘company'.
Answer 3(ii)
‘Doctrine of indoor management’ and ‘doctrine of constructive notice’
After registration of the Memorandum and Articles of Association they become
public for inspection to the public in the office of the Registrar of Companies. On
payment of fees, copies/extracts therefrom can also be obtained from the office of the
ROC. Any person, therefore, dealing with the company is supposed to have seen them
or to have notice of their contents. This is called Doctrine of Constructive Notice. Thus
while an outsider dealing with the company is supposed to have constructive notice of
the powers of the company, they are not supposed to know as to whether all the formalities
supposed to have been done indoor has been fulfilled or not. This rule is known as
doctrine of indoor management. For example, the directors of a Royal British Bank
gave bond to Mr. Turquand which they had powers to do under the Articles of Association
of the bank only when a resolution authorizing the directors to do so had been passed.
In fact, no resolution was passed. Court, in case of Royal British Bank vs. Turquand,
decided that an outsider was expected to know the powers of the company and not to
see as to whether all the indoor formalities had been duly followed.
Thus while doctrine of constructive notice saves the company from the acts of the
outsiders, doctrine of indoor management benefits the outsiders from the irregular acts
of the company.
Answer 3(iii)
‘Rights issue’ and ‘bonus issue’
Rights issue – Section 81 of the Companies Act, 1956 provides for the issue of right
share and states that whenever at any time after expiry of two years from the incorporation
of the company or after the expiry of one year from the first allotment of shares, whichever
is earlier, it is proposed to increase the subscribed capital by allotment of further shares,
such shares shall be offered to the existing holders of equity shares in proportion to the
capital paid up on their shares at the time of further issue.
7 EP–CL– June 2011
Bonus issue : Bonus share is the capitalization of accumulated profits of the company
by issuing fully paid bonus share to the existing shareholders of the company.
Difference
While right issue is to increase capital by inviting existing shareholders to subscribe
capital bonus share issued to convert accumulated profits into share capital.
Similarity
The only similarity between the two is that both are issued to the existing shareholders
in proportion of their shareholding to the capital paid up at the time of issue.
Answer 3(iv)
‘Motion’ and ‘Resolution’
A motion is a proposition or proposal, subject to amendment, formally submitted to
a meeting. When the proposition or the motion with or without any amendment is passed
by the meeting, it becomes a resolution. A motion which has been adopted is called a
resolution.
A motion must be in writing and signed by its movers. A motion is positive or
affirmative form. Generally, the motion is seconded.
A mover of the motion has a right to withdraw it before it is put to vote with the
consent of the meeting. He has also right to speak on the motion.
A motion if adopted at the meeting is called a resolution.
Answer 3(v)
‘Whole time company secretary’ and ‘Company secretary in whole-time practice’
Total ` 50 crores
9 EP–CL– June 2011
The amount of ` 50 crores is beyond the authorized powers of the Board hence
approval of the shareholders by a special resolution is required to be passed in General
Meeting. In case the company is a listed company such an approval should be taken
through postal ballot.
Answer 4(b)
Procedure for granting loan by one company to another:
A company which proposes to make loan in another body corporate must follow the
procedure detailed below:
1. Issue notice for Board meeting in writing to every director for the time being in
India and to every other director at his usual address in India as per the provisions
of Section 286 of the Companies Act.
2. Hold Board meeting to consider the proposal to give loan.
3. If the aggregate amount of proposed loan exceeds the specified limits under
Section 372A then fix time, date and venue for holding general meeting to pass
the special resolution thereat in that regard.
4. If your company is a listed company then the Special Resolution mentioned
above passed shall be passed through postal ballot for giving loans.
[Section 192A read with Rule 4(g) of the Companies (Passing of the Resolution
by Postal Ballot) Rules, 2001].
5. Issue notice in writing at least twenty one clear days before the date of the
General Meeting proposing the special resolution with suitable explanatory
statement.
6. In case of listed companies, send three copies of the notice to each Stock
exchange, where shares of the company are listed.
7. Hold the General meeting and pass the special resolution.
8. In case of listed company, forward to the Stock exchanges where the shares of
the company are listed, copy of the proceedings of the general meeting.
9. File the special resolution in e-form 23 along with the explanatory statement
with the concerned Registrar of companies within thirty days of passing the
Special Resolution after paying the requisite fee prescribed under Schedule X
to the Companies Act, 1956.
10. Ensure that approval of the Public Financial Institution(s) has been obtained
before implementing the proposal if the company has taken any term loan from
any one of the financial institutions referred to in Section 4A.
11. Ensure that company has not defaulted in complying with the provisions of
Section 58A of the Companies Act, 1956.
12. Also ensure that loan to any body corporate is not made at the rate of interest
lower than the prevailing bank rate of interest being the standard rate made
public under Section 49 of the Reserve Bank of India Act, 1934.
EP–CL– June 2011 10
13. The officers authorised for this purpose should comply with all formalities like
execution of documents, remittance of money etc.
14. Enter the particulars in respect of every investment or loan made, guarantee
given or security provided by the company in relation to any body corporate in a
register kept for such purpose in chronological order within 7 days.
Answer 4(c)
According to Rule 2(a) of Companies (Disqualification of Directors under
section 274(1)(g) of Companies Act, 1956) Rules, 2003, ‘disqualifying company’ is a
company in which the default has occurred on account of which a Director stands
disqualified to be director in other companies. The default will be considered to have
occurred:
(a) Whenever a company fails to file the annual accounts and annual returns, as
described in Sub-clause (A) of clause (g) of Sub-section (1) of Section 274,
persons who are directors on the last due date for filing the annual accounts and
the annual returns for any continuous three financial years commencing on and
after the first day of April, 1999, shall be disqualified.
(b) If a company has failed to repay any deposit, irrespective of the enactment,
rules or regulations under which the deposits have been accepted by the
companies, or interest thereon, or redeem its debentures, or pay any dividend
declared on the respective due dates, and if such failure continues for one year,
as described in sub-clause (B) of Clause (g) of Sub-section (1) of Section 274,
then the directors of that company shall stand disqualified immediately on expiry
of that one year from the respective due dates.
Provided that all the directors who have been directors in the relevant year, from the
due date to the expiry of one year after the due date, will be disqualified.
Provided further that disqualification on account of the reasons cited under this Rule
shall also apply to the reappointment as a director.
Question 5
(a) What is meant by the term ‘striking-off’ of the name of a company ? Can any
aggrieved creditor apply for restoration of the name of the company after 10
years of its striking-off ? If so, how ? (4 marks)
(b) What is the general structure of e-filing process under MCA-21 ? (4 marks)
(c) List out the kind of investigations carried out under the Companies Act, 1956.
(4 marks)
(d) Enumerate the circumstances under which the Central Government can order
special audit. (4 marks)
Answer 5(a)
Striking off the name of a company is a short cut method of dissolution. It means
striking off the name of a company from the Register of Companies by the Registrar of
Companies under section 560, in case the company is defunct company. The only
statutory criterion is that the company is not carrying on business or is not in operation.
11 EP–CL– June 2011
According to section 560(6) the company having been struck off the register or any
member or creditor of such company may make an application to the Court if the company
or the member or creditor feels aggrieved by the company having been struck off, for the
restoration of the company to the register. Such an application must be made before the
expiry of 20 years from the publication in the official gazette of the notice of the striking-off.
The Court may order the name of the company to be restored to the register, if it is
satisfied that-
— the company was, at the time of the striking off, carrying on business or in
operation; or
— that it is just that the company be restored to the register.
Court orders for restoration when it is satisfied that on restoration the company will
be in a position to carry on the business.
Answer 5(b)
E-filing or electronic filing is a key feature of the MCA21 system. An e-form contains
certain standardized features. Each e-form contains guidelines for filling up the form.
An e-form may be filled in either on line or off line. On line filing implies that the e-form
is filled while being connected to My MCA portal through the internet. Off line filling
denotes that the e-form is downloaded into users computer and filled later without being
connected to internet.
The other requirements include:
E-form requires some mandatory attachments, declaration to the effect that the
information and attachments are correct and complete, digital signatures of third parties
may be required. Prescribed fees as application will be made either on line or off line.
After completion of filing e-form duly signed (Digital Signature) an acknowledgement e-
mail is sent to user regarding its approval/rejection.
Answer 5(c)
The Companies Act, 1956 provides for carrying out the following kinds of
investigations:
(a) Investigation of the affairs of the company whose business is being conducted
in fraudulent or unlawful manner or in a manner oppressive of any member
[section 235 and 237].
(b) Investigation of the affairs of related companies [section 239].
(c) Investigation of ownership of the company for the purpose of determining the
true persons who are or have been able to control or materially influence the
policy of the company or who are or have been financially interested in the
success or failure, whether real or apparent of the company [section 247].
Answer 5(d)
Under section 233A, the Central Government can appoint either any Chartered
Accountant or company’s own auditor to conduct a special audit if in its opinion-
(i) the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices, or
EP–CL– June 2011 12
(ii) the company is being managed in a manner likely to cause serious injury or
damage to the interests of the trade, industry or business to which it pertains, or
(iii) the financial position of any company is such as to endanger its solvency.
Question 6
(a) “Approval of the government is not always required under section 269 for
appointment of a whole-time director by a company having a paid-up capital of
` 5 crore.” Discuss. (4 marks)
(b) “A new business cannot be dealt with in an adjourned meeting without permission
of the chair.” Do you agree with the statement ? Give reasons. (4 marks)
(c) A single fixed depositholder, after marriage, applied for adding the name of his
wife as joint-holder. The company refused to do so. What are the remedies
available to the depositholder ? (4 marks)
(d) What do you mean by ‘abridged letter of offer’ ? What should it contain ?
(4 marks)
Answer 6(a)
Where the conditions specified in Parts I to III of Schedule XIII of Companies Act
1956, are met with while appointing whole-time Director, no approval of Central Government
is necessary. Section 269(2) provides that no appointment of a person as a managing
or whole-time director in a public company or a private company which is subsidiary of
public company shall be made except with the approval of Central Government unless
such appointment is made in accordance with conditions specified in Parts I to III of
Schedule XIII of the Act. Where the provisions of the schedule are satisfied, no approval
of Central Government is required.
Answer 6(b)
No business shall be transacted at any adjourned meeting other than the business
left unfinished at the meeting from which the adjournment took place. Since in law an
adjourned meeting is a continuation of the original meting only the business not finished
at the original meeting can only be transacted at the adjourned meeting. A fresh business
can be dealt only when proper notice is given for a new proposal.
Answer 6(c)
Addition of one or more name(s) as joint holder(s), on a fixed deposit receipt during
the period of the fixed deposit is not permissible. Hence, there is no remedy available.
Answer 6(d)
“Abridged letter of offer” means the abridged version of the letter of offer. A listed
company is required to send the abridged letter of offer to each and every shareholder
who is eligible for participating in the rights issue along with the application form. A
company is also required to send detailed letter of offer upon request by any Shareholder.
According to SEBI (Issue Of Capital And Disclosure Requirements) Regulations,
2009 the abridged letter of offer, along with application form, shall be dispatched through
registered post or speed post to all the existing shareholders at least three days before
13 EP–CL– June 2011
the date of opening of the issue: Provided that the letter of offer shall be given by the
issuer or lead merchant banker to any existing shareholder who has made a request in
this regard.
The aforesaid regulations provide that the abridged letter of offer shall contain the
disclosures as specified in Part F of Schedule VIII and it shall not contain any matter
extraneous to the contents of the offer document.
(d) Renunciation;
(g) Statement that a copy of the offer document of the immediately preceding public
or rights issue is made available to the public as specified under sub-
regulation (1) of regulation 61 and also as a document for public inspection.
Question 7
(a) The promoters of a new company have decided to start their company with the
name ‘i2 Technologies Ltd.’. However, the jurisdictional Registrar of Companies
(ROC) has declined to allow the name starting with small alphabets. Is the
ROC’s contention valid under company law as prevalent in India ? (4 marks)
(b) John, who is a member of Alex Ltd., is of unsound mind. Can the shareholder
of unsound mind exercise his voting rights in respect of his membership in the
said company ? Give your advice. (4 marks)
(c) Thrive Ltd. is a public limited company, incorporated under the Companies Act,
1956. The Board of directors of the said company has recently decided to
insert an article in its articles of association relating to expulsion of a member
by the Board of directors of the company where the directors were of the view
that the activities or conduct of such a member was detrimental to the interests
of the company. Is the Board’s decision valid in the eye of law ? (4 marks)
(d) Chatur is a director of Hopes Ltd., a public limited company, registered under
the Companies Act, 1956. He wants to inspect the books of account and other
books and papers of the company. Can he do so ? Will your answer be different,
if the director wants to inspect the books of account through an agent ?
(4 marks)
EP–CL– June 2011 14
Answer 7(a)
In accordance with General Circular No. 6/99 dated 13.5.1999 issued by the Ministry
of Law, Justice and Company Affairs:
ROCs may allow names starting with small alphabets (like i2 Technologies ..... Ltd.,
etc.) as such names are being increasingly used by many companies in other countries.
It should, however, be ensured that the names starting with small alphabets does not
have phonetic or visual resemblance to the name of a company in existence.
Earlier name-search for allowing names for companies used to be a manual search
based on list of names already in existence on a particular date, names made available
by different ROCs (which used to be circulated periodically) etc. The name search is
no longer manual. It has become a computerised operation in all ROC offices. In
view of this, some of the old constraints (like alphabetical listing) which could be a
restrictive factor in the manual system do not exist under the present computerised
system.
In the present case ROC’s contention of declining the proposed name starting with
small alphabets is invalid.
Answer 7(b)
With reference to Table A of Schedule I of Companies Act 1956, a member of
unsound mind, or in respect of whom an order has been made by any Court having
jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee
or other legal guardian, and any such committee or guardian may, on a poll, vote by
proxy.
In this respect a member of unsound mind may exercise his voting rights in respect
of his membership in the said company.
Answer 7(c)
According to Section 9 of the Companies Act, the Act overrides the Memorandum
and Articles of Association and any provision contained in these documents repugnant
to the provisions of the Companies Act, is void.
The Ministry of Corporate Affairs has, therefore, clarified that any assumption of the
powers by the Board of Directors to expel a member by alteration of Articles of Association
shall be illegal and void.
Considering the abovementioned clarification the Board’s decision of Thrive Ltd. is
invalid in the eyes of law.
15 EP–CL– June 2011
Answer 7(d)
Sub-section (4) of Section 209 provides that books of account and other books and
papers should be available for inspection by any director on working days during business
hours.
Though generally the director should personally exercise this right of inspection, the
right is not so restricted that it can only be exercised personally by the director. In
Vakharia v. Supreme General Film Exchange Co. Ltd. (1948) 18 Com Cases 34 : AIR
1948 Bom 301 it was held that a director is entitled to take inspection of accounts
personally or through an agent provided that there is no reasonable objection to the
person chosen and the agent undertakes not to utilise the information obtained by him
for any purpose other than the purpose of his principal.
As the right of inspection is a statutory right given under sub-section (4), a director,
who is prevented from or refused inspection, may enforce his right through Court.
Question 8
(a) Shine Well Ltd. has accepted deposits from the public under the Companies
(Acceptance of Deposits) Rules, 1975. The company has now decided to repay
some of its deposits before maturity. Can the company do so ? If yes, what are
the conditions attached thereto ? (4 marks)
(b) Grow More Ltd. is a government company in which the Central Government and
many State Governments in India are members. The company has recently
convened its annual general meeting at its registered office. Does the legislature
have any access to the annual reports of such a company ? Give your advice.
(4 marks)
(c) Daisy Ltd., a company registered under the Companies Act, 1956, has failed to
register a charge which requires registration under section 125 and the charge is
not registered as per sub-section (1) of section 125. What will be the
consequences of such non-registration ? (4 marks)
(d) Rahees, who is a member of Vivek Ltd., a public company, has very recently
become an insolvent. Can the insolvent Rahees continue as a member of the
company ? (4 marks)
Answer 8(a)
Deposits are not repayable before maturity. However, in the event of exceptional
circumstances the company at its absolute discretion may make premature repayment.
The rate of interest payable by the company on such deposits agreed to be repaid
before maturity shall be reduced by such rate as may from time to time be specified in
the Companies (Acceptance of Deposits) Rules, 1975.
Repayment before the period of maturity was offered at reduced rate of interest in
exercise of the power under Clause 11 of the rules framed by the company. The depositor
accepted the same. He was estopped from challenging the reduction saying subsequently
that his consent was not taken in advance [Umanath Baliga v. SRP Tools Ltd., 2003
CLC 1139: (2003) 47 SCL 146 (CLB)].
Accordingly Shine Well Ltd. can also repay deposits before maturity in exceptional
circumstances.
EP–CL– June 2011 16
Answer 8(b)
In case of Government companies, the Central Government must place before both
the Houses of Parliament an annual report on the working and affairs of each Government
company within three months of its annual general meeting together with a copy of the
audit report and any comments upon or supplement to such report made by the Comptroller
and Auditor General of India. Where a State Government is member of a Government
company, the annual report is likewise to be placed before the State Legislature
(Section 619A).
Considering this, legislature will have access to the annual reports of Grow More
Ltd. a government company.
Answer 8(c)
If a charge which requires registration under Section 125 is not registered as per
sub-section (1) of Section 125, the consequences are as follows:
(a) The charge will be void as against the liquidator (if the company goes into
liquidation) and against creditors, but against them only.
(b) The charge is good against the company and the amount becomes payable
immediately.
(c) Until liquidation, the person seeking to enforce such a charge, has available to
him all remedies of a mortgage against the company, though not against other
creditors.
(d) The company may give a subsequent valid mortgage to secure the same debt.
But if a subsequent creditor, even with notice of the first charge, takes a registered
charge before the first said charge is registered, he obtains priority.
(e) During liquidation the charge-holder (creditor) assumes the status of an unsecured
creditor, as the charge is void against liquidator and creditors.
(f) The holder of an equitable charge whose charge is void on the ground of non-
registration, has no lien on the title deeds or documents deposited with him as
the deposit is only ancillary to the void charge.
(g) Although a security becomes void by non-registration, it does not affect the
contract or obligation of the company to repay the money thereby secured. In
fact, Section 125 provides that where a charge becomes void by non-registration,
the money becomes immediately payable and the company cannot repudiate it
on the ground of non-registration.
Answer 1(ii)
Answer 1(iii)
Answer 1(iv)
Answer 2(iii)
True
Foreign Exchange Management Act, 1999 allows Indian companies to freely issue
Right / Bonus shares to existing non-resident share-holders, subject to adherence to
sectoral cap, if any. However, such issue of bonus/rights shares have to be in accordance
with other laws/statutes like the Companies Act, 1956, SEBI (ICDR) Regulations (in
case of listed companies) etc.
Answer 2(iv)
True
Person Resident in India has been defined under Section 2(v) of the Foreign Exchange
Management Act, 1999 to mean -
(i) a person residing in India for more than 182 days during the course of the
preceding financial year. However, two categories of persons are excluded from
the purview of definition.
The first category includes any person who has gone out of India or who stays
outside India for or on taking up employment outside India, or for carrying on
outside India a business or vocation. The definition also includes person who
stays outside India for any other purpose in such circumstances as would indicate
his intention to stay outside India for an uncertain period.
The second category of persons which have been excluded from the definition
of person resident in India include:
A person who has come to stay or stays in India, in either case otherwise
than—
(a) for or taking up employment in India; or
(b) for carrying on in India a business or vocation in India; or
(c) for any other purpose, in such circumstances as would indicate his intention
to stay in India for an uncertain period.
(ii) any person or body corporate registered or incorporated in India
(iii) an office, branch or agency in India owned or controlled by a person resident
outside India.
(iv) an office, branch or agency outside India owned or controlled by a person resident
in India.
As the term “Person resident of India” has not been defined under the Foreign
Exchange Management Act, 1999, it may be assumed that there is no difference between
“Person resident in India” and “Person resident of India”
23 EP–ELL–June 2011
Answer 2(v)
True
Section 8 of the Foreign Contribution (Regulation) Act, 1976 contains exemptions to
the prohibition on the acceptance of foreign contribution by any person specified in
Section 4. Accordingly, Section 8 allows the acceptance of foreign contribution by the
persons specified in Section 4, subject however to Section 10 and where such contribution
is accepted by him by way of a gift or presentation made to him as a member of any
Indian delegation, provided that such gift or present was accepted in accordance with
the regulations made by the Central Government with regard to the acceptance or retention
of such gift or presentation.
Answer 2(vi)
True
As per Section 73 of the Standard Weight and Measure Act, 1976 any offences
punishable under Sections 50, 55, 56, 57, 58, 59, 60, 63, 64, 65, 66 or 67, may be
compounded by the Director or authorised officer on payment of such sum as may be
specified. However, such sum shall not in any case exceed the maximum amount of
fine which may be imposed under the Act for the offence so compounded. Any second
or subsequent offence committed after expiry of three years from the date on which the
offence was compounded, shall be deemed to be a first offence.
Question 3
(a) Distinguish between any two of the following :
(i) ‘Competition’ and ‘cartel’.
(ii) ‘Registered proprietor of a trade mark’ and ‘registered user of a trade mark’.
(iii) ‘Competition Commission’ and ‘Competition Appellate Tribunal’.
(iv) ‘Patent’ and ‘patent of addition’. (5 marks each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) The transfer or issue of foreign security is a _______ transaction.
(ii) A person who has acquired or purchased foreign exchange for a specified
purpose is unable to use the same and is required to surrender it within
_______ days from the date of its acquisition or purchase.
(iii) The term of every patent granted under the Patents Act, 1970 shall be
_______ years from the date of filing of application for the patent.
(iv) The literary, dramatic, musical or artistic works enjoy copyright protection
for the life time of the author plus _______ years beyond.
(v) The National Consumer Disputes Redressal Commission shall have
jurisdiction to entertain complaints where the value of the goods or services
and the compensation, if any, claimed exceeds ‘ _______ .
(1 mark each)
EP–ELL–June 2011 24
Answer 3(a)(i)
Competition is a situation in a market in which firms or sellers independently strive
for the buyers’ patronage in order to achieve a particular business objective, for example,
profits, sales or market share.
On the other hand cartel is an anti-competitive practice, which has been defined
under Section 2 (c) of Competition Act, 2002 to include an association of producers,
sellers or distributors, traders or service providers who, by agreement amongst
themselves, limit control or attempt to control the production, distribution, sale or price
of or, trade in goods or provision of services.
Answer 3(a)(ii)
As per Section 2(1) (v) of the Trade Marks Act, 1999 “registered proprietor” in relation
to a trade mark, means the person for the time being entered in the register as proprietor
of the trade mark.
Section 18 of the Act provides that any person claiming to be the proprietor of a
trade mark used or proposed to be used by him, who is desirous of registering it, shall
apply in writing to the Registrar in the prescribed manner for the registration of his trade
mark.
As per Section 37 of the Act the person for the time being entered in the register as
proprietor of a trade mark shall, subject to the provisions of the Act and to any rights
appearing from the register to be vested in nay other person, have power to assign the
trade mark, and to give effectual receipts for any consideration for such assignment.
As per Section 2(1) (x) of the Trade Marks Act, 1999 “registered user” means a
person who is for the time being registered as such under section 49.
Section 48 of the Trade Marks Act, 1999 provides that subject to the provisions of
section 49, a person other than the registered proprietor of a trade mark may be registered
as a registered user thereof in respect of any or all of the goods or services in respect of
which the trade mark is registered.
Answer 3(a)(iii)
Section 7 of the Competition Act, 2002 empowers the Central Government to establish,
by Notification, a Commission to be called “Competition Commission of India”. The
Commission is a body corporate having perpetual succession and a common seal. The
Commission has power to acquire, hold movable or immovable property and to enter into
contract in its name and by the said name, sue or be sued. The Commission consists of
a Chairperson and not less than two and not more than six other Members
25 EP–ELL–June 2011
Section 53A empowers the Central Government to establish, by notification, an
Appellate Tribunal to be known as Competition Appellate Tribunal –
(a) to hear and dispose of appeals against any direction issued or decision made
or order passed by the Commission under sub-sections (2) and (6) of section
26, section 27, section 28, section 31, section 32, section 33, section 38,
section 39, section 43, section 43A, section 44, section 45 or section 46 of
the Act;
(b) to adjudicate on claim for compensation that may arise from the findings of the
Commission or the orders of the Appellate Tribunal in an appeal against any
finding of the Commission or under section 42A or under sub-section(2) of
section 53Q of this Act, and pass orders for the recovery of compensation
under section 53N of this Act.
The Appellate Tribunal shall consist of a Chairperson and not more than two other
members to be appointed by the Central Government.
Answer 3(a)(iv)
As per Section 2(1) (m) of Patents Act, 1970 patent means a patent for any invention
granted under the Act. Generally speaking, Patent is a monopoly grant and it enables
the inventor to control the output and within the limits set by demand, the price of the
patented products. Underlying economic and commercial justification for the patent is
that it acts as a stimulus to investment in the Industrial innovation.
As per Section 2(1) (q) of Patents Act, 1970 patent of addition means a patent
granted in accordance with the section 54. Section 54 of Patents Act, 1970 provides
that where an application is made for a patent in respect of any improvement in or
modification of an invention described or disclosed in the complete specification, namely
the main invention and the applicant also applies or has applied for a patent for that
invention or is the patentee in respect thereof, the Controller may, if the applicant so
requests, grant the patent for the improvement or modification as a patent of addition.
Answer 3(b)
(ii) A person who has acquired or purchased foreign exchange for a specified purpose
is unable to use the same and is required to surrender it within 180 days from
the date of its acquisition or purchase.
(iii) The term of every patent granted under the Patents Act, 1970 shall be 20 years
from the date of filing of application for the patent.
(iv) The literary, dramatic, musical or artistic works enjoy copyright protection for
the life time of the author plus 60 years beyond.
(v) The National Consumer Disputes Redressal Commission shall have jurisdiction
to entertain complaints where the value of the goods or services and the
compensation, if any, claimed exceeds ` 1 Crore .
EP–ELL–June 2011 26
Question 4
(a) With reference to the relevant provisions of the Foreign Exchange Management
Act, 1999 and the rules and regulations made thereunder, advise on the following:
(i) Karan, a person resident in India, borrows US $20,000 from his friend resident
outside India.
(ii) Rakesh, a person resident in India, is interested in extending an invitation
to George, a person resident outside India, to stay as his guest while on a
visit to India.
(iii) A person, resident outside India, is interested to repatriate outside India the
sale proceeds of an immovable property held in India.
(iv) A person, resident in India, wants to acquire immovable property outside
India by way of gift from a person who is resident outside India.
(v) A foreign investor is interested to invest in an Indian company which is a
small scale industrial unit. (1 mark each)
(b) Mohan made a deposit of `1.50 lakh with the Housing Board for a house proposed
to be built by it. There was a stipulation that the house would be completed
within 2 years. The house could not be completed and possession was not
handed over as promised. The Housing Board pleaded that construction was
not upto the mark and expected level because of the use of low cost technology.
Expressing regret, the Housing Board suggested that it was prepared to refund
the deposit amount adding that there was no provision to pay any interest charges.
Mohan is not satisfied with the explanation and intends to approach the Consumer
Disputes Redressal Forum for claim of refund amount, interest and compensation,
if any. Will Mohan succeed ? Refer to decided case law, if any. (5 marks)
(c) Mention the provisions of the Trade Marks Act, 1999 relating to assignment and
transmission of registered trade marks. (5 marks)
Answer 4
(i) Karan can borrow US $20,000 from his friend resident outside India subject to
the compliance of provisions of Foreign Exchange Management Act, 1999 and
Foreign Exchange Management (Capital Account Transaction) Regulations,
2000.
(ii) In pursuance of the provisions of section 3 of the Foreign Exchange Management
Act, 1999 and RBI Notification No..FEMA/16/RB-2000 dated 3rd May, 2000 the
Reserve Bank of India allows a person resident in India, to make any payment
in rupees towards meeting expenses on account of boarding, lodging and service
related thereto or travel to and from and within India of a person resident outside
India who is on a visit to India.
In terms of above provision, Rakesh can extend invitation to Gorge to stay as
his guest while on visit to India.
(iii) In terms of Section 6(5) of Foreign Exchange Management Act, 1999 and
Regulation 6 of Foreign Exchange Management (Acquisition and Transfer of
Immovable Property in India) Regulations, 2000 a person, resident outside India,
27 EP–ELL–June 2011
can repatriate outside India the sale proceeds of an immovable property held in
India..
(iv) As per Regulation 5 of Foreign Exchange Management (Acquisition and Transfer
of Immovable Property Outside India) Regulations, 2000 a person resident in
India may acquire immovable property outside India by way of gift from a person
referred to in Section 6(4) of Foreign Exchange Management Act, 1999 or
Regulation 4 of Foreign Exchange Management (Acquisition and Transfer of
Immovable Property Outside India) Regulations, 2000.
Section 6(4) of Foreign Exchange Management Act, 1999 provides that a
person resident in India may hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India if such
currency, security or property was acquired, held or owned by such person
when he was resident outside India or inherited from a person who was resident
outside India.
Answer 4(b)
Yes, Mohan will succeed. The present case is similar to the case of S.P. Dhavaskar
v. Housing Commissioner, Karnataka Housing Board & Vice Versa (First Appeal No.
203 of 1993 decided on 27.9.1995 (NCDRC). In this case the National Commission
observed that the Housing Board had been grossly negligent in rendering service and
ordered for returning deposit amount with interest to the depositor.
Answer 4(c)
Section 37 of the Trade Marks Act, 1999 entitles the registered proprietor of a
trademark to assign the trade mark and to give effectual receipts for any consideration
for such assignment. Section 38 deals with the assignability and transmissibility of a
registered trade mark with or without goodwill of the business either in respect of all
goods or services or part thereof. Section 39 provides that unregistered trade mark may
be assigned or transmitted with or without the goodwill of the business concerned.
The environmental pollution are not confined to side effects of industrialisation but
reflect the inadequacy of resources to provide infrastructural facilities to prevent industrial
pollution. The National Environment Policy recognizes environmental protection as an
integral part of the development process and mainstreams environmental concerns in
all developmental activities. As industrial growth is essential to fulfill the increasing
human needs, a change in lifestyle, particularly going back to the age of pre-industrial
revolution is inconceivable. Therefore, the need to monitor the environmental pollution
caused by discharge of polluting substances from the industries become significant.
Conservation of environmental resources is necessary to secure livelihoods and well
being of all. Industrialization has a direct bearing on environmental pollution leading to
climatic change, depletion of ozon layer and increased proportion of carbon dioxide in
the atmosphere. While industrial development almost inevitably for economic growth,
the possibilities of adverse effects on the environment also increased if these adverse
effects are not properly contained or reduced to minimum.
Answer 5(b)
Indian Penal Code, 1860 contains penal provisions for corrupting or fouling the water
or spring or reservoir so as to make it less fit for the purpose for which it is ordinarily
used as well as for vitiating the atmosphere so as to make it noxious to the health of any
person etc. A number of other Central and State laws covering boilers, dangerous drugs,
radiation, forests, etc. were enacted during the middle of the 20th century, however the
legislative and administrative measures directed specifically at protection of the
environment were introduced in the 1970s and 1980s. The Water (Prevention and Control
of Pollution) Act was enacted in 1974 and the Air (Prevention and Control of Pollution)
Act was passed by the Union of India in 1981, essentially to give effect to the decisions
29 EP–ELL–June 2011
taken at the International Conference on Human Environment at Stockholm in 1972
declaring mans fundamental right to live in a pollution-free atmosphere and his
responsibility to protect and improve the environment.
In 1986, the Government enacted the Environment Protection Act to provide for the
protection and improvement of environment and the prevention of hazards to human
beings, other living creatures, plants and property. The Public Liability Insurance Act,
1991 was enacted for the purpose of providing immediate relief to the persons affected
by accidents occurring while handling any hazardous substance. Parliament also enacted
Bio-Diversity Act, 2002 for the preservation of Bio-Diversity and National Green Tribunal
Act, 2010 for speedy disposal of environmental cases.
Answer 5(c)
Answer 7(a)(iii)
41
EP–SLC – June 2011 42
Answer 1(a)(iii)
False
Foreign Venture Capital Investor means an investor incorporated and established
outside India, which proposes to make investment in venture capital fund(s) or venture
capital undertakings in India and is registered under SEBI (Venture Capitals Funds)
Regulations, 1996.
Answer 1(a)(iv)
True
Depository is required to frame its bye-laws with the prior approval of SEBI, consistent
with the provisions of the Act and the regulations made by SEBI thereunder. SEBI has,
however, the power to direct the depository to amend or revoke any bye-laws already
made, wherever it considers expedient to do so. If the depository fails or neglects to
comply with the directions of SEBI, SEBI may make the bye-laws or amend or revoke
the bye-laws on its own.
Answer 1(a)(v)
True
The money market is a wholesale debt market for low-risk, highly liquid, short term
instruments. Funds are available in this market for periods ranging from a single day
upto a year. Mostly government, banks and financial institutions dominate this market.
It is a formal financial market that deals with short-term fund management.
Answer 1(b)
(i) Money at call is outright money.
(ii) Good governance / Investor Protection in capital market has always been
high on the agenda of SEBI.
(iv) To eliminate counter party risks, SEBI has advised Stock Exchanges to set-up
either trade guarantee fund or settlement guarantee fund.
(v) Automated screen based trading of shares on stock exchanges has resulted
into Transparency/faster settlement .
Question 2
(a) What do you understand by ‘participatory notes’ ? Briefly explain the
disadvantages associated with the issuance of participatory notes. (5 marks)
Answer 2(c)(ii)
The Prevention of Money Laundering Act, 2002 and the Rules notified thereunder
require every intermediary to furnish details of suspicious transactions whether or not
made in cash. Suspicious transaction means a transaction whether or not made in cash
which, to a person acting in good faith –
(a) gives rise to a reasonable ground of suspicion that it may involve the proceeds
of crime; or
(b) appears to be made in circumstances of unusual or unjustified complexity; or
(c) appears to have no economic rationale or bonafide purpose; or
45 EP–SLC – June 2011
(d) gives rise to a reasonable ground of suspicion that it may involve financing of
the activities relating to terrorism.
Question 3
(a) Write short notes on the following :
(i) Venture capital funds
(ii) Offshore hedge funds
(iii) Derivatives’ contracts
(iv) Collective investment schemes. (2 marks each)
(b) Expand the following abbreviations :
(i) SMILE
(ii) NDTL
(iii) CFDS. (1 mark each)
(c) Discuss briefly the different surveillance systems adopted by stock exchanges.
(4 marks)
Answer 3(a)(i)
‘Venture capital fund’ under SEBI(Venture Capital Funds) Regulations,1996 means
a fund established in the form of a trust or a company including a body corporate and
registered under these regulations which—
(i) has a dedicated pool of capital,
(ii) raised in a manner specified in the regulations, and
(iii) invests in venture capital undertaking in accordance with the regulations.
Answer 3(a)(ii)
Answer 3(a)(iii)
Derivatives are contracts which derive values from the value of one or more of other
assets, called underlying assets. Derivatives contracts can be of different types like
futures, options, swaps, forwards. Futures contract is a contract to buy or sell an underlying
financial instrument at a specified future date at an agreed price (strike price) quoted
when the contract is entered. Option contracts give its holder the right but not the obligation
to take or make delivery on or before specified date at an agreed price (strike price).
EP–SLC – June 2011 46
Answer 3(a)(iv)
The Collective Investment Scheme has been defined under Section 11AA of SEBI
Act, 1992. It means any scheme or arrangement made or offered by any company under
which (a) the contributions, or payments made by the investors, by whatever name
called, are pooled and utilised solely for the purposes of the scheme or arrangement; (b)
the contributions or payments are made to such scheme or arrangement by the investors
with a view to receive profits, income, produce or property, whether movable or immovable
from such scheme or arrangement; (c) the property, contribution or investment forming
part of scheme or arrangement, whether identifiable or not, is managed on behalf of the
investors; and (d) the investors do not have day to day control over the management
and operation of the scheme or arrangement.
Answer 3(b)
(i) SMILE – Securities Markets Infrastructure Leveraging Expert Task Force
(ii) NDTL – Net Demand and Time Liabilities
(iii) CFDS – Corporate Filing and Dissemination System.
Answer 3(c)
Surveillance systems may be
(i) On line Surveillance
On-line Real Time Surveillance system has a facility to generate the alerts on-
line, in real time, based on certain preset parameters like price and volume
variations in scrips, members taking unduly large positions not commensurate
with their financial position or having large concentrated position(s) in one or few
scrips, etc.
(ii) Off-Line Surveillance
The Off-Line Surveillance system comprises of the various reports based on
different parameters and scrutiny thereof such as High/Low Difference in prices;
% change in prices over a week/fortnight/month; Trading in infrequently traded
scrips etc.
(iii) Derivative Market Surveillance includes abnormal fluctuation in the prices of a
Series, Market Movement (Cash vis-à-vis Derivative) and Member Concentration
(Cash vis-à-vis Derivative).
(iv) Surveillance also includes in-depth Investigations, Rumour Verification and Pro-
active measures.
(v) Surveillance Action at exchange level includes Special margins, Reduction of
Circuit Filters and Circuit Breakers etc.
Question 4
(a) Explain the following terms related to buy-back of securities :
(i) Letter of offer
(ii) Specified date. (2 marks each)
47 EP–SLC – June 2011
(b) List out various money market instruments. (5 marks)
(c) What is ‘short selling’ ? Discuss the mechanism of securities lending and
borrowing scheme (SLBS). (6 marks)
Answer 4(a)(i)
The letter of offer is the document which is being dispatched to security holders
containing the disclosures specified in schedule III of SEBI (Buy Back) Regulations,
1998. The company has to file draft letter of offer with SEBI within seven days of public
announcement and the letter of offer shall be dispatched not earlier than 21 days from
the submission of draft letter of offer with SEBI.
Answer 4(a)(ii)
“Specified Date” means the date on which the names of the security holders would
be determined for the purpose of dispatch of letter of offer to security holders.
Answer 4(b)
Various Money market instruments are as under:
• Government Securities
• Money at Call and Short Notice
• Bills Rediscounting
• Inter-Bank Participation (IBP)
• Money Market Mutual Funds (MMMFs)
• Call Money Market and Short-term Deposit Market
• Treasury Bills
• Certificates of Deposits
• Inter-Corporate Deposits
• Commercial Bills
• Commercial Paper
• Gilt-edged (Government) Securities
Answer 4(c)
“Short selling” is defined as selling a stock which the seller does not own at the time
of trade. All classes of investors, viz., retail and institutional investors, are permitted to
short sell. Securities lending and borrowing (SLB) scheme provides for the following
mechanism for borrowing of securities to enable settlement of securities sold short:
— The SLB is operated through Clearing Corporation/ Clearing House of stock
exchanges having nation-wide terminals who are registered as Approved
Intermediaries (AIs).
— The SLB takes place on an automated, screen based, order-matching platform
which will be provided by the AIs.
EP–SLC – June 2011 48
— The borrowers and lenders access the platform for lending/borrowing set up by
the AIs through the clearing members (CMs) (including banks and custodians)
who are authorized by the AIs in this regard.
— The tenure of lending/borrowing is fixed as standardised contracts.
— The settlement cycle for SLB transactions is on T+1 basis.
— The settlement of lending and borrowing transactions is independent of normal
market settlement.
— The settlement of the lending and borrowing transactions is done on a gross
basis at the level of the clients i.e. no netting of transactions at any level will be
permitted.
Question 5
(a) Explain briefly the various factors for judging the efficiency of mutual funds.
(4 marks)
(b) Discuss briefly the obligations and responsibilities of bankers to an issue.
(5 marks)
(c) What is Securities Appellate Tribunal (SAT) ? Explain the procedure for appeal
to SAT. (6 marks)
Answer 5(a)
The efficiency of mutual funds may be judged on the factors such as -
— Stability of funds
— Liquidity of funds (listed on exchanges)
— Increase in NAV, consistent growth in dividend and capital appreciation
— Whether the investment objectives are clearly laid and implemented
— Whether the issuer has a proven track record and offers assured return or return
not less than a percentage
— Whether it observes investment norms to balance risks and profits.
Answer 5(b)
Regulation 12 of SEBI (Bankers to an Issue) Regulations, 1994 requires every banker
to an issue to maintain various records.
The Banker to an issue is required to intimate SEBI about the place where these
documents are kept and preserve them for a minimum period of 3 years.
The banker to an issue need to inform SEBI as to the number of issues for which he
was engaged as banker and certain additional information regarding the monies received,
the refunds made and the dividend/interest warrant paid.
The banker to an issue is required to enter into an agreement with the body corporate
for whom he is the banker to an issue and also inform SEBI about disciplinary action
taken, if any by the RBI against him in relation to issue payment work. Every banker to
issue is to abide by the Code of Conduct as specified in Schedule III of SEBI (Bankers
to an Issue) Regulations, 1994.
49 EP–SLC – June 2011
Answer 5(c)
The Central Government may, by notification establish an appellate tribunal known
as Securities Appellate Tribunal (SAT) to exercise the jurisdiction, powers and authority
conferred on such tribunal under the SEBI Act, 1992. The Central Government has set
up a tribunal at Mumbai.
• Any person aggrieved,-
(a) by an order of SEBI made, under this Act, or the rules or regulations made
thereunder; or
(b) by an order made by an adjudicating officer under this Act, may prefer an
appeal to a Securities Appellate Tribunal having jurisdiction in the matter.
• No appeal shall lie to the SAT from an order made
(a) by SEBI;
(b) by an adjudicating officer, with the consent of the parties.
• Every appeal shall be filed within a period of forty-five days from the date on
which a copy of the order made by SEBI or the adjudicating officer is received
by him and accompanied by such form and fees as may be prescribed.
• The Securities Appellate Tribunal may entertain an appeal after the expiry of the
said period of forty-five days if it is satisfied that there was sufficient cause for
not filing it within that period.
• On receipt of the appeal, the Securities Appellate Tribunal may, after giving the
parties to the appeal an opportunity of being heard, pass such order thereon as
it thinks fit, confirming, modifying or setting aside the order appealed against.
PART B
(Answer ANY TWO questions from this part.)
Question 6
(a) What is ‘parking’ of external commercial borrowings (ECB) proceeds ?
(5 marks)
(b) What are the conditions for issue of Indian Depository Receipts (IDRs) ?
(5 marks)
(c) Briefly explain the following terms related to public issue :
(i) Pre-issue advertisement
(ii) Anchor investor
(iii) Green shoe option
(iv) IPO grading
(v) Book building. (2 marks each)
Answer 6(a)
Parking of ECB proceeds
Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds
to India, pending utilization for permissible end-uses.
EP–SLC – June 2011 50
ECB proceeds parked overseas can be invested in the following liquid assets :
(a) Deposits or Certificate of Deposit or other products offered by banks rated not
less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s,
(b) Treasury bills and other monetary instruments of one year maturity having
minimum rating as indicated above, and
(c) Deposits with overseas branches / subsidiaries of Indian banks abroad. The
funds should be invested in such a way that the investments can be liquidated
as and when funds are required by the borrower in India.
ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts
with AD Category I banks in India, pending utilization for permissible end-uses.
Answer 6(b)
According to SEBI (ICDR) Regulations, 2009 an issuing company can issue IDRs
only if it satisfies the following conditions:
(a) issue size is not less than fifty crore rupees;
(b) procedure to be followed by each class of applicant for applying is mentioned in
the prospectus;
(c) minimum application amount is twenty thousand rupees;
(d) at least 50% of the IDR issued is allotted to qualified institutional buyers on
proportionate basis ;
(e) the balance 50% can be allocated among the categories of non-institutional
investors and retail individual investors including employees at the discretion of
the issuer and the manner of allocation is required to be disclosed in the
prospectus. Allotment to investors within a category is to be on proportionate
basis;
(f) at any given time, there is only one denomination of IDR of the issuing company.
Apart from the above conditions, an issuing company has to comply with the
conditions as specified in Companies (Issue of IDRs) Rules, 2004.
Answer 6(c)(i)
Pre-issue advertisement
The issuer company shall soon after receiving final observations, if any, on the offer
document from SEBI, make an advertisement in an English National daily with wide
circulation, one Hindi National newspaper and a regional language newspaper with wide
circulation at the place where the registered office of the issuer is situated, in the
prescribed format, subject to section 66 of the Companies Act, 1956. In case of a fast
track issue, the advertisement shall be made before the issue opening date.
Answer 6(c)(ii)
“Anchor Investor” means a qualified institutional buyer who makes an application
for a value of ten crore rupees or more in a public issue made through the book building
process.
51 EP–SLC – June 2011
Answer 6(c)(iii)
“Green Shoe Option” means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing mechanism in
accordance with the provisions of Regulation 45 of SEBI (ICDR) Regulations, 2009.
Answer 6(c)(iv)
“IPO Grading” (initial public offering grading) is a service aimed at facilitating the
assessment of equity issues offered to public. The grade assigned to any individual
issue represents a relative assessment of the ‘fundamentals’ of that issue in relation to
the universe of other listed equity securities in India. Such grading is assigned on a five-
point point scale with a higher score indicating stronger fundamentals.
Answer 6(c)(v)
“Book Building” means a process undertaken to elicit demand and to assess the
price for determination of the quantum or value of specified securities or Indian Depository
Receipts, as the case may be.
Question 7
(a) Who is an Ombudsman in stock market operations ? Discuss his role in investors’
protection. (6 marks)
(b) List the approvals required for resource mobilisation by a company in the
international capital market. (7 marks)
(c) Discuss briefly the steps involved in the issue of bonus shares by a listed
company. (7 marks)
Answer 7(a)
“Ombudsman” means any person appointed under regulation 3 of SEBI (Ombudsman)
Regulations, 2003 and unless the context otherwise requires, includes stipendiary
Ombudsman. Regulation 2(n) of the regulations defines stipendiary Ombudsman as a
person appointed under regulation 9 for the purpose of acting as Ombudsman in respect
of a specific matters in a specific territorial jurisdiction and for which he may be paid
such expenses, honorarium, sitting fees as may be determined by SEBI from time to
time.
Role of Ombudsman in Investors Protection
(a) Receives complaints against any intermediary or a listed company or both;
(c) Approves a friendly or amicable settlement of the dispute between the parties;
Answer 8(iii)
Depository agreement lays down the detailed arrangements entered into by the
company with the Depository, the forms and terms of the depository receipts which are
represented by the deposited shares. It also sets forth the rights and duties of the
depository in respect of the deposited shares and all other securities, cash and other
property received subsequently in respect of such deposited shares.
Answer 8(iv)
The term ‘Employee Stock Option’ (ESOP) has been defined under Sub-
section (15A) of Section 2 of the Companies Act, 1956, according to which ‘employee
stock option’ means the option given to the whole-time directors, officers or employees
of a company, which gives such directors, officers or employees the benefit or right to
purchase or subscribe at a future date, the securities offered by the company at a pre-
determined price.
Answer 8(v)
Fixed Income Products are investment vehicles which provide for fixed income
returns on investments. Fixed Income Products includes Bank Fixed Deposits, Corporate
Fixed deposits, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate
etc.
A bank basically has three types of deposits, i.e. time deposit, savings deposit and
current account. NBFCs also accepts various types of deposits.
55 EP–SLC – June 2011
Answer 8(vi)
Fast Track Issues (FTIs) : Listed companies satisfying certain specified requirement
are eligible to make fast track issue (FTIs) as per SEBI (ICDR) Regulations, 2009. Such
listed companies are able to proceed with follow-on public offering/rights issue by filing
a copy of the Red Herring Prospectus (in case of book built issue)/Prospectus (in case
of fixed price issue) as the case may be, with SEBI and stock exchanges. Such
companies are not required to file draft offer document with SEBI and stock exchanges.
Accordingly the provisions relating to filing of offer document are not applicable to
public issue of securities by a listed issuer company or a rights issue of securities by a
listed issuer company, where the aggregate value of such securities, including premium,
if any, exceeds Rs. 50 lacs, subject to compliance of certain conditions as laid down in
the SEBI (ICDR) Regulations, 2009.